Pure internet banks were audacious revolutionaries a couple of years ago. Their customer base looks much less secure today.

Quite suddenly, in October 1998, the boring Prudential came from nowhere and turned the banking world upside down. The defining moment was when Sir Peter Davis, then the head of the giant insurer, announced to astonished journalists that he was about to open a phone and internet bank. Called Egg.

The papers sniggered and were sceptical about its chances. However, a week after its launch Egg had taken on 270 extra staff to deal with phone calls, the website kept crashing under the pressure of demand and wannabe customers were told they would have to wait up to 28 days to open a savings account.

As the first "pure-play" internet bank in the UK, Egg's launch was the biggest revolution in UK financial services since Direct Line cut the middlemen out of insurance sales. At first Egg offered savings, mortgages and loans managed by phone and post as well as online. It has since expanded its range to include a credit card, a shopping channel and Egg-branded stock market investments run by big-name managers.

The beauty of online banking is that the customer does all the legwork, going through his or her own security procedures, clicking to check balances or move money about. All these were jobs previously done by clerks at branches or at a call centre.

Egg decided to move most customers online, rather than having them rely on call centres. It imposed a crude carrot-and-stick policy, for instance offering internet savers 6.3 per cent interest on their savings, whereas phone users earned 6 per cent and had to pay [pound]2 for each posted printout of their savings account. The bulk of Egg's 1.35 million customers are now net-based.

Although Egg has had an indifferent flotation and has yet to make any money (last year's pre-tax losses were [pound]155.3m), it is confident of breaking even this year.

Egg does not operate current accounts, but its success has delivered a huge kick to the other banks, which relied on their captive current account customers to buy their other in-house savings and investment products in order to make money.

The banks responded in one of two ways: most, including the "big four" (Lloyds TSB, Barclays, HSBC and NatWest), concentrated on rolling out an online version of their high-street offerings. Three chose to launch their own stand-alone internet banks with silly names: Smile from the Co-operative Bank, Cahoot from Abbey National and IF from the Halifax. The French Banque d'Escompte also operates an internet bank, First-e, in the UK (and in Germany).

The banks that chose to pour money into "pure-play" online banks can justify it by claiming that they win new customers for the parent group--in the same way that the innovative phone bank First Direct brought young, affluent blood into the HSBC Group. The Smile and Cahoot ad campaigns and websites are clearly designed to appeal to customers who are comfortable using the internet (although Cahoot claims one centenarian among its clients).

But a funky-looking website is not enough. As Egg found, the way to rack up customer numbers is to offer headline-grabbing deals on interest rates. Most current accounts from the big high-street banks pay interest at 0.1 per cent to customers in credit. Compare that with 6.3 per cent from Cahoot, IF's 4.89 per cent and Smile's 4.5 percent. A little effort to change banks could pay dividends.

According to Ed Bowie, a banking analyst at the research firm Gomez.com, the British are open-minded about internet banking mainly because we are obsessed with getting the best interest rates. "In the USA people are far happier to buy shares, but in the UK we typically put our money into bank and building society accounts, and the internet banks are offering excellent rates at the moment."

The relative lack of success of pure-play internet banks in the US means that Egg now has more customers than all the US-based internet-only banks combined.

It is too early to work out exactly how successful the online banks can be. They may offer great rates, but the people who move their cash around to earn maximum interest are called "rate tarts" in the industry: they will take their business elsewhere as soon as something better-paying comes along.

The online banks' core customer base is always going to be the "low-hanging fruit" -- young, affluent people who are pressed for time, who trust the bank's brand and like to bank online. What no one really knows is how many people fall into this category. There probably aren't enough of these highly desirable customers to push stand-alone net banks into profit.

Although 7.1 million of us do at least some of our banking and financial transactions online, most of us are dabbling, using the net to browse for a mortgage or to check recent transactions on a traditional high-street bank account. Internet industry analysts suggest that the UK market for pure internet banking -- people who want to do everything over the net -- has stalled at around one million customers. If that analysis is right, the pure online banks will almost certainly be reintegrated eventually into their parent banks' websites, as they lack a sustainable customer base of their own.

It has happened before. In August 1999, Citibank in the US launched a stand-alone internet bank, Citi f/i. It was aimed at its sophisticated, net-savvy customers who wanted higher interest rates if they promised to keep away from Citibank branches. The venture survived barely a year -- in July 2000, the bank announced that Citi f/i was to close.

While the good times last over here, online customers are extremely well served in comparison to those who still like to queue in branches. Excellent customer service, loss-leading interest rates and integrated money management are all part of the deal, according to Ed Bowie at Gomez.com. He is optimistic that these superior offerings will win over more of the 51 per cent of UK adults who have access to the internet. "We see customer service as a critical -- if not the most critical -- retention tool for banks. Those banks with a high level of service will succeed."

Even so, the traditional banks don't seem too bothered by the threat of mass defections. Gomez.com believes that the big four's sites, products and customer service are lagging well behind the pure net banks and some smaller banks and building societies. The Nationwide Building Society scores very highly, coming second overall behind Smile.

The high-street banks are held back by clunky sites and non-integration with their branch operations, which ought to be their biggest advantage over banks that can communicate with customers only by e-mail or phone. Many banks have also been spreading themselves thinly in recent months, rolling out online banking through digital TV or Wap phones, rather than consolidating their internet services.

It appears that they are right to be unconcerned. Most of their customers just don't seem to care that the traditional high-street giants are raking in even more cash by offering the same (low interest) accounts online as they do in their branches.

It's a no-brainer for the high-street banks. They make easy pickings by offering net novices the exciting opportunity to administer their own cash online (in other words, get the customers to do all the work). They also haven't had to spend millions on developing and advertising a new brand or championing innovative but hard-to explain total financial management systems. After taking marketing and advertising into account, it can cost hundreds of pounds to recruit a single customer to a stand-alone online bank. The big-name banks, as usual, are winning the battle by doing nothing more than relying on the apathy of their customers.

Barclays claims the most online users (1.7 million), with 20,000 people a month signing up. An overwhelming proportion of these people are "dabbling": monitoring their existing Barclays current accounts online, making the odd transaction, but certainly not relinquishing their reliance on branches and bank staff. Barclays is sanguine: it has discovered that its customers are more likely to sign up for other profitable products such as mortgages, investments and insurance when they are online.

If the stand-alone online banks fail to contribute to company profits, they will probably be reintegrated. The most vulnerable looks to be Cahoot, because Abbey National's future as an independent bank is already under threat. A buyer might decide it could do without a separate, loss-making online bank.

Maybe the banks will not be able to get away with it; the Egg revolution should mean that the net-savvy expect higher standards and decent returns on savings. But people forget fast.