So Far, Online Banking Is Mostly Wishful Thinking

At a time when many financial institutions are rushing to create a presence in cyberspace, Security First Network Bank, created last year as the world’s first virtual bank, is heading in the other direction: opening actual bricks-and-mortar branches staffed by live human beings. The first of the so-called city offices will open in Atlanta late this year, to be followed by branches in Palo Alto; Cambridge, Mass.; and elsewhere.

“We’re in a hybrid phase right now,� said bank spokeswoman Kim Humphreys. “While most bankers are turning to do banking online, there are people who would like to know that there is still somewhere they can walk into.�

SFNB’s plan to bolster its virtual existence with the old-fashioned kind underscores the basic question facing the nation’s bankers as they scramble to erect the shiniest new edifices on the information superhighway: If you build it, will they come? So far, at least, the answer is mostly no.

“The facilities are there, the infrastructure is there� to support full-scale online banking, said Steven Horwitz, an economics professor at St. Lawrence University in Canton, N.Y. “The problem is that consumers are hesitant.�

The truth is that online or PC-based home banking remains more wishful thinking than anything, both for banks, which hope to increase market share and cut costs with such services, and for customers, who seek ease of use and increased convenience.

And, as with much of the business conducted on the Internet, there is a real question of whether there is any money to be made by the banks.

*

“I just don’t see how [online banking] is that helpful,� said Linda Sherry, a spokeswoman for the advocacy group Consumer Action in San Francisco. “The chief benefit seems to be record keeping or transferring money [from one account to another]. But other than that, it escapes me why it’s so great. You can’t withdraw money out of your personal computer.�

Most consumers apparently agree. Although home-based computer banking has been around since the mid-1980s, there are fewer than 2 million online bank customers, accounting for less than 1% of all retail bank transactions in the country, according to the American Bankers Assn.

The concerns cited by consumers include high fees, lack of security and privacy, fear of technology and difficulty of use.

Financial Service Online magazine estimates there are only 20 banks with more than 10,000 customers doing PC banking, and only five with more than 100,000 customers. Industry leaders include Citibank, Wells Fargo Bank and Bank of America, and also non-bank services such as CheckFree.

Some believe the growth of home personal computing and the Internet is about to produce an online banking boom. The ABA, in a survey conducted with Ernst & Young, predicted this year that “PC-based banking may become one of the most-used delivery channels in the near future,� with PC transactions projected to skyrocket 600% by 1998.

But others remain skeptical. Mentis Corp., a market research firm specializing in banking technology in Durham, N.C., forecasts just 4 million online banking customers by the end of the century. And some banks are even backpedaling on their projections of the business’ potential, saying now that they expect online banking to remain a niche business.

Most recently, Citicorp Chairman John S. Reed, whose Citibank has one of the oldest and largest online presences, told a gathering of bankers that widespread, full-scale electronic banking would not take hold for 50 to 70 years.

Still, banks have stepped up their online projects dramatically in the last two years. The ABA reports that banks’ total investments in information technology grew from $16.3 billion in 1994 to $18.7 billion in 1995, and 84% of banks surveyed by the ABA said they plan to offer services through personal computers by 1998.

Even now, the options open to consumers are dizzying. They can choose direct dial-up services through an 800 phone number, can access a bank through online service providers such as Prodigy or America Online and, in some cases, can even access their accounts over the Internet. Services generally include looking up account balances, transferring funds from one account to another and paying bills. Some banks allow stock quote “lookups� and investment services.

Fees for such services vary, though they have generally fallen substantially in the last year or so, with some banks, notably Citibank, offering them for free.

*

At the heart of the land rush to build online banks is the fear of losing the race, observers say.

“There’s a perception that you have to have those . . . delivery channels or you’ll be left behind,� said Kawika Daguio, an ABA lobbyist specializing in payment system and technology issues.

