Banks Struggle To Assert Control Over Cybermoney

A future television commercial, brought to you by your bank:

Dawn creeps through the windows of a house. Logging onto his personal computer, a young executive instructs his bank to pay bills, checks on his investments and completes an on-line car loan application.

His wife calls. Away on a business trip, she has just transferred cash, via a laptop computer, from the family’s savings to their checking account.

His son charges in, late for school and bellowing about lunch money. Dad grabs the boy’s smart card - a plastic credit card look-alike embedded with a computer chip - and swipes it through a card reader in his PC to download electronic cash from his bank account onto the card.

Banks hope this scenario becomes reality in the not-too-distant future. They’re betting that on-line innovations will transform the way consumers complete most financial transactions, from buying a cup of coffee to investing for retirement.

About 200, or 1 percent, of financial institutions in North America currently offer on-line banking, but because most large banks offer it, it is available to 60 percent of consumer banking customers, said Jim Bruene, editor of the on-line Banking Report, an industry newsletter based in Seattle.

If the industry has its way, every household will be banking soon from a home computer. “We see the numbers of on-line banking customers exploding from prior years,” enthuses Michael Papantoniou, vice president for electronic commerce at Chase Manhattan Corp.

But it’s not certain that consumers will take to the new technology in enough numbers to justify the expense to banks. Dana Massie, an on-line client of Wells Fargo Bank, is director of technical research for Creative Technology Ltd., a multi-media company, and is probably as computer-savvy as banking customers come.

But, Massie said, “I don’t have a lot of patience for complicated stuff at home. When computers are as reliable and easy to use as televisions, then they will take off, because they’re a lot more fun. But computers have to stop crashing, they have to turn on instantly - and computers are loud.”

Financial companies believe on-line banking will lower transaction costs and give them an edge over competitors. They’ve taken studies showing that customers like on-line banking because it saves them time, and that it appeals to merchants because it saves on billing and processing costs.

But the notion of winging theoretical money through cyberspace still sends many consumers into a panic. And it prompts questions about security and privacy. Many people still want to handle cash and speak face-to-face with their bankers.

A closer look at on-line banking:

How did we get here?

On-line banking actually has been around for years.

The huge growth in consumer purchases of PCs over the past decade has fed the expansion of on-line banking. By 1995, more than 30 million households in the United States had home computers. More than a third used personal finance software.

Intuit, maker of Quicken, and other software companies figured out how users of their home finance software could communicate via PC and modem with their banks. And the Internet became vastly more popular and more secure.

Meanwhile, significant innovations in the smart card made it possible to carry electronic cash and perform financial transactions from a computer or telephone. The smart card - even more than the magnetic stripe card, which made automatic teller machines and debit cards possible - turned on its ear the notion that banking customers must visit a bank.

Financial institutions began using on-line banking to attract and keep customers. PC owners, who as a group are young, well educated and affluent, are prize customers indeed.

A few large banks, including Chase Manhattan Corp., Citibank, Bank of America and Wells Fargo, developed or acquired on-line banking systems. Other financial firms formed alliances with technology companies - Visa International has teamed with Microsoft Corp., while 15 banks formed a consortium with IBM.

But on-line banking is still nascent. Of the 10 million households that use Intuit software products, only about 350,000 or 3.5 percent, have signed up for on-line banking, Intuit said. The American Bankers Association said about 1 percent of transactions in 1995 were completed on-line.

On-line banking and you

What does this trend mean for the banking customer? On-line banking shortens the amount of time consumers spend on finances, and allows them to work on them any time of the day or night. No more racing to the bank Friday afternoon to deposit a paycheck - Chase said 40 percent of its on-line banking is done on the weekend.

Some consumers have been leery of doing banking or other personal business on the Internet, which works like a huge electronic party line, for fear someone could steal private information. But developers of on-line banking technology say new scrambling and encryption techniques have made Internet transactions safer.

A big stumbling block to the growth of on-line banking is that most vendors such as department stores and utilities don’t accept electronic payments. Right now, this is a chicken-and-egg problem for banks - vendors are reluctant to invest in technology that their customers won’t use. Consumers are leery of investing in technology that vendors don’t accept.

Why the banks want it

Financial institutions are in a life-or-death race with technology and telecommunications companies to provide home banking services.

Electric utilities, telephone and cable companies already have lines into homes that can transmit financial information and are trying to develop new services. If customers can transfer money and get loans via a technology or communications company that already has lines into their homes, why would they need a bank?

So banks must reassert control of the banking business, or cede it to non-financial companies. But regaining control is tricky indeed. Banks have invested billions of dollars in technology that quickly reaches obsolescence, and lavish branch systems that, while shrinking, are expensive to maintain.

Banks have to make good on these investments before they charge into new technologies that may themselves be quickly obsolete. They also must stay innovative enough to keep their increasingly computer-adventurous customers. The task is somewhat like catching a moving bus.

If they are to continue to be the place where people deposit and borrow money, banks must devise cost-effective ways to turn the new technology into programs customers and merchants will use.