To the surprise of many community bankers, their customers want on-line service.

"I thought in rural Tennessee we would not be confronted with Internet banking in my lifetime," said John L. Campbell, chairman and president of First Community Bank, Rogersville. "I was wrong."

His $87 million-asset institution in a town of 4,800 found in a customer survey that 47% owned personal computers. After recovering from the surprise, the bank created an Internet home page for less than $2,000. It now expects to spend at least $150,000 more so customers may open accounts or make mortgage payments at the site.

To small-town bankers like Mr. Campbell, the Internet can be a way to compete with larger banks and attract customers without building new branches or buying other banks. It also enables a bank to earn fee income by offering Internet services to other banks and businesses.

Mr. Campbell said the cost is far less than the half-million dollars he would have to spend to build a new branch. And while he isn't about to give up bricks and mortar, he said he is trying to reach a new generation.

Britton & Koontz First National Bank, Natchez, Miss., is already reaching wired customers. In May, the $150 million-asset bank started letting customers open accounts, reorder checks, and stop payments on-line. The bank also is an Internet service provider for businesses in the Natchez area.

"I think if you haven't started, you may be doomed," said Page Ogden, president and CEO of Britton & Koontz. "You have to have that kind of access available to your customers."

Both Mr. Ogden and Mr. Campbell said electronic banking is especially important to small-business customers, most of whom use PCs.

"Some community banks want to be cutting-edge," said John Hall, an American Bankers Association spokesman. "They see the Internet as the great equalizer. Size doesn't matter when you're looking at someone's Web page- it's service."

But despite the growing number of community bank executives with on-line ambitions, bankers and technology experts say it will likely be years before Internet banking becomes common at small banks.

Many banks are waiting to see whether the hype about the Internet becomes reality, Mr. Hall said. And even if they offer PC banking, they are sometimes hesitant to offer banking on the Internet because of security fears, he said.

A survey this year by Mentis Corp., a technology research firm in Durham, N.C., found only 1% of financial institutions with less than $1 billion of assets offered Internet access to customers. Of the rest of that group, 42% said they planned to offer Internet access within three years.

Of banks with more than $4 billion of assets, 14% were offering Internet access and 78% of the remainder planned to by 2000.

"It's a tough issue for community bankers because they know they have to do it," said Robert Schmermund, a spokesman for America's Community Bankers, a trade group of 2,000 community banks and thrifts. "But they're wondering how do they get there?"

Mr. Schmermund said about 25% of ACB members have Web pages and the rest show interest in starting one. But few offer electronic banking of any sort, whether it's PC banking software or banking on the Internet.

John Gage, chief science officer of Sun Microsystems Inc., Mountain View, Calif., issued a wake-up call at the ABA convention in Boston this month. He demonstrated how, if U.S. law allowed, Banco Santander of Spain could solicit deposits in the United States through its sophisticated Web site.

ABA president William T. McConnell said Mr. Gage's example had convinced him and other bankers that they need to understand what their customers want. Mr. McConnell, who is chairman and chief executive officer of Park National Corp., Newark, Ohio, said his bank offers a Web page but doesn't offer banking services through the site.

"We need to move in that direction," he said.

Octavio Marenzi, research director at Meridien Research, a financial technology firm in Needham, Mass., said Meridien sees community banks as potential clients. The firm now caters to banking companies with more than $5 billion of assets that want on-line banking services.

But he said too many community bankers don't think they have the money to offer high-tech services. Outsourcing or joining a network could let a community bank spend less than $400,000 to create a World Wide Web site that offers full-service banking, he said.

"It's a very cheap way for a community bank to expand the geographic borders and horizons beyond their branch network," Mr. Marenzi said. "As people start to get more comfortable, they'll start looking on the Internet for the best loan rate."

Curt Hage, chairman, president, and CEO of Home Federal Savings Bank, Sioux Falls, S.D., said his two-month-old Internet banking service has brought him customers from California and Oklahoma.

He said he wants to be able to keep hometown customers who move away as well as to bring in new customers who don't have a connection to Sioux Falls.

"Having your bank just around the corner ... is a thing of the past," Mr. Hage said.

Carolyn Mroz, president and CEO of $57 million-asset Bay-Vanguard Federal Savings Bank, Baltimore, said she expects only about 10% of her existing customers to bank on-line. That would be pretty good-most researchers say 10% of bank customers is the maximum that will be doing their business on-line by 2000 or 2001. But Ms. Mroz is after further growth.

"We can't afford to go out and open branches," she said. "We can certainly reach them through the information superhighway."

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