Has the threat from Net-only banks vanished for good, or is it merely lying dormant, like a virus prepared to attack your best customers when the business cycle turns?

As mentioned on page one, with the highly visible failures of three Net-only pioneers, SFNB, CompuBank, and Wingspan Bank, it’s tempting to write the obituary for the whole segment. But that ignores the impressive inroads made by aggressive entrants such as ING Direct which has signed up more than 200,000 accounts for its Orange product line; Virtual Bank which turned profitable with its full-service Net-only bank just 15 months after launch; DeepGreen Bank which is booking $100 million in home equity lines from 7,000 applicants (Aug. ‘01 actual results per company); and PayPal, LendingTree, and NextCard, which all have more than a million customers now.

You can also look to Europe where more innovative Net-only companies (e.g., Egg, Smile.co.uk, First-e, and Virgin Money) initially made more inroads than similar U.S. companies. However, these companies have been hit by the downturn, with First-e announcing (Sept. 7) that it was withdrawing from the UK and German markets.

But it doesn’t look like any of the grandiose forecasts made by some of the early Net-only companies will come to pass in this decade anyway. We remember being told by a Net-only bank founder that his new company would be among the five largest U.S. banks within 5 years. At this point, I doubt the execs at BofA, Wells, Citi, JP Morgan Chase, or Bank One, are too worried about being unseated by a startup.

In fact, in the U.S., the total market share of Net-only banks is less than the rounding error on total industry revenues. Households using any Net-only bank account number more than 1 million (not including PayPal’s 10 million), that figure is only about 7% of all households banking online.