A window to the bank that never closes
Second in a five-part series: Online finance
By Michelle Samaad • Bankrate.com

The premise behind banking online sounds tempting: No stamps to buy. No trips to the post office and the satisfaction of knowing this month's phone bill will be paid on time, sidestepping any late fees.

But after a sluggish three years, industry watchers say the cyber service is finally catching on with consumers.

According to the American Bankers Association, about 625 of the nation's 9,000 consumer banks presently offer some form of online banking, which allows customers to carry out many common transactions over the Internet, or by dialing into the bank's private network.

With the tap of a few keys and the click of a mouse, online users can do most of their banking transactions such as reviewing accounts, transferring funds and paying bills through the Web.

A matter of cost
For banks, the rewards of online banking directly affect the bottom line. According to a study from research firm Booz, Allen & Hamilton, the cost of a full-service teller transaction is $1.07; a telephone transaction is 54 cents; an automated teller machine transaction is 27 cents and a software-based, PC transaction is 1.5 cents.

But Internet-based transactions cost banks only a penny.

Online banking was first offered in 1995, when 16 of the nation's largest banks, including Compass Bank, Chase and NationsBank, began the service through Intuit Inc.'s Quicken financial software. People with a computer, modem and Quicken software were allowed to bank online for a monthly fee of $6 to $10.

Today, here's how online banking generally works: To go online, customers first must have a checking account and a computer with a modem or another telecommunications device. Next, they need to either pick up a one-page application (usually available online) from the bank or have it mailed.

The application tells the bank who can access the account and which accounts are involved. Four to five days later, the customer will receive online software (if the bank doesn't offer Web-based service) in the mail, a personal identification number and a password.

In most cases, the software is free, but the monthly charge for online banking ranges from nothing to roughly $8.95. Most offer a free-trial period of about three months.

Slow to catch on
Industry watchers had anticipated that consumers would embrace online banking at a relatively leisurely rate, much as they were slow to begin using automated teller machines in the 1970s and 1980s.

"Prior to 1998, there had been concern over the slow rate at which consumers were adopting PC banking, so the burst of activity in the past year has surprised most industry observers," according to George Barto, senior financial services analyst for INTECO Corp., a technology research firm based in Norwalk, Conn.

Two factors are responsible for driving the explosive growth in online banking, Barto says. One is the 68 percent rise in the number of U.S. households with access to the Internet. The second is the "build it and they will come" approach taken by financial institutions. "It's not so much that financial institutions provided major motivators for consumers to adopt online banking, it's just that they removed so many barriers," he says.

Before shutting down that traditional hard account, potential online users should be aware of the differences between PC banking and Web-based banking -- and their respective costs.

PC banking generally means that a home user direct-dials the bank via a modem. Internet banking means a customer logging on to the Internet via an Internet service provider, such as America Online, and then going to the bank's Web page before accessing the secure site via a password.

Access from anywhere
The advantage of Internet, or Web-based banking, over PC banking is that customers can access their bank details from anywhere in the world, and that's how these services are generally being marketed. The disadvantage is that users need an Internet account with an Internet service provider, which could carry a cost.

While PC banking has existed for a longer period of time -- though generally using much of the same browser architecture that is used for the Web -- online banking is considered to be less fussy, with no need to load software from compact discs or floppy disks. In most cases, the software for PC banking is free. Some banks charge a one-time fee ranging from $9.95 to $14.95 for the software.

Bank of America was one of the first banks to offer its customers online banking in the early 1980s, using a DOS-based system, says Jeff Hershberger, spokesman for Bank of America, which recently merged with NationsBank.

"Overall, we've been experiencing very rapid growth. Now that we've merged, the new Bank of America has nearly 1 million online customers nationwide," Hershberger says.

Along with a handful of others, BankBoston jumped into online banking in 1995. Bob Shay, executive director of global electronic banking for BankBoston, says that 375,000 of his bank's 1.8 million customer accounts -- about 21 percent -- use some kind of online banking system. That customer base, he says, is growing by 50 percent a year. "We're really being lifted by the consumer move to the Internet."