One recent sign of the increased pressure: IBM’s announcement this month that it had formed a consortium with 15 regional banks, including Bank of America, to market a broad range of interactive banking and electronic commerce services to banks in the U.S. and Canada, and to develop standards for Internet banking.

Bankers say they’re preparing to meet demand from consumers who are snapping up PCs, signing on to the Internet and increasingly using software such as Quicken and Microsoft Money to manage their finances. Online banking customers can download account information directly into those programs.

But banks certainly have incentives to push their customers down the electronic road. They can cut costs by weaning consumers away from branches and toward telephones, ATMs and PC banking, all of which are much cheaper to provide than teller transactions and branches.

“The trend toward PC banking is being led by the banks and the technology companies that sell software solutions to the banks,� said Jonathan Whaling, project manager at Mentis. “Consumers are lagging this trend. . . . By and large, the lion’s share of banking customers are not demanding these services.�

That helps explain why online banking fees have plunged as much as 30% to 50% in the last year, according to Financial Service Online. Citibank, which once charged as much as $15 a month for its PC bank service, led the move by cutting its fees to zero last year.

“It was our sense that there was a price barrier for people to try PC banking,� said spokeswoman Susan Weeks. “They either said there’s not enough I have to do to justify the fee or . . . I resent having to pay for it.� Since dropping fees, Citibank has seen its customer base increase sixfold, Weeks said.

Wells Fargo now offers its PC banking free, except for a $5 monthly charge for bill payment. Security First Network Bank charges a variety of fees; Bank of America charges $6.50 a month but offers a free option for customers with direct paycheck deposit or a minimum balance.

Mark Freeland, 41, a computer programmer in San Francisco, has been an online customer of Citibank for about a year.

“The check writing is a definite convenience,� he said. “Rather than having to deal with stamps and writing out checks, I can just have them send the check for me. . . . Some payments are on an automatic payment schedule. All I have to do is remember to make an entry in my checkbook every month.�

But others expressed frustration at one element of online banking: the delay in bill payments. Banks say payments could take as much as five or six days to be properly credited once they are requested, even though the money is immediately deducted from a consumer’s account.

That’s because many merchants still prefer a check, not an electronic payment. A customer’s bill payment must be converted into a paper check, which must still be mailed to the merchant.

Brian Gordon, 56, a software engineer in Campbell, Calif., has been an online customer of Bank of America since 1989, but rarely uses the service to pay bills.

“I used to do it for a while, but I ran into too many cases where the bill didn’t get paid, and it took too long to figure out why,� he said.

*

Even with more customers, however, online banking may not be a big moneymaker, the ABA’s Daguio said.

“A lot of people forget that . . . it costs money to do these transactions, and . . . the costs are not based on how much money you access or what information you access. . . . It’s just expensive to deploy new technology,� he said.

He cited as an example ATMs, which met with consumer resistance when they were first deployed as a means for banks to save money on the costs of teller transactions.

Once consumers became comfortable with them, they turned out to be a drain on bank finances, he said. “Bankers assumed that people would substitute transactions at an ATM for teller transactions on a one-to-one basis. But they didn’t. They go to an ATM a gazillion times more than they would take the time to go into a branch.

“So even though a teller transaction costs more than an ATM one, when you add up all the new ATM transactions . . . you’ve just cost yourself a lot of money by deploying really expensive new technology,� Daguio said.

In an earlier gold rush, the man who made the most money was not a gold digger but the one who made dungarees for the other fortune hunters.

Similarly, Kentucky-based Security First Network Bank may make its money not in the virtual arena, but by licensing its software--protected by the same security measures used by the military--to other banks.

“The software will probably generate the most income,� said spokeswoman Humphreys.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

No Big Inroads

The American Bankers Assn. forecasts that home banking will grow dramatically by 1998, but it will still constitute a small fraction of total bank transactions. Transactions by method:

Home Banking

1996: 1%

1998: 6%

Sources: American Banking Assn., Ernst & Young