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Banking in Cyberspace

Though banking by computer may never completely replace “going to the bank”, most of the nation’s 10,000 financial institutions will offer online banking services by the year 2000.

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Banking by computer has made a huge splash with American consumers.

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While a few banks have offered home banking for more than a decade
– such as Citibank and NationsBank – it’s only been during the
past two years that banking by computer has become vogue. And
now, not only is PC banking available to individuals, but also
to small-business owners.

What brought about this sudden surge in banking by computer? The
growth of the Internet has had a lot do with the rising tide of
interest in PC banking. In fact, most people familiar with the
industry predict that we’re currently standing at the shoreline
of an ocean of possibilities.

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"These are exciting times," says Intuit Chairman Scott
Cook. Intuit has been at the forefront of PC banking offerings
during the 1990s. "I believe we’re at the outset of a 20-year
period of tremendous innovation in the electronic delivery of
financial services. Online banking and bill payment services are
just the beginning."

Cook isn’t alone in his optimistic outlook. IBM marketing executive
Boley Llewellyn also believes we’re just beginning to catch the
coming wave of PC banking possibilities. "While earlier electronic
banking projects met with limited success, the outlook is much
brighter now," says Llewellyn. "Powerful and relatively
easy-to-use personal computers are widely in use, both at home
and at work, and time-pressed baby boomers find remote financial
management increasingly attractive."

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San Francisco-based Wells Fargo was one of the first banks to
offer online banking services to small businesses, and others
have quickly followed suit, sparking a rapidly growing trend around
the country. A recent report released by accounting firm Ernst
& Young predicted a 600 percent increase in retail transactions
through PCs by 1998. A similar rate of expansion was predicted
for small businesses. The report indicated that 84 percent of
banks currently – or plan to – offer financial services through
online capabilities.

What PC banking services are available to businesses like yours?
So far, banks typically offer checking and money market account
services, bill paying, online transfers of funds, e-mail and loan
products.

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System Requirements

The more advanced technology needed for electronic delivery of
banking services naturally requires more advanced hardware for
your shop. If you’re still using an old 386 PC unit to manage
your information, you’ll need to upgrade. The good news is PC
prices have dropped considerably in the ’90s. In fact, you should
be able to purchase a state-of-the-art unit with a 17-inch monitor
for about $1,500.

For most banks, the minimum specs are:

  • IBM-compatible 486 or greater;
  • Windows 3.1 or Windows ’95 operating system;
  • 8 MB of RAM;
  • 10 MB of hard disk space available;
  • VGA monitor or higher resolution; 256 colors recommended;
  • Hayes-compatible modem.

The software, generally, is provided free by the bank, and an
example of the software is BankNOW for America OnLine (AOL). The
setup is simple and can be downloaded right off the online provider
you’re using (e.g. AOL). Some banks are also offering direct Internet
access.

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You’ll pay a monthly fee to the bank for the service, and if you
opt for account services only, this fee likely will range anywhere
from $5 to $25. If you also use the bill paying services, fees
will be slightly higher.

Delivery-Channel Choices

Currently, four different methods are used by financial institutions
to deliver online banking services: the World Wide Web, stand-alone
software, proprietary technology and joint venture offerings such
as BankNOW.

The World Wide Web offers direct access to the bank’s services
simply by having online capability, and you don’t need to purchase
a monthly service like AOL. The way it works is you download from
a bank browser section on your computer screen, your information
is encrypted (scrambled to ensure that only the bank and you can
decipher the information) and you conduct banking business directly
through the Web to your bank.

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With the stand-alone software option, you order the software from
the virtual bank branch on the Internet or from one of the bank’s
local branches. The software is installed separately on your PC,
and a private dial-up connection is utilized directly to the financial
institution. This also is encrypted for security purposes. While
you run this online on your PC, you’re not operating through the
Internet or a service such as AOL.

Service providers like AOL offer proprietary technology. For example,
the country’s largest bank, Bank of America, uses a special AOL
technology designed just for AOL members. Rather than ordering
software or downloading a Web browser, the user accesses the online
banking services directly through the service provider. Your banking
information never travels over the Internet; instead, it moves
directly between your PC and the bank.

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The fourth type of online banking delivery system is through financial-services
partnerships, such as AOL’s BankNOW. Banks such as American Express,
First Chicago NBD and Union Bank of California offer BankNOW software
in conjunction with Intuit, the makers of Quicken. The software
is free and is downloaded directly from the bank’s online site.
Personal identification numbers (PINs) and passwords are used
for security, as well as encryption.

Most financial institutions operating online offer more than one
of the four small-business computer banking options, and the bank
you choose should be able to help you determine which is most
appropriate for you.

