The jury is still out on the prospects for Internet banks, but Judy Bentovim isn't waiting for a verdict.
The 58-year-old office manager from San Diego, California, recently put about $5,000 into a new checking account with Bank of Internet USA, a San Diego online-only bank founded last July. And she plans to set up two more cyber-accounts with the fledgling bank, another for herself and one for her father.
"I just decided that it was time to join the 21st century and go online," Bentovim said. "I love it. I think it saves a lot of time and paperwork."
Internet-only banks are gaining popularity - thanks to offers of higher interest rates, lower fees and reimbursements for ATM surcharges. But they have not broken into the big leagues yet, because most people still prefer having at least the option to visit a branch.
With tiny work forces and no need for a network of branches, Web banks are much cheaper to operate than their traditional brethren. Most, though, have yet to show a profit, mainly due to marketing costs and slow growth in the number of customer accounts.
"Basically, you could say that online-only banks have been a bunch of abject failures," said Octavio Marenzi, managing director of Celent Communications, a Boston research firm. "The vast majority of them are doomed, that is clear."
Richard Bell, an analyst at Tower Group, sees things differently. He said virtual banks can be strong and profitable if they focus on good banking methods and avoid dot-com fluff.
"I think the growth prospects are generally pretty good," Bell said. "You can, in fact, succeed as a pure-play Internet bank, but you've got to focus on being a bank, not focus on the Internet."
The number of U.S. households banking online is expected to triple in the next five years, from 14.6 million presently to about 43.5 million by the end of 2005, according to Internet research firm Jupiter Research.
That number includes the online banking operations of large traditional banks, but Internet-only banks also are expected to see rapid growth, according to Jupiter's Robert Sterling.
Only three or four virtual banks are actually turning a profit, out of the 42 Bell identified in his research of the young industry. He noted that about 30 percent of the virtual banks he studied were Internet-only, with no backup from traditional institutions.
Faced with a loss-making bank holding her money, Bentovim said she is not worried. "If they didn't turn a profit a year from now, that would worry me," she said, referring to Bank of Internet, which has 1,600 customers and $75 million in assets. "But they need at least 12 months to settle in."
That's exactly the timeframe that Gary Evans, Bank of Internet's chief executive, has set for profits.
"Time will tell if Internet banking will be successful or not, but I can't help but think it will," Evans said. "If it's a lower cost distribution channel, why shouldn't it work?"
NetBank Inc. , an Atlanta-based Internet-only bank that is publicly traded, earned $8.6 million last year, nearly triple its 1999 profit of $3 million. The bank had $1.8 billion in assets as of Dec. 31, and has 162,000 accounts.
"Profits are here to stay," D.R. Grimes, NetBank's chief executive, told Reuters. "There is absolutely no question that Internet banking is not only successful but is going to continue to be successful moving forward."
Many investors are not convinced: NetBank's stock currently trades for around $10 a share, sharply below its high of $83 reached in April of 1999.
Lower operating costs allow NetBank to be a nimble competitor and have boosted profit margins, Grimes said.
"We are operating with about 50 percent of the expenses of a traditional bank," he said.
But Internet-only banking is not lucrative enough to ensure long-term prosperity, Celent's Marenzi said. He noted that virtual banks tend to reap most of their business from products such as checking accounts and certificates of deposit.
"You're not going to make much money clearing people's checks," he said.
WIDENING THE NET
Internet-only banks are pushing into other areas of financial services, such as insurance and brokerage accounts, in a bid to gain more customers and bring in more cash. To date, most have done this through partnerships with established players in those industries.
NetBank, for example, has partnerships with online broker Ameritrade Holding Corp. and Web-based insurance provider Insurance.com.
First Internet Bank of Indiana, which launched two years ago, has plans to cater to wealthy customers by offering online cash management tools, connections to brokerage accounts and trust programs.
The Indianapolis-based bank, which has about 18,000 customers, is adding 40-60 accounts each day, Chief Executive David Becker said. He forecast a 40 percent rise in assets this year, to $300 million from the current $215 million.
Yet, because many people still prefer banking with live tellers in brick buildings, Internet-only banks appear unlikely to quickly amass assets that would be a threat to older institutions.
"I think from a pure numbers point of view, barring some extraordinary initiative, Internet-only banks in this country will remain a relatively niche phenomenon," Tower Group's Bell said.
Bentovim, for her part, is already sold on the idea.
"I just think it's a faster, cleaner way of doing things," she said.