With everybody and his brother starting up an online bank, it was fairly predictable that some of them would fail - and the shakeout seems to have just begun.
CompuBank is selling its assets to NetBank Inc. USABancshares.com is going back to the brick-and-mortar business. Brookline Bancorp is selling off or folding Lighthouse Bank, citing a huge cash leakage. Synovus Financial Corp. never followed through on its plans to introduce pointpath.com as a bank aimed at newlyweds. Other Internet banks are adding fees to products whose main attraction was meant to be that they were free.
Given the silly premises of some of these ventures (USABancshares, for example, had a private-label Internet bank for fans of David Bowie) and the senseless proliferation of no-name financial institutions, one could only expect that consumers would vote for less flimsy-sounding depository choices. But one lesson does seem to be emerging: Offering credit cards on the Internet seems to be a more promising recipe than simply taking deposits there.
NextCard Inc., of course, is the poster child of a company that started with an online-only credit card product and built it into a prosperous business. The San Francisco company now boasts a banking charter, a shiny reputation, and $1.312 billion in managed loans as of Jan. 24. Even firms that were already well established in the card business - such as Discover Financial Services, American Express Co., and Providian Financial Corp. - have had noteworthy success in capturing customers and securing loyalty through Internet-based promotions an daccount management featues.
The online banks started with deposit relationships as their basic premise, but the card companies used credit products as their primary tools, and that seems to have worked better. NextCard, for example, opened in 1996, and added new features - including certificates of deposits from NextBank - as its clientele grew. Juniper Bank opened six months ago as a fuller-service online bank with a heavy emphasis on selling credit cards, and now boasts 140,000 accounts (the bulk of them credit card accounts) and $350 million in card loans outstanding.
Jim Stewart, president of Juniper Bank, says his company's "main differentiator" is that "our primary strategy is to grow as a credit card issuer." He says the reason why the card-oriented banks have thrived - and arguably done better than the deposiit-oriented banks - is that there are many creative ways to use the Internet to enhance credit card products, but there is not so much you can do with a checking or savings account.
"The online piece really adds a lot of features and functionality that are on top of the standard credit cards," Mr. Stewart said. "We have viewed the other banking products all along as an important adjunct to that."
Juniper's parent company, Columbus Bank & Trust Co., is also a subsidiary of Synovus, of Columbus, Ga., which owns the card processor TSYS. Interestingly, Synovus decided to turn pointpath.com not into a deposit-taking bank, but into a Web site that sells loyalty cards.
Mr. Stewart and his partner, Richard Vague, have already built a monoline card empire, First USA, which is now a Bank One Corp. subsidiary, and they are using some tried-and-true methods (such as direct mail) to drive growth for Juniper. So far, the basic credit card product has proven to be the main attraction, rather than the additional frills: only about 10% of Juniper's card customers have signed up for more than one product, and not too many customers are taking advantage of the wireless account access option.
Mr. Stewart said Juniper is highlighting low interest rates, good customer service, and convenient features (such as e-mail reminders when a card bill is due). The firm, based in Wilmington, Del., now has 425 employees.
Juniper is a "combination of a very proven model, which is the monoline credit card business" with some enhancements that only the Internet can create, Mr. Stewart said. This type of formula may be a bigger stretch for bankers seeking niches in the online deposit business.
