EDVARD PETTERSSON

Staff Reporter

Washington Mutual Inc. has been extremely aggressive in its expansion drive but when it comes to technology, the Seattle-based bank is definitely in the slow lane.

Contrast that with Wells Fargo Bank, another one of the Big Three banks operating in Los Angeles. The company is on the cutting edge of Internet-based banking and recently introduced services on its Web site that allow customers to open and contribute to an Individual Retirement Account online or even file their federal and state tax returns.

Why the differing strategies? Bank officials say it has a lot to do with the different customer bases the two companies are trying to pursue. It also reflects the varying success financial institutions have had so far with electronic banking.

“We are a mass-market bank with a broad base of customers, and the appeal of online banking has just now entered in the mass market,” said Tim McGarry, a spokesman for Washington Mutual, which does not offer its customers any online services. “We are certainly not in the vanguard of online banking. The vast majority of our customers find visiting their branch offices very important, and the branch office is not yet outmoded.”

Meanwhile, Wells Fargo is going after younger, relatively affluent customers who are looking for a diverse package of financial services and thus are the most profitable customers for the bank.

“Over time, we found that the customers we attract, with our online banking services, are those with a higher household income and higher household assets,” said Mark Baumli, Wells Fargo’s vice president for online financial services. “This was our assumption back in 1995, when we first introduced banking services on the Internet, and it has borne out to be true. These customers have a 50 percent higher retention rate than our other customers, they purchase more of our other financial products, and they maintain higher balances.”

Many large banks have been reluctant to get into online banking because of the huge price tags involved but those that hesitate are likely to find that the going only gets tougher.

“It costs a tremendous amount to acquire and to maintain the computer capacity for online banking,” said Sara Mason Ader of market research firm Cerulli Associates. “At the same time, it’s still early in the game for banks to know which services are more cost effective than others. Those that have held off until now may have waited to learn from the mistakes that those on the cutting edge of online banking made.”

Wells Fargo may be at somewhat of an advantage because it got in the game early, according to Mason Ader. “Banks that are starting from scratch right now have to make an enormous investment to get where Wells Fargo is currently,” she said.

There is one very good reason for banks to encourage customers to use their Web sites rather than branch offices: It saves money. According to Cerulli Associates, the average cost of an Internet transaction is $0.01; that of a branch transaction is $1.07.

Meanwhile, more and more Americans are using the Web, and banks that don’t provide online services may find themselves at a competitive disadvantage. About half of the U.S. population is expected to have access to a PC by the end of this year, and about one-third of those will have Internet access.

Even Washington Mutual is not blind to the changes in technology. McGarry said the company has a pilot online banking program in the Northwest, which eventually will be available to customers elsewhere as well.

The third local powerhouse, Bank of America, falls somewhere between Wells Fargo and Washington Mutual in online services. Customers can check their balances, pay bills and perform other banking tasks on the Web, though BofA does not have tax filing and other special services offered by Wells Fargo.

At this point, the necessity of extensive online banking services is open to debate.

“There is no question that online banking will be important in the future, but whether a bank has an online presence now, in six months, or in a year won’t matter in the long run,” said analyst Jonathan Gray of Sanford C. Bernstein. “There is no serious problem with Washington Mutual not having online banking services right now. Their market share has not been hurting, and their checking business is growing.

“There is a segment of the market that will use online services, just as there is a segment that will do their banking in the supermarket. But the vast majority of deposits belongs to older, more conservative customers that like to sit down with a banking representative,” he said.

Even if the benefits of online banking are undetermined, banks are paying heavily to get a share of the action. Banks spent an estimated $540 million on online banking in 1998, compared with an estimated $199 million in 1996, according to Cerulli Associates.

Analysts say the spending is justified because banks need the Internet to meet two challenges: deregulation and globalization.

“A strong online presence is going to help as the distinctions between banks and other financial-services providers continue to blur,” said Jim Brostow, an analyst with Pacific Crest Securities. “The goal is to make the bank’s Web page a financial supermarket, which will be very compelling for customers looking for a range of financial services, whether these are checking accounts, brokerage services, or insurance needs.”

In addition, the Internet will give banks access to customers around the country and the world, who will not be concerned about where the bank is physically located.

“Retail customers can shop around on the Web for the very best services and prices,” said Brostow.