Faced with growing competition from traditional banks and a renewed focus on Net security, online banks are in need of new ways to lure customers. Some analysts point to a physical presence as an obvious path for growth.
"The lack of branches is a big problem," said Rob Sterling, an analyst at Jupiter Communications in New York. "If there are no branches associated with the online bank, it limits the flexibility of the institution, and limits the number of new customers signing up for services."
According to a recent study by Gomez Advisors, financial institutions operating only online have yet to enter the top 10 banks ranked by their number of active Web users. The report estimates that there are 11.1 million consumers now using the Web to access account information, with about 5.9 million using online banking at least once a month.
In addition, nine of the 10 largest retail banks in the United States now offer Web services.
The apparent solution: Net-only banks need to build up their brand recognition in the offline world to draw more customers.
"It's not that people want tellers waiting to cash checks or read balances to them," said Chris Musto, director of financial services at Gomez Advisors and co-author of the report. A branch "really serves to provide a marketing presence--a validation of existence and a point of contact for complex transactions."
Charles Schwab is a good example of the blending of online and offline services. The San Francisco-based company parlayed the exposure it has from its more than 300 brokerage branches nationwide to become the largest online trading firm.
Some Net-only banks are beginning to forge ties with offline players. First Internet Bank of Indiana now allows its customers to make deposits and withdraw cash at automated teller machines operated by MAC, an ATM network.
Other Net-only banks have strong ties with their brick-and-mortar counterparts. Wingspanbank.com is a subsidiary of Bank One, one of the largest banks in the United States. Security First Network Bank, the first Internet-only bank, was acquired in 1998 by Canada's Royal Bank Financial Group.
Security concerns also loom over the online financial industry. This week, H&R Block shut down its online tax filing service after the company accidentally exposed some customers' sensitive financial records to other customers. Last year, NetBank linked the account of one customer to that of another customer.
"Repeated problems at a given financial institution don't just scare away customers from that financial institute, they scare them away from the idea of online banking," Sterling said. "If one firm is sloppy in its quality control, it damages other firms, too."
As a result, established financial institutions often win the trust of new consumers more easily than the Net-only upstarts.
And if that trust is broken, it can be difficult to regain the customer's faith.
Take the case of David Wexler, a NetBank account holder. Wexler said he recently received a confirmation in the mail for the purchase of a certificate of deposit.
The problem was that a different David Wexler had actually purchased the CD. The confirmation slip included vital private information, including the other Wexler's Social Security number.
NetBank president Mike Fitzgerald attributed the mistake to an "isolated offline clerical error."
Even so, Wexler said he decided to close his NetBank account.