When most people think of banking they think of moving money around. But banks have been slow to put the current account, the essential for almost everyone’s financial life, on to the internet. That has changed in the past few months, with the laggards finally catching up. HSBC (www.hsbc.co.uk), the former Midland Bank, will be the last big bank to launch its online current account when it finishes testing this summer.

This is unequivocal good news for customers. Internet banking, meaning online current accounts, provides access to services difficult or impossible in branches or by telephone, and provides them 24 hours a day, seven days a week.

Indeed, the internet could have been designed to help consumers control their money. It wasn’t (it was created by the US military to allow scientists to communicate), but this is not stopping banks from thinking up new ways of taking advantage of the instant, free communication the net offers.

The key difference between banking by telephone or face to face and banking online is that on the web the customer does all the work. Instead of dictating name, account number and mother’s maiden name to a clerk, customers type in their password. And rather than asking counter staff to pay a bill or transfer money, they can carry out basic transactions themselves.

"You can be your own bank manager with just a few clicks," says Ambrose McGinn, director of e-commerce at Abbey National. "Generally speaking this is about improving services, not reducing prices. "There are added advantages to online access: checking by telephone whether a cheque has cleared is not always easy, while trying to understand why the account is overdrawn is far simpler with a full statement on the computer screen.

Many bankers also suspect a painful truth behind the popularity of internet banking. Customers would rather stare at an anonymous computer screen than talk to bank staff.

The extra services available online appear to be enough for the vast majority of customers, just as branch banks with telephone accounts proved more attractive for most people than First Direct (www.firstdirect.co.uk), the telephone-only bank owned by HSBC.

However, the ability of the banks to keep the same prices on the web as on the high street is being eroded by the emergence of a new breed of banks offering full online current account services.

These banks are passing on the benefits of low-cost operations through better interest rates on current accounts, lower charges and - in some cases - innovative new products that would be impossible through old distribution channels.

The first pure-bred online bank, Smile from the Co-operative, has an impressive rate of interest. It pays 4.85 per cent to current account holders, as well as giving them an automatic £500 overdraft. This compares to just 0.1 per cent interest and only £20 automatically at Barclays.

The other two online-only banks, Cahoot and First-e (www.first-e.com), also have high rates of current account interest. Cahoot pays 3-4.5 per cent and First-e offers 4.88 per cent. First-e, however, does not yet have some of the essentials for a current account, such as direct debit facilities, a cheque guarantee card or standing orders.

Branches versus cyberspace

Price is not the main factor to consider before moving a current account online. With a current account even a much better interest rate is unlikely to make a huge difference - convenience is far more important. For example, assuming an average credit balance of £1,000, the difference between banking with Smile and with its parent, the Co-op (www.co-operativebank.co.uk), which pays no interest on current accounts, is just £48.50 a year, although there would also be big savings on overdraft rates.

Is it really worth giving up telephone and branch access for less than £50 a year? At the moment, the answer for many people is no. But for several million people who already carry out much of their banking by telephone, switching to a web-based account with telephone back-up for emergencies could be attractive. Lloyds TSB (www.lloydstsb.co.uk), which plans to launch Evolvebank, a new internet bank, towards the end of this year, estimates that as the technology becomes more reliable 6m people in the UK will want to bank purely online by 2005.

