Online banking, the ability to conduct banking transactions on the Web, is revolutionizing the way that consumers bank. Behind this transformation is information technology. With its use, banks have been able to scale and secure transactions, provide the same and often more functionality than brick-and-mortar banks and evolve from mass marketing to one-to-one marketing.
The popularity of online banking is soaring with more than fifty million adults banking online in the United States as of November, 2004, an increase of forty-seven percent during the past two years (Sullivan, 2005). It is the fastest-growing Internet activity. Home broadband connections are credited with driving consumer adoption. Those with broadband access are about twice as likely to have tried online banking as users with dial-up connections because broadband encourages users to do more activities online. Demographic characteristics of those more likely to have broadband access include consumers between the ages of twenty eight and thirty nine, and more affluent households, reflecting a group inclined to be early adopters of information technology.
The client/server or PC local area network common in the first half of the 1990s as an alternative to the centralized architecture of mainframes and mini-computers in the 1970s and 1980s is now being challenged by the needs of online applications (Miranda, 2002). Therefore, many financial institutions that migrated to the PC-based system switched back to mainframes. The need for high-capacity data storage, open source or interoperability of programs and the existence of multiple applications software and mission-critical systems have all played a role in the renewed interest of mainframe computing. Online banking systems usually meet the needs of both consumer and corporate accounts, however business-to-business transactions tend to be the heaviest in volume, adding to the need for industrial strength computing power.
In addition to high-volume transaction scale, hardware devices are emerging to help resolve security issues discussed next in this paper. Some financial services companies are testing a hardware device that provides a unique code every sixty seconds (Shermach, 2005). When the consumers want to check their accounts or initiate transactions, they follow the usual login process but also enter the code appearing on the device at that moment. For now, the cost of the hardware device is limiting adoption. Initially these devices will probably be issued to high-net-worth individuals to access accounts. As the devices gain more acceptance and come down in price, they will be made available to a broader audience.
Security and Fraud
Security is one of the major concerns of online banking and has not been completely addressed. Growth in complaints about electronic funds transfer fraud has doubled since 2002 (Sullivan, 2005). And, phishing e-mails used by hackers to trick consumers into revealing online banking account numbers and passwords is increasing. Single-factor authentication for online banking has flaws that are increasingly being exploited by phishers (Shermach, 2005) .
Already, analysts believe that fraud will cut out one to two percent of growth in online banking in 2004 (Sullivan, 2005). Further, consumers may begin to limit the way they using banking Web sites such as not signing up for online bill payments. A TowerGroup survey of 3,800 households in the United States, reveal that seventeen percent of consumers still cite security concerns as the primary reason they don't utilize online banking (Hoffman, 2003).
Fraud is occurring despite the fact that online banking employs a lot of security features to prevent fraud. Many Web sites have the minimum standard of 128 bit encryption, firewalls, user identification, authentication, authorization, system lockout, automatic timeouts and double passwords (Online banking). Although new security technologies are being introduced all the time, they are never entirely adequate to deal with all the proliferating threats. New security systems and procedures are being evaluated such as biometrics, smart cards and real-time detection devices; continuous auditing of online systems; and careful monitoring of outsourcers and vendors; and ongoing education of consumers (Hoffman, 2003). Banks are removing all links from bank e-mails to keep customers safe and informing consumers that any e-mail that requires a response is not a legitimate communication (Shermach, 2005).
Recently, the first legal action by a customer was initiated against a United Sates bank to recover money stolen by cybercriminals (Katz, 2005). This case is being called a landmark event because it will resolve the question of who is responsible when a customer's computer is hacked into. The incident occurred because of a variant of a virus called coreflood had existed on the victim's computer systems. The bank contends that the bank was not responsible for the loss because no one hacked into its system to initiate the wire transfer. If the bank is found libel, this will no doubt escalate online banking security measures.
Online banking is available twenty-four hours a day, seven days a week for anytime, anywhere access (Online banking). Thus, online banking provides unprecedented convenience and control. Online banking and bill payment customers can not only traditional banking transactions such as conducting balance inquiries, transferring between accounts and obtaining statement reconciliations online, but can also receive and pay bills electronically, allowing them to pay virtually any bill, whether it arrives over the Internet or through the United States Postal Service, to anyone (The U.S. online banking market, 2005). Electronic bill paying is currently the biggest draw for online banking.
Not only does online banking benefit consumers, it's also a boon for banks. According to a study from research firm Booz, Allen & Hamilton, the cost of a full-service teller transaction is $1.07, while a telephone transaction is fifty-four cents, an automated teller machine transaction is twenty-seven cents and a software-based PC transaction is 1.5 cents (Samaad, 1999). In contrast, online banking transactions cost banks only a penny.
New services and features are further transforming the online banking market. Some of these include e-bills, account aggregation, interbank transfers and customer alerts (The U.S. online banking market, 2005). The future of online banking heralds the use of portal, broadband and wireless technologies (Fields, 2001). New portal strategies offer everything from account aggregation to stock information, maps, news, weather and horoscopes. Broadband will increasingly incorporate streaming media and real-time functionality. And, wireless will empower the bank to alert you to deadlines and to opportunities and will give the consumer even more options for when and where they can conduct online banking.
Another online banking trend catching on is the rise of virtual banks (What is online banking?). These are banks without bricks; from the customer's perspective, they exist entirely on the Internet, where they offer pretty much the same range of services and adhere to the same federal regulations as traditional banks. Virtual banks pass the money they save on overhead such as buildings and tellers along to the consumer in the form of higher yields, lower fees and more generous account thresholds. But, virtual banks have no ATM machines, and usually charge the same surcharge that a brick-and-mortar bank does for the use of another bank's automated teller. And, many virtual banks won't even accept deposits via ATM so the consumer either has to deposit the check by mail or transfer money from another account.
Customer Relationship Management
When a potential customer enters a brick-and-mortar bank, they can interact with a person, but online banking provides only machine-based transactions. However, online banking can compensate through the use of customer relationship management (CRM) that promotes one-to-one marketing. For example, agents can look up any e-mail ever sent by a customer, note all the specifics from a past trouble ticket and know about any information transacted (Fields, 2001). This transparency translates in the ability to leverage information technology for personalization to make the online banking experience more appealing and targeted marketing techniques to increase revenue and decrease marketing costs. One bank reported that after implementing CRM, it earned 1.5 times more revenue from an online customer than it earned for other customers. And, for every dollar spent on an offline customer, the bank spent only eighty-six cents on an online one.
Banks are known for information silos -- segregated databases from autonomous divisions with separate record keeping, customer information and agendas to protect (Fields, 2001). When online banking emerged, banks were afraid that the maximization of the Internet channel would come at the expense of other channels. Thus, they moved to trying to understand the customer's relationship with the entire bank. Systems integration has helped some banks offer the same products and services across any touch point.
In summary, online banking hasn't just put banking on the Internet, it's transformed the banking process. Behind the scenes is information technology, constantly resolving challenges of banking on the Web such as scalability, security, acceptable functionality and one-to-one marketing. Security remains the largest area of concern, with new technology developments occurring at a rapid pace to address them. And, like any product, expect online banking to expand its features and services to best the competition. Once again, new technology advancements will be the key elements of market differentiation. No…