By John Anderson
September, 2000

First there was banking by phone; then there was online banking; now web only banks are becoming the new way to bank. While many e-businesses are faltering, online financial services have been among the web’s biggest success stories. So far that success has been limited to online stock trading and insurance. Is online banking about to become the next big thing? And will traditional banks be able to fight off new firms like x.com and WingSpan?

Established banks start out with a huge advantage, a customer base that the new e-banks want. Customer acquisition is expensive. If you combine that with residual customer loyalty, plus the branch service accessibility and it’s easy to see that brick and mortar banks have a compelling advantage.

Internet-only vendors spend huge amounts of money to build a presence. Where Amazon.com may have sales figures that reach $16 million per day, they have spent millions to create brands that established vendors already have. The established vendors have fought back successfully using a “click and mortar” strategy mixing physical presence, old-fashioned mail-order, and web sales. A mix of physical and virtual has been used by firms such as clothing retailer, The Gap stay profitable.

Traditional banks have a similar potential advantage but a lot of them will fall behind. In the U.S., mergers significantly damaged many banks’ relationships with their customers. Customer satisfaction with merged banks dropped to 44 percent, compared to 65 percent at banks where there wasn’t a recent merger. Many established banks have cut back on personalized service to the point that there are relatively few advantages to using a local bank.

Net banking has begun to catch fire. It is estimated that 15 percent of U.S. customers will conduct some of their banking with online providers by year’s end. The reason is simple - web banks provide better service. Many Internet banks charge nothing for writing checks or making online bill payments, require no minimum balance, send monthly statements over snail-mail (as well as online account management), and offer full customer service via an 800 number. Moreover web only banks pay an interest rate on checking accounts up to six times as high as anything that the local brick-and-mortar banks offer.

The real question is whether you really need to bank electronically:

1. How many accounts do you have with your bank?

2. Do you frequently transfer balances among them?

3. How many bills do you pay each month?

4. Is the paperwork a monthly nightmare?

Convinced it’s time to bank online? For information on “click and mortar” banks visit bankonline.com, which identifies banks, credit unions, and savings and loans in your area offering online banking and bill-payment services. Traditional financial institutions, like Citibank and Wells Fargo, also have their own online offerings, and most online banks offer a demonstration-providing a peek at the service’s layout, functions, and sample ledgers.

Whether you choose the online services of your local brick-and-mortar bank or take your business to one of the new online-only banks, get these questions answered:

What fees do you need to be aware of before signing up? - The key is shopping around and reading the fine print.

What software will you need to set up your accounts? - The bank’s proprietary software is usually provided without charge and allows you to download your account into Quicken or Microsoft Money.

What kind of services can you expect with online banking? - In most cases, you can check balances and view account activity on all your accounts: checking, savings, credit card, mortgage loan, auto loan, line of credit, CD-based IRA and so forth.

How quickly do your online transactions post? - Account information is updated daily to reflect all account activity. Real-time access means you can access your account, pay your bills online 24 hours a day, seven days a week. Some banks allow you to see the front and back of your canceled checks as well as view your bank statements online.

What about security? - Should you be concerned about someone breaking into your online accounts?
The likelihood of someone hacking into your checking account is very remote, say online banking experts. All banks use secure socket layer encryption, which is the industry standard, in the interactive sections of their sites and require secure browsers such as Netscape Navigator 3.0 or higher, Microsoft Internet Explorer 3.0 or higher, or AOL 3.0 or higher.

For even tighter security, many banks require that browsers be capable of 128-bit encryption, which limits your browser choices to Navigator 4.0 or Internet Explorer 4.0 or higher. Another safety measure is the user ID and password (which you choose yourself) that you’ll use to log into your account. What this all means is that there are layers and layers of protective firewalls a hacker has to break through to access your cash. Even then, he would need your password.

Banking online can save you a lot of time. You can manage all your finances from your computer on your schedule - not the bank’s. Transfer funds, check account balances, even make bill payments. Like most people, paying bills every month is probably the one financial chore that takes the most time and it is what makes online banking’s automatic features so attractive. If you have multiple accounts at one bank, a torrent of monthly bills and little free time, online banking may be just what you need.

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