The following is an excerpt from an American Banker Article.

The closures of two Web banks in as many weeks have once again raised questions about the viability of the Internet-only banking model.

G&L Bank, a Pensacola, Fla., company that focused on serving gays and lesbians, said Tuesday that it was shutting its doors because of the poor economy and an inability to attract assets. Late last week regulators shut down the Phoenix-based NextBank because of its high credit losses and steep operating expenses.

With the closings, the sector has dwindled to about 20 banks, compared with around 40 a year and a half ago, according to TowerGroup, a Needham, Mass., research firm. Indeed, the downfall of NextBank, a subsidiary of NextCard Inc., prompted Comptroller of the Currency John Hawke Jr. to comment at a recent banking seminar that he doubted the Internet-only banking model was viable.

But some financial institutions that rely primarily on the Web dispute Mr. Hawke’s contention. Even as the shakeout continues, some Internet-only banks are touting their strength and profitability.

Another Internet bank that bristled at Mr. Hawke’s suggestion that the Web model is not viable was Bank of Internet USA. In response to Mr. Hawke’s comments, Gary Evans, the San Diego bank’s president, wrote in a letter to American Banker: "There is no economic reason why an Internet-only bank cannot be successful." [See letter, page 8.]

Virginia Philipp, a senior analyst for TowerGroup, a Needham, Mass. consulting firm, said successful Internet banks share some characteristics - low marketing costs, strong management teams, in-house customer data, consistently good customer service, and a focus on the "meat and potatoes" of banking.

"Online banks need to focus on the business of banking instead of the technology," she said. "Having real cool bells and whistles isn’t going to get these banks anywhere."

Product mix is also important for pure-play banks, Ms. Philipp said. NextBank and WingspanBank.com, which in July was folded back into its parent company, Bank One Corp., failed largely because they were focused only on credit cards, she said.

"A single product model is extremely difficult, if not impossible, to pull off," since pure-play banks do not have the economies of scale to absorb losses, she said.

Paul Jamieson, the president of FiSite Research of Littleton, Mass., said the failures of G&L Bank and NextBank must be looked at individually and are not indicative of any larger trend.

G&L failed to differentiate itself through its product offering and did not manage to create an emotional bond with consumers, while NextBank took the "growth before profits" dot-com approach and fell victim to a new conservatism among regulators wary over the Enron Corp. scandal, he said.

I think in another era or a more liberal regulatory environment, NextBank probably would’ve been all right, Mr. Jamieson said.

Ms. Philipp pointed to a TowerGroup survey conducted last year that showed that 85% of online banking consumers said they wanted to be able to bank in a branch.

"That’s 15% of online banking users that don’t really want that branch," she said. "It’s not a big market, but for a small number of players that have the ability to recognize how to build a business on the Net, those banks can capture an awful lot of market share and mind share."

While there will undoubtedly be "more deaths in the family," there will still be a market for Internet banks, she said.