Virtual banking hits the high street

According to a survey from Barclays bank last week, up to 10 million people in the UK will bank on the Net in a year's time. So what will they be doing and how will it change the services we have come to expect from our traditional banks?

The fight to be top of the heap in online banking is reaching fever pitch as traditional players and Internet start-ups slug it out. On Monday, the Bank of Scotland announced a host of online services for its customers, although no plans for stand-alone Net banking. NatWest, currently embroiled in a hostile take-over bid from BoS, is also set to go online.

And bankers aren't the only ones who want to jump on the bandwagon. Bernard Arnault, owner of luxury goods firm Louis Vuitton, is set to launch a global Internet bank, it was reported Tuesday.

While Barclays confidently declares itself to be the UK's biggest Internet bank -- with around 450,000 customers -- all the high street names are feeling the pinch of the Internet startups. Internet-only banks like Smile, Egg and first-e are gaining profile and, without the costs of physical buildings, can afford to dangle carrots in front of potential customers. first-e promises users the UK's best interest rate -- 6.51 percent -- on its saving account for example.

According to Barclay's banking survey, viewing statements is the most popular online activity with 88 percent using this service. Seventy-eight percent use their account to transfer funds, 59 percent for paying bills and 33 percent for downloading statements. Convenience, access to more information and more time to think about financial decisions are cited as benefits of Internet banking.

Luisa Bordoni at research firm IDC believes it will not be enough for Internet banks just to provide banking services in the future. "They will no longer be just banks but aggregators of information," she said.

But with the main banking services still being about taking money out and putting money into accounts, how long before the technology can provide it? According to Bordoni, the technology is already available to provide smartcard depositing and electronic purses, but banks are reluctant to employ it because it removes the human interaction. "Spanish banks are the most advanced technologically, but have the lowest number of users," she said.

Traditional banks face an uncertain future as they battle to keep both high street branches and virtual banks alive, Bordoni warns. "High street banks' profits are at stake. They are threatened by the new players," she said.

According to Gordon Sharpe, director of e-business at the Bank of Scotland, electronic purses -- which will allow online customers to deposit and withdraw money virtually -- will be available in the next two years. However he is convinced the real challenge will be to re-personalise a banking experience made impersonal by technology.

The physical banks of the future may will be smaller, friendlier and more conveniently situated, he believes -- but they certainly aren't going to disappear. "It may be that traditional branches end up as part of the Saturday shopping expedition. Those palatial bank buildings may no longer be appropriate. Smaller banks closer to supermarkets may be a better way," he said.

Sharpe is unconcerned about the threat from Egg, Smile and other Internet banks. "At the end of the day the companies that start these Net ventures -- Halifax, Co-op, etc -- still have costs of running their own separate businesses, and they must expect some of their existing customers to transfer to the Internet service they offer. That is, ultimately, a loss-making scenario," he said.

For Internet-only banks like first-e, Sharpe also has a warning. "If I was a customer I might feel aggrieved having to go to an Internet-only bank. Where is the service or loyalty factor?" he said.

Richard Thackray, the UK manager of first-e, is optimistic about the future for Internet-only banks. "People want to put money in, take it out, do things with it and a well-designed Internet bank will allow all of these things," he said. While he admits Internet banking lacks the face-to-face element people are used to, he denies it is impersonal. "What is more personal than being able to do your own banking?" he said.

Thackray predicts that for those who like a personal service, Webcams will be used on the Net but he warns it will not be cheap. "That personal touch is hugely expensive. If you want to have someone on the screen to talk to, you will be able to but you will have to pay," he said.

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