Hybrid operations lure depositors

By Todd Mason
Knight Ridder News Service

Internet banks suffered the fate of most dot-com dreams as the "new economy" faded a couple of years ago.

Now, a more realistic generation of bankers is populating cyberspace and turning profits in record time. They carve out modest roles for their Internet presence and make sure that customers can reach a human being when they need one.

"It will take customers many years to feel comfortable doing most of their banking over the Internet," said Walter L. Tillman Jr., president of Earthstar Bank, in Southampton, Pa.

Earthstar has grown rapidly by gathering deposits on the Internet, but it mixes virtual branches with the real kind.

ING Bank, of Wilmington, Del., targets customers' saving and borrowing needs at INGDirect.com and tells them to leave the rest of their banking business where it is.

For the moment, high yields and the Internet translate to stunning growth. ING was paying 2.28 percent on money-market accounts recently, according to Bankrate.com. That's the fourth-highest rate nationally.

Amassing $8.2 billion in deposits in roughly two years of existence, the U.S. arm of the giant Dutch bank turned profitable in the quarter ended Sept. 30, according to FDIC data.

The banks trolling in cyberspace today are different from the first generation, says James Eckenrode, a vice president at TowerGroup, a research firm in Needham, Mass. Traditional banks assumed customers would flock to an online version offering the same services. In many cases, they did not raise rates or cut costs.

They were disappointed, Eckenrode said. "Everyone thought Internet banking would quickly be able to stand on its own."

The new crop of Internet banks aims lower. Gathering deposits from local customers as well as distant ones, the banks coax wary customers online.

"People still want to touch and feel" the institution that holds their money, said Hal J. Shaffer, chairman and chief executive of interState Net Bank of Cherry Hill, N.J.

Low costs are key. Earthstar's humble base is a storefront in a Southampton shopping center. With no marble lobbies or expensive real estate to support, Earthstar made money in its first year of operation in 2001.

Despite its advertising budgets, ING keeps its costs low by limiting its services to savings accounts and loans.

Hybrid Internet banks let their savings rates do their talking, and for the moment they've persuaded millions of depositors to listen.