The already eroding confidence in Internet banks has worsened with the announcement of a major strategic shift by USABancshares.com Inc.
In its 2000 earnings results, released Monday night, the Philadelphia company said it will sharply curtail investing in the Internet. It also said it will take a $3.7 million charge in the fourth quarter, partly because of the unwinding of several partnerships.
These announcements came only days after Compubank, Houston, announced it had agreed to sell its customer accounts and assets to NetBank of Atlanta. Compubanks demise triggered speculation of an imminent consolidation wave among Internet banks.
Craig Scher, president and chief executive officer of USABancshares.com, said the company is de-emphasizing the Web, not abandoning it.
I dont think Internet banking is impossible, he said, I just think the capital resources have to be carefully allocated as any bank with an Internet platform tends to grow its customer base.
Given the trouble that had been brewing at the company, the latest developments are not surprising. Last month it reached a deal with the Federal Reserve Bank of Philadelphia designed to rein in its debt, and Kenneth L. Tepper, the companys founder and a vocal Internet proponent, resigned.
Mr. Scher, who joined the company in 1998 and headed its community banking operations before being promoted to president and CEO last month, said it now is evaluating dropping the dot-com and returning to USABancshares.
Mr. Tepper shifted the companys focus from community to Internet banking in April 1999.
The company was among the first in the United States to offer account access over wireless devices, and before that it had opened one of the first private-label Internet banks, bowiebanc. com, which features the music and art of David Bowie. USABancshares also made its services available over broadband tele- communications networks.
But the company has shown a loss every quarter except for the second quarter of 1999. USABancshares net loss last year more than tripled from a year earlier, to $9.7 million, or $1.70 per share.
Tom McGrath, managing partner of Bank Earnings International LLP, a consulting firm in Orange, Va., said USABanchsares never had the resources to try to do what they did, and they were eating into their equity at an alarming pace, and now they are undercapitalized. Recuperating the loss will take at least three or four years, he said.
Other Internet banking companies have begun reassessing their business models to shore up earnings. Bank One Corp.s WingspanBank.com and BankDirect of Dallas recently began affixing new fees on some accounts, and First Internet Bank of Indiana laid off 20% of its employees.
Its part of a trend that indicates how difficult online banking is, said Tim Butler, senior research analyst at Pacific Crest Securities. The first example is Compubank selling its accounts to NetBank, and now USABancshares is exiting the business.
Still, several Internet banks appear to be holding their own. E-Trade Bank, a subsidiary of E-Trade Group Inc., has amassed more than $11.2 billion of assets and 362,000 accounts. NetBank, with $1.8 billion of assets, has been successful because they have been relatively conservative, and they did not go wild with their marketing spending, Mr. Butler said.
Richard Bell, an online banking analyst at TowerGroup, said Internet banking is a tough business to be in if you dont have a strong physical-world parentage or presence, or some other supporting value proposition. Pure-play Web banks will be successful, but I suspect over time there will only about a half a dozen, he said.
Mr. McGrath said he was less optimistic. The whole sector is populated with people with a bunch of pipe dreams, and reality is catching up to them.
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