Convenience is the key

Banking over the internet liberates customers from restrictive branch hours and the tedium of the lunchtime counter queue

Egg, Smile, First-e - the names get more esoteric with each new online bank. But whatever the thinking behind the marketing strategy, it seems to be working. Tens of thousands of new users go online every day and the total number of customers now runs into millions.

High street banks have now got in on the act. Barclays, for example, has 720,000 online customers, and adds new users at the rate of 4,000 a day.

Convenience is the key. The web liberates you from restrictive banking hours and the tedium of the lunchtime counter queue. Online customers may also benefit from high interest rates on their current and savings accounts, at least if they use internet-only banking services.

Smile, the internet-only subsidiary of Co-operative Bank, pays a market leading 4.85 per cent on its current account if you are just £1 in credit. Its mini-cash ISA is also one of the most attractive around, paying 7.25 per cent.

Customers going online with the larger banks, however, are less likely to see higher rates than traditional customers. The online services are an add-on to their branch network rather than an alternative, and few financial incentives are available to those who bank at home.

Barclays, for example, offers a free service that allows online users to access their current account, transfer money between accounts, pay their Barclaycard bills, check statements, set up and cancel standing orders, and pay bills such as their phone or gas bill.

Many of the other high street banks offer similar services. But you may not be able to apply to start an account online, as a written signature may be required and you may not be allowed to set up direct debits.

Both Barclays and NatWest allow users to access their share dealing operations over the internet.

NatWest has 197,000 customers on its online service and adds another 2,000 each day. It also offers a 24-hour helpline with calls charged at local rate.

Natwest does not offer credit cards and loans, but plans to introduce them soon and it is considering offering reduced prices for online customers when these services go online. It currently offers discounts of 30 per cent for travel insurance and 15 per cent for term assurance for online users.

Nationwide offers full current and card-based account facilities to 140,000 users of its free online banking service.

The building society now offers a full internet service in addition to its older PC-based banking service. With the PC service users are sent software to download on their computer, which allows them to access their account through a private line. The drawback of this system is that the bank must send out new software for each improvement it makes to its service. The internet, on the other hand, allows new features to be added centrally.

This system is being phased out in favour of the internet. First Direct exemplifies the development of internet banking. It started as a telephone bank, developed PC-based banking and will offer true online banking from June this year. First Direct has one million customers in total. From June, its internet service will offer users preferential interest rates on its cheque and credit card accounts.

Egg, the online offering from the Prudential, offers a savings account, credit card and mortgages to its 940,000 customers, and pays 6.3 per cent to internet-only customers. Users who also want to use its telephone service will get 6 per cent.

Egg has pledged that it savings rates will not fall below the Bank of England base rate until at least January of next year. But its credit card interest rate has just increased to 10.9 per cent APR.

Smile, launched last October, charges 9.9 per cent APR on its credit card. It offers competitive savings rates on current accounts, savings accounts and loan rates. It pays 6 per cent on its savings account to customers who also have a Smile current account, or 5 per cent to those without. First-year students can have overdrafts of up to £1,000 with Smile without being charged a fee. This rises each year to a maximum of £2,000 after four years.

First-e offers a savings account, free banking and generous interest rates of up to 6.61 per cent. However, it does not yet have a current account, although it is promising to offer one shortly.

With the major banks looking to close even more branches, online banking is likely to be the future for most of us. Some predictions see up to 10 million people in the UK signing up to an internet banking service by the end of the year.

Whether the high street banks will use online banking to pass cost savings on to customers, rather than using them to boost their profitability, remains to be seen.