How Information Technology Is Transforming Online Banking

Introduction

Online banking — the ability to conduct banking transactions on the Web — is revolutionizing the way consumers bank. Behind this transformation is information technology. Through its use, banks have been able to scale and secure transactions, provide the same and often greater functionality than brick-and-mortar institutions, and evolve from mass marketing to one-to-one marketing.

Consumer Readiness

The popularity of online banking has soared, with more than fifty million adults banking online in the United States as of November 2004 — an increase of forty-seven percent over the prior 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 engage in 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.

Hardware Infrastructure

The client/server or PC local area network architecture, common in the first half of the 1990s as an alternative to the centralized mainframes and minicomputers of the 1970s and 1980s, is now being challenged by the demands of online applications (Miranda, 2002). As a result, many financial institutions that had migrated to PC-based systems switched back to mainframes. The need for high-capacity data storage, open-source interoperability of programs, and the existence of multiple application software environments and mission-critical systems have all contributed to renewed interest in mainframe computing. Online banking systems must typically serve the needs of both consumer and corporate accounts; however, business-to-business transactions tend to be the heaviest in volume, further increasing the demand for industrial-strength computing power.

In addition to high-volume transaction scale, hardware devices are emerging to help address security issues. Some financial services companies are testing a hardware device that generates a unique code every sixty seconds (Shermach, 2005). When consumers want to check their accounts or initiate transactions, they follow the usual login process but also enter the code displayed on the device at that moment. For now, the cost of such hardware devices is limiting their adoption. Initially, these devices will likely be issued to high-net-worth individuals for account access. As the devices gain wider acceptance and decline in price, they will be made available to a broader audience.

Security is one of the major concerns of online banking and has not been completely resolved. Growth in complaints about electronic funds transfer fraud has doubled since 2002 (Sullivan, 2005). Phishing emails — used by hackers to trick consumers into revealing online banking account numbers and passwords — are increasing. Single-factor authentication for online banking has flaws that are being exploited by phishers with growing frequency (Shermach, 2005).

Security and Fraud

Analysts already believe that fraud cut one to two percent of growth in online banking in 2004 (Sullivan, 2005). Furthermore, consumers may begin to limit the ways in which they use banking websites, such as declining to sign up for online bill payment. A TowerGroup survey of 3,800 households in the United States revealed that seventeen percent of consumers cite security concerns as the primary reason they do not use online banking (Hoffman, 2003).

Fraud is occurring despite the fact that online banking employs numerous security features. Many websites maintain 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 introduced continually, they are never entirely adequate to address all proliferating threats. New security systems and procedures under evaluation include biometrics, smart cards, and real-time detection devices; continuous auditing of online systems; careful monitoring of outsourcers and vendors; and ongoing consumer education (Hoffman, 2003). Banks are also removing all links from bank emails to protect customers and are informing consumers that any email requiring a response is not a legitimate communication (Shermach, 2005).

Recently, the first legal action by a customer was initiated against a United States bank to recover money stolen by cybercriminals (Katz, 2005). This case has been called a landmark event because it will resolve the question of who bears responsibility when a customer's computer is compromised. The incident occurred because a variant of a virus called Coreflood had been present on the victim's computer systems. The bank contends that it was not responsible for the loss because no one hacked into its own system to initiate the wire transfer. If the bank is found liable, this outcome will no doubt escalate online banking security measures industry-wide.

Conclusion

Banks have long been known for information silos — segregated databases from autonomous divisions, each with separate record keeping, customer information, and proprietary agendas (Fields, 2001). When online banking emerged, banks feared that maximizing the Internet channel would come at the expense of other channels. This concern prompted them to work toward understanding the customer's relationship with the bank as a whole. Systems integration has helped some banks offer the same products and services across every customer touch point.

In summary, online banking has not merely put banking on the Internet — it has transformed the banking process. Behind the scenes, information technology continually resolves the challenges of banking on the Web, including 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 emerging threats. And, like any competitive product, online banking will continue to expand its features and services to differentiate itself in the marketplace. Once again, new technology advancements will be the key drivers of market differentiation. Banking will no longer be a conservative, static environment — instead, it will be a highly dynamic activity mirroring the rapid pace of change in the technology industry.