e-banking: The check is in the email
Someday soon, according to Vermont bankers, most of their Customers will ill be carrying out online financial online financial transactions with as much frequency and confidence as they already use ATMs. Banking online can in fact be seen as the latest in a series of popular service innovations over the past 40 years, says Tom McGuire, Internet product manager for Chittenden Bank.
First came drive-up windows as a convenient alternative to finding a parking space and then walking to the bank. Next was the automated teller machine, which initially met with resistance from customers wary of such a non-human interaction, McGuire notes. That was followed by telephone banking, which might or might not involve a human presence. Online banking is gaining consumer acceptance as rapidly as did the ATM, says Thomas Leavitt, senior vice president for retail banking at Merchants Bank.
“It’s following a similar growth curve,” Leavitt says, noting that about one-third of Merchants’ retail customers now at least occasionally conduct banking business online. One year from now, he predicts, two-thirds of Merchants’ roughly 60,000 depositors will be using electronic accounts. Online activity is growing at a similar rate at Chittenden.
About 40 percent of the bank’s retail customers made use of Chittenden’s Internet services in 2004, McGuire says. Conscious of the need to upgrade and expand its online capabilities, the bank retooled its network last June to make it more compatible with a wide range of Web browsers.
What’s happening in Vermont is happening in other states as well and even more rapidly in some cases. ComScore, a U.S. consumer research group, found in a recent study that 22 million Americans logged onto accounts at the nation’s top 10 banks in the first quarter of 2004. That was a 29 percent increase from the same quarter a year earlier. Online bank bill payment services are increasing in popularity at an even swifter pace, growing 37 percent during the same period.
“Online banking and bill payment continue to be among the fastest growing applications on the Internet,” says Jim Larrison, a ComScore vice president. He cites the continued proliferation of broadband access, along with big banks’ heavy promotion of online services, as key reasons for the upsurge.
Vermont-sized banks will also need to advertise their electronic options in order to maintain market share, another study suggests. Online service has become the third most important factor in choosing a bank, according to a consumer survey carried out in late 2004 by Keynote Systems.
Free checking and fee and service charges were cited as the top two factors by 68 and 67 percent, respectively, of those surveyed. More than half the respondents rated online capabilities as more important than the locations of a bank’s branches and ATMs.
Banks can also build customer loyalty by developing strong online services, according to another study. It found that frequent online banking customers are only half as likely as traditional bank users to switch their accounts to a different institution. The retention rate is said to be even higher when customers pay their bills online.
An entirely electronic bank may thus have some unique advantages in today’s marketplace. And that does appear to be the case for Everbank, an Internet-only entity that originated six years ago in a converted Stowe barn and that still maintains some of its operations in Vermont.
Everbank’s banking business grew by 50 percent last year, according to Rob Forreger, the division’s chief operating officer. Mortgage lending and other financial services are also attracting growing numbers of customers as Everbank diversifies, adds Forreger, a University of Vermont graduate. In all, he reports, the online company now has $3 billion in assets, 400,006 customers and 1400 employees at offices in Stowe, St. Louis, Long Island and Jacksonville, Florida, which is now the site of Everbanks corporate headquarters. Forreger attributes the takeoff to the high degree of flexibility that a purely online presence gives his company.
“There’s nothing wrong with bricks and mortars. It’s still a great way to do business,” Forreger says, adding, “But the way we operate allows us to be very opportunistic. We take advantage of possibilities that would not be available if we were confined to a geographic area.”
A growing number of mid-range retail account holders are making their way to Everbank and its bigger competitors, including ING Direct and E-Trade, because of the higher interest rates made possible by the online banks’ lower overhead costs. Spared the costs of establishing and maintaining physical branches, online banks can typically offer rates 1 to 1.5 percentage points higher than traditional banks.
For one popular money market account, for example, Everbank offers an annual percentage yield of 2 percent, compared to what it says is the national average APY of 0.53 percent. At the same time, Internet banks have to work harder to attract customers precisely because they lack a street-corner presence.
And while they are starting to take market share from bricks -andmortar operations, branchless banks still account for less than two percent of the nation’s banking business. Consumer acceptance of online banking is increasing as other types of electronic financial transactions become more common, Forreger says.
“You never see the person who issues your credit card, but you don’t doubt that it works. You probably don’t see the manager of your mutual fund either, and your mortgage provider may no longer be operating in a branch format,” Forreger points out. Underpinning the growth of all forms of online banking is customers’ confidence that their transactions are secure. More and more Vermonters, as well as Americans in general, do make this assumption – and it’s fully warranted, according to bank managers.
Officials at Chittenden, Merchants and other Vermont banks say they have not been victimized by online frauds and are able to repel any attacks by hackers. Chittenden has a department dealing exclusively with data security, McGuire says.
“We’re buttoned up tight,” the Internet product manager adds, noting that the bank’s security systems are regularly assessed by the Federal Deposit Insurance Corporation.
“Experts are brought in who try to hack our system,” says Kim Candib, electronics services manager for Merchants. They can spot any weaknesses and help devise improvements, she adds. But the FDIC does not believe that banks’ existing security features will prove adequate in defending against increasingly sophisticated attempts at online theft.
“The financial services industry’s current reliance on passwords for remote access to banking applications offers an insufficient level of security,” the FDIC said in a report in December. It called for upgrading the current password-based single-factor customer authentication systems to two-factor systems, which usually include a standard password and a hardware security device. Such an upgrade “has the potential to eliminate, or significantly reduce, account hijacking,” the FDIC said, using a term generally synonymous with “phishing.”
(See accompanying story.) The federal bank insurance agency is also concerned about newer scamming techniques such as “malware.”
More insidious than phishing, which relies on gullibility on the part of an email account holder, malware surreptitiously invades a personal computer through e-mail or pop-up advertising. Undetected by the user, it can record and transmit keystrokes – and thus personal financial information – whenever an infected computer’s user logs onto a banking program or makes a credit card payment.
Some leading U.S. banks are starting to adopt the hardware devices recommended in the FDIC report. Small enough to be attached to a keychain, these freestanding units display a sixdigit number that changes every minute. An online banking customer would have to type in the number shown on the device, along with his or her user name and password.
Banks in Europe are already starting to make the security devices mandatory for their online customers, according to a recent report in The New York Times. Major American banks are evaluating the technology for use by retail customers, who could be required to pay the roughly $10 cost of one of these devices.
Consideration is also being given to how to safeguard the accounts of customers whose units are lost or stolen. The FDIC is also encouraging banks around the country to strengthen educational programs intended to help keep customers safe from online scams such as phishing. That’s something Merchants, Chittenden and other Vermont banks already emphasize, according to their officers.
“It’s true that people are becoming more comfortable, but at the same time banks are trying to coach them to be more careful on the Internet,” says Chittenden’s McGuire.
“Most people think they’re more secure than they really are.”
For Everbank, which lacks the reassurance of a physical presence, the perceived integrity of its brand name is allimportant. Familiarity breeds confidence, Forreger suggests.
“As our own brand recognition grows, security probably becomes less of an issue,” he says. As long as security specialists remain at least a few steps ahead of online fraudsters, Internet banking will likely to continue its rapid expansion in Vermont and elsewhere.
Political factors, however, may eventually pose obstacles, especially in a liberal state like Vermont. Because electronic banking can be serviced from anywhere in the world – including low labor-cost countries such as India – growth rates might be slowed by opposition to the outsourcing of jobs now performed by clerks and tellers in Burlington, Bennington, Brattleboro and Barre.
Copyright Boutin-McQuiston, Inc. Feb 01, 2005
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