The 127-year-old bank is hoping to get a head-start on its high street rivals in the UK by launching smile.co.uk - a stand-alone online venture.

The Co-op, like many other traditional or telephone-based banks, already allows customers to use the Internet in conjunction with their branch-based accounts.

There is a clear incentive to persuade customers online, with each Internet transaction estimated to cost just one tenth of a branch-based transaction, leaving scope for lower prices for customers.

Where Smile and similar operations such as the Prudential's Egg tend to differ is that they are entirely Internet-based, so avoiding any need for a costly branch network.

Emulating Egg

Traditional banks have had to balance the need to gain online customers against the fact that many of those signing up are likely to be their own branch-based account holders.

But with the lower costs being passed on to customers through better interest rates, there is increasing competition to grab a share of the fast-growing online banking sector.

Co-op Bank will be hoping to emulate the success of Egg, which attracted more than £6bn in funds from savers in its first year with rates described by competitors as incompatible with making a profit.

Egg has recently been adding new products and services to its range, including a credit card launched earlier this month.

But the Co-op claims that the difference with smile is that it will offer a wider range of services.

Autumn launch

Chief executive Mervyn Pedelty said: "This is a brand new bank which offers all the products, services and convenience of a high street bank, but based on the Internet."

Its current account will pay 4% gross interest on credit balances, have an automatic no-fee £500 overdraft and an authorised overdraft rate of 9.9%. Students will have a £2,000 overdraft.