Online banking: A better security bet?
By Kristin Arnold • Bankrate.com

Reports of security breaches, hackers and phishing scams have consumers running scared about online financial transactions. However, a study released in January 2006 by Javelin Research and Strategy shows that Internet-related fraud problems are actually less severe, less costly and less prevalent than previously thought.

According to the study, identity theft victims who detected the crime by monitoring their accounts online lost only about $551, compared with an average of $4,543 when the theft was detected from paper statements.

The difference is that the longer it goes on before you detect the fraud, the more it will cost you, and you're likely to discover it faster if you monitor your accounts online.

Online banking has grown steadily since first being introduced to consumers in the 1990s. More than 53 million Americans currently make some type of monetary transaction online, according to a study performed by Pew Internet & American Life Project, an organization that tracks the social impact of the Internet.

According to both the Javelin and Pew reports, growth in online banking is built on two trends.

The first is that Internet users are gaining more experience and, therefore, are more likely to participate in activities like online purchases and travel reservations.

Betty Reiss, senior vice president of media relations for Bank of America, says that when Internet banking was first introduced in 1995, banking customers made baby steps in their initial online bank attempts.

"Our customers traditionally started to bank online to look at transactions and move money between accounts. The next step was paying bills online. Once people tried paying bills online, they saw that it was easier and more convenient."

The second trend is that banks are more aggressively offering online banking as an option for their customers, and they are offering it for free.

"Online bill pay from Bank of America has been a free feature for our customers since 2002," Reiss says.

Reiss says Bank of America, which has the largest online-banking customer base in the United States, made bill pay free based on an 18-month analysis comparing online-bill-pay customers to offline customers. She says that over time, online-bill-pay customers had wider relationships and more loans with Bank of America, and stayed with the bank longer.

Still, even though banks have tried to make online banking attractive, some consumers refuse to take that route because of security fears.

But despite the series of recent security breaches, most bank-related crimes remain old-fashioned.

The Javelin study indicates that the most common source of misused information is a lost or stolen wallet, checkbook or credit card. More than 68 percent of ID theft and fraud occurred from offline means, compared to just 11.6 percent from online.

Paper statements from your bank, credit card offers and insurance claims also can be potential time bombs if someone, even your family member or friend, get ahold of them.

The Javelin study pointed out that in 26 percent of all cases of ID theft and fraud, the victim knew the person who had misused his or her personal information.

Bruce Cundiff, a researcher for Javelin Strategy and Research, says consumers reluctant to bank online face a greater threat of ID theft and fraud because they leave a paper trail that is easily accessed by thieves, family members and friends, which then gives them direct access to their important financial information.

Cundiff says, "Online banking gives consumers the ability to eliminate the physical statements, taking away the ability to get your information through that physical record."