Current account on the web
		Transaction history shown on screen	Support for Apple Macs?	Bill payments
Abbey National	www.abbeynational.co.uk	40 transactions	Yes	Yes
Barclays	ibank.barclays.co.uk	6 weeks	Yes	Yes
Bank of Scotland	www.bankofscotland.co.uk	30 days	Yes	No, coming September
Co-operative	www.co-operativebank.co.uk/	6 statements	Some	Must phone first
Halifax	www.halifax.co.uk	60 transactions	No	Yes
HSBC	www.hsbc.co.uk/	90 transactions	Yes	Yes
Lloyds TSB **	www.lloydstsb.co.uk	1 statement	Yes	Limited list, or phone first
National Westminster	www.natwest.co.uk	40 transactions	No	Limited list, or takes 2 days to set up
Nationwide	www.nationwide.co.uk	Last 90 days	Some	Yes
Royal Bank of Scotland	www.rbs.co.uk	6 months	No	Yes
Woolwich	www.openplan.co.uk	All	No	Must phone first
Internet and telephone banks
Cahoot	www.cahoot.com	All	Yes	Yes
Citibank *	www.citibank.co.uk	90 days	Some	Yes
First Direct	www.firstdirect.com	4 months	No	Yes
First-e	www.first-e.com	All	Some	Yes
Intelligent Finance	launches August
Smile	www.smile.co.uk	All transactions	Some	Yes
	Formats for downloading statements	Credit interest on £1 (%)	Authorised overdraft (%)	Overdraft [fee (£/month)]
Abbey National	No	0.10	13.40	nil
Barclays	MS money, Excel	0.10	18.80	£5.00
Bank of Scotland	No	0.10	13.25	nil
Co-operative	No	nil	19.56	£8.00
Halifax	No	0.25 ***	14.30	nil
HSBC	MS Money, Quicken	0.10	16.90	nil
Lloyds TSB **	Quicken	nil	18.80	nil
National Westminster	All	nil	18.35	£5.00
Nationwide	MS Money	1.45	11.90	nil
Royal Bank of Scotland	Quicken MS Money	0.10	19.50 º	nil
Woolwich	MS Money	2.00	11.00	£3.50
Internet and telephone banks
Cahoot	No	4.50	9.00 ºº	nil ºº
Citibank *	All	0.25	14.25	nil
First Direct	All	1.00	10.90	nil
First-e	No	4.88	no overdrafts	no overdrafts
Intelligent Finance	Scheduled to be launched during the summer
Smile	No	4.75	9.90	nil
* Also has three branches, all in London		** Closed midnight-4am
*** Starts at £50		º Lower rate on overdrafts above £1,000
ºº Cahoot rates depend on credit rating
Sources: Moneyfacts; Companies. Rates true as of July 2000.

Today the banks with the most online customers are the old-fashioned high street banks with plenty of branches. It is far more convenient for customers to gain access to their existing account via the web than it is to go through the hassle of opening a new one. Even with the internet supposedly making opening an account easier, new customers still need to mail photocopies of passports or driving licenses to prove their identity. Transfer of direct debits from one bank to another remains fraught with error.

With many of the traditional banks, one cannot open an account online anyway. Royal Bank of Scotland (www.rbs.co.uk) recommends would-be customers who visit its website to head for a branch or ring for an application form, illustrating why many consumers are fed up with their banks.

The new banks have special systems in place to ease account transfer. Smile is taking part in testing a system which will automate the switching of direct debits. It even offers to help customers move back to their old bank with minimum hassle, if they don’t like internet banking. Even with this automated system, though, mistakes can still occur, and not all the established banks are compatible yet. Intelligent Finance from Halifax (www.halifax.co.uk), is threatening to “name and shame” banks that obstruct transfers.

But even customers who rarely use branches probably need them occasionally. Paying in cash, changing foreign currency and paying in a large cheque over the counter rather than trusting it to the post are all things that can only be done in branches. Use the branch of a different bank for deposits and a customer faces a hefty charge. For example, Lloyds TSB charges non-customers £5. Not all customers will be happy paying in even low-value cheques by post, a requirement of both internet and telephone banks.

Cahoot initially found its own solution to paying in cash, using special security envelopes carrying insurance, although customers have to order the envelopes in advance. It has now followed Smile by signing a deal with the Post Office, bringing a branch network of sorts to its customers.

But there is clearly a trade-off between price and the convenience of old-style branch access, and each customer must decide for themselves what this is worth. The key factor to remember is that it is more important to have guaranteed access to a current account, where most banking errors are made, than to simpler products such as savings or credit cards, which provoke fewer enquiries.

