A community bank in Lexington, Ky., is trying to outpace some of the industry's giants by building a bank on the information superhighway.
Cardinal Bancshares plans to use the Internet, the global web connecting thousands of computer networks, to deliver a wide range of banking services including transaction, savings, and money market accounts.
The $560 million-asset bank wants to quiet all the talk about fully computerized banking over the Internet by being the first actually to accomplish it, said James S. "Chip" Mahan 3d, chairman and chief executive officer.
Seeing plenty of business prospects among the approximately 30 million Internet subscribers, Mr. Mahan added, "We're totally focused on the Internet propeller-heads and trying to bring the bank to them."
Cardinal is still a few months away from launching the system, but the technology has been demonstrated. It had its public unveiling Wednesday at a Montgomery Securities conference in Pasadena, Calif.
One business-plan hurdle is regulatory: Cardinal is awaiting approval from the Office of Thrift Supervision for a subsidiary, First Federal Bank of Pineville, Ky., to serve customers nationwide.
When cleared, the business would fit the definition of a "virtual" bank, serving customers almost entirely through on-line connections. First Federal Bank's physical facilities would be a single office in Kentucky and an operations center in Atlanta.
Mr. Mahan said he expects approvals from the OTS and the Securities and Exchange Commission, with which it must also file documentation, "sometime before Derby Day" - May 6- enabling the bank to open on the Internet in June or July.
The prototype was designed to emulate branch banking. On the computer screen are icons representing a teller window, an account set-up area, an information desk, and a manager's station.
Consumers will be able to make electronic transactions, including bill payments and other basic debits. They also will get access to images of canceled checks.
Later, Mr. Mahan said he expects to provide credit card and loan products through the on-line service, which does not yet have a marketing name.
Calvin Johnson, director of operations for the new unit, compared Cardinal's initiative to Midland Bank of London's creation of First Direct, an entirely "remote" bank utilizing telephones and automated teller machines.
"Instead of the telephone, we're using the Internet," said Mr. Johnson, who recently left Bank South Corp. to join Cardinal. "It's traditional bank services delivered over nontraditional pipelines."
Mr. Mahan said Cardinal has an advantage over larger, more established, and technology-rich competitors in that it is not weighed down by a mainframe-based, legacy computer system or an expensive network of brick- and-mortar branches. The operating-system backbone of the Internet is Unix- based, an "open" system architecture that has been favored by an increasing number of smaller financial institutions.
Like anyone of any size on the Internet, Cardinal has major concerns about data security. Working with SecureWare Inc. of Atlanta (see accompanying article), the bank believes it can achieve the necessary level of transaction security and privacy.
Many technology experts see data security as the key to banking's success or failure in delivering products on the Internet.
As such, most major banks with initiatives in the area of electronic commerce over the Internet have focused their energies on developing security measures, often with the help of third parties.
Cardinal has had to enlist the service of new vendors and extend agreements with some current ones to facilitate the birth of this new bank unit.
The bank will use Netscape Communications Corp., a computer network service provider that has inked deals with other major banks, to supply the "browser" capability and communications-level integrity that customers will need to access the bank and conduct safe transactions.
By providing services nationwide without the overhead of a branch system, Mr. Mahan anticipates being able to offer extremely competitive rates, giving banks of all sizes a run for their money.
In order to circumvent some legal obstacles to the new unit, Mr. Mahan plans to spin out almost half of the Pineville unit's current branch assets - bringing it down from a $70 million subsidiary to only about $35 to $40 million in size.
He sees his network-based bank operating at far better than average efficiency, even including the costs of computer security and sophisticated system enhancements to accommodate additional services.
Mr. Mahan and Michael S. Karlin, president and chief operating officer of the new unit, expect other banks to make similar forays on the Internet this year - particularly institutions such as BankAmerica Corp. and First Union Corp., which have already staked initial claims with Internet "home pages" and catalogs of banking information.
With its nationwide ambitions, Cardinal's strategy differs from that of a well-publicized community bank, the $200 million-asset State Bank of Fenton, Mich. Most of the latter's information highway initiatives, including an Internet bulletin board, were designed for local consumption.
The Cardinal executives also see their Internet service as a weapon against increasingly potent nonbank competition.
"What the banks need to be wary of, and what we're wary of, is that we're not always going to be king of the jungle," Mr. Karlin said. "We could get stepped on relatively quickly."
