Paperless banking offers rich rewards

Every major bank in the UK is taking steps into cyberspace. From NatWest to Smile, banks are making their services available on the Internet, and new legislation removing the need for written signatures could soon cut out paperwork altogether.

High-street banks such as Barclays, NatWest and LloydsTSB now have websites where customers can perform a variety of banking tasks, including checking account balances and transferring funds from one account to another.

The new electronic communications channel has proved popular with customers. So far, just over 800,000 customers have signed up for Barclays' online banking service, and this number is growing at around 4,000 a day.

There are now three banks operating in the UK which are accessed almost exclusively through the Internet - Prudential subsidiary Egg, Spanish-owned First-e and Smile, a subsidiary of the Co-operative Bank. All three run savings accounts which pay competitive rates of interest, but so far only Smile is offering a current account as well. First-e says it plans to introduce current accounts for UK customers by the end of June.

So what are the advantages of Internet banking? Firstly, pure Internet banks tend to pay much higher rates of interest. The cost of running an Internet-based bank is much less than that of a conventional bank - it does not have to establish expensive branches or hire the thousands of staff to run them. According to Smile spokesman Dave Smith, the infrastructure costs of running an Internet bank are about a tenth of those of a conventional branch-based bank, and these savings can be passed on to customers.

While branch-based current accounts pay a pittance in interest on credit balances, if they pay anything at all, Smile is offering 4.85 per cent gross on current account credit balances. The bank also offers a savings account paying 6 per cent gross (if you hold a Smile current account), and a mini cash Isa paying 7.25 per cent gross.

First-e offers an instant access savings account through its website: this pays 6.81 per cent interest on balances as small as £1. However, as a foreign bank based in Dublin, it pays interest gross, which means the customer is responsible for paying income tax.

Secondly, online banking is very convenient. You can pay your bills at any time of the day or night. You also have access to statements which are right up to date.

Although it is now possible for just about every banking transaction to be conducted entirely over the Internet, to comply with EU regulations, written signatures are still required when opening an account or applying for credit facilities. But the Electronic Communications Bill, expected to get royal assent this month, will give electronic signatures legal status, paving the way for entirely paperless banking.

However, the number of people in the UK who can actually use any of these services is still relatively low. Just 6 million adults now have access to the Internet through their PCs. This is why the banks are now making moves into digital television, forging deals with satellite and cable TV companies to offer interactive services through television sets.

HSBC forecasts that 71 per cent of retail banks will either offer interactive TV banking within the next six months or are negotiating with digital providers to develop such products.

The market now opening up to banks is far wider than PC banking, with predictions that within three years 26 million adults in the UK will be able to carry out financial transactions via television.

Smile's better for a busy broker

It was the convenience of online banking that appealed to Gill Henry. As business development manager for a London-based mortgage broker, she just didn't have time to keep visiting her bank.

'I use online banking all the time,' says Gill, from Islington. 'Work is very hectic, and I don't get the chance to pop out at lunchtime.'

Having used the Internet to access her Nationwide current account for about a year, Henry decided six months ago to apply for a credit card with new Internet-only bank Smile.

She admits it was the catchy advertisements that originally lured her to Smile. But once she had applied for the card, she was surprised how simple the whole process was. It took two minutes to get an answer to her application, and a credit agreement was posted for her to sign.

Having access to up-to-date statements at any time gives you more control over your finances, she says. 'You always know what you've got in your account.' Henry doesn't share the frequent impression that online banking is too impersonal, although she says there are certain matters she would want to discuss face to face.

She now does most of her banking from her desk at work, where she has access to the Internet. But she also has a laptop computer, giving her access from home.