Closer Than You Think

The Internet has forever changed the face of banking. Not just in the most obvious waysu00e2u20ac”like creating a new avenue of commerceu00e2u20ac”but in even more dramatic ways, like the way bankers think about technology spending. Initiatives that were dismissed as too costly a few years ago, such as check imaging and wireless access, have suddenly become doable, bankers embrace the Internet as a utility critical to the basic operation of their institutions. Rather than budget millions of dollars on new hardware and software configurations that will have to be upgraded in a few years, banks are plugging into the Internet and downloading the latest applications. And they`re accessing vast storehouses of data, automating paper-intensive processes, even offering wireless services with no more of a capital outlay than the cost of the Web browsers that connect them to a new generation of outsourcers, known as application service providers. “As technology evolves, more applications will go with the ASP architecture, up to and including core systems providers,” observes Ken Johnson, a managing director at Alex Sheshunoff Management Services, Austin, Texas. “Technology will come into a bank through the Internet, just as electricity comes into the bank by wires.” ASPs are modern day service bureaus accessed via the Internet, and in some cases, intranets. (An intranet functions much like an in-house Internet.) Perhaps the best-known ASPs today are the antivirus software companies, like Norton. Small to mid-sized banks also use ASPs to support offerings like cash management services that are on a technology par with big banks. “The Web is appealing to these banks because it gets them out of the software business,” explains Dan Smith, vice president, Politzer & Haney, a Newton, Massachusetts-based software house. To compete with the big institutions, especially in technology-rich service lines, a smaller bank needs to be nimble enough to support rapid deployment of and enhancements to products and services. It might cost a bank as much as $2,000 to dispatch a techie to a customer site to install new cash management reporting software, notes Smith. Downloading software to a customer via an ASP and the Web costs a fraction of that amount, because the ASP leverages the economies created by dozens of other similarly situated banks. The savings are even more dramatic when the ASP model is applied to emerging, cutting-edge technologies. Take, for example, wireless access. Grant Thornton, in its latest survey of community bank executives, found 45% expect widespread customer demand for wireless access to bank and investment accounts, and 31% ranked wireless access a key success factor for their institutions. Yet wireless technologies are a risky investment because nobody knows if customers really want to access their accounts using mobile telephones or Palm devices. Forrester Research, Cambridge, Massachusetts, reports that of the 35% of U.S. households that say they are at least somewhat interested in mobile data services, only 40% would check their bank account balances and just 30% would transfer funds. Cleveland-based Key Bank has been testing the concept, allowing customers equipped with mobile telephones and certain Palm devices to access the bank`s Internet site for balance inquiries, funds transfers, bill payments, and stock quotes. Paul Ayers, a Key Bank senior vice president, figures about 60% of customers` wireless log-ons are for stock quotes. “We`re still not sure we can make a case for it, on a B2C [business-to-consumer] basis,” says Ayers of wireless access to the bank`s Internet services. Enter the ASP. The ASP provides all the hardware, software, network, and customer services needed to support wireless access to a financial institution`s Internet banking applications. The bank (or its technology agent) pays a modest upfront fee, plus fees each time an account is accessed. Critical to the value of an ASP is its ability to support scores of devices from an array of vendors accessing information from a dozen or more networks. Lack of standardization in devices and communications protocols is a huge obstacle that will keep banks from investing in wireless access technologies and instead plugging into ASPs for the capability. “Wireless services must be delivered securely and soundly, and end-to-end delivery of service must be reliable. Splintered data and communications standards in the U.S. are key obstacles” to widespread implementation, says Teresa Lindsey, chief of staff for the Banking Industry Technology Secretariat. BITS recently took on the task of building an industry consensus for what it will take to create an infrastructure that can support wireless delivery of financial services. Lindsey is optimistic the obstacles can be overcome, but she isn`t committing to any time frame for the completion of this latest BITS project. Check imaging, a technology that has been languishing on the periphery of many banks` wish lists for the past several years, is also getting a boost from ASPs. Electronic storage and communications technologies are cheaper than ever, encouraging a new breed of ASPs that specialize in image storage and distribution services. The most notable of these is Viewpointe Archive Services, a joint-venture ASP announced last fall by Bank of America, Chase Manhattan Bank, and IBM. Viewpointe aims to develop a Web-accessible digital archive for all checks and other paper items created during banking transactions at BofA, Chase, or any other bank that plugs into the Viewpointe ASP. Viewpointe is not alone in the marketplace. Even the Federal Reserve is putting in place a Web-accessible check image archive. Fed officials say they should have a national check archive up and running this year that can support long-term storage and retrieval of the images of truncated paper checks. This is important because under present law, banks must hold onto copies of posted checks for at least seven years. What Viewpointe, the Fed, and scores of bankers are coming to accept is that Americans will not stop writing checks any time soon. Depending upon which expert guesstimate you believe, Americans wrote between 65 billion and 70 billion checks last year. And every indication is that the yearly total will only increase before it begins to decline. In addition to pushing image storage, the Fed is preparing legislation it hopes will convince Congress to change federal statutes that today stymie interbank truncation, where a paper check is stopped at the bank of first deposit (or even the point of sale) and converted and handled as an electronic image from that point forward. With widespread truncation, banks can eliminate check courier costs, and they can stop sending customers monthly statements stuffed with canceled checks. Statements instead will display images of checks cleared against a customer`s account that month and reference numbers that support downloading of individual images via the bank`s website, which is connected to an outside archive service. Banks can also use a check archive to support new fee opportunities, like check fraud prevention and customer data-mining services. Jeanne Capachin, an analyst with Meridien Research, Newton, Massachusetts, expects the trend to spill over into the electronic payments arena, with payments companies supporting banks that Web-enable ATMs. The first service to be offered will be check cashing, Capachin figures. “There are plenty of folks, even folks with bank accounts, who would like to be able to cash checks at ATMs,” she says. The major debit card networks already have Web strategies. Star, a coast-to-coast, bank-owned network that was acquired recently by a large nonbank payments company, is testing a debit card that uses digital certificates in lieu of personal identification numbers to authenticate Web-initiated transactions. A debit card coupled with a digital certificate could be a so-called smart card, but it doesn`t have to be. Smart cards, will become increasingly common as more customers access their banks via the Web. Bankers have two archrivalsu00e2u20ac”American Express and Microsoftu00e2u20ac”to thank for an uptick in the number of Americans who carry and conceivably would use smart cards to access financial services. Microsoft has been pushing smart cards for electronic commerce applications that can be used with its software architecture, and AmEx is believed to have issued some three million Blue cards in the last two years. Blue, a credit card with a smart card chip that also includes a magnetic stripe, carries the cache of being a hip (and more secure) card to use for Internet purchases. Although most of the transactions initiated on Blue cards today are at brick-and-mortar establishments, the strategy has enough appeal to have prompted Visa to introduce its own smart card. At least three large Visa banks are issuing smart cards today, and more are expected to follow. Experts anticipate the number of smart cards and the number of devices capable of reading the computer chips contained in smart cards will increase as more consumers go online to bank and shop. Forrester Research predicts Internet commerce (consumer and business) will exceed $860 billion in the United States this year. By 2004, Forrester estimates spending by Americans on the Internet will exceed $3.1 trillion. Prudent risk management policies will dictate that more banks will issue smart cards as additional commerce moves to the Internet. “The role of the smart card is to re-create the level of security [people are used to] over a different channel”u00e2u20ac”the Internet, says Politzer & Haney`s Smith. And when dealing with banks, Americans have come to expect the highest levels of security and privacy.