Outside Help For Online Banking

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March 16, 1998

Outside Help For Online Banking

Banks turn to outside service providers for the technology and support they need to deliver full-fledged banking on the Internet

By Gregory Dalton

o keep pace with the banking industry's move toward full-service banking on the Internet, banks of all sizes are outsourcing functions to third-party service providers.

Bankers, aware of how the Internet has shaken up other areas of financial services such as stock trading, are upgrading their Web sites from "brochureware" to transactional platforms that support money transfers, bil l payment, and, eventually, bill presentment. NationsBank, one of the country's largest, took a step in that direction last week when it introduced Internet-banking functions for customers in six eastern states and Washington D.C.

To achieve transactional economies of scale that wouldn't be possible otherwise, many banks, including California Federal Bank and Peninsula Bank of San Diego, are looking to outside companies to help them.

"Every time you add a channel, you add complexity," says Pam White, electronic-commerce manager at California Federal, a $31 billion bank in Sacramento that has outsourced hosting of its Web-banking site and related customer service to Online Resources & Communications Corp. (ORCC) in McLean, Va. The bank is about to roll out a Web-banking pilot for 2,000 customers in California, Florida, and Nevada.

Generally, two types of companies provide banks with technology and services for delivering online banking via the Web and dialup networks. One offers tech nology for home banking, including transactional Web sites, automated voice-response systems, and dialup PC networks. Players include ORCC and Digital Insight Corp.

The second type are service bureaus that perform core processing functions for banks, such as transaction handling and printing and mailing bills. NCR Corp. is one such company. A few companies in both groups provide call centers for technical support, and most plan to do so.

Outsourcing is a sensible option for online banking because it lets banks leverage an external service provider's transaction platform, says Cliff Condon, an analyst at Forrester Research. Banks are going to need all the help they can get. The number of households that bank online will nearly triple--from 3.6 million this year to 10 million in 2001, according to Forrester.

"Even if you have your own in-house core processing system, it makes sense to outsource Web banking because Internet technology is changing so fast," says Bill Burnham, an electro nic-commerce analyst at Piper Jaffray Inc. in Minneapolis.

Peninsula Bank of San Diego, which operates 10 branches, chose ORCC to support its PC banking three years ago when it was one of a few companies adding that capability to its automated phone-banking services. ORCC now also handles the bank's Web site, including online bill payment.

Here's how ORCC's system works. Consumers use their browsers to access Peninsula Bank's site on the ORCC server. After their identification is verified, bank customers can view their balances, transfer funds between accounts, and pay merchants. Their transactions are transferred to the bank via the regular automated teller machine system and handled by bank staff along with regular debits and credits made using ATMs.

"Our customer-service procedures didn't change at all," says Marilyn Merritt, electronic banking manager at Peninsula Bank. The only operational procedure the bank had to devise, she says, was sending a file with statement history to ORCC each day so customers visiting its Web site could see their latest balances and transactions.

Merritt was particularly pleased that the system lets her avoid the headaches of handling bill payments from customers to merchants, which operate myriad computer systems and networks. "We don't want to bring bill payment in-house," she says. "It's a really tough area to do well, and a whole other business."

Other bankers agree. "The key component of home banking is the bill-pay function," says Harry Rust, senior VP of technical services at $5 billion Riggs Bank NA in Washington. "It has enormous back-end ramifications on an organization."

Riggs Bank sidestepped a potential legacy-to-Web integration hassle for its Web-banking service, which went live in December, by going with ORCC. ORCC's use of the ATM system mean s data comes into the bank on "existing rails," Rust says. "It was a straightforward implementation," and the back end was not a significant component, he adds. Riggs also looked at Visa Interactive and CheckFree Holdings Corp. but chose ORCC because "they were there and operational," Rust says.

On Their Way
Matt Lawler, ORCC's CEO, says it takes about $30,000 and 30 to 40 days to get a bank up and running on the Web. After that, he says, banks pay well under $10 a month per customer with Web-banking accounts.

Banks typically pass on that cost to customers by charging a few dollars a month for home banking and a slightly higher fee if they use the bill-payment service. For example, California Federal charges $5.95 a month for bill payment over dialup PC connections, which White says is less than what it costs the bank to provide that service. "It's not a pretty business case," she says. "But could we do it cheaper ourselves? My hunch is no. Third-party service providers are going to be sitting pretty."

Digital Insight, in Camarillo, Calif., is one such provider. In January, it landed a contract with Home Savings of America, a $56 billion savings and loan in Irwindale, Calif. Digital hosts a Web-banking site for Home Savings that includes bill payment. The site supports loan and credit-card applications, online car shopping, and stock tracking.

In addition to functions such as bill payment, Digital helps banks design their Web sites and hosts the sites on its servers. The company also gives banks monthly statistics and an administration platform so they can make small changes to their sites.

Digital charges banks $25,000 to set up a bill-payment system on the Web, and about $1.50 per transaction for the first 50,000 transactions their customers make per month. Digital plans to operate call centers for banks, but for now, bank IT departments have to help their customers with problems installing software or using the system.

Security First Technologie s in Atlanta, often referred to as S1, is another outsourcing player. Its Virtual Financial Manager supports the usual banking and stock-trading functions. Users can deploy the product on their own sites, at S1's data center, or at service bureaus such as Computer Services, FiServ, and M&I Data Services.

NCR, in Dayton, Ohio, has teamed with Edify Corp. to provide Web banking for 18 banks, either in-house or at NCR's data center in Columbia, Md. Banks outsourcing to NCR pay about $30,000 to get started and a minimum of $1,200 to $1,500 per month for the first 12,000 transactions, says NCR senior product manager Greg Sackenheim. Additional customer transactions are priced at 10 cents each.

Banks can also consider the Integrion Financial Network, a consortium owned by 18 of the country's largest banks along with IBM and Visa USA. Its Interactive Financial Service is essentially a middleware platform that provides links between CheckFree's electronic-payment system and Web-banking software host ed by Integrion.

NationsBank and BancOne are live with Integrion, and others are joining the bill-payment pilot. Most banks elect to have Integrion host the Web-banking software on its servers, but a few, including First Chicago, have opted to run their own servers, connecting to Integrion to clear payments. Integrion representatives won't discuss pricing, but say transaction-based fees are the same for both consortium members and nonmember banks.

Easy Payment
IT managers are also watching the hot area of consolidated bill presentment. This feature is expected to draw new customers to online banking because it offers them a convenient, efficient way to view and pay their bills while completely eliminating paper bills.

Because online bill-presentment technology is still immature, merchants and consumers have resisted any move away with paper bills. To date, online bill payment involves receiving a bill in the mail, throwing away the return envelope, and paying it online instead.

The major players in online bill presentment--CheckFree and its strategic partner Integrion, and MSFDC, a venture between Microsoft and First Data Corp.--are signing up banks and conducting pilots.

Getting in on such cutting-edge technology is seen as a competitive advantage that bankers say will help them hold customers. Once customers take pains to set up a method to pay their bills through a bank's Web site, they won't jump as quickly to a competitor for a slightly higher interest rate on their checking account, bankers say.

Customers, meanwhile, will keep the banks on their toes by using more devices to access the Web. ORCC CEO Lawler says relatively few people will pay their bills over the Internet using their televisions, but "banks have to support interactive TV because purchases will be made there."

Keeping up with the technology that's vying to gain the upper hand in America's living rooms is just one more reason banks will call on external service provide rs.