For a bank with Internet aspirations, Los Alamos National Bank had everything going for it: a small, self-contained community with an upscale, educated, truly wired population that included the bank's true-believer president.

The bank's road to the Web, however, has been about as rocky as its mountainous New Mexico terrain. It offers a cautionary tale for others among the hundreds or thousands of U.S. banks setting Internet strategies.

In the two years since it set its sights on the Net, the $342 million- asset bank has suffered huge cost overruns, agonizing delays, and infuriating misunderstandings with a vendor.

"Our customers are thirsty for on-line banking," said president SteveW. Wells. But all that he can offer them today is a small and basic site ( that does not handle transactions.

Now searching for a new vendor, the bank hopes to have at least a rudimentary interactive banking program in place by June, ready to be upgraded as the market demands more.

"It's like taking the car to get repaired," said Mr. Wells, 41, reflecting on the frustrations. "If you have no idea what's wrong, everything's wrong.

"You need to be educated. If you think you're just going to go out and buy technology and plug it in, you're going to pay dearly."

Los Alamos would seem just about perfect for an Internet bank. The community of 18,000, 35 miles northwest of Santa Fe, is the home of Los Alamos National Laboratory, which housed the Manhattan Project that developed the atomic bomb during World War II.

The town is said to have this country's highest per capita concentration of PhD's. About 65% of the population works at the laboratory, and 80% of households have personal computers, more than double the national average.

The median income-$54,801-is tops in New Mexico, and more than 27% of Los Alamos households earn over $75,000.

Reflecting its community, Los Alamos National Bank likes to consider itself a technology leader. It was an early provider of automated teller machines, and in 1995 it was in the first wave of banks that looked at the World Wide Web as a potentially important distribution medium.

BankAmerica Corp., whose Bank of America subsidiary does business in New Mexico, was showing itself to be an early leader on the Internet, and Los Alamos National did not want to lose customers to that organization.

Los Alamos National Bank, founded in 1963, claims a 56% share in the five northern New Mexico counties where it does business.

In the heady early days Mr. Wells asked Robert D. Harris, a nine-year bank employee who had worked as a commercial lending officer and credit analyst, to explore the available Internet options.

Mr. Harris, 32, was considered one of the more technology-literate on the staff of 150. He began researching vendors and amassing literature on Internet banking.

The bankers quickly decided they did not have the expertise to design and develop their own Web site.

In looking at vendor alternatives, they were turned off by the expense involved in hooking up customers through Intuit Inc.'s Quicken program and were concerned about the Quicken brand name's potentially drowning out that of the bank. (Intuit has since tried to address such concerns, and Mr. Wells has not ruled out cooperating with it or with Microsoft Corp. on its Money software in the future.)

Determined to stay within a modest budget, Mr. Harris began looking at several companies that had put banks up on the Internet. He said the pickings were then "fairly slim."

The Los Alamos bank decided it wanted a vendor with a local presence that could hand-hold through the new experience.

Only two met that criterion. One was a start-up called Virtual Los Alamos, a family-run business tied to a local electronic media company. Its Web-design experience was limited, but it was cheap: Virtual Los Alamos would charge $2,000 to develop and post up to 25 digital pages, and would do the job within a month or two.

The other was Netgoal Inc., which had gotten wind of the bank's interest in a transactional Web site and had approached it with a written proposal.

Netgoal was a group of five people who had never designed a Web page together before. One was a college student, and four were young, moonlighting employees of Los Alamos National Laboratory.

The partners hoped to cut their teeth with Los Alamos National Bank, then perhaps turn Netgoal into something bigger. They told the bank that their skills and specialties, when pooled together, gave them all the tools for Web site design.

"What we envisioned was that LANB would kind of be the spine of a regional electronic commerce architecture where everything that gets built in Los Alamos could easily fit into the bank," said Netgoal partner Molly Cernicek. "For instance, if you were doing real estate you could link straight into the loan pages, into the rate pages."

Netgoal told Los Alamos National it would charge approximately $30,200 for site development, design, labor, and equipment, and could post a site in five to eight months, with changes or updates to follow. On its World Wide Web home page, Netgoal describes itself as "the premier Internet developer in northern New Mexico."

