Only a year ago setting up a stand-alone Internet bank was seen as the way to boost the flagging share price of a traditional bank. The market was punishing banks that did not have an Internet strategy with a clear timetable for the establishment of an independent Internet operation. Great expectations rested on the new Internet-only banking operations. Traditional banks were concerned they would lose customers to bank and non-bank suppliers of financial services who were establishing Internet operations. The argument appeared to be that customers would move almost en bloc to bank on the Net rather than in traditional branches or on the phone.

Now, with the Internet-only model failing to live up to expectations, there is a move towards a more realistic view of the potential of the Internet and where it fits in banks' overall business plans. Internet banking is now seen more as an another channel of distribution/service, offering customers wider choices about the way they bank, rather than a stand-alone business. But, as customers become more comfortable with banking on the Net, it will be a channel particularly well-suited to the sale of certain products and the delivery of services. It could become a strong revenue driver in areas such as mortgages and savings, share dealing and simple investment products. It could also be used by banks to cherry-pick customers in their own or foreign markets, in much the same way that Bank of Scotland and Northern Rock used telephone banking to access mortgage and saver customers in the Irish market.

Last week AIB announced it was dropping plans for the Internet-only bank it was expected to launch early next year. It found that customers wanted the integrated approach, allowing them to dip into different channels such as branches or telephones at different times. Around the same time the Tokyo-based Sanwa Bank decided to abandon its online bank in favour an integrated operation.

Behind these decisions lies an assessment that while the Internet will be a valuable distribution/service channel, its scope to back a full stand-alone banking operation may be limited. So far potential customers have been slower than expected to become comfortable with banking over the Internet. Some remain nervous about the security aspects of Net banking.

In time more customers will use the Internet for some of their banking requirements. But many will still want a range of banking options such as personal services, branch services and telephone banking. The potential market - or the number of customers who currently want to bank through the Internet - is so far lower than expected, while there are a good number of stand-alone Internet banks. Analysts at ABN Amro have calculated that the plans of all the UK online banks project 3.5 million customers by the end of 2002, while the market has been estimated at just two million people by research company Forrester. There may now be too many Internet banks chasing too few online customers. In the UK, the Abbey National subsidiary Cahoot has so far failed to meet its customer targets. First-e, owned by the Dublin-based Enba but operating in the UK market, is cutting costs, making staff redundant and looking at adding a branch structure.

At Egg, the Prudential subsidiary, growth has slowed. Savers withdrew about £440 million sterling (€742 million) in the three months to end September, when the bank withdrew loss-leading savings account rates. In the Irish market the Bank of Ireland and Irish Permanent see the Internet as an important distribution channel.

But the stand-alone Internet banks say they are here to stay. First-e says new customer applications are growing, despite reduced advertising. Cahoot says credit card and current account applications have doubled. Egg says the savers who left were unlikely to have been profitable anyway. And at least two more standalone Internet banks are planned for the UK market - Evolvebank, to be set up by Lloyds TSB, and a subsidiary of the Swedish bank SEB.

But there is market evidence from the US that consumers are not opening Internet-only accounts; at the beginning of the year JP Morgan calculated that of customers using Internet banking in the US, 96 per cent were with banks that also had branches. The Internet will become increasing important in banking. But the winning bank business model is likely to be the one that offers customers a range of ways to access products and services while ensuring keen pricing and a good service.