Small Net Bank Challenges Larger Brick-and-Morter Institutions

Article excerpt

ATLANTA -- Net.Bnk, a bank with no branches, tellers or bankers' hours, is taking on the big banks on the Internet.

Atlanta-based Net.Bnk, with one office and 22 employees, said its low expenses allow it to pay higher rates for deposits, charge less for loans and still make a profit. Analysts expect the Internet bank to challenge bigger banks encumbered with branch networks and thousands of employees.

"Big banks are handicapped," said Bill Burnham, an analyst at Deutsche Morgan Grenfell in San Francisco. "Internet banks can offer great rates; that's what scares the hell out of the big guys." Deposits at Net.Bnk swelled by about $15 million to $20 million a month at a time when most banks struggle to keep them. Consumers are drawn by checking accounts that pay up to 4 percent and require a minimum balance of $100, and by high-yielding certificates of deposit and money markets. Chief Executive and Vice Chairman D.R. Grimes, one of Net.Bnk's founders, said even though the bank is turning a profit, there is a lot of ground to break. "When we had our first audit, the regulators came in and asked to see our vault so they could count up the cash," said Grimes. "We don't have a vault, and there's no cash." If regulators worried about consumers putting their money on an unsecured network, three years of losses at Security First Network Bank -- the first "virtual bank" -- didn't help. The Atlanta-based company spent more on programmers and marketing than it earned from banking. Because of regulators' reluctance to approve Net.Bnk, it was run as Atlanta Internet Bank under Carolina First Corp. of Greenville, S.C., from the end of 1996 until it sold stock to the public in July 1997. Net.Bnk used proceeds from the sale to fund itself and buy a thrift charter. Bank consultant T. Stephen Johnson, co-founder and chairman, recruited Grimes, who spent 12 years at Trust Co. of Georgia, a predecessor to SunTrust Banks, and 18 years at Servantis Systems an electronic banking software company in Norcross, Ga. In April, Net.Bnk's deposits increased 19 percent to $160 million with 10,000 customers in 50 states and 20 countries. Grimes said the bank may attract up to 20,000 customers and $225 million in deposits this year. That compares to an average of 1 percent growth in 1997 for big banks covered by PaineWebber. "I can't think of an industry better fit for the Internet than banking," said Grimes. Investors agreed, boosting Net.Bnk shares 155 percent to a record of 30 last month from the beginning of the year. The stock now trades around 23. By March, Net.Bnk was operating at a profit. …