Bank officials were ambivalent. Both firms were new and inexperienced. Virtual Los Alamos had other drawbacks-it planned to charge $50 an hour for modifications to the Web site, and said it would not change the site content more than twice a month.

On top of that, Mr. Harris found that previous Virtual Los Alamos sites had "many misspellings and poor site design."

With quality a concern, the bank asked Virtual Los Alamos to develop a small site as a trial run. It cost only $1,326.06, but it took months to complete and was marred by "poor graphic images and misspellings," Mr. Harris said.

On Sept. 28, 1995, Los Alamos National Bank hired Netgoal.

At the time, a spate of different Internet standards and protocols were being proposed by various technology companies and associations. Bank executives said they felt ill-equipped to evaluate them. All they knew was they wanted to act fast, and Netgoal was eager.

The relationship soon turned into a classic case of he said, she said, with each side accusing the other of being out of touch.

"From our perspective it went really well," said Ms. Cernicek. "Overall, we got a good product out. Everybody we talk to in town uses that (home) page a lot for information-they've had a tremendous amount of feedback."

Netgoal partners said the site's design would reflect the bank's interest in serving present and future customers on the Internet. They articulated a goal for the bank of using the network as a tool for interactive banking, finance, and advertising.

Then bank executives warned of some potential complicating factors.

One was that Los Alamos National was in the midst of building a 70,000- square-foot facility, where it planned to consolidate employees from three smaller buildings. The project was scheduled to be completed by June 7, 1996, with occupancy scheduled for June 22.

The other was a computing change. The bank was switching to a new operations system called Pulse. The initiative, which was scheduled to be operational by Jan. 11, 1996 (the date was later pushed back to April 17), was a top priority, and bank officials feared it would preclude them from training employees to use the Internet.

Even so, the two sides agreed to a contract that set several deadlines.

According to the bank, phase one, to be completed by Nov. 30, 1995, would involve designing bank logos and on-line applications for account information. Phase 2, by Feb. 28, 1996, would include establishing E-mail throughout the bank, determining internal technological configurations, and designing more Web pages.

Phase 3 was to end June 22, 1996, to coincide with the opening of the new building. By this time the Web site was supposed to give customers on- line account access, a bank personnel index, a list of ATM locations, and information about local real estate.

The bank and the design firm agreed contractually to meet once or twice a month to monitor progress and hash out any questions.

By Dec. 28, 1995, the bank's Internet link was fully operational, but some cracks in the plan were showing, executives said.

In November, their regular meetings with Netgoal began to be curtailed. The bank's understanding was that Netgoal was busy setting up hardware and designing software, so most communications occurred electronically instead.

Whenever an Internet-literate bank official came across a pleasing Web site, he or she would E-mail the address to Netgoal to show what types of buttons, colors, and designs the bank liked.

At the same time, Netgoal asked the bank staff to look at certain Web sites and offer feedback.

According to the vendor's account, meetings took place constantly, and progress was impeded by the bank's unfamiliarity with the technology and ambivalence about what it wanted.

"We had a vision, but we were working with people who had very little experience on the Net and very little idea as to where it might be taking banking and business," Ms. Cernicek said. "For instance, one month we were all ready to go and working on things, and then they'd change the design. They changed the design three times in one month."

Both sides agree Netgoal made progress on the hardware and connectivity issues, and also on page design. By yearend 1995, the general hierarchy of Web pages had been established. Links were operational. The opening home page had been written, and so had pages that would show interest rates.

On Valentine's Day 1996, Los Alamos National Bank's E-mail system was up and running, and everyone was pleased Netgoal had hit its deadline.

But the bank got a rude awakening in March when Netgoal presented a $25,250 bill for the work done so far.

Mr. Harris and Mr. Wells were flabbergasted. The bank had expected to spend no more than $30,000 on the entire project, not just the first few months.

To their amazement, the bank executives found that they had misread their contract with Netgoal. The bank thought it had agreed to pay $5,000 to $7,000 for each of the three "phases" of the project. But the contract actually stated that Netgoal would receive $5,000 to $7,000 per month.

