VIRTUAL BANKING.

CUSTOMERS ARE BECOMING MORE COMFORTABLE WITH ON-LINE BANKING DESPITE SECURITY AND Y2K CONCERNS

DWIGHT ELLIS IS IN WITH THE ONLINE BANKING CROWD. IN HIS POSITION AS VICE PRESIDENT for human resource development with the National Association of Broadcasters in Washington, D.C., Ellis is on the road about 60% of the year. To help manage his finances, he has online accounts with Crestar National Bank, and uses the software programs Check Free and Quicken 99 to balance his books.

"It's superefficient. I access and keep tabs on my bank register, how much money is in my accounts, and who is being paid through Quicken 99," says Ellis. "I find myself in a hotel room, and know in an instant how much money I have. I can transfer funds from savings to investment accounts. I think it's a wonderful, paperless, highly mobile society that I live in. I assumed that everybody was doing it."

Ellis is one of millions of people who have turned to the Internet as a viable alternative to traditional banking. According to Jupiter Communications, an independent new media research firm in New York City, in 1998 about 3.8 million households in the United States used the Internet for their banking needs. That figure is expected to grow to 19.4 million by 2002.

As banks consolidate and close physical branches, more are staking their claims on the Internet. "Banks aren't increasing their hours," says James Punishill, an analyst with Forrester Research, a Cambridge, Massachusetts-based firm that tracks e-commerce and financial services. "The more mergers and consolidations there are, the more companies are going to be hard-pressed to reduce costs by cutting the number of branches and the number of hours. Banking online is a compelling proposition."

In the past few months alone, at least three new cyberbanks have opened for business: Principal Bank, a subsidiary of the Principal Financial Group, an insurance and financial services firm based in Des Moines, Iowa (www.principal.com); CompuBank NA, a Houston-based Internet-only institution (www.compubank.com); and First Internet Bank of Indiana in Indianapolis (www.firstib.com). And stiff competition is helping to hold down fees charged by most online banks (see table).

In addition to traditional savings and checking accounts, more loans and credit cards are likely to be processed via the Net. Forrester Research estimates that in the next five years, about 11 million credit cards will be issued over the Internet. The firm also projects that by 2003 more than $21 billion in auto loans and $13 billion in student loans will originate online. Consumers are expected to take advantage of this burgeoning world of e-banking.

Steve Louie is one customer who already has. When the 50-year-old business systems analyst decided he wanted a home equity loan on his San Francisco house, he turned to the Internet. He had already gone through conventional brokers and banks, and wanted to see if he could do better on the Net. After searching a few directories, he tapped into LendingTree (www.lendingtree.com), a Charlotte, North Carolina-based company that offers a wide variety of loans.

"Compared to the conventional process, LendingTree wanted a minimum of information. It only took me 20 minutes to fill out the form, and I got a response almost immediately," Louie says. Within two days, he had a proposal from Pittsburgh PNC Bank. The bank verified his and his wife's employment over the phone, did a "drive-by appraisal" of his house, then sent his home equity loan check to him overnight.

"I got a rate three-quarters of a point lower than anyone else in my physical area was offering, and the whole thing took about 15 to 20 calendar days."

Although LendingTree is just three years old, in August there were over 70,000 loan applications worth $75 million, according to Reginald Bowser, the firm's vice president of marketing. That's up substantially from 7,000 actual loan applications for approximately $28 million over the same period a year ago.

Bowser asserts that using LendingTree is a win-win situation for lenders and borrowers alike for one main reason: lower costs. "You come to our site, fill out one qualification form and through the use of Internet technology you can send it simultaneously to different lenders on our network," he says. "It's good for both sides of the equation. You'll go to lenders who are more likely to approve you for a loan, and lenders see only those borrowers who they are more likely to approve. It cuts down on their marketing and origination costs, and allows lenders to actually make loans at lower rates than more traditional channels."

LendingTree currently has 75 lenders on its network, along with an affiliate network with more than 8,000 members.

Another virtual bank, Net.B@nk (www.netbank.com), an Atlanta-based institution chartered in July 1997, already has over 45,000 accounts and about $817 million in assets. D.R. Grimes, Net. B@nk's CEO, says the firm's business model makes it about half as expensive to run as a traditional bank because it hasn't had to build and staff branches and has been able to share those savings with customers.

"We pay 3% interest on our checking accounts, while the national average is under 1%," says Grimes. "We have no service charges for our checking accounts, while the national average is more than $9 a month. With Net.B@nk, you get unlimited online access, an ATM or debit card, a Visa card and we buy your checks."

