Are you one of the six-and-a-half million people who now bank online? If not, should you be? Paul Farrow investigates

The days of queuing at the bank to pay your bills are already a distant memory to six-and-a-half million people throughout Britain.

Internet banking has been a phenomenal success since it emerged in the late 1990s and its popularity shows no sign of abating - more than one million people have made the switch in the last year alone.

At the beginning of the Internet banking boom, customers could only see their accounts and move money between them. Now people can create standing orders, transfer money, pay bills and change direct debits with just a few clicks of the mouse. It isn't going to stop there. Egg, for instance, has just launched Egg Pay - the first service launched by a UK bank allowing customers to email money securely to friends and family. First Direct is to start piloting Alex, a Lara Croft-style virtual bank clerk for its web customers to talk to.

Better rates of interest
Convenience has not been the only attraction. The Internet banks have been able to steal a march on their high street rivals by offering better interest rates on credit cards and savings accounts. It is the online banks that stepped up the competition in the banking arena by spawning the 0 per cent credit card and paying decent rates on interest on current accounts. The reason is simple - they have fewer overheads and so have been able to pass on the savings to its customers.

Today, four of the five best-paying current accounts come from banks that operate primarily online, according to Moneyfacts, the financial analyst. They have won over many customers from the big four high street banks, who have been attacked by the Consumers Association for paying miserly rates of interest on credit balances: as little as 0.1 per cent a year in some cases.

In comparison, Cahoot, the online banking arm of Abbey National, pays 3.93 per cent; Intelligent Finance (known as IF) pays 3.15 per cent. Smile, the online arm of the Co-operative Bank, is also on the radar, paying 3 per cent on balances in its current account.

Security breaches
The initial fears surrounding security breaches have proved unfounded. Today's technology offers sophisticated 128-bit encryption, which encodes data before it is sent. So even if a hacker manages to grab some of the data, the information should be unreadable and would take years to decipher. In any case, all good online banks offer some form of fraud guarantee.

Andy Deller at Egg says: 'In the early days there were rumours that online banking was not safe, but today we hear very little noise about security problems. The irony is that it is probably safer than the traditional medium because it is "virtual" - paper-based transactions can get intercepted or people can overhear you. But I think the rate of growth of Internet banking suggests that people do not have too much concern about security.'

Online banking has many advantages over the traditional branch network, but it is not without its faults. Needless to say there have been several occasions when technical glitches have shut down computer systems. Last year, the Egg system failed and left many angry customers unable to get to their money.

It's a reason why the experts admit that Internet banking works best in conjunction with other media, such as the telephone. Indeed, all the major high street names now give branch customers access - free of charge - to their own online and telephone operations.

The face-to-face factor
Despite evidence that people are logging on in droves, new research from IBM, the IT giant, indicates that bank customers are not giving up on their branches just yet. It shows that only two per cent of those choosing to bank online have given up visiting branches.

IBM research has revealed that rather than turning people away from branch banking, the new channels have simply 'raised the bar on customers' expectations'. It reckons that customers still want a branch to visit because of 'trust' and that they still prefer to deal with people face to face.

Account aggregation: the future
But Internet banking is here to stay and it is set to become an all-encompassing one-stop financial shop with the development of account aggregation.

Account aggregation allows consumers to view all their financial dealings on one website. The provider will collate information on bank accounts credit cards, mortgages, Isas, Peps, life policies and pension plans - even loyalty points, utility bills and Air Miles - and display them on a single screen. The benefits are obvious: rather than remember endless passwords, memorable dates and pin numbers, you only need to go through one security check to get an instant, up-to-date view of your finances.

Not surprisingly it originates from America, but British providers are keen to start signing up savers and investors. Citibank and Egg are two banks that have recently entered the fray, although the take-up has been slow so far.

Tips for banking online