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The sad state of online banking
By Holden
Lewis • Bankrate.com
 A
year ago, online banking seemed bright with promise. Enthusiasts
shouted that consumers would abandon their old-fashioned brick-and-mortar
banks and embrace online-only banks. We would happily track our
finances online. Cash would begin its slow decline as people started
e-mailing money to one another, or beaming cash from one Palm device
to another.
Sanity has returned.
A year ago, I said X.com's online checking
accounts and mutual funds represented the future of banking. A few
months later, X.com ditched its online bank accounts to concentrate
solely on its PayPal person-to-person payment service.
Last year, other online-only banks, such as
Wingspan and First Internet Bank of Indiana, seemed to be growing
based on their low fees. But Wingspan
is now charging a monthly fee of $7.50 to customers whose average
checking balances fall below $1,000. That's the type of policy that
drove people to Wingspan in the first place.
Meanwhile, First
Internet Bank of Indiana recently laid off four of its 20 employees.
It was one of the first online-only banks, and it's well-regarded.
It was one of the first banks to provide customer service via online
chat. But the weakening economy means fewer commercial loans, so
the bank had to cut back.
Of aggregation and PayPal
Last year, a bunch of companies got into the
account aggregation business, which allows people to visit one Web
site to keep track of their accounts and loans from various financial
institutions. Yodlee
is the most prominent aggregator. But concerns about privacy and
security dissuade many consumers from using these services, and
they no longer have that gee-whiz appeal.
One of the services, eBalance, abruptly stopped
providing account aggregation to consumers, leaving 2,400 users
nationwide out in the cold. Some of those users had accounts with
eBalance through Bankrate.com's "My Account Manager" feature.
The rise of PayPal, which allows people to
e-mail money to one another, marked the biggest online banking development
of 2000 and might continue to be the biggest story this year. PayPal
started 2000 with fewer than 100,000 users. It ended 2000 with 5.5
million users who send about $7 million through the system daily.
PayPal has a great success story, but the company
suffers from growing pains. Its call center in Omaha (far from headquarters
in Palo Alto, Calif.) appears to be swamped all the time, and PayPal's
owner, X.com, is constantly on the lookout for fraud investigators
because the company makes a tempting target for crooks.
Unfortunately, innocent PayPal users sometimes
feel the pain of fraud. If someone -- an auction seller, for example
-- accepts a PayPal payment from someone fraudulently using a credit
card, PayPal sometimes freezes the seller's account while the fraudulent
transaction is investigated. Sometimes this takes weeks, during
which time the seller can't accept payments or withdraw money.
"If they continue to keep treating their
customers this way, trust will erode," says Paul Jamieson,
an analyst with Gomez.com. "They've got to bring stability
back to their service, trust and integrity back to the service."
Also during 2000, PayPal quietly discontinued
its coolest feature: the ability to beam money from one Palm device
to another, using the pocket computer's infrared port. It was judged
too risky because users could lose their money if they lost their
personal digital assistants.
Debit cards and digital signatures
Speaking of cool technology, an electronic payments
network called Star Systems wants you to pay for stuff online with
your debit card. You can do this already at some online retailers
by typing the number on your debit card as if it were a credit card.
But Star Systems proposes you do it the high-tech way: by sticking
your debit card into your computer's floppy drive.
Why would you want to pay with a debit card
that you insert into your computer? Because it's more secure, says
Barbara Span, a vice president of Star Systems.
"There's a great deal of interest in creating
a secure method of purchasing over the Internet that will address
the consumer concerns among those who aren't making purchases or
making few purchases," she says.
It's more secure because the payment method
uses digital signatures. The transaction is encoded, using nearly
unbreakable public-key cryptography. It's also more secure because
the card has to be present; someone can't just copy down the number
on your debit card and use the number to buy something online.
About 100 customers of Commercial Capital Bank
of Irvine, Calif., are testing the payment method until March. They
are given regular debit cards, the ones with the magnetic stripe
on the back. They also get a little card reader that slips into
a computer's floppy drive.
Star Systems and its partners plan to incorporate
other kinds of readers, some for magnetic-stripe cards and some
for chip-embedded smart cards. Most would plug into a computer's
USB port and not into the floppy drive. That's good news for iMac
owners, whose computers come without floppy drives.
If this payment method takes off, you eventually
might see the STAR logo on the payment pages of online retailers,
alongside the logos for Visa, Mastercard, American Express and Discover.
Just don't ask me if I think this will become
popular. As last year taught us, nothing is predictable in the world
of online banking.
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