Bank One officials assessing the future of should consider the fate of a similar Internet-only venture launched two years ago by Bank of Montreal. That Web bank didn't work.

Though Bank One received kudos for the ambitious launch of its direct bank in June, Bank of Montreal actually gets credit for being the first bank in North America to roll out a separately branded bank, accessible only through electronic channels.

But only two months after Wingspan was started, Bank of Montreal pulled the plug on its venture, called mbanx. The $144 billion-asset bank determined that its mbanx customers would be better served if they were given access to physical branches.

After spending an amount estimated by Canadian Business at $70 million to build and brand mbanx, Bank of Montreal folded the unit's 170,000 customers into the mix of 750,000 Bank of Montreal customers who had signed up for Internet banking. The operation was renamed mbanx Direct.

"We've experimented with one-size-fits-all," said Marnie Kinsley, chief operating officer and executive vice president of mbanx Direct, referring to its exclusive use of direct channels to serve customers. "While that is an interesting idea, it's not how it works," she said.

The lessons of Bank of Montreal may be relevant not only to Bank One but also to the handful of other institutions that are pursuing the Internet-only model of serving customers. The same month that mbanx was being revamped, Citigroup introduced a preliminary version of Citi f/i, its direct bank contender. American Express also rolled out a direct offering, Membership Banking, this summer.

At least one such institution, North Fork Bancorp, got cold feet. John Adam Kanas, chief executive officer of the $11 billion-asset company, backed off a plan to open an Internet-only bank six months after announcing it, claiming the approach "is just not viable."

Bank of Montreal's decision to fold mbanx into its traditional bank is "not a surprising outcome," said Daniel W. Latimore, a director at Mainspring in Cambridge, Mass. "mbanx can be seen as a preview of the challenges that Bank One will face."

Bank One canceled a meeting with analysts this week that it had scheduled in order to reveal its plans for its First USA credit card subsidiary, which includes Wingspan. Uncertainty over Wingspan's future mounted last week after the Internet bank's president and chief executive officer, James W. Stewart 3d, announced his resignation.

With the benefit of hindsight, Bank of Montreal has greatly modified its Wingspan-like approach to direct banking. Customers of mbanx Direct now have a choice of seven packages that offer services at varying prices through all channels -- telephone, Internet, and branches.

"We're segmenting service far more than we did at mbanx," said Ms. Kinsley, who formerly oversaw Bank of Montreal's direct bank and mbanx.

As with Wingspan, the original aim of mbanx was to close loans virtually, eliminating the need for customers to use Bank of Montreal's 1,000 branches. "We would offer relationship management over the phone and the Internet," Ms. Kinsley said.

Besides allowing Bank of Montreal to offer services through lower-cost channels, mbanx was viewed as a major customer retention tool. The direct bank offered significant reductions of its normal $9 monthly fee when customers increased their loan or deposit holdings. It completely waived fees for customers who brought in about $42,000 of business, including mortgages, and actually paid cash rewards to more loyal customers.

However, customers found the program confusing, and many were not maintaining balances, Ms. Kinsley said.

Now mbanx Direct offers a simpler combination of fee waivers and airline miles. Minimum balances are set once customers opt for one of the seven account packages. They get air miles for every transaction made or account opened.

By January, mbanx Direct will begin a program for adding to its customer base, which has now exceeded one million customers. "We want to know how to approach those doing transactions in the branches and get new customers," Ms. Kinsley said.

As a stand-alone operation, mbanx did not exceed expectations in terms of attracting customers, 80% of whom were from Bank of Montreal and 20% of whom were new to the institution. Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Canada Trust all had at least twice as many registered users.

But mbanx did excel in strengthening customer loyalty. It achieved a 95% client satisfaction score -- higher than any other financial institution in North America -- in a client loyalty study compiled this year by Burke Customer Satisfaction Associates.

"Our biggest success has been our customer loyalty," Ms. Kinsley said. "We go the extra mile in terms of customer service."

Mbanx built a customer information file that records every contact a client makes with the bank, plus the comments a customer service agent makes during that call. With the system, which is based on VisualBanker from International Business Machines Corp., customers do not have to repeat their inquiries every time they call.

"We're focusing on how to build relationships on a direct channel, while other banks are just adding products," Ms. Kinsley said.

Despite mbanx's revamping, Ms. Kinsley said she believes the Internet-only approach can work in the United States because it has 10 times more people than Canada's 28 million.

"Canada is not big enough to sustain an Internet-only bank," she said.

Bank of Montreal's research shows that Canadians want all the options. "They like to conduct their banking at home at night, but they also like a place to go where they can see someone face-to-face," she said.

Presenting such options to consumers in a coherent way can be a difficult task for banks, said Christopher Musto, director of financial services at Gomez Advisors Inc.

"Bank One came up with the WingspanBank brand for its Internet customers, and many are trying to sense if this is for them," he said.

"We're all working on high-tech, high-touch, and high value," Ms. Kinsley said. "People want the convenience and new value of telephone and Internet banking, yet they want the old value of touch."

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