But some computer users are still wary of online banking. James Harney, a Brooklyn-based writer, says he worries that some mistake will happen in cyberspace and there won't be a flesh-and-blood teller around to fix it. "I hate not being able to actually see the money move around. What if I make a deposit at 10 p.m.? How do I know when it will actually be there?" says Harney. "If there's a problem, and I've deposited my money at the branch, at least there's someone I can look in the eye and ask, 'Where's my money?'"

But such worst-case scenarios aren't likely, according to Paul Glenn, special counsel with the Office of Thrift Supervision in Washington, D.C. Glenn says the OTS, which regulates all savings and loan institutions, requires Internet banks--and others offering electronic banking options--to prove to regulators that customers are safe from computer glitches.

For example, before the OTS will approve any electronic banking activity, it requires institutions to hire an independent third party to try to hack into the bank's computer system and analyze its vulnerabilities. The bank must then correct any faults that might put customers at risk. Glenn adds that customers should make sure banks are following OTS regulations and are insured by the Federal Deposit Insurance Corp. by visiting www.fdic.gov, which lists all banks approved by federal regulators.

Then there is the Y2K issue. Some people are worried that access to their money might be restricted at the dawn of the millennium. But experts say most banks have already taken steps to correct possible problems.

LendingTree, for example, says it tested all systems in March 1999, and doesn't expect the year 2000 to pose significant operating problems--though the firm does intend to replace its current accounting software before then. Tom Cable, chief technology officer for Net.B@nk, says his company has been preparing for Y2K since 1998.

"We have followed the guidelines laid out by the [OTS] and other regulatory agencies like FFIEC [Federal Financial Institutions Examinations Council], and we have taken all the steps we know to investigate, repair and replace anything we find to be noncompliant," Cable says. "But even with precautions, you still have to plan in case things don't work for a few days."

Online banking may be a special boon for African Americans and Hispanics, who may wish to consider it as a way to avoid the possibility of lenders turning away business the minute a person of color walks in the door, says Net.B@nk's Grimes.

Even retail outlets and other financial service companies are jumping on to the online banking bandwagon. Nordstrom, the Seattle-based department store chain with 99 outlets, already owns a financial subsidiary--Nordstrom Credit Bank--which offers various products, including credit cards. The company has applied for a thrift bank charter, and is considering offering traditional banking products such as business credit card accounts, home equity lines of credit, money market checking accounts, as well as private-label debit cards and some limited mortgage lending.

Meanwhile, elsewhere on the financial services front, online brokerage E*Trade Group of Palo Alto, California, merged with Arlington, Virginia-based online bank Telebanc Financial Corp., to create what it cans the first totally Internet-based financial services company. Customers can do everything from trade stocks and bonds to apply for mortgages and pay bills on the same site.

LendingTree's Bowser says the most important thing for consumers to remember is that obtaining a loan online can save them money.

"Borrowers and consumers look for three things: convenience, choice and price. The Internet provides all three of these attributes," Bowser says. "It makes the market more efficient, and when the market is more efficient, prices are driven down, so it is a better situation for the consumer."

CHEAPEST CYBERBANK ACCOUNTS

Want to open an online bank account but don't want to spend a lot of money doing it? Here is a list of the 10 lowest-cost, no-frills checking accounts offered by online banks, as ranked by Gomez Advisors, an e-commerce research firm based in Lexington, Massachusetts (www.gomezwire.com). The banks were rated on overall cost, meaning the cheapest combination of balances, minimums, ATM fees, bill payment fees and other miscellaneous costs.

1 Salem Five Cents Savings Bank        Salem, MA
2 Bank of America                      Son Francisco, CA
3 Riggs Bank                           Washington, DC
4 Dollar Bank                          Pittsburgh, PA
5 People's Bank                        Bridgeport, CT
6 Net.B@nk(*)                          Atlanta, GA
6 Northern Trust Bank of Illinois(*)   Chicago, IL
6 U.S. Access(*)                       Louisville, KY
6 Washington Mutual(*)                 Seattle, WA
6 Waterhouse National Bank(*)          New York, NY

1 Salem Five Cents Savings Bank        www.salemfive.com
2 Bank of America                      www.bankofamerica.com
3 Riggs Bank                           www.riggsbank.com
4 Dollar Bank                          www.dollarbank.com
5 People's Bank                        www.peoples.com
6 Net.B@nk(*)                          www.netbank.com
6 Northern Trust Bank of Illinois(*)   www.northerntrust.com
6 U.S. Access(*)                       www.usaccessbank.com
6 Washington Mutual(*)                 www.wamu.com
6 Waterhouse National Bank(*)          www.waterhousebank.com

(*) Tied for sixth place

SOURCE: GOMEZ ADVISORS3