First Direct wades into the online banking war

Competitive rates on savings and borrowings plus the back-up of an "award-winning" telephone service so you can actually talk to a real person if you need to. That's what First Direct this week claimed it would be offering as it stepped up the internet banking war with the launch of a range of online products.

The telephone bank, part of the HSBC group, is attempting to exploit dissatisfaction with some of the stand-alone internet banks, which have come under fire on occasion for poor customer service.

Its new firstdirect.com product range includes a current account paying up to 5% gross on credit balances, a savings account paying up to 6% gross, a credit card and personal loans. While the account rates are pretty good, they are not quite as high as some of the purely online offerings - but First Direct is gambling on people accepting a slightly lower rate in return for the reassurance of knowing they can speak to someone 24 hours a day, at no extra charge.

Its motto is "the online bank that customers can talk to" - a dig at rivals such as First-e, which imposes a £5 charge for transactions conducted by phone which could have been carried out over the net.

First Direct's move comes just days after a report which claimed to show that Britain's new internet banks are struggling to win the public's trust. Just 8% of men and 6% of women would choose an online bank over a high street bricks and mortar equivalent, despite all the bad press the traditional banks have received of late, according to brand consultancy Henrion, Ludlow and Schmidt.

A contributory factor has undoubtedly been the technical problems which many online banks seem to have suffered. Earlier this month Intelligent Finance (IF), the Halifax's stand-alone internet and telephone bank, was forced to postpone its launch after a glitch almost brought its systems to a halt during the trial run. IF will now go live in August.

And last month, Cahoot, Abbey National's internet bank, suffered the embarrassment of having its website out of action for several hours after a surge in demand left its systems unable to cope.

Worries about internet security were exacerbated this week when gas and electricity supplier Powergen was forced to contact more than 2,500 of its customers after their banking details were revealed on the company's site.

First Direct chief executive Alan Hughes pledged that its customers would benefit from competitive prices, "but not at the expense of the service they receive". The bank expects a large proportion of its 1m customers to use its online service.

Those who are unable to, or don't want to, use the net, and who stick with telephone-only banking, will have to make do with First Direct's existing non-online rates, which are a lot less attractive.

So just how good are the First Direct online rates? The flagship product is a current account paying up to 5% gross - 50 times the 0.1% that the big four banks pay their standard current ac count-holders. However, the interest rates are tiered, and to get 5%, you need to have £5,000 or more sitting in your account. For those with between £1 and £999 in the account, the rate is just 1%. It rises to 2% for £1,000-£2,499, and 3.5% for £2,500-£4,999.

Of the other online banks, Cahoot (www.cahoot.com) tops the rate table because it pays between 4.5% and 6.5% gross depending on how much is in the account and whether you take a cheque book. IF (www.if.com) also beats First Direct - it will be paying a flat 5% gross no matter how much is in the account.

Similarly, Smile (the Co-op Bank's online offshoot - www.smile.co.uk) and First-e (part of the French bank Banque d'Escompte - www.first-e.com) pay 4.75% and 4.88% gross respectively on all credit balances from £1. First Direct's savings account has a rate of 5% gross for balances of between £1 and £4,999, rising to 6% for £100,000-plus.

Again, most of the other online banks beat this. Egg's no-notice account pays 6% gross from £1 upwards - 6.3% if you are happy to operate it entirely over the net.

First-e will give you 6.81% gross from £1, though this includes a 0.81% introductory interest bonus which only lasts until September 30. IF's savings account will pay 5% gross on £1 to £999, then 5.65% on £1,000-£9,999, with a top rate of 6.25% for balances of £100,000 or more.

However, some of the best online rates are available from good old building soci eties. Nationwide's e-Savings account is paying a table-topping 7% gross on balances of £1 upwards, but it has to be operated in conjunction with the society's current account. Meanwhile, Newcastle building society's NewcastleNet Savings account pays between 6.6% and 7.1% gross, though minimum investment is £1,000.

First Direct's online credit card annual percentage rate is 10.9 APR, and there is a six-month introductory rate on balance transfers of 4.9 APR. Its personal loan rates range from 9.9 APR to 12.9 APR.

Egg (www.egg.com) used to be one of the banks that, as First Direct puts it, "penalise their customers for calling them", but this week it ditched the £2 charge that customers of its internet savings account and credit card had to pay if they phoned up to request something which could have been done online.

Egg originally imposed the charge to deter people from ringing up and has scrapped it after customer feedback showed that "customers value a combination of internet and telephone servicing in managing their finances".

Egg also this week became the latest player to move into online share-dealing. It has linked up with stockbroker Charles Stanley on the service, which goes live tomorrow and will charge a flat fee of £9.99 per trade.

This is one of the cheapest deals around, but there is also a £5 monthly admin fee and you have to have an Egg savings account.

Next month Egg will launch a general insurance broking service allowing people to obtain quotes for products such as home and motor cover from a panel of insurers offering "specially negotiated rates". And a mortgage broking service, where peo ple can buy home loans from rival lenders, is due to be launched in early autumn.

Meanwhile, First-e is hot on its tail - it plans to launch its own online share-dealing and mortgage broking services within the next couple of months, plus own-brand home loans before the end of the year.