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Online Banking; It's Your Bank's Future

For banks, the Internet is the future. Customers will increasingly demand Internet services. If you don't provide them, you stand to lose customers. It's that simple. Whether the revolution explodes this year, next year or soon thereafter, that doesn't matter. It will happen. If you're a banker, you still have a chance to make your bank a leader in the next big thing to hit banking.

Terminology The online banking area has produced some new terms that appear to be confusing and somewhat overlapping. For example, some banks say they provide "PC Banking."

PC Banking usually refers to "dial-up" computer banking services. This is where the customers calls a designated telephone number for access to their accounts. These types of services have been around for more than a decade. Typically, PC Banking lets customers see checking and savings account information, transfer funds between accounts, and pay bills online.

With PC Banking, the customer needs special software to act as an interface between the bank and their computer. The bank might provide its own proprietary software or require that the customer use a financial planning package like Microsoft Money or Quicken.

Internet banking requires no special dial-up or software. It's a customer service dream because all the customer needs is their Internet browser. Either Microsoft's Internet Explorer or Netscape Navigator will do.

Once they're already on the Net, their bank's website is only a mouse-click away. This is obviously more convenient than using a dial-up service, which requires them to leave the Internet, load the special software, and call the bank's telephone number.

Customers who want to continue using Microsoft Money or Quicken can usually import their account information from Internet banking services into those programs for record keeping and analysis purposes. The import process is simple for an experienced computer user, but more complicated than it needs to be. Novices would find it intimidating.

A big improvement in the next generation of software would be automating this repetitive import operation. It's a process begging for one button to click to move your account information magically from the Web into your Quicken or Microsoft Money software.

Although some banks permit sole proprietorships to bank over the Internet, other types of businesses will generally find themselves using dial-up computer banking services for a while longer. Additionally, those customers who don't have Internet access, or who don't trust the level of security on the Internet, may prefer to use dial-up services.

Advantages for the Bank Electronic banking isn't new. Banks are already way ahead with profits created from electronic financial services like ATMs, dial-up banking and telephone banking. The most important advantage of electronic banking is the lower costs associated with processing electronic transactions as compared to paper check or in-person branch transactions. The extreme ease with which customers can access accounts over the Net also makes it possible to reduce the number of traditional and very expensive "brick-and-mortar" branches.

The potential cost savings for Internet banking are dramatic. An American Bankers Association study placed the cost of handling a paper check transaction at between $0.42 and $2.00. Although Internet banking is so new that the recovery of development and start-up investments skew transaction costs, the cost could ultimately rival the reported $0.15 to $0.50 cost of an ATM transaction.

In addition to cost savings, Internet banking will open opportunities for increased revenue for banks. Tradition says that banks can't charge customers for teller transactions. One attempt at doing so demonstrates why treading on tradition can be dangerous.

In 1995, First Chicago Corp. started charging $3 for a transaction involving a living, breathing teller. Jay Leno jumped on this one. He joked that for $3.95 the teller would "talk dirty" to you.

The tradition in the Net banking world is different. Most banks charge or plan to charge fees for Internet services including bill payment services. Affiliated brokers already charge fees for Internet securities trading. As new services appear on the Net, you can anticipate that most banks will use the opportunity to charge their customers new fees.

Is it Safe? Probably the biggest single obstacle on Net banking's path to success is consumer skepticism about the security of the Internet. Interestingly, the major risks in Internet banking are probably not in the area which potential users focus on-interception of financial data transmissions.

Banks and other entities conducting business over the Internet deal with the interception issue by encrypting sensitive information sent over the Net. Even current versions of Netscape and Internet Explorer include encryption technology that makes it technically not feasible for a hacker to read the intercepted information.

As the Federal Deposit Insurance Corporation (FDIC) pointed out in its December 1997 "Issues Paper" on Internet security, encryption alone is not a complete solution. Anyone who improperly obtains a customer's log-on identification and password will be able to fool a bank's Internet security software and internal safeguards into believing that the customer is legitimately conducting a transaction.

Human nature has dogged the protection of ATM personal identification numbers (PINs). It will do the same in the Internet context. Customers love to pick passwords that are easy to guess because they're easy to remember. The most common passwords tend to be things like their children's names, birthdays and zip codes. Then, you also have the ones who write down their log-in information and post-it to the edge of their office computer screens for passers-by to see.

A much more sophisticated method of illegally obtaining passwords is "spoofing." With "spoofing," customers are directed away from a bank's genuine website to a fake site, where they are tricked into providing their log-in name, password, and other confidential information.

Log-in information can also be obtained by surreptitiously loading software which records information transmitted by a customer on a computer that she doesn't control, such as a machine located in a public library or Internet cafe.

As with ATM PIN protection, the best weapon in safeguarding Internet banking access will be educating customers. They need to be taught to avoid public-access Internet terminals, select appropriate passwords, and stop transactions when presented with an unexpected Internet screen or an unusual request for confidential information.

A greater security threat suggested by the FDIC is a hacker attack on the bank's main computer system through the point where the bank's computer is connected to the Internet. Lax security could permit a hacker to plant computer viruses, and corrupt or fraudulently create data on the bank's internal computer system.

Fortunately, this risk is relatively simple to address by the aggressive use of "firewalls" that only allow specified types of information to pass from the Internet through to the bank's central computer and a consistent security monitoring program.

Getting a Bank Online Most banks don't have the resources in house to take their bank online, so they outsource the project. These are complex projects often involving many parties. Typically, the bank needs web designers to design a front-end interface with their customers. They also need to tie together back-end integration to insure that the website can access and update account information as required. Yet another company may provide the bill payment services demanded by the bank's customers.

Having been involved with these projects, the only thing that I can say briefly is that they raise complex contracting issues pertaining to coordination, timing and intellectual property. Each agreement with each party must detail the functions that the bank expects from that party while also ensuring that each party is responsible for insuring integration with the other pieces of the puzzle.

Jumping into this without thoroughly dealing with the integration issue is the best way to get to that ugly place where there's a problem with the website and each company is pointing a finger at the other. You can help to avoid this nightmare with good contracting practices. "Good contracting practices" means something more than making a couple of changes on the form the vendor provided to you and then sending it back signed. That's called a "placebo."

"Good contracting practices" means ensuring that the professionals on your side have experience in these types of transactions and are capable of critically analyzing the obligations of the various parties. If it doesn't all tie together, you may find yourself over budget and freshening up your resume.

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