When people write a check or take cash out of an automatic-teller machine, few of them stop to think whether the computer system handling their transaction might crash and their savings disappear. But when customers of Internet banks sit at their PCs and move thousands of dollars between accounts, they must wonder, if only for a moment, if such a catastrophe could occur. So far, only the rare individual entrusts all of his or her financial affairs to a virtual bank (Exhibit 1). Given these reservations, it would seem that the solid, reliable image enjoyed by established banks should give them a special opportunity to lead in the on-line world. Have they taken it?

In one sense, they have. In other industries, incumbents roused themselves to exploit their natural advantages only after pure-play attackers brought enormous numbers of customers on-line. In banking, the opposite is true: while Telebank and NetBank are having trouble notching up their first 100,000 customers, Citibank, Wells Fargo, and Bank of America can boast hundreds of thousands, if not millions, of on-line accounts (Exhibit 2). Indeed, so indifferent has been the performance of Internet-based institutions that CompuBank, the first purely virtual bank to receive a...