Quotes of the Day

After reading their bank statements, many consumers may need a stiff drink. Perhaps with that in mind, Smile, a British online bank owned by the Co-operative Bank, has launched drinks2u, a home delivery service of alcohol, supplied by Co-op supermarkets. But Smile's management also has reason to hoist a few — in celebration. In April the Internet bank signed up its 500,000th account holder, and it continues to add clients at a rate of about 20,000 a month. "We are on target," says ceo Bob Head, who adds that his goal — though a very long-term one — is to "wipe the big banks out."

Online banking is growing steadily across Europe. NetValue, a market research firm, says the number of unique visitors to Internet bank sites in eight large European markets jumped 15% between October 2001 and May 2002, to nearly 22.5 million. Each visit might represent a deposit, an electronic payment or just a peek at an account balance. In Continental Europe, online banking is dominated by traditional banks. But in the U.K., even though "High Street" banks have more online customers overall, four pure-play Net banks — Egg, Smile, Intelligent Finance and Cahoot — have made impressive inroads. Egg has 2.1 million customers, for instance, compared to about 3 million for Barclays' online service, the biggest among Britain's bricks-and-mortar banks. And together, the pure plays have nearly 30% of the U.K.'s total number of unique visitors, according to NetValue. Elsewhere in Europe, Spain's Uno-e's customer base rose 13% in the first quarter to 130,000. And earlier this year, Egg bought France's online Zebank, which has 89,000 customers.

But it is in Britain where the stand-alone Net banks have the best chance to move beyond a niche role. Success so far results from keen pricing, meticulous attention to customer service, quirky advertising and the convenience of around-the-clock access. "Pricing's really the thing that keeps them in the game," says Matt Stamski, a senior analyst at Gomez, an Internet consultancy. Egg offers an interest-free, six-month introductory period on its credit card, and afterward a modest annual percentage rate (A.P.R.) of 13.9%. Smile gives current-account holders a credit-card rate of 9.9%; non-account holders pay 12.9%. High Street banks' credit-card A.P.R.s are as high as 24.9% on a standard card. The big banks are hardly standing still. Barclays, for example, invested $468 million last year to improve its website; Smile, in contrast, will spend no more than $5.8 million to upgrade its system. And Jon Kirk, a banking analyst at Fox-Pitt Kelton, says some traditional banks automatically offer lower rates — mainly on mortgages — to customers they consider vulnerable to the allure of pure plays, such as young marrieds with high mortgage payments, hoping they'll stay put.

If the stand-alones are to challenge the giants, Kirk says, "they need to constantly expand the category." Ultimately, that could mean opening real branches. "They will need some sort of face-to-face offering," says Alex Boorman, a financial-services analyst at the research firm Datamonitor. "Not everyone wants to bank online."

Although the four British banks are called pure plays, they have good family connections. Three of them were created by brand-name institutions, though they maintain entirely separate operations: Smile is owned by Co-operative Bank, Intelligent Finance is part of HBOS and Cahoot is owned by Abbey National. Egg is a child of insurance giant Prudential. Some of these may soon find themselves operating desks within their parents' branches. Says Head: "As far as Smile is concerned, [branches are] an option for the future." Emma Byrne, an Egg spokeswoman, notes that Zebank will offer its services in Paris' La Samaritaine store.

To retain and attract customers the pure plays must keep offering new products. Smile is starting a brokerage service and may sell insurance. Egg has introduced an electronic bill-payment service, two savings plans and a loan offering. Its Shopping Zone uses other e-tailers to sell everything from computers to lingerie. Beyond home delivery of booze, Smile now sells holidays, dvds and CDs online. Analysts say the nonfinancial items are neither needed nor profitable, but Head thinks "it's an experiment worth going for to see what actually happens." If Smile's alcohol effort succeeds, could wine bars in traditional bank branches be next?

• THOMAS K. GROSE
• Online banks diversify as they swell