Banking: Transactions A Click Away

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September 22, 1997

BANKING:
Transactions A Click Away

The boom in Net-based services has banks redefining the way they do business
By Beth Davis
IW 500 slug iticorp has adopted a new motto: Be only "one call, one click, or one mile" from every customer worldwide. Although the company's Citibank division is the nation's largest bank, it's by no means the only one embracing this philosophy, made possible by IT, and particularly by the global reach of the Internet.
"The interest to empower consumers to bank when they want to, how they want to, from where they want has b een embedded in our culture here for a long time," says Ed Horowitz, executive VP of advanced development at Citicorp in New York. But the rapid rise in the number of Internet users and access points, combined with efforts to bolster online security, is making "anytime, anywhere" banking more of a reality than ever.
"Before, the Internet wasn't really considered a full-fledged channel, it was just a means to communicate with customers," says Kathy DeWit, executive VP of alternative delivery and planning at Norwest Services Inc., the technology arm of Norwest Corp. in Minneapolis. "Now, the Internet has almost become a household word for people with all types of backgrounds."
That popularity has spurred interest in on-line banking. While many of the InformationWeek 500 banks have offered some type of online banking service for several years, these services typically are offered over private networks. Now, banks are looking at ways to run these services over the Internet.
Citicorp presented its fir st PC home-banking service to customers in the mid-'80s via a package of software and a private network. In the last few months, it has begun building an infrastructure that will let customers use their home PCs and an Internet connection to check account balances, transfer funds, and pay bills.
"If we want to reach the customer anytime, anywhere, any place, we have to do that with a number of different channels," says Horowitz. "The ATM [automatic teller machine] is an important one. So is the telephone, as well as the home PC, whether linked via the Internet or a private network."
The Internet, World Wide Web, intranets, and extranets are creating new IT infrastructures for all types of businesses. For banks, they're also presenting new business opportunities. Home banking, financial planning, asset management, bill payment, and other tailored customer services are just some of the products and services that will capitalize on the Internet's ability to reach customers.
Net Gains
"The Internet is not just one more incremental improvement. It's really a radically different technology," says Janey Place, executive VP of strategic technology at NationsBank Corp. in Charlotte, N.C. The difference, she explains, "is that it puts the customer in the center."
For example, if a customer is looking to buy a car, he or she can do research on or even take a virtual test drive of the car, join a chat group, order the car, and arrange the financing from a bank-all from a home PC linked to the Internet.
The Internet and related technologies are also making IT more flexible so banks can push new products and services out the door faster. "We can bring products to market and change functionality to deliver what customers want, and keep up with competitive pressure very quickly," says Place. "You couldn't do that with legacy systems."
Changing legacy systems requires rewriting lines of code in more-complex programming languages, Place notes, whereas the programming languages used in Intern et technologies are much easier to code.
Also, Internet and Web-based banking services, unlike home-banking services over private networks, don't require customers to purchase specially packaged client software; they require only a Web browser. When a new service is made available, such as bill payment over the Internet, the user just needs to dial in from the Web client and automatically download the required code to install the new service.
The Web is giving home banking new life. Although the concept of banking from home has been around for more than a decade, it's been slow to catch on with customers. Only about 1.2 million U.S. households-out of a total of nearly 100 million-use home banking today, accounting for about $170 million in transactions a year, according to the Tower Group, a market research firm in Newton, Mass. Compare that with the two most popular channels: banking at branches, which accounts for about $10 billion in transactions; and banking at ATMs, which accounts for about $13 b illion.
Online Craze
But the Internet could make home banking more acceptable. According to IntelliQuest Information Group Inc., a research firm in Austin, Texas, as many as 60 million U.S. adults will be using the Internet by year's end.
The growth in Internet access and PC use will translate to more people banking online. The Tower Group estimates that about 12% to 15% of U.S. households will use home banking, either on the Internet or private networks, by 2001, accounting for $2.5 billion in transactions.
Banks will not let the online craze pass them by. Within two years, the most important channel investment for banks will be Internet-based PC banking, according to a recent report by Ernst & Young. The report, based on a survey of chief technology officers and chief financial officers at bank holding companies and financial services firms worldwide, says fewer than 5% of the banks surveyed give top priority to Internet-based PC banking today. But 36% said it will be a top priori ty by 1999.
"The speed at which adoption of the Internet by consumers and businesses has taken off-when you compare it with ATMs-that in and of itself is changing the way we look at things," says Bruce Luecke, general manager of interactive delivery services at Banc One Corp. in Columbus, Ohio, the highest-ranking bank in this year's IW 500.
Luecke predicts that about 15% of Banc One's transactions will be done online within the next five years. "A few years ago, you built online applications and wondered if anyone would come," Luecke says. "The issue today is whether we can handle all the requests."
Banc One is averaging 200 to 300 requests a day regarding its online service, which is offered over a private network and will be available over the Internet this fall, according to Luecke.
