Before the passage of the landmark Gramm-Leach-Bliley legislation in 1999, several insurers received clearance from the federal government to operate online thrift institutions. Executives with Principal Bank of Des Moines, which opened for business in February 1998, say the brand-name backing of its parent and a growing acceptance of online banking will help it grow to $5 billion of assets by 2005.Principal Bank, owned by Des Moines, Iowa-based Principal Financial Group, had $1.5 billion of assets at the end 2002-compared with $100 million in January 2000. "We had expected, when the initial strategic plan was put together, to be about $100 million at year four," says Barrie Christman, Principal Bank's president and CEO.

Principal Bank is one of a cadre of thrifts started by insurers like State Farm Group, Allstate Corp., ING Group NV, and USAA that have begun to accumulate enough assets to make them significant players in the thrift universe.

Are they competitive?

But online banking analysts say accumulating assets alone will not make the thrifts competitive over the long term.

Avivah Litan, a vice president for financial services at Gartner Inc., says that ING has one of the few insurer-owned thrifts that has drawn customers other than those who have a previous relationship with the insurer.

The ING thrift's success is "for very obvious reasons-they offer 2.3% interest on their savings account," Litan says. "That's the best rate you can get anywhere." For other insurers, "cross-selling has just not worked," because most consumers are not looking to their insurers for banking products, she says.

As it expands both its customer base and its product lines, Principal Bank will need new technology to make everything work, Christman says. "We can accommodate the growth that we have today, but we want to get to the next level." One of its goals is "to be able to co-develop products with other parts of Principal."

James Van Dyke, the principal and founder of Javelin Strategy and Research in Pleasanton, Calif., says that, even though insurer-owned thrifts benefit from their backing by large, brand-name institutions, he is "skeptical" those relationships can produce large-scale growth.

"There really isn't a clear precedent for an insurer that provides online banking to have that additional offering result in a large amount of traffic and a large amount of banking customers," Van Dyke. "It's not just cross-selling. It's cross-selling into a different line of business," and the opportunities to attract customers are not as clear-cut as they would be for a regular bank trying to move customers online.

Principal Financial has a pool of millions of customers who already turn to it for annuities, retirement products, life and health insurance, mortgage banking, and other products, Christman says.

The marketing of banking products to current Principal customers is her thrift's "top priority," though "that doesn't mean we don't welcome anyone who wants to deal with an Internet-based bank."

The relationship with the insurer lets the thrift save money not only on branches but also on marketing, because it can focus on a specific group of customers, Christman explains.

"Principal has 13 million customers, and we would be very happy to have 10% of that." Principal Bank says it currently has about 85,000 customers.

Christman attributes a lot of her thrift's success to its parent. "The start-up dot-coms that have nothing behind them have been struggling. A lot of them are no longer around," she says. "We are backed by a large financial services company" that provides not only funding but also a sense of security for customers. Principal Bank intends to add products, especially those geared toward businesses.

This article first appeared in American Banker, a Thomson Media publication. It has been edited for this publication.

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