"Our costs really ran away from us-they were about twice as much as we had expected," Mr. Harris said. "But that was primarily our fault, because we really didn't read the contract correctly."

At the same time, the bank perceived that Netgoal was not meeting its deadlines. The cost overruns forced the bank to scrap its original plans for a transactional Web site and to focus on getting a static one posted.

"It was a learning experience for both of us," Mr. Harris said. "My advice now is that if you do go through somebody, try and get somebody who has actually done sites before. That way you can look at it and also get some references to see how happy they were with the work."

Ms. Cernicek said Netgoal had installed a whole Internet architecture and set up a prototype Web site. But she said the bankers did not seem to understand all of what Netgoal was doing, and were impeding progress by constantly changing their minds.

"We just assumed that they would know what we were talking about, and we should have stepped back and been a lot more explicit," Ms. Cernicek said. "I think we both learned a lot in terms of how to proceed next time."

"We didn't know as much about banking, and we'd put something up there and they'd go, 'No, no, it's actually this way,'" Ms. Cernicek said.

Last June 22 the new building opened as scheduled. And in July the slightly tardy site made its debut.

The site did not offer account access. It did not have an ATM locator or real estate information. It did have some very basic information about rates, accounts, and services.

There was a newsy welcome message from Mr. Wells, and a place where people could contact the bank. The cost was roughly double what the bank had anticipated.

Ms. Cernicek said that the site is well equipped for on-line banking, and that it was the bank's reluctance to offer account access that had prompted the vendor to stop developing the site after it was posted in July.

The bank contends it was trying to cut its losses and find a more experienced vendor.

There was good news for Mr. Harris, who had been researching on-line banking and kept a diary of his experience in creating the Los Alamos National Bank Web site. It was the basis for the thesis he used in graduating last June from the American Bankers Association's Stonier Graduate School. (Mr. Harris has since moved on to other responsibilities, as an investments officer at Los Alamos National Bank.)

After the nontransactional site was posted, the bank decided to maintain it without outside help. Looking within its ranks, it found a young technician in the information systems department who was interested in learning HTML and Java, the important Web programming languages. He was placed in charge of Web site development last summer and spent several months polishing what Netgoal had built.

"I have been more impressed with the work he has done and the dollars we're spending for that than the work we did prior and the dollars we spent for that," Mr. Wells said.

Netgoal partners still came in from time to time to troubleshoot, but their involvement was kept to a minimum.

Chastened by their experience, bank executives went back to square one. They started conducting fresh research into vendors that could take their static Web site and turn it into an interactive one.

A year had passed since their initial evaluations, and the bank officials found that costs had come down, security had improved, and more vendors had entered the market.

Mr. Wells does not regret the earlier misadventures.

"There really is no way to get into this game other than you just have to start and jump in," he philosophized.

"It's sort of like buying a new computer," Mr. Harris said. "You can say, 'I'm going wait because there's something coming out that's going to be better.' But if you keep waiting, you're never going to be able to come to market or provide customers with what they need."

Aiming for on-line banking capability in June, Mr. Wells is steeped in vendor comparisons. He now favors Checkfree Corp. and Visa Interactive, though he has also been impressed with Edify Corp., Home Financial Network Inc., and others.

Though still eagerly pushing forward, Mr. Wells said he occasionally questions his strong faith in the new medium.

"There are some bankers I can talk to and feel like they have the same thirst, or vision, about where this is going-but I'd say those are the minority," Mr. Wells said. "More commonly I talk to bankers who say, 'Why do I need E-mail?' or 'Why do I need on-line banking? Our customers don't need that.'"

Mr. Wells said "invisible competition" from companies like Intuit is part of what spurs him on.

"You do a little soul-searching and you say, 'Am I out of line here? Am I too far ahead of the crowd here?' Then you go log back on and you get customers asking you to do this.

"It may not be for the masses today. But if you're not already at the threshold of doing some banking on-line, when the room opens up it's going to be crowded, and you'll have a hard time working your way in."

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