Brick and Block Are Back.

On the face of things, purely online bank ought to have an insurmountable advantage over brick-and-mortar institutions. Much Lower overhead, instant customer gratification, higher interest-rate payments, 24-hours-a-day, seven-days-a-week, universal availability, are all factors that favor the Internet bank. They can offer their customers lower fees and higher interest rates. Clearly, online banks lack only one thing to compete successfully with brick-and-mortar banks: brick and mortar.

That deficiency is looming larger all the time, however, as a new report from Meridien Research makes clear: If it comes to a choice between a banker with a website and a banker with a website and a building, the guy with the building will win.

"Regardless of the technological advancements experienced by the financial services industry, the branch continues to be the most popular customer interaction channel," the report says. "A recent study revealed that pure Internet banks captured only 2 percent of the new online customers during 2000, while traditional banks, many of whom expanded and improved their online offerings, captured the balance."

"The idea (of online banks) is great if you just look at the surface," agrees Jennifer Schmidt, co-author of the Meridien report. But, she adds, it's a little more complicated than that.

One problem that Internet banks share with all other startups is the lack of an established name and customer base. To overcome this obstacle, says Schmidt, online banks must spend more on advertising than other banks. For a brick-and-mortar bank, the branch office on the corner, with the big sign out front, is a form of advertising that is unavailable to its online competitors. Moreover, consumers have shown themselves to be leery of trusting their money to an institution operated by people they can't see.

To make matters worse for cyberbanks, there's nothing to prevent more established competitors from also entering the online banking business--something they're doing in increasing numbers and with increasing success. Traditional banks can take advantage of the cost advantages of doing business online while leveraging their established positions in the marketplace at the same time.

Meanwhile a number of online banks, faced with the high cost of customer acquisition and consumers' reluctance to turn over their money to a website, have been forced to raise fees and cut interest rates, lay off employees, and (in some cases) become niche marketers, concentrating on a smaller subset of the financial universe.

"We don't feel that the Internet bank will disappear," says Schmidt, "but they'll need to develop multichannel access."

Or to put it another way, they need to open a branch or two.