"Internet banking hasn't been successful to date," said Chris Musto, director of financial services at Gomez Advisors, a research firm. "We believe that Internet-only banks need to carefully target their customers and not simply tout slogans about high rates and low fees."
Now online banks are springing up across the Internet, targeting different populations. G&L Bank is catering to the gay and lesbian community while VirtualBank.com and First Tech Credit Union are targeting high-tech workers. Starting this summer, Pointpathbank.com will target newly married couples.
Seth Gordon, a spokesman for G&L Bank, said providing high-quality service will be the key to success. "A sense of community and comfort get washed away if you don't have super service.
"The reason we think this Internet bank will do better than a generic Internet bank is that this is the only real community bank on the Internet that makes gay people feel like it cares about them," Gordon said. "It's also a sense of practical utility where two guys don't have to endure a certain amount of scrutiny and discomfort when applying for a mortgage together in a small town."
The strategy is much like the one fine-tuned by MBNA America Bank and First USA, two of the largest issuers of credit cards. Their cards target groups such as university alumni organizations, America Online customers and professional associations. Another popular strategy has been offering credit cards that consumers can use to accrue airline mileage by making everyday purchases.
Recent figures have shown that online banks are not making much of a mark in the Web finance world. Of the 300,000 people who used online banking services in 1999, only 2 percent were using Internet-only banks, according to Gomez Advisors' data. More than half used regional and large banks; 25 percent used credit unions; and 4 percent used community banks.
Analysts remain divided over whether niche banking will reverse the trend.
"Net banking can divorce banking from physical restrictions, allowing banks to go after communities that are bound by interests but not geographically bound," Musto said. "That is the beauty of affinity credit cards--linking people who have a shared space that is not geographically concentrated."
The biggest hurdle in banking, both online and offline, is that people rarely switch banks once a relationship has been established.
"People tend to have many different affiliations and the need for really only one banking relationship," said Brook Newcomb, a senior analyst at Forrester.
VirtualBank, which has signed up Compaq, EMC and Textron, faces several stumbling blocks. Analysts note that credit unions, which have a high penetration rate on the Internet, are already well-positioned at most tech companies.
VirtualBank also faces stiff competition from First Tech Credit Union, which already offers financial services to Microsoft and Intel employees.
Despite the competition, analysts say niche banking may be a necessity for many Net-only banks, even if their businesses attract a small group of customers.
G&L Bank's Gordon said although the company's account growth is not exploding, it is still growing steadily and meeting expectations.
"You're dealing with a very small market," Newcomb said. "If you go for a targeted group, you can market yourself as unique."