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Deposit-Account Services

The most popular use of online banking has been for deposit-account
services. Your business checking and/or money market account is
set up online for you to access 24 hours a day, seven days a week.
Putting your deposit accounts online enables you to download your
bank statement, verify account balances, view recent transactions
and transfer money.

The benefits include:

  • Timeliness of information availability;
  • Ability to know which checks and deposits have cleared;
  • Maximization of interest earned on excess funds;
  • Freedom from bank lobby hours.

Bill Paying Services

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Another important service offered online by banks to small businesses
is bill paying. The way it works: You set up a database of suppliers
and creditors to whom you pay bills on a regular basis. You can
pay electronically or by check (written by the bank, not by you),
and you can schedule payments at any interval (daily, weekly,
monthly, etc.) up to one year in advance.

These bill paying systems also offer the flexibility to pay different
amounts at different times. In other words, you might be billed
$500 by a supplier in June and then $750 in July. To pay this,
you’ll have that supplier set up in the system and you’ll only
have to change the amount when the bill is due. If you do have
a set amount for a periodic payment to a creditor or supplier
(i.e. bank loan payment), you can set this up to be paid automatically
at a set time without your having to make a monthly entry.

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The benefits of online bill paying include:

  • Ease of use, being Windows based;
  • Less likely to miss or be late on payments;
  • Easier to schedule payments according to typical cash inflows;
  • More efficient than handwriting checks;
  • Ability to check the status of payments at any time.

Borrowing Money Online

While you can’t yet do all of your small-business borrowing online,
some banks are now offering online borrowing services to businesses
for more simple transactions, such as car loans and leases, business
credit cards and smaller lines of credit ($50,000 or less with
most banks, higher with some).

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Online borrowing allows you to take out a loan for your body shop
without ever leaving your office. The application is submitted
electronically, approval is handled without your being there and
the funds can be deposited directly into your checking account.
In some cases, documents will be mailed for your signature. In
other cases, the online application and agreement to comply with
note terms will suffice.

Security Concerns

The biggest concern expressed by most small-business owners is
security. Stories have circulated about users having money stolen
from their accounts in cyberspace, and this has prevented many
from using online banking services. And while there have been
some instances overseas where the level of online security technology
has been limited, few instances have occurred in the United States.
In fact, you’re probably more likely to have checks or credit
card numbers stolen and used than you are to have online business
banking information fall into the wrong hands.

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Banks use several high-tech measures to ensure adequate security.
First, you use a PIN for every transaction. As long as you keep
this to yourself, it would be very difficult for your PIN to be
broken. Second, most banks use passwords in addition to PINs,
so even if your PIN is stolen, no one can access your account
without your password.

But PINs and passwords are only the beginning of the security
system. A 1024-bit master RSA key encryption is used for session
key exchange. Then, triple-DES encryption is used for your data.
In layman’s terms, this means that the transfer of information
is scrambled between the bank and your PC. According to AOL, these
two measures make it "virtually impossible for anyone using
current technology to steal information." AOL likens the
process to paying your phone bill by enclosing the check in a
steel safe and mailing it through the U.S. Postal Service with
only you and the receiver having the combination.

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And security technology will only improve, according to Bill Burnham,
head of Internet banking research for Booz, Allen & Hamilton.
"While security currently ranks as the industry’s top concern,
we believe this issue will persist only for the next year or so,"
wrote Burnham in a recent "Bank Management" article.
"The technical hurdles with security have been largely overcome,
and the challenge is now one of careful implementation and education."

The Future of Online Business Banking

Industry insiders say that online banking services for businesses
will only expand in the future. And it likely will happen sooner
rather than later. Citibank has offered online banking services
for more than a decade and has a significant level of resources
devoted to expanding online banking offerings in upcoming years.
Frits Seegers, the marketing and sales director for Citibank’s
U.S. retail division, says that small businesses and individuals
alike will have a growing number of delivery channels to choose
from when interacting with banks.

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"Online banking is only one part of a wider electronic banking
strategy at Citibank," says Seegers. "The future of
electronic banking is not limited to the Internet or PCs. It includes
delivery channels such as the traditional phone, the automated
teller machine and the branch."

Seegers doesn’t see online banking ever replacing traditional
delivery methods for banking services but says it simply offers
small-business owners and individuals more options. "In our
view, online banking will complement and enhance the overall customer
experience, not eclipse other delivery channels," he says.

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Although online banking is offered by only about 100 banks today,
by the year 2000, most of the nation’s 10,000 financial-services
institutions will offer online banking services.

"Within five or 10 years, essentially all banks will offer
direct banking, and customers will have multiple means of direct
access," says Lewis Levin, general manager of Microsoft Corp.’s
desktop finance division. "Nearly all bank products and services
will be available directly to the customer. Direct banking will
be the avenue of choice for most people and most products, most
of the time."

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J. Tol Broome Jr. is a contributing editor to BodyShop Business.

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