Citibank Kills Net-Only Project

SAN FRANCISCO (07/04/2000) - John Reed has some advice for financial institutions grappling with the Internet. Speaking at a financial-services conference last week, the former Citigroup Inc. (C) CEO said banks could set up independent Internet subsidiaries that have some ties to the parent's brand and resources, as well as benefit from new-economy leadership and technology.

Sounds good. Now if only Reed's old company would listen. While Reed was sharing his wisdom, the biggest U.S. bank was making plans to shutter its Internet-only subsidiary, Citi f/i, and to roll the business into its traditional online banking service, Direct Access, creating a new site.

"We learned that our customers liked the service, but they also wanted to have the ability to access our financial centers," says Citibank spokesman Mark Rodgers. Details on product rates and fees for the new services have not been determined, he adds.

Three years in the making, Citi f/i has struggled through several management changes and a lukewarm reception by a public that has been slow to accept online banks in general. Since launching last fall, Citi f/i has been offering customers higher interest rates on checking and savings accounts in exchange for staying away from Citibank's brick-and-mortar branches. The only marketing dollars spent on Citi f/i were for a targeted advertising campaign in Austin, Texas.

Rodgers won't say how many customers the site has attracted or how many people it employs, but he insists the bank won't lay off any employees as a result of the consolidation.

Citi f/i customers and partners, meanwhile, haven't been informed of the changes. "They haven't told us," says Henrik Bodenstab, co-CEO of Oneclip.com, a promotional services partner of the Internet bank. But judging from how unresponsive Citibank had been to Oneclip, which worked on Citi f/i since six months before its launch, Bodenstab says he wasn't surprised to hear it's being shut down.

S1 Corp. (SONE) , the software company that worked with Citi f/i for three years developing much of the technology and services for the Internet bank, is waiting to find out what role, if any, it will have in hosting technology for Citibank's new banking site.

"This is the fourth or fifth management team they've had, and they will figure out what they're going to do," says Chuck Ogilvie, general manager of the Americas for S1. "There has been no official decision or instructions for us, but we're going to support them in any way we can."

Recent shifts in the online banking industry suggest that traditional banks and Internet-only banks are moving toward a middle ground, where both physical locations and Internet services will be required.

Bank of America Corp. (BAC) recently said it plans to step up the pace of its branch closings, citing an increase in customers who use only its Web site and ATMs. On the other end of the spectrum, VirtualBank, a Florida-based startup that announced its first corporate distribution partners last week, will begin opening brick-and-mortar branches across the country this year.

In his speech, Reed didn't address any troubles that Citi f/i had been facing, and he couldn't be reached for further comment. Reed has indicated he may return to the banking world. And his comments since he left Citigroup in April have centered around opportunities in online financial services, suggesting he may re-emerge in the field of online banking.

"I think Net-only banks can be profitable, but I'm not sure you want to end up with a Net-only bank," Reed told the conference. "You're going to want to have a terrestrial presence." If only he'd known that about three years ago.

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