Boston-based Eastern Bank has had an Internet presence since 1995.

Now that the shine’s off the Internet apple, banks have resigned themselves to operating World Wide Web sites that probably will not turn a profit anytime soon.

That’s according to the latest survey published by the American Bankers Association in its monthly journal. About 50 percent of the survey respondents said they expect their sites will never be profitable. But the idea of banking Web sites has evolved substantially from the industry’s first forays online.

“The idea of a stand-alone model has definitely proven to not be successful,” said Moriah Campbell-Holt, an analyst with Gomez, based in Waltham. From Wingspan to Lighthousebank, the Internet spinoff of Brookline Savings Bank that has since been folded back into the main bank, examples of unsuccessful Internet-only bank ventures abound.

“Banks are realizing that they should be capitalizing on their existing brands in terms of developing their Internet offering,” she said. There have been significant initiatives from large brick-and-mortar banks to enhance the self-service functionality offered via the Internet.

The industry has matured from thinking that Web-only banks with separate identities would flourish and has settled into the idea of a Web presence with the same brand name as the physical entity, as a necessary and expected delivery channel.

“It completes the delivery system,” said Brian Arsenault, senior vice president at Maine-based Banknorth. “You have to have ATMs, the phone bank, you have to have branches and, increasingly, you need to offer customers Internet banking.”

But Banknorth is one of the few sizable banks that held off on an Internet offering until last year. Despite that, 100,000 of its customers have signed up for its new Web services.

Eastern Bank in Boston, which has had an Internet presence since 1995, recognized the potential for the Web as a delivery channel and in 1998 started its own e-commerce division. Joseph Riley, senior vice president of e-commerce, said the bank is always evaluating what products and services will blend well with the Web and has seen attitudes change dramatically.

Banks didn’t know whether the Web would be a delivery channel or a completely new way of providing financial services, he said.

“Given that, we were looking for a pretty broad spectrum of services we would deliver through our Web sites, everything [including] thinking of the bank’s homepage as a portal to the world …” where customers could buy tickets to baseball games, said Riley.

“We never really believed it, but it wasn’t too much of a stretch to go from there to providing procurement services for office supplies, legal services or those sorts of things,” he said. But Eastern quickly drew in the reigns and didn’t pursue the portal strategy, choosing instead to offer only those products that could be defined as falling within the realm of financial services. Most recently, it added the Equifax Credit Report offering for its customers. According to the survey, 74 percent said their sites don’t serve as a portal. None of the banks contacted by Banker & Tradesman planned on creating a portal site. However, 67 percent of respondents in the ABA survey did provide transactional capabilities on their sites.

Banks no longer view the Internet as a huge profit-making endeavor and are carefully planning what they should offer with an eye toward the bottom line.

“A couple of years ago people were spending a lot of money without a lot of thought as to what the return on that investment was going to be. That’s changed a lot as well,” said Riley.

While revenues from Eastern’s Web site are growing, they are still “nowhere near enough” to cover the costs of development,” said Riley.

‘Implicit’ Value

For Banknorth, the costs are folded into the total costs of doing business, but Arsenault said it views the costs in a different way. “If you have a customer applying for loans over the Internet – if you have a customer not making demands of your branch system – it seems to me there’s some implicit profitability there,” said Arsenault.

In the ABA survey, 28 percent of respondents said that having a Web site reduced the number of customer telephone inquiries their bank receives.

“That’s why I think banks, more and more, have to look at this as an integrated delivery system as opposed to trying to isolate them and assign a specific profit margin to each delivery system,” he said.

Bob Kline, e-commerce relationship manager for Sovereign Bank, said he also does not expect the Web unit alone to turn a profit anytime soon, but that’s not the point. Rather, the Web should be viewed as a secondary delivery channel for customers to access the bank.

“It’s critical. I don’t think you can get by without it,” he said of online banking in today’s marketplace.

Campbell-Holt compares the necessity of a Web presence to the ATM. Virtually every bank will have some form of an ATM presence as a cost of attracting and retaining customers. The strategy for Web sites should be similar.

“The banks should view it both as a servicing opportunity and as an acquisition opportunity both for new customers but also for existing customers. It’s an opportunity for banks to brand themselves to existing customers,” she said.

Riley said the concept is similar to the debit card, asking what would happen if a bank were to take that product away from customers. Most would change banks. The same is true of those that have grown used to online banking functions, he said.

“It [the Web] provides a measure of convenience that is absolutely inescapable. This is an old analogy, but it is absolutely true,” he said.

Kline said customers’ use of the Internet for banking transactions is expanding exponentially. “I don’t necessarily believe [customers] choose an institution solely based on their Internet offering, but the lack of an Internet offering can certainly impact the decision process,” said Kline. Sovereign has about 200,000 customers signed up for its services. Eastern’s customers are immediately linked to its Internet services but Riley said an additional 15 percent have signed up for subscriber-based services.

While Arsenault of Banknorth said the creation of a Web presence today is as much a defensive move as it is an innovative business strategy, they see potential growth in the Web consumer niche in two areas.

“There’s a whole generation of people coming along – that is to say, people anywhere for their early 20s just out of college to their mid-30s – that are extremely comfortable with Internet banking. We also see, which surprised us, a lot of older customers … A lot of these people have gone back to school and have gotten comfortable with computers. So you really have both ends of the spectrum getting comfortable with Internet banking,” he said.

Another prediction made in the midst of the stand-alone Web bank hysteria was that physical branches would go by the wayside. That hasn’t happened. Many bankers, 42 percent responding to the survey, said that by 2005, traditional brick-and-mortar branches would be the leading consumer banking channel. Only 18 percent said the Internet would be the lead channel.

“Branches are certainly not going to disappear,” said Campbell-Holt. There are too many useful advantages they provide, the most important of which is to provide a level of comfort for the consumer who may be completing a complex transaction and would rather do so face-to-face with a financial services provider.

Kline said being in the community has always been a strategic goal of Sovereign that is not likely to change. Despite the popularity of the Internet, the bank will maintain its branches.

While Riley said branches will continue to be very important, a bank will have to have a well-integrated strategy that incorporates online banking, branches, call centers and ATM networks. Offering such a total package is critical to success in the future, he said.