The provision of web-based financial services has been one of the boom areas of the internet and the sector has largely escaped the collapse of the dotcom bubble. More and more people are choosing to bank, invest and arrange insurance and mortgages online. The web offers considerable benefits to both providers and customers, and even regulators are discovering that the internet can, in some respects, provide a safer environment than more traditional transaction methods.

Progress has nevertheless been uneven. Mortgage providers, with rare exceptions, have yet to make a killing on the net; online-only banks have discovered that customers still like the additional security of a bricks-and-mortar presence; and the provision of standalone independent financial advice online has been virtually a non-starter.

In addition, there are still concerns about the security of web-based transactions, while plans to introduce concepts such as digital signatures have not moved ahead as quickly as was expected.According to Huw van Steenis, e-finance analyst at JP Morgan in London: "There's a high penetration for simple products such as current accounts and savings.

Also, the percentage of shareholders online continues to grow. But for infrequent services and expensive products, very few people will go online."

Impressive figures

It is estimated that some 4.7m current accounts in the UK now have online access, while the proportion of share executions carried out online in the UK went up from 12 per cent to 18 per cent last year. In Germany, almost one in three shareholders has an online account. The UK's Fidelity sells 15 per cent of its Individual Savings Accounts (ISAs, a tax-efficient investment vehicle in the UK) directly online. Charcolonline, the website of mortgage brokers John Charcol, says 25 per cent of the company's UK mortgage broking business is done on the web.

Most customers gain access to online financial services through a growing number of internet portals such as Virginmoney in the UK and Credit-on-line in France. These provide comparative quotes for financial products such as mortgages and personal loans that are based on customers' circumstances and requirements. They then provide a link to specific providers.

In Spain, Bankinter's KMO portal lets the customer choose a car, put through an online order and then arrange financing and insurance online. In the end, however, most deals still have to be closed using the postal system (or "snail mail") and, in the case of home purchases in Spain, must be signed in front of a notary. For legislation is only slowly catching up with the technology. In the past year, EU member states have been introducing legislation, on the basis of a European Commission directive, to permit digital signatures. These would have the full force of an actual signature on a piece of paper. But the legislation is proving troublesome as it frequently runs up against pre-internet laws.

Siobhan Hotten of Charcolonline is not convinced the public is ready for the leap to digital signatures. "It would certainly mean a lot more of the processing could be done online, but I'm not sure it would appeal to consumers. They might have security concerns."

A major drawback

What the portals cannot provide, however, is independent financial advice on which product to choose, although some will post a "best buy" sticker on the cheapest product available. But this is hardly a substitute for advice and, last year, the UK's Abbey National bank demanded that quotes for its home loans be taken off a number of financial portals, complaining that the sites did not conform to the industry code of practice on giving mortgage advice.

MoneySupermarket, a site that provides comparative information on everything from credit cards to gas bills, said Abbey National was just trying to avoid unfavourable comparisons. After seeking legal advice, the company refused to remove its Abbey listings.

If there is one factor that has restrained the growth of financial services provision on the internet it is the concern over security - not only the question of whether a site is technologically safe from fraudsters out to harvest credit card details, but also whether it is trustworthy.

Regulators are now taking this concern to heart. The International Organisation of Securities Commissions, which groups 21 regulatory bodies from 18 countries, now holds periodic "surf days" during which the staff of member organisations trawl the web for internet scams. On one day last year, the surveillance staff of the UK's Financial Services Authority (FSA) identified 53 sites out of some 600 in the UK that they felt merited further investigation.

But seeking advice on the internet need not be more dangerous than doing so from an unregistered backstreet adviser. In fact, in some ways it is safer. "The reason is the traceability of online advice," according to JP Morgan's Mr van Steenis. "With online advice you can keep an electronic paper trail' that will be there for 10 years plus."

No revenue model for pure advice

However, he sees little future for pure advice-only sites on the internet. "The problem is that there is no revenue model for pure advice independent of anything else," he says. "The interested person would sooner buy a couple of specialist magazines but, with the internet, they wouldn't know where to go."

The internet does, however, provide a gateway to finding reliable advisers who can then be contacted directly. The FSA offers individuals a free six-times-yearly search of its database to check on the credentials of financial service providers. The search will turn up any given provider's contact details and its range of services plus - most importantly - whether it is authorised by the FSA.

Similarly, the UK's Society of Financial Advisers (Sofa, see box, A gateway of trust') allows visitors to search a database of its members. Advisers can be located by postcode - the site even provides a map - and can be contacted directly via an online form. According to Mr van Steenis, regulators have become much more at ease with the issue of online advice and this is confirmed by the FSA. "The approach we take is to be neutral with regard to technology," says the FSA's Andy Newton.

"We try not to discriminate for or against the internet. People will generally talk to us before they establish themselves on the internet. In some cases, we have persuaded them to hold back their services and have a rethink."The challenge is certainly a Europe-wide one. Regulators across the EU are co-operating through the Forum of European Securities Commissions (Fesco), which even has its own "police force" - Fescopol.

Part of its function is to ensure that providers in one country treat customers in other EU states correctly and with fairness. Although online transactions are now much more acceptable to an increasingly web-savvy public, there is still a long way to go.

According to Mr van Steenis, mortgage providers will have to adopt the tactic of Spain's Bankinter if they want to thrive - the Spanish concern offers online mortgages at 25 basis points below the going rate. Financial advice services, he says, will only do well if they are transactionally based, as people are not prepared to pay for information that is now so readily available on the internet.

Wedded to transactions

"I strongly believe that online support will stay wedded to transactions for a long time to come," says Mr van Steenis. "By year-end the sites based on transactions will do the best." He adds: "What is interesting is that the first round was about providers getting a working project up online. Now the IT companies themselves are desperate to move into value-added areas."

Email Harvey Morris at harvey.morris@ft.com