WASHINGTON — Internet-only banks have failed to live up to the fanfare that accompanied their entrance into the financial services market five years ago, and they are creating unique challenges for supervisors, a top regulator said Wednesday at a seminar in Tokyo.

Office of Thrift Supervision Director Ellen Seidman, whose agency has chartered eight of the country’s 15 Internet-only banks, said that the online institutions have been more expensive to operate than projected, are attracting an unstable deposit base, and cannot easily satisfy customer demand for personal interaction and easy access to cash.

Contrary to predictions, Internet-only banks have not saved money by abandoning the traditional branch system, Ms. Seidman said. “The savings they have achieved by not having branches have often been more than offset by the high costs associated with acquiring and retaining customers and with updating and improving their technology infrastructure. The promise of low general and administrative expenses has yet to be proven.”

A common strategy among Internet-only banks has been to offer high interest rates on deposits to bring in customers. The result is that, rather than attracting core deposits from customers who want to build a relationship, the banks are getting “hot money” from individuals shopping for high interest rates, Ms. Seidman said.

“As soon as they lower their rates, the deposits flow out,” she said. “It is unclear whether an institution that has few stable core deposits will be able to succeed on a long-term basis throughout economic cycles.”

Internet-only banks face particular difficulties in mortgages, Ms. Seidman said. Many people remain reluctant to enter into such a large transaction without face-to-face contact with their lender, and the technology necessary for originating and closing mortgages online is still in the developmental stages, she said.

As a result, the OTS has found that “most Internet-only institutions must still rely on costly third-party arrangements to buy loans in the wholesale markets, which results in razor-thin margins,” Ms. Seidman said.

Internet-only banks are also being challenged by customers’ need for easy access to their money and their desire to have “the flexibility to walk into a branch office and see who they are doing business with or — if they so desire — to complain,” she said.

This has caused some institutions to rethink their Internet-only strategy altogether, she said. Some have bought ATM networks, and others have opened branch offices.

In trying to assure that Internet-only banks operate safely and soundly, the OTS has had to impose a somewhat different regulatory regime on them, Ms. Seidman said. For instance, capital requirements for such banks are higher than those for a traditional de novo, to compensate for “inevitable” losses from early advertising and technology costs, she said.

The banks had little trouble meeting the higher requirements when they first came to market, because the capital markets were more than happy to fund online ventures, she said. “In recent months, however, this situation has changed. Investors are beginning to expect Internet companies to show a profit before they invest additional funds.”

The OTS has also been forced to address the issue of Web security by requiring every applicant for an Internet-only bank to hire an outside computer security firm to verify that their systems are safe from attack, Ms. Seidman said.

The reason for this is not just to assure the bank’s safety, but to maintain public confidence in online banks as a whole, she said. “We recognize that if there is a security breach at just one Internet-only institution, the systemic repercussions could be significant.”

Despite all of her agency’s concerns, Ms. Seidman still sees a future for online banking.

“Right now it is unclear who will survive and which strategy will ultimately be successful and how new technologies, such as wireless banking and account aggregation, will affect them,” she said. “It is clear, however, that Internet banking and new information technologies hold great promise, and that they will evolve rapidly for many years to come.”

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