Brick and Block Are Back.

• Position: Traditional banks versus Internet banks - Brief Article

On the face of things, purely online bank ought to have an insurmountable advantage over brick-and-mortar institutions. Much Lower overhead, instant customer gratification, higher interest-rate payments, 24-hours-a-day, seven-days-a-week, universal availability, are all factors that favor the Internet bank. They can offer their customers lower fees and higher interest rates. Clearly, online banks lack only one thing to compete successfully with brick-and-mortar banks: brick and mortar.

That deficiency is looming larger all the time, however, as a new report from Meridien Research makes clear: If it comes to a choice between a banker with a website and a banker with a website and a building, the guy with the building will win.

"Regardless of the technological advancements experienced by the financial services industry, the branch continues to be the most popular customer interaction channel," the report says. "A recent study revealed that pure Internet banks captured only 2 percent of the new online customers during 2000, while traditional banks, many of whom expanded and improved their online offerings, captured the balance."

"The idea (of online banks) is great if you just look at the surface," agrees Jennifer Schmidt, co-author of the Meridien report. But, she adds, it's a little more complicated than that.

One problem that Internet banks share with all other startups is the lack of an established name and customer base. To overcome this obstacle, says Schmidt, online banks must spend more on advertising...