Why loyalty is no reason to stand by your bank

It has taken a long time for them to get round to it but banks are finally offering customers a better deal. Stand-alone internet banks, such as Egg, Smile, First-e and Cahoot, are stirring up the traditional high-street banks with high interest accounts and low rate credit cards.

It has taken a long time for them to get round to it but banks are finally offering customers a better deal. Stand-alone internet banks, such as Egg, Smile, First-e and Cahoot, are stirring up the traditional high-street banks with high interest accounts and low rate credit cards.

But even though it is possible to get more for your money, many of us can't be bothered to shop around. A survey from Mintel, the market researcher, reveals that only 8 per cent of us have switched accounts from our existing bank to a stand-alone internet bank.

"Take-up of pure online access is no way near the heady forecast that was peddled at the beginning of the year," says Alan Hughes, chief executive of First Direct. "If anything, the number of people switching has fallen."

Security is the main reason most of us stick with our current bank, even though it may not offer the best deal. Given the high-profile security glitches that have hit the online services of Egg, First-e and Barclays, the safety of our account details is of utmost importance.

After these security scares and some problems encountered while testing its service, Intelligent Finance (IF), the Halifax's stand-alone bank, has repeatedly delayed the launch of its online venture to be completely sure that there will be no hiccups. "We'll go as soon as we're absolutely ready and not before," says Jim Spowart, chief executive of IF.

Many of us are also put off switching accounts because we think that the main advantage - having a choice as to how we bank - will be rolled out to all banks soon enough, anyway. HSBC, which launched its online banking service this summer, was the last of the main high-street banks to do so.

Today, nearly every banking customer has the option of accessing their account online. Banks have realised that the majority wants a choice of method when it comes to banking, though few want to be limited entirely to the internet.

"Customers want to use the internet in conjunction with other channels of distribution, not exclusively," said Peter Duffy, commercial director of online banking at Barclays.

Ambrose McGinn, Abbey National's retail e-commerce director, agrees. "The evidence is pretty clear - the majority of the market is interested in bricks and clicks and wants to do business with the names it trusts." However, he believes there's also a place for standalone banks.

Mr Duffy says: "Some do find it [an internet-only bank] preferable but this is by no means the mass market."

Customers favouring online banking are likely to be net-savvy young professionals, who are used to trying out new products and services and who don't mind the fact that they won't have the face-to-face contact of branch banking.

Whether or not you fall into this category, online banking has definitely made an impact in the past year and it looks set to continue. Cap Gemini Ernst & Young, the IT and management consultancy, has found that 4 per cent of banking transactions - for example, transfers of money from one account to another - take place online. It predicts that this figure will increase to 25 per cent by 2003. This is some growth rate but not everyone believes that such general estimates are helpful.

"We are seeing 15 per cent, 20 and even 25 per cent of some transactions being done online," says Mike Constantine, head of internet services at HSBC. "The most common online transactions are transferring money and paying bills. But as customers get used to using the internet for their banking, they are likely to become more adventurous in what they do."

One big impact of the internet has been the role stand-alone banks have played in injecting competition into an industry that had been wallowing in the fact that customer inertia meant consumers were unlikely to move to a different bank. "Internet banks have broken a very big compromise that's existed in the banking industry for years," says Richard Thackray, UK country manager at first-e. "People didn't love their bank but they trusted it not to go wrong, which is why they stayed. Internet banks have upset that status quo and consumers are now much more aware and more aggressive in shopping around for a better deal."

The higher rates of interest we have seen offered by internet banks have already led the Halifax and Alliance & Leicester to announce increases in the interest paid on their current accounts. From 9 January, Halifax will be paying 4 per cent on balances over £1,000 or to those who pay in their salary each month, and Alliance & Leicester will pay 5 per cent on balances over £5,000. These rates are considerably higher than the previous 0.25 per cent both paid. It is likely that we will see other banks increase the interest rate on their current accounts to compete and avoid losing market share.

Gordon Pell, chief executive of retail banking at the Royal Bank of Scotland Group, says: "If they [stand-alone internet banks] do something successful, others will follow. They're doing a very expensive pilot for the rest of the industry - we're not going to let them take our market away. It's a win-win situation for me. If it doesn't work, I win. If it does work, they've tried it out and we'll follow suit. What's more, it's good news for the consumer."