2HRS2GO: Online banking takes heat

Online banks sure seemed like a good idea.

They still seem like a good idea in many ways. But not for investors this week.

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Bank One (NYSE: ONE) reportedly has hired Morgan Stanley Dean Witter & Co. to explore a sale for the young WingspanBank.com unit. Yesterday shares of NetB@nk (Nasdaq: NTBK) dipped after an analyst said he expects the company to earn far less than the First Call consensus forecast. NetB@nk's stock price has fallen 93 percent since peaking a little more than 11 months ago.

Not so long ago, many folks portended great things for the Internet banks. Last year, I spoke optimistically about the idea, which should have been an immediate sign it was something to avoid.

Most people are doing just that apparently, at least for the independent online banks. GomezWire recently noted 11 million people are banking online, but many of those folks are using traditional banks such as Bank of America (NYSE: BAC).

Non-traditional outfits aren't necessarily doing so well. Most of them aren't publicly traded so there isn't much information available, but The Wall Street Journal notes some analysts expected WingspanBank.com to pull in half a million customers in its first year; instead, the operation had just 107,000 after six months. NetB@nk has more than 77,000 deposit accounts, and although it's profitable, revenue per account has slid recently as the bank focuses on increasing market share.

Online banking offers advantages such as higher interest rates and some easily accessible account services, but there's still a big psychological hurdle to overcome. People feel safer with a bank that lets you walk in and hand someone a deposit slip. Even an automated teller machine is something physical, if not necessarily personal.

Obviously you can't walk into a virtual bank branch to cash a check, or talk to a representative about getting a loan. And most banks force you to mail in deposits. One major exception soon will be E*Trade's Telebank (Nasdaq: EGRP), thanks to the company's plan to buy the Card Capture Services ATM network.

But are physical banks more efficient, secure or convenient? Not really, although mailing takes a little longer. Still, the Internet banks can do just about everything the real banks can and more, such as online brokerage services.

Unfortunately, ingrained psychology is hard to overcome, particularly when it comes to storing people's money. Convincing people to buy something is easy; getting them to trust you to keep their money safe requires a whole new level of confidence.

That's why the independent online bankers will have a hard time staying independent: when it comes to their savings, many people would rather go with someone established. A Wells Fargo (NYSE: WFC) or Chase Manhattan (NYSE: CMB) -- or your local community bank -- offers a familiar name and a sense of security.

Not to mention branch offices in case you lose your Internet connection.

Other issues:

Santa Cruz Operation

(Nasdaq: SCOC) The longtime Unix vendor is being squeezed between Solaris and a certain Penguin-themed OS, so the company is reorganizing to more aggressively pursue Internet services and Linux. Either way, the profit margins won't be as fat as they were for those good, old corporate systems.

Good for lowering customer costs, but it's too bad for SCO, since the company had a pretty good OS offering. But solid technology by itself never wins anything if the market is changing. 22GO>