Banks may not have seen the end of the damage that highly focused, monoline credit card competitors can do to their historical business strongholds.

The specialized card marketers garnered significant card market shares over the past decade. They started side businesses in certificates of deposit and money market accounts sold through the mail or over the phone. But these businesses were relatively confined and closely related to card issuing.

With the rise of the Internet, these aggressive issuers see an opportunity to become banks in a more traditional, full-service sense - and without the need for a costly branch system.

American Express Co. made that leap in July with the introduction of its Membership Banking program, and NextCard Inc., a company built for the Internet, said it plans to offer additional banking services on-line.

Analysts say Capital One Financial Corp. and MBNA Corp. may be moving in this direction. First USA Inc. began to do so even before its 1997 acquisition by Bank One Corp. and its controversial launching this year of the branchless Internet service WingspanBank.com.

"These new players are a significant risk to traditional banks," said Michael Auriemma, president of Auriemma Consulting Group in Westbury, N.Y. "Everybody in the financial services industry is talking about customer relationship management and how to maximize the profit of each individual customer, and credit card issuers have a leg up when it comes to managing relationships."

Companies like MBNA of Wilmington, Del., and Capital One of Falls Church, Va., have attracted deposits at favorable interest rates to help fund their loans. MBNA said 25% of its funding comes from CD and money market deposit accounts. But as credit card competition increases, issuers are starting to market noncard products more intensely and view them as a way to solidify customer relationships.

Accomplishing that without a branch network may be becoming less difficult as the public becomes more accustomed to virtual and remote dealings by computer, phone, and automated teller machine.

"We are a very viable competitor to the traditional bank," said Vernon Wright, vice chairman and chief corporate finance officer at MBNA. "We're able to have significant diversification of our deposit base." Lacking the costs of bricks and mortar, "we can share that economic benefit with our customers."

MBNA said it has no immediate plan to open a full-service, on-line bank but looks to the Internet as a potent marketing vehicle for additional products.

Capital One has been marketing its CDs more actively and now offers frequent-flyer points to customers who invest in CDs on-line. Through an agreement with Click Rewards, a $10,000 Capital One CD earns 1,000 clickmiles. Click Rewards is also in use at CDNow, barnesandnoble.com, and officemax.com.

Analyst Gary Gordon, managing director at PaineWebber Inc., said the deposit-taking business will change "pretty dramatically" over the next couple of years and price-sensitive products may soon have no place in bank branches. He said he envisions a commoditized on-line marketplace in which people shop for the best rates, which credit card companies are well positioned to offer.

"All of the [monolines] are making a push to build consumer products," Mr. Gordon said. "The source of competition because of the Internet has changed dramatically. It's a major threat to the branch system."

Some industry experts say banks still have a leg up.

"The large banks have their Internet strategies too," said Jeffrey Baxter, principal at S.J. Baxter & Associates in Forest Hill, Md. "They're not just sitting there waiting for someone to take their business away."

David B. Hilder, a banking analyst at Morgan Stanley Dean Witter, said the deposit customers that card companies attract with high rates are not the most profitable for banks, anyway. "The value for the bank is really created by non-interest-bearing or low-interest-bearing customer accounts," he said.

"I would be a little more concerned if any of the card players were offering an Internet bank," he said, adding that American Express' gambit is of "potential significance to the traditional banks."

American Express' on-line bank offers money market and checking accounts, CDs, bill payments, personal loans, and debit cards. To make up for its lack of banking offices, American Express offers rebates of up to $72 a year for automated teller machine surcharges. Other perks include money market accounts with yields of 5% and interest-bearing checking.

"We have a fabulous brand, and the Internet offers us the opportunity to launch into banking," Alfred F. Kelly Jr., president of consumer card services at American Express, told American Banker after the program's start-up.

American Express declined to say how its banking initiative is going.

San Francisco-based NextCard has since its inception stated a desire to expand into on-line banking. It said none of the Internet banking initiatives so far offers people a compelling value proposition.

"Our intent is to redefine the banking experience for the Internet consumer," said Richard Goebel, vice president of business development at NextCard. "The banking industry has really not innovated all that much, and we think for that reason you haven't seen the same sort of adoption rates that you've seen at on-line brokerages."

Mr. Goebel would not elaborate on what NextCard is planning or when it might launch new products. He said it is looking into card products such as debit.

Credit cards are a natural way to reach consumers initially, Mr. Goebel said, because you are "giving them money as opposed to asking them for money." That is why NextCard started out that way and plans to expand from there.

At the Bank Administration Institute Retail Delivery Conference last week in Miami Beach, NextCard founder and chief executive officer Jeremy Lent got into a debate with Frank Petrilli, president of the discount brokerage TD Waterhouse Group, about the long-term need for brick and mortar.

Mr. Petrilli said his branch network, approaching 200 offices, is "a must," having been instrumental in attracting on-line clients at costs well below industry averages. He described the physical complement to Internet services as "a permanent ad campaign."

Mr. Lent said he can foresee a day when "you don't need a physical presence for any element of financial services. Customers are becoming more and more comfortable" without in-person interactions, and when they need customer-service contact they will be able to get it on the Web.

NextCard recently began a provocative newspaper and magazine advertising campaign. One ad says, "Banks are History, What's next?" in graffito style across a traditional bank facade.

"What we mean by that is that the manner of how you bank is going to be changing," Mr. Goebel said. "And NextCard is going to be part of that."

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