Security First Network Bank's decision to shed its Web bank skin was not one of 1997's big surprises. For many observers, the writing was on the wall a year and a half ago, when SFNB acquired Security First Technologies (formerly Five

Paces), shifted its software sales into high gear and relegated its bank forever to the role of security system prototype. The realization that SFNB could not go on pitching banks as customers while competing with them for accounts, coupled with regulatory requirements forcing the company to tie up much-needed capital in the bank, prompted the decision to put the Web bank on the block. While some say the move was inevitable, others contend it casts doubt on the future of Internet banks.

The cost to build international brand would have started at $100 million-prohibitive for a start-up Web bank and unnecessary for a big-name buyer, says SFNB president Eric Hartz. "I guarantee if SFNB were converted to Citibank.com, there would be a lot of confidence suddenly and a lot of brand value," he says, adding that several banks have expressed interest. He declined to reveal the banks' identities. Despite its more than 12,000 customers and $48 million in assets, SFNB lacks the trusted brand necessary to grow beyond that. "Customers were putting in their play money to find out what kind of bank it was, but I don't think too many were putting in their life savings or opening up very large accounts," says Mildred Wulff, a commerce analyst at Jupiter Communications. And with more big institutions adding Web banking to their sophisticated remote banking rosters, SFNB's advantage was slowly eroding, she says. Hence, the desire to focus on Security First Technologies, which now has 48 financial institution-customers representing $800 billion in assets, says Hartz.

The looming question: Can pure Internet banks survive? Don Shapleigh, president of $80 million-asset Atlanta Internet Bank, says there's no comparison between SFNB and AIB. "They never put any real effort into running that bank. It was a beta to show the world that (it) works, and that's been a resounding success," he says. "But we're not in the software business."

Shapleigh argues that AIB's lower cost of operation will allow the bank to compete effectively on price with larger banks boasting Internet services. AIB reports 10 percent account growth in the 20 days after the launch of a new Internet ad campaign. As for Hartz's comment that customers prefer multi-channel banking, Shapleigh disagrees: "Our customers never complain about needing a branch."

-prince tfn.com

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