No one was surprised when, in late June, Bank One Corp. pulled the plug on its WingspanBank.com Internet bank venture. After all, the market has seen its share of dot-com failures over the past year. But was Wingspan-a standalone Internet bank announced with much fanfare two years ago-a flawed business model or a good idea doomed by circumstance?

Industry analysts are divided on the question of whether Internet banking can work. Some state outright that Internet pure plays just don't have staying power, especially in banking. "Pure online banks are beginning to look like failed dreams," says a report issued by Newton, MA-based Meridien Research. However, other analysts blame bad management. "The death of Wingspan was inevitable," according to a brief from Forrester Research of Boston, blaming "internal turmoil" for the banking company's failed endeavor.

Bank One, based in Chicago, isn't pulling out of Internet banking altogether. The company announced that it hopes to convert Wingspan's 225,000 customers to its self-branded Internet bank, bankone.com, this fall. In its announcement, Bank One said shutting down Wingspan would eliminate "the substantial expense of supporting another brand." Bank One, which does not break out revenues and expenses for Wingspan in its financial filings, was believed to have spent at least $150 million promoting the Wingspan brand. During its debut in June 1999-the height of the dot-com glory days-Wingspan advertisements declared: "If your bank could start over, this is what it would be."

However, Wingspan was continually rocked by ongoing management turmoil within its parent company. WingspanBank.com opened for business under John B. McCoy's tenure as chief executive officer at Bank One. McCoy, long praised for groundbreaking initiatives in electronic banking, was forced out in December 1999 under pressure from Wall Street over financial problems at the company's First USA card unit. Former Citigroup executive James Dimon came along as CEO of Bank One a few months later, and the future of Wingspan was up for grabs as the new CEO trimmed expenses and consolidated operations in a quest for profitability at the $270-billion-asset banking company. At one point, Richard Vague, founder and former chief of First USA, which was acquired by Bank One, even tried to buy the venture. When his bid for Wingspan failed, Vague launched a competing pure-play Internet venture, Juniperfinancial.com, and hired away Wingspan's CEO, Jim Stewart. Juniper is a Wilmington, DE-based division of Columbus Bank & Trust Co.

Wingspan also had to contend with the limitations of pure-play Internet banking. For example, deposits are an issue. Juniper is addressing this challenge with a non-Internet solution. An alliance with San Diego-based Mail Boxes Etc. enables Juniper customers, beginning this fall, to walk into any of MBE's 4,200 U.S. locations, overnight deposits to Juniper, free of charge, and receive a receipt that will help them track the package by way of the Juniper and MBE Web sites.

"We've been saying all along that you shouldn't expect the next E*Trade to pop up with online banking," says Robert Sterling, senior analyst with Jupiter Media Metrix, based in New York. Even E*Trade can no longer lay claim to being an Internet pure play, having recently opened a high-tech customer center in midtown Manhattan.

Another big problem for online banks is attracting balances beyond the amount that is used to open an account, usually $100. Sterling says many online banks are burdened with thousands of $100 accounts, which depresses value per account, an important metric for understanding success in Internet banking. "That's a losing business proposition," he explains. A Bank One spokesperson would not comment on customer account balances, saying that it's the company's policy not to publicly discuss Wingspan data beyond basic customer numbers.

Sterling believes there is a place for online banking, and suggests it's a worthwhile strategy for new players, though maybe not a standalone strategy. "If you're starting de novo it's a good place to start," he says.

Gary Craft, president of FinancialDNA.com, based in San Francisco, sees a future for pure Internet banks, but feels "it may be limited to the fringes of society." Likely customers might include hard-core techies, foreign nationals or "people with unforgettably negative experiences with traditional banks," Craft adds. However, unlike online book selling-in which Amazon.com stole share from traditional booksellers-mainstream customers are not likely to make the switch to the Internet quickly. "When it comes to banking, customers are not apt to be as experimental and, thus, change creeps into the market," explains Craft.

A consumer survey, conducted by Newton, MA-based TowerGroup, drives home the point: better than half of consumers surveyed (51%) still prefer to handle routine banking transactions at a brick and mortar branch. The vast majority use either use two (26%), three (24%) or four (20%) different channels for accessing their banks, TowerGroup found. Today, only 18% of U.S. consumers have used online banking, and among those individuals 85% have been to a brick and mortar bank in the last 30 days, according to TowerGroup's research. Among all U.S. households, 92% have used a bank branch in the last 30 days.

"The Internet is just another way for customers to interact with their banks," explains Ray Graber, a TowerGroup senior consultant. Graber expects Internet banking customer numbers will grow relatively slowly (in Internet terms)-about 10% a year for the next several years. TowerGroup's consumer research, however, suggests many of the new sign-ups will be among banking's most coveted prospects: the affluent. For example, 80% of households with annual incomes in excess of $250,000 currently have access to the Internet, and thus are likely targets for Internet banking services, according to TowerGroup's research.

While all may not choose to bank via the Internet, data from Gomez Inc., a Waltham, MA, company specializing in Internet metrics, suggests those customers who do are happy. On a scale of one to seven, with seven being most satisfied, online banking customers report an average satisfaction level of 5.1 with their banks, according to Gomez. However, 31% of online banking customers with low satisfaction ratings have considered switching banks because of bad Internet experiences, Gomez reports.

If the experience of one Wingspan customer is an indication, Bank One may have a tough sell rolling the Internet bank's base into its own banking base. While the customer may allow his Wingspan account to transition over to bankone.com, he doesn't expect to establish a relationship with Bank One. "I liked the idea of having an account at an Internet-only bank," says the customer, a retired banker who asked that he not be quoted by name. The customer reports he was disillusioned by technical glitches in attempting funds transfers. For example, when he attempted an automated transfer of a small amount of funds from his primary bank to his Wingspan account, Wingspan first notified him, by e-mail, that an amount more than 10 times the requested amount had been transferred. Then, the customer's monthly account statement from his local bank showed that the transfer was done in reverse-from his Wingspan account to his primary bank. "To me it seems they're just not ready for prime time," he says.

While the Internet is a viable and potentially profitable delivery channel, bank ventures that pursue an Internet-only strategy do so at their own peril. Conversely, banks cannot ignore the Internet, either. The closing of Wingspan should not deter bankers from pursuing Internet strategies, and offers a valuable lesson in today's fast-changing economy: Multi-channel access and delivery is the way to go. "An Internet strategy has become more of a business strategy. It's something a bank needs to attract customers," says Jennifer Schmidt, a Meridien analyst and co-author of the firm's latest Internet banking report. "Banks that don't have Internet strategies are really making a big mistake."

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