Community banks have been slower than larger ones to offer online services, but there are signs they are catching up.

Executives at these banks say they are more aware both of the danger of losing customers to Internet-only banks and that customers expect to be able to do business online. Chris Lorence, director of sales at ICBA Bancard, the payment services subsidiary of the Independent Community Bankers of America, said that about 55% of the ICBA's 5,300 member banks enable consumers to check balances and transfer funds online, but only about a third offer a full Internet banking service - with transactional and check imaging capabilities and bill payment/presentment.

Habit, not cost, is the main hindrance, Mr. Lorence said.

"Our banks are very conventional, and it's hard to break out of tradition," he said. "Most of them are family-owned and -operated, and they're used to operating the same way they always have. It takes them time to realize that even in a town of 300, people do have computers and they do travel outside of the geographic area the bank is used to working in."

In fact, Mr. Lorence said, rural areas can be a prime market for Internet banking, since many people who live there are self-employed, work long hours, and do not want to drive great distances to do their banking. Community banks have to understand this type of thing or they will lose out to new competitors offering a wide range of online services, he said.

"E-Trade Bank, I'm scared to death of them," he said. "We're seeing large, large interest in these nontraditional banks from the customers."

Even banks with assets of as little as $11 million are adding Internet services, Mr. Lorence continued. Until recently, "Community banks sort of stood back and said, 'We have all our customers. We're not losing customers, because we operate in our geographic footprint, so we don't need this.' I think a lot of them are starting to realize that - footprint or not - access is important."

Online banking is still so new in certain pockets of community banking that some institutions call themselves forward-thinking when they make it available. Take, for instance, Bank of Asheville in North Carolina, which put out a press release Monday saying it was a "national leader" for offering such an "innovative service."

Bank of Asheville, an $80 million-asset subsidiary of WestStar Financial Services, was chartered in 1997 and has signed up 3,500 customers. Its retail Internet service, which went live last week, lets customers check balances, transfer money, and view statements. Bill payment will be added next month, and future additions will bring check imaging, bill and statement presentment, account aggregation, and commercial banking services, said Randall C. Hall, executive vice president and chief financial officer at Bank of Asheville.

Mr. Hall pointed out that many of his customers are older people who divide their time between North Carolina and Florida.

"A lot of retirees are spending more time on their computers," he said. "It amazed me how sophisticated they are. More of them are becoming comfortable with technology as they have the time to investigate it and utilize it."

And they are demanding the ability to bank online, Mr. Hall said.

"People are expecting this, just like ATMs," he said. "They expect you to have this service available to them, and a number of people have told us they will transfer their accounts to us once we start Internet banking."

More community banks are looking at online banking in a new light, Mr. Hall said. "A lot of us have placed emphasis on face-to-face customer contact, and some people may see the Internet as a way to reduce that, as opposed to it being another avenue for customers to use," he said. "Their market may not have a demand for it, but I think in time it will."

Emigrant Savings Bank, a 150-year-old New York thrift, started offering Internet banking in June. Like Bank of Asheville, Emigrant said it recognized the need to offer online banking to attract new customers and keep those it already has from going elsewhere.

They are not the only ones to recognize this. In Grant Thornton's latest annual survey of community banks, conducted in November, 77% of the 519 institutions said they see Internet banking services as important to their continued success, and 30% said Internet-only banks pose a threat to community banks.

Eighty-six percent told the accounting firm that their customers want Internet access to their accounts, 61% said their customers want online securities trading, and 45% said their customers want wireless access to bank and investment accounts.

Among community banks that already offer Internet services, 52% told Grant Thornton that they allow customers to monitor account balances and transfer funds, while 41% said they offer electronic bill payment and just 22% accept online loan applications. About 90% of the banks surveyed said that over the next three years they will provide customers with the ability to check balances and make transfers, 84% said they will enable them to pay bills, and 81% said they will let them apply for loans online.

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