While the Internet is expanding opportunities, the challenge for banks will be to reconfigure their IT infrastructures so the different delivery channels can share software code, applications, and networks, ind ustry experts say. "Banks need to create a new layer of software that can support multiple channels," says Bob Landry, director of retail banking advisory services at the Tower Group.
Middleware On The Way
One approach is to connect the back-end systems to a single messaging standard or some other common middleware. Industry efforts to develop middleware for Internet banking are already under way. Last December, 16 banks joined forces with IBM to create the Integrion Financial Network, which is devoted to building a strategic platform for banking and electronic-commerce services that includes a messaging standard and a set of application programming interfaces.
Banc One, an Integrion member, plans to use the network in its Internet-based banking service. NationsBank, also a founding member of Integrion, will use the network and is also developing its own middleware, based on object technology, to tie together its delivery channels. The project, dubbed Direct Banking Infrastructure, will le t NationsBank use the same infrastructure for customers banking with PCs, network computers, telephones, kiosks, or call centers.
Norwest is also implementing object technology to link its delivery channels. "Integrated channel delivery is the way we describe the approach we're trying to take," says DeWit. "We're creating solutions to be used across a seamless architecture so we don't have to develop five pieces separately."
Objects are chunks of code that define generic functions. For example, one object might define "get balance." If a customer wants to make an early mortgage payment or obtain information on a bounced check, each of those requests requires the "get balance" function.
"In the more classic way of writing software, you had to write code that specifies each function, such as going to the mortgage loan to get the account balance, and this involved lines of code embedded in code," says Place. "With objects, once you've written them, you can reuse them."
Crucial to the success of b anks is their ability to understand the needs of their customers. To that end, banks continue to invest in data mining and data warehousing. Mining tools let banks cross-reference a number of databases to determine such things as which customers are most profitable or which customers of one service are good candidates for another.
Linking the various databases together, coupled with decision-making tools, gives banking service representatives "an enterprisewide view of each customer," says Kathleen Khirallah, a senior research analyst at the Tower Group. "These customer information systems, or enterprise views of the customers, are what make the delivery systems successful."
Along with investments in new technology, banks are spending billions of dollars on year 2000-related maintenance and changes. According to the Ernst & Young report, the year 2000 issue will cost U.S. banks a total of $7.2 billion. About 75% of the banks have begun year 2000 programs, according to the survey.
Feeling In secure
As the banks prepare their IT infrastructures for the new world of online banking, threats to information security continue to be a concern. Although security tools and technology such as firewalls, encryption, and authentication have matured in recent years, there are still unresolved issues that make risk management a more difficult task for IT managers deploying Internet-based projects. For one, the debate over encryption software is far from settled. Still in effect: a U.S. policy, signed late last year, that lets U.S. companies export stronger encryption software as long as they provide mechanisms within two years that allow for the recovery of encryption keys.
The policy replaced the "Clipper chip" plan that would have let the government hold keys to unlock or decrypt messages secured via encryption. Now, accredited agencies will hold the keys, and the government won't be able to obtain them without a court order.
But many experts say the current policy is still too restrictive. "Key recovery as a government requirement is probably overkill and won't likely be accepted across the world," says Vinton Cerf, senior VP of data development at telecommunications carrier MCI Communications in Washington, co-author of TCP/IP and the so-called father of the Internet. "Voluntary key recovery is essential for businesses, however. You have to be able to recover vital company information if a key is lost or destroyed."
The restrictions have put a squeeze on the market, making it more difficult for IT managers at global banks to find the software they need to encrypt data on networks they operate overseas. "We'd prefer 128-bit security, but there aren't a lot of 128-bit encryption Web servers out there," says Banc One's Luecke.
Encrypted Transactions
But the situation is improving. In late May, the industry approved a security standard that's designed specifically for credit-card transactions over the Internet. The Secure Electronic Transaction (SET) protocol encrypts credit-ca rd transactions as they traverse the Internet and authenticates the identity of the sender and receiver.
Bank of America this month is rolling out a live SET pilot backed by Visa that will let nearly 500 Bank of America employees make purchases online using SET-based digital certificates. Cynthia Kopec, VP of consumer credit at Bank of America in San Francisco, says SET will allay consumers' fears when using credit cards over the Internet.
"People feel comfortable with retailers they know who have catalogs, because there's a level of security when someone spends money to publish a glossy catalog and has an 800 number," Kopec says. But Web sites are relatively easy and inexpensive to set up. "SET lets you authenticate a merchant," she says.
At the same time, SET-based certificates will let merchants authenticate customers. Forthcoming "smart-card" technology is expected to further increase the security of electronic banking. Smart cards are wallet-sized cards that contain computer chips and can ho ld SET digital certificates, personal identification data such as age, and encryption algorithms.
Smart cards will be used for transactions as if they were cash. That should make Internet-based banking as useful as stopping by the local branch. "Right now, you can't get cash out of your PC," says Citicorp's Horowitz. Eventually, though, "you'll be able to download money to your smart card."
Another step toward anytime, anywhere banking.

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