Paying the bills online
Meanwhile, major companies are slowly moving toward so-called electronic bill presentment systems that will let them send bills over the Internet and receive electronic payments from consumer bank accounts. More than 15 million households are expected to pay bills this way by the year 2002, according to Jupiter Communications, a New York-based technology research firm.

The first time that consumers pay a bill online, they usually have to type in the name, address and phone number of the payee, as well as their account number. The next time the same bill comes, however, all they have to do is enter the amount and the date they want the payment sent. If they want to pay the same amount on the same date each month (for mortgage or cable TV bills), they can schedule these payments for up to a year with just one mouse click.

Other features of electronic bill presentment that promise to simplify bill payment include tracking the status of bills and payments any time, viewing past bills, searching for a specific charge or establishing automatic payments according to the user's criterion.

Some banks will often charge a monthly fee for bill payment or presentment services. Others will allow a certain number of bills to be paid each month and then charge for every bill paid after the limit is reached.

Slower and, perhaps, riskier
Online banking customers should allow four to five days for their bills to be paid, online banking specialists say. While transactions between online banking customers and the bank move electronically, actual checks still may have to be mailed by the bank.

And paying a bill online may still pose a minimal amount of risk, says Jim Bruene, editor of the Online Banking Report.

"You actually take more (of a risk) to pay online than with a paper check ... You need to understand how it works," he says. Bruene suggests users start "by sending a bill to yourself, so that you understand how long it takes [to get paid] and where it goes from there."

The biggest problem with online bill payment isn't technology, but the lack of it, some technology consultants say. In an ideal world, the entire process would be electronic. Money would be transferred instantly from your bank account to the company you're paying.

"In the real world, it hardly ever works that way, because very few companies are equipped to handle direct electronic payments," says Bonnie Brooks, an electronic technology analyst at Creative Strategies, an online commerce firm based in San Jose, Calif. "Instead, the bank must print out a check and mail it. Ironically, these checks will often take longer to arrive than if you'd mailed them yourself -- what happens is you may have to pay your bills earlier in the month."

In addition, many companies ask you to return a coupon with your check, to help them enter the payment into their computers, Brooks says. "You can't include these coupons when you pay online. Many consumers have had bill payments go astray because of a missing coupon."

Pursuit of the "lost" payment
That's sort of what happened to Aileen Grimes, a trauma nurse who works for a private hospital in Nashville, Tenn. Grimes says the bank "lost" her telephone payment and she was faced with paying a late fee. "I did everything right -- I entered the date I wanted it paid, which was actually about four days before it was due, I got a confirmation that the payment was sent," she says.

Despite her care, the phone company mailed Grimes a notice saying they had not received her payment. In the end, the bank reimbursed her for the amount of the bill and the late fee and her payment came through three days after the due date. "It was strange because I never knew what really happened," she says.

In spite of the snafu, Grimes still pays her bills online: "I just don't have the time to write out checks and mail them."

In spite of online banking's convenience, time-cutting factors and ease, security concerns may still loom in the back of the minds of those reluctant to bank online.

It's still an issue but not when compared to the "massive" fear of a few years ago, Bruene says. "A lot of times, it's a user error for newcomers; they don't do it right. You know how to send a check in the mail. There's no user error there."

Bruene adds that secured transactions use an encryption method to scramble information you send and receive from secured Web servers.

"You can always tell when you're talking to a secured server by the appearance of the little padlock (or key) on the bottom of your Web browser," Bruene explains. "If it appears locked (or if the key is unbroken), you're working with a secured server."

Wanting Web-based access
What's the biggest trend on the horizon for online banking? The extinction of PC software, predicts Jimmy Sawyer, a consultant with Reynolds, Bone and Griesbeck PLC, based in Memphis, Tenn.

"Many banks started offering online access through direct-dial software because they saw the Web as a passing fad," Sawyer says. "Now, thanks to the widespread acceptance of the Web, direct dial is on its way out and Internet banking is becoming a viable alternative-delivery channel."

A lot of banks that jumped onto the direct-dial bandwagon are "having to go back to the drawing board," he adds. "Customers are going to want access with their Web browsers."

-- Posted: March 2, 1999