Personal Finance: Internet cuts costs and keeps customers Transactions in a branch can be pounds 10, by phone pounds 2 and online just 2p, says Tony Lyons. That's why banking by computer thrives

INTERNET BANKING is coming of age. Gone are the days of securitylapses and other glitches, from customer details being available toother users of the site, failure to launch on time, to suspension ofthe service on the first day of operation. Although it would bereckless to claim there will never be any more such problems, theyare clearly fading.

Up-to-date figures are hard to come by in this growth arena. Thelatest best estimate of Tim Sawyer, marketing director of cahoot, isthat some 10 million internet accounts have been set up and 4.5million customers regularly use computers for their daily bankingchores.

Although there had been pilot schemes, notably by Bank of Scotlandin this country, the first truly online bank was Wells Fargo'swebsite in the US in 1994. It took three more years for UK banks tojoin in when Nationwide building society and Royal Bank of Scotlandunveiled their operations. In May 1995, Wells Fargo claims it was thefirst to offer banking on the Web when it offered the ability to viewbalances and the past 45 days' transactions.

Today, all the major high street bank and building societies haveinternet sites . Some even have offshoots with trendy names, such asHalifax's IF (Intelligent Finance), Abbey National's cahoot and Co-op Bank's Smile, seen as attempts to corner younger markets.

It is not difficult to understand why they have rushed intointernet banking. Apart from keeping up with the competition and theneed to offer the most modern means of dealing with customers, themain attraction is lower costs.

Using the existing high-street branch network costs anything frompounds 5 to pounds 10 a transaction, depending on the bank'sefficiency. Even the phone/post only banks, generally operatedthrough call centres, cost about pounds 2 every time a customer usesthem. Internet banking, which involves hardly any human beings at theother end of the modem, slashes costs to less than 2p a time.

This is why some, especially the internet-only banks such as IF,smile and cahoot, can offer attractive rates of interest on ordinaryaccounts. Compare their rates with the miserly 0.1 per cent on thehigh street. All are easy to use. Just type in the name, usuallyfollowed by .co.uk or .com. Once into a site, you will see that amajor advantage for customers using internet banks, apart from theirmore attractive rates of interest paid in many cases, is theconvenience. Most are open 24 hours a day, every day of the year,excepting Lloyds TSB which closes between midnight and 4am.

Different services are available from the online banks, so do yourhomework first. Useful places to start include moneyextra.co.uk orfind.co.uk. At one extreme is Virgin, which combines mortgage, creditcard, deposit and ordinary accounts into one package, good for thefinancially astute. Then come banks such as IF and Woolwich thatallow offset accounts so money on deposit in one account can offsetinterest payable in another, such as a mortgage, reducing payments.

Some offer minimal service. Egg, one of the best-known names onthe internet, is not really a bank. It is a deposit-taker and credit-card issuer which also issues mortgages and provides investmentvehicles such as individual savings accounts.

But most offer the same types of services as are available on thehigh street although there are differences in how they allowcustomers to change standing orders and direct debits, pay bills andview back statements. Most are good at answering customers' queries,but some are better than others in responding to e-mails. A numberprefer you to phone.

Some things cannot be done over the internet. Because of the money-laundering rules and the need to have a written signature, to open anaccount means either a visit to a branch of the bank or the use of"snail mail" rather than e-mail.

"Internet banking is all about customers being able to do theirbusiness at their own convenience," Mr Sawyer says. "They want easeof use. Our attractive rates of interest, whether in credit or in thered, and the ability to make deposits through Abbey Nationalbranches, over the 17,500 post office counters, makes cahoot anattractive proposition. The problems have been ironed out and we havestill a long way to grow."

Internet banking promises to be a moneyspinner, if you ignore thebillions of pounds the banks have thrown into creating theseservices. Although Egg has reached break-even, it will be some timebefore any recoup the money their parent banks have ploughed in andstart to make reasonable profits.

MARK NEWTON, a 28-year-old sales manager, says: "I was fed up withthe poor interest rates on offer, especially for the ordinary chequeaccounts, and getting in touch with the bank during its opening hourswas generally difficult for me. And I found the phone banking fromthe Halifax was unhelpful."

Mr Newton, who works for Boots, had been with Halifax since hisstudent days, but he wanted a bank that was open when he wanted to dobusiness. "I wanted a bank that was online, that I could deal withwhen it was convenient for me, and that offered attractive rates ofinterest," he says.

He chose cahoot, Abbey National's internet-only bank. "I'm veryhappy with my decision. I get all the usual facilities, use of cashmachines and a cheque book. I like the automatic pounds 250overdraft; it comes in useful sometimes at the end of a month if bighousehold bills come in. I'm very happy and I'll probably stay withcahoot."