Profits Galore in the Online Banking Business

Like many moneymaking enterprises, financial entities such as banks and credit card issuers haven't been immune to the influence of the Internet. Many banks have offered their customers online banking services for years, but times are changing and there is a movement afoot to innovate online-only products. As the profits roll in, credit card companies are also stepping in with their own online offerings.

There are many reasons for financial companies to increase their online presence, not the least of which is that it makes good fiscal sense. Online transactions save on paper and personnel, something banks have known for years. Consumers are asking for more Internet-based banking services as well, and even financial-reform legislation has helped accelerate the move to online services. The new trend is moving toward online-only savings accounts that offer higher interest rates than regular banks, and it's not only banking institutions that are jumping on board.

London-based Barclays (NYS: BCS) is returning to the U.S., but not with the brick-and-mortar presence it had here until it closed its branches in the 1990s. The company's reason for offering online-only savings accounts and CDs is primarily to fund its credit card business in this country, as regulators are pressuring banks to fund their operations through consumer, rather than brokered, deposits, since the latter are less stable than the former. The bank's credit card loan profile is valued at a hefty $12 billion, and it has offered credit card services in the U.S. since 2004.

Barclay's will have plenty of competition in its quest to offer online-only savings accounts. Capital One (NYS: COF) purchased ING Direct from Dutch parent ING Group recently, when the European Union's bailout terms required the divestiture of the online-banking unit. ING Direct had at least $83 billion in deposits on its books, which immediately transformed Capital One into an Internet banking powerhouse.

Another big player is Discover Financial Services (NYS: DFS) , which offers an array of savings instruments, as well as student and personal loans, through its online arm, Discover Bank. Discover padded its nearly $13 billion in online deposits with an additional purchase of a number of online savings accounts from E*TRADE Financial in early 2010, producing a nice cushion upon which to further grow its credit card business.

American Express (NYS: AXP) offers two online savings products, a high-yield savings account and CDs. The company is also moving into the prepaid debit card market and is currently running a trial of its Bluebird card at Wal-Mart stores. CIT Group (NYS: CIT) very recently began offering its own online savings account, in addition to CDs. CIT was another company that was rumored to have been interested in buying ING Direct last year.

Fool's take
Online-only banking is a lucrative concern, with little overhead for financial institutions and lots of fast profits: Barclays noted that it took only two months to collect online deposits valued at $1.3 billion when it opened an online savings bank in Germany recently. Many of these companies are also looking into mobile banking offerings, which I think will be equally profitable. If you're looking for a place to park your money, you could do worse than to consider companies that are getting in on the ground floor of what promises to be the next banking revolution.

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At the time this article was published Fool contributorAmanda Alixowns no shares in the companies mentioned above.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores and creating a write covered strangle position in American Express. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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