Reliability

Experienced users of online banking report frequent problems with websites, and even more frequent problems with home computers and access to the internet itself. Lloyds TSB claims its site is now 99 per cent reliable, but Peter Hubbard, managing director of e-commerce, admits: “We do have some problems occasionally.”Other sites certainly have problems, too. Unfortunately it is very difficult to make comparisons between the reliability of services, as ratings of sites tend to rely on anecdote or only compare the marketing pages of the bank, not the banking systems themselves. Most bank websites now contain demonstrations, which can give a clue as to whether the service is graphics-heavy (and therefore slow), involves lots of clicks between pages to get information (again, slowing it down) or uses fancy new technologies such as video (yet again, reducing its speed).

In Nationwide, Woolwich (www.openplan.co.uk) and some Abbey National branches it is possible to test the online services and ask staff to explain how they work. But none of the banks give statistics on how often they are offline.

Simply trying the website out will tell customers a lot about whether the designers tried to be helpful to the private user, likely connecting from a home computer on a relatively slow modem. National Westminster (www.natwest.com), owned by Royal Bank of Scotland, has arguably the worst opening page of any bank. Instead of helpful information about banking, or even advertising, visitors to the NatWest site are greeted by nothing but the bank’s logo, and have to click again for information - annoying to anyone, but particularly so if you have to wait for it to download. This is a strange design decision. Visitors would not need the logo to tell them they had reached the NatWest site - they had after all just typed in www.natwest.com. NatWest is not alone in bad design. Woolwich, Nationwide and Halifax also use large slow-loading graphics when text would be quicker for home-based customers.

It’s good to talkNatWest and Lloyds customers won’t have a serious problem when systems fail because they can always go to a branch or ring the call centre. For customers of internet banks, though, a broken website means calling the back-up telephone line. And when the site is down, everyone else is also trying to get through on the telephone, so the wait is often tedious.

”The telephone is only a back-up,” says Richard Thackray, UK manager for First-e, an internet-only bank. “We will one day move to charging for calls.”At present none of the internet banks offering current accounts charge for calls, although all discourage them. But once they start - and unless there is huge customer resistance, they will - customers could find they can only get banking information using their computers. This might not sound much of a hardship for customers who remember the days when queuing in a branch was the only way to get access to their finances. But as customers of other banks check their balances by telephone at the till before making a purchase, those limited to internet access may feel excluded.

Thackray does not feel this is a big issue. He foresees a time when people will pay more if they use more expensive services. “We may well one day get to a stage where you can have video banking and get 2 per cent, have telephone banking and 3 per cent or have internet banking and have 5 per cent.”There are alternatives to this stark choice between low-paying bricks and mortar banks and pure internet operations, though. The halfway house of telephone and internet banks providing dual access is likely to attract significant interest.

At the moment only two established banks, Citibank (www.citibank.co.uk) and First Direct - which is trying to transform itself from pure telephone to telephone and internet - offer this option. In the UK, Citibank is a partially branch-based bank, with three outlets in London. But Halifax has just launched IF, run by Jim Spowart, the formidable former boss of Standard Life Bank. Spowart argues that most people still prefer the human touch.

”The only time I go into a branch is to get foreign currency or travellers cheques,” he says. “But we still think that a large part of the market wants to use the telephone. Multi-channel delivery will succeed in the future.”IF is expecting around two-thirds of its customers to apply by telephone, although it hopes more will use the internet in the longer term. Of course, higher telephone use means it will have higher costs, and thus in the long term, will not offer customers the keenest prices. But it does believe its innovative new products will be enough to convince them to stay.

For the moment, IF has very aggressive prices. Its current account will pay 5 per cent, the best on the market, while savings (6.25 per cent), mortgages (6.8 per cent), overdrafts and personal loans (10.5 per cent) are among the best.

