In the sleek lobby of the Bank of Internet USA stands a hulking ATM that has the distinction of being the only automated teller machine the bank owns.
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| Jerry Englert, chairman of Bank of Internet USA, headed a meeting in the bank. Howard Lipin / Union-Tribune |
And the Carmel Valley headquarters, a rabbit's warren of spartan offices, is the bank's only outpost, even though it has assets approaching a quarter of a billion dollars, with more than 8,000 customers.
"This is a totally different delivery system from other banks," Gary Lewis Evans, co-founder and president, boasts with hyperbolic flourish. "We're doing what (Bank of America founder) A.P. Giannini wanted to do: creating a nationwide banking system, with deposits and loans in all 50 states."
The bank is not unique.
In the past several years, at least 40 banks have been founded with the goal of doing business solely online instead of through extensive networks of branches and ATMs. Half those banks have gone out of business, and a number of the survivors are wobbling.
Nevertheless, there is a growing appetite for Internet banking.
By the end of this year, more than 24 million households will be using online banking services, nearly twice as many households as at the end of 2000, according to Jupiter Research of Connecticut.
But the growing number of corpses in the online banking field suggests Web-based bankers are having problems attracting that audience. The key question is whether a bank can exist solely on the Web or if it needs a physical presence to deal with customers.
"Most people still associate their bank with its branches," said George Tubin, an Internet commerce analyst with the Tower Group in Connecticut. "More than 90 percent of retail banking customers still visit a branch."
Evans downplays such concerns.
"The problem with the banks that have gone out of business is that they were relying on the technology to be their total savior rather than viewing it merely as a tool to increase their efficiency," he said. "Internet banking really isn't about technology. It's about delivering services efficiently. That's what we're doing."
And unlike most other online banks, Evans' bank turns a profit.
Bank of Internet USA went into the black in September 2001, just 14 months after opening. During the third quarter of 2002, it generated $666,824 in profits. Most traditional banks take two to three years to make a profit.
"Our secret is that we don't have any illusion that this is anything more than banking," Evans said. "We're just doing pure old-fashioned conservative banking using the Internet."
Evans, a 31-year veteran of the banking industry, began dabbling in Internet banking in the early 1990s and developed a Web-based marketing program for La Jolla Bank in 1994. In 1997, he co-authored "The Financial Institution Internet Sourcebook" for McGraw-Hill.
Soon afterward, Evans and local entrepreneur Jerry Englert -- who heads the Harvard Fair packaging supply company -- assembled a group of investors to create an online bank.
The backers included a variety of professionals: high-tech entrepreneurs, real estate developers, doctors and brokers. One of the few professions not represented was banking.
"We got no serious interest from bankers," Evans said. "To them, we were kind of a square peg trying to fit into a round hole. Even today, many don't appreciate what we're doing."
In early 2000, the bank raised $14 million in start-up capital, more than any previous bank in the county, from about 180 local investors. The bank opened on July 4, 2000, sending the message to customers that Bank of Internet would be open around-the-clock, even on national holidays.
For Evans, the key to survival is keeping costs low and passing savings on to the customers.
Unlike some competitors, he has built the bank largely though word of mouth instead of buying costly pop-up ads on the Web. And he keeps a trim staff. The bank handles $235 million in assets with only 19 employees, or $12.3 million per employee. That's three times more than the average bank's ratio of $3.9 million per employee.
The cost structure enables the bank to extend cheap loans, such as 5.375 percent for a 15-year-mortgage, and pay strong rates on deposits, such as 3.21 percent for a two-year personal CD. Because the bank has not spent money on its own ATM network, it reimburses any charges when its customers use other banks' ATMs.
Raj Dhinsa, an analyst with Jupiter Research in San Francisco, warns that Internet banks might soon find themselves in fierce competition with the bricks-and-mortar banks, which have been putting more effort into their online services.
"In the last 18 months, the traditional banks have turned the corner, and now they're pretty close to catching up on the technology," Dhinsa said. "That will make it a much more competitive environment, especially since most banking customers prefer a multichannel environment," meaning they want online and traditional services.
But some of the bank's customers say Bank of Internet delivers enough personalized service that they don't miss the bricks-and-mortar.
Tom Boothe, who works on M-1 tanks for the U.S. Army, said he has been able to call in for personal service on his account from as far away as Kuwait using the bank's 800 number.
Boothe, who lives in Alabama, recalls that when he bought his house, he needed several thousand dollars transferred immediately into his account to complete the purchase. His account executive at Bank of Internet, Jerri Braun, got up at 6 a.m. to make sure the payment made it to his local bank before the deadline in the Eastern time zone.
"I don't know how many people at a community bank would be willing to do that," Boothe said.