Looked at today, early predictions that a new wave of virtual businesses would disintermediate traditional industries on the Web seem well wide of the mark. The retail banking establishment is by now comfortably ensconced in cyberspace, with the Internet considered just another element in the general multi-channel service delivery mix.

The fear factor that once galvanised Internet investment has gone, as evidenced in a poor set of recent results by UK online banking vendor Intelligent Environments.

As Clive Richards, iE Chairman, ruefully acknowledges: "The appetite of the major UK financial institutions to invest in new strategic Internet platforms remains cautious with most relying on tactical enhancements to legacy systems."

For the banks, this agreeable state of affairs will soon be put to the test, as the spread of ‘always on’ broadband connections brings fresh challenges and new challengers. The static self-service model deployed today will gradually give way to a more animated, interactive experience, powered by fat pipe services such as video and VoIP.

At the same time, a host of new entrants and established Internet businesses threaten to upset the status quo. PayPal, one of the few successes of the early wave of Internet entrepreneurs, continues to eat away at the payments franchise. The e-mail funds transfer arm of giant online auction house ebay recently posted a 44% increase in the value of total payment transactions handled to $6.2 billion for the first quarter 2005. Speaking at a recent investor conference, PayPal president Jeff Jordan remarked that the platform's greatest potential for growth lies beyond eBay and in international expansion.

Internet merchant Amazon, another dotcom survivor, has moved to diversify its business in response to a slowdown in sales by running e-commerce operations for other retailers. The firm may also be mulling the adoption of its own payments operation to reduce bad debt expenses from credit card transactions, according to a February research report from Bear Stearns. Amazon.com's head of operations Jeff Wilke "noted that opportunities such as an automated clearing house solution or a PayPal-like service could have the potential to reduce this cost overtime and there is potential to move in that direction in the future, though he stressed that using PayPal itself was not part of Amazon.com's plans."

An easy-to-use Amazon-embedded payments function that resolved retailer liability issues would very quickly get Web traction.

Nor is it just the payments franchise which is up for grabs. UK-based start-up Zopa (Zones of Possible Agreement) has used the eBay community model to develop an online exchange that puts people who want to lend in touch with creditworthy people who want to borrow. James Alexander, former strategy director of online bank Egg and Zopa’s chief financial officer says the site’s appeal is based around the empowerment of the individual.

"People want to consumer on their own terms," he recently told the FT. "The next movement in business is the transfer of power to the individual, via a middle man, but a very light touch middle man."

Old line banks may have muscled their way into cyberspace, but they have done so without recourse to innovation. Failure to re-invest could prove costly. The bursting of the dotcom bubble may have slowed the pace of revolution – and given the smokestack industries time to play catch up – but it hasn’t diminished the potential for disruption. In fact, it’s only just beginning.