InnovationIF, along with Cahoot and Woolwich, will be among the first to take advantage of the web to create new types of accounts that could not be offered any other way. They hope such carrots will encourage customers to move from the high street to online banks.

In fact, Halifax, IF’s parent, has already produced a product that can only work because of the internet. Its Web Saver account gives customers far more flexibility than a standard savings account.

IF itself goes much further. It is more than just a current account. Customers only get the full benefit if they move their entire banking relationship - from savings through mortgages and credit cards - to IF. It is major commitment for a customer to make. But Spowart believes he has created a “revolutionary” new account that would be impossible with old banking methods.

It works by netting interest on different accounts against each other. In the simplest case, a customer with £1,000 in their current account and £1,000 of personal loan, mortgage or credit card debt would pay no interest on the loan, and receive no interest on the current account, as the debts and deposits cancel out. Depending on whether the loans or savings are higher, customers would either pay or be paid interest on the difference.

Woolwich offers a similar system on its “Open Plan Offset” mortgage. This only charges interest on the difference between the mortgage balance and the total of savings and current account balances held with Woolwich. But this is not extended to credit cards and personal loans.

Cahoot, when it works, is also breaking new ground. Its well-publicised failure on the first day left it nursing a serious PR wound, although it now claims it has solved the problem.

But for the customers that have succeeded in gaining access, it should be a refreshing break with the past. Its main feature is risk-based pricing. While this sounds like gobbledegook it means that people who make an effort with their finances should get a better deal. Basically, the lower the risk Cahoot thinks it is taking by lending you money, the lower the rate it will charge. The rates on current accounts vary from 3-4.5 per cent, with overdrafts and credit cards ranging from 7-11 per cent, against a flat 9.9 per cent borrowing rate at Smile.

Cahoot is also splitting up its charges, in much the same way Thackray sees First-e doing eventually. To start with the only choices are whether to have a cheque book, and certain extra credit card services. Opting for a better interest rate instead of a cheque book will earn customers an estimated £29 a year extra. More options will follow.

Investec (www.investec.com), a South African bank, is using the new technology to change the way customers bank. Its service is designed to give users access to all their financial information - even accounts held at other banks. At the moment it is fairly primitive, as customers have to enter information about other bank accounts, unit trusts or shares themselves. This can be simplified by downloading the information in the right format for Quicken software, with whom Investec is working, but it is still a chore.

However, Investec points the way to the future for a lot of banks. Several, led by Woolwich have accepted that they will not be able to run every type of account. Instead, they are buying in products from other banks, allowing them to offer a better deal than doing it themselves. Investec hopes to go a step further by becoming a “portal” for customers to access and control their finances, without the hassle of using lots of different websites.

Yodlee, a US dotcom, is already making it possible automatically to update US sites similar to Investec’s with secure information gathered from a range of accounts with other banks, and it is likely to come to the UK soon - meaning access to all financial information should be available through just one site, and just one password.

Stuck in the past

All the banks are hyping their new technology as the future. But most traditional banks are still stuck in the past when it comes to operating their own systems. The fancy websites conceal clunky old computers, few of which can be made to do things that seem obvious. For example, existing customers wanting to open a new account often have to go through the same process as a new customer, repeating information the bank already holds about them.

The most annoying thing about the old banks is the number of passwords some require. Barclays customers need to memorise a password for the website, a different one for the telephone, another password for their Barclaycard if they use its online service, and another still to access Barclays Stockbrokers on the web. Barclays is trying to sort this out, and all banks are working hard to integrate security across different websites and access methods.

For the moment users of current accounts on the internet have to put up with flaky systems, multiple passwords, and, if they want better prices, limited telephone back-up. This explains why most are sticking with their existing banks and their trustworthy, if unfriendly, branch and call centre staff.But when it comes to savings accounts, credit cards and mortgages, internet banks are different creatures entirely, and all customers wanting a good deal should be examining them closely.