Lloyds TSB enters net fray

Lloyds TSB is aiming to capture one million internet banking customers within a year through the launch of a separately branded internet bank, widely tipped to be called e-bank.

The company is still considering whether the internet bank will offer higher savings rates and lower borrowing rates than those available to its branch-based customers. But, through the development of the new internet bank, Lloyds TSB aims to attract a new range of customers.

The move comes amid a race among the banks to develop internet facilities, following the success of Prudential's Egg in attracting new customers.

Barclays claims to be the country's biggest internet bank, through its Barclays Online banking facility while earlier this month Halifax announced plans to spend £100m to set up Greenfield.co to target new customers. Woolwich is spending £125m over three years on developing its Open Plan banking service, which embraces the internet and digital television while NatWest, which is fighting off a £22bn hostile bid from Bank of Scotland, has also said it intends to invest in new banking facilities.

The internet is attractive to banks because it allows them to reach customers more cheaply than they can through their expensive branch networks. The disadvantage is that the development of the facilities is costly.

The cheaper running costs, however, mean that banks such as Egg are able to offer more competitive rates. Egg, however, is yet to make any money for its parent, Prudential.

Unlike rivals such as Halifax, Lloyds TSB does not expect to incur such a high cost in setting up its internet bank. Neither does it intend to run the online operation as a "standalone" venture.

Gordon Pell, group director of retail banking at Lloyds TSB, said: "It will not be stand-alone. What we want to do is repackage [our existing internet bank] under an associated brand."

Lloyds TSB already has an internet bank product which allows customers to operate on screen, take out loans and connect to its C&G mortgage website. It has 100,000 customers and after a series of 10-second television commercials is winning new customer at the rate of 17,000 a day.

But Mr Pell said the new internet bank would be "marketed to an outside franchise" through an "associated brand" which he refused to name.

Lloyds TSB's existing internet customers tend to use the facility in addition to the bank's branches and telephone services. Customers of the new internet bank are also likely to be able to use branches and the telephone but will have an internet account manager rather than one in a branch or on the phone.

Mr Pell set the target of a million customers by the end of next year and said the bank would undertake an advertising campaign. The pilot for the bank will start activities early in the new year and should become fully operational soon afterwards.

Earlier this year, Lloyds TSB started trailing an "e-bank for students" and senior banking sources said that because the company has registered "e-bank" it is likely that the the new venture will take that name.

Banking sources believe that, given its track record, Lloyds TSB is unlikely to run the new internet bank at a loss, as have some of the newer arrivals on the internet.