| Cyberbanking
threat to Banks
Archive material for historical interest from 1997
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Future of Banking
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From September 1994 to July 1996 the number of banks
on the Internet grew from 20 to 1,178. By May 1997 the number was
over 2000, growing at around 350 - 400 every quarter. A large survey
of European banks found that 56% of those with web-sites were planning
to provide full on-line net banking by the end of 1997. As a result
There is a shortage of skilled web programmers in Europe, especially
those able to integrate financial legacy systems with the new technology.
From October 1996 to March 1997 the number of financial
institutions offering full Internet transactions leapt from around
15 to over 70. Traditional banks are struggling to keep up with
non-banking competitors who are are intent on grabbing market share.
Unlike traditional banks, they have no culture to fight and are
able to move fast. The stampede onto the net is gathering pace with
an explosion of alliances between banks, food retailers, insurance
companies, software houses, media companies and internet service
providers. Security problems are easing -(see below)
Internet life measured in dog
years
The net ages at seven times normal speed so a corporate
decision making process at twice normal speed still leaves a large
company stranded with out of date decisions. Every step forward
is three steps further behind the front runners.
The most dramatic changes are being seen not in retail
banking but in share trading with discount brokers now offering
unlimited trades for $12 or less - a saving on large deals of over
$3,000. At that level the tiny commission is hardly worth collecting
so the next step is to charge nothing at all. The bottom is about
to fall out the conventional brokerage market which has been built
on free advice but expensive trades. Now that trades are virtually
free, brokers are going to have to think again. Either they continue
to provide free advice at a huge loss, cross-subsidised by encouraging
other business, or they stop giving advice. The only alternative
is to carry on and hope for the best, assuming that many clients
will still pay a premium for reliable service.
However 1.5 million people are already selling and
buying stock on their PCs, increasing at 100,000 a month. Commissions
are so low that it is easier to make money on multiple trades of
the same shares over a short period. Most net users have free access
to current market prices, delayed only by thirty minutes which is
fine for many people. Punters can play the game both ways: phoning
a broker for advice and doing an occasional trade to keep the firm
happy, while carrying out most trades on the Internet. We may argue
about the percentage of the market which will run through the net
by when but the trends are clear: the days of large commissions
are over.
The uptake of on-line retail banking is slow with
some exceptions such as Wells Fargo, topping 200,000 net accounts
in early 1997. Most banks are growing net accounts by cannibalising
existing client bases who had been using direct dial PC banking.
The drive onto the net continues, fuelled by the low costs (1% of
normal traditional routes per on-line banking transaction). Security
issues were solved a year ago though many banks are still catching
up. The latest announcement by the US government (May 1997) will
help by easing export restrictions on strong encryption for banking
security.
Global marketing
It is a tough world, with net users able to find global
comparisons on interest rates, insurance premiums, and other products
in a matter of seconds.
The days of "virtual banking" are here already
with banks whose only presence is on the Internet. Customer interfaces
in the future will need to be global brokers for best-price deals
whether of loans, insurance and other products. The role of humans
will be to provide trustworthy advice and guidance through the mass
of data available, enabling people to buy on quality of service
rather than just cost.
Branding of banking products will be essential to
survive. Price Waterhouse said recently: "Banks will need to
think of themselves as fast-moving consumer goods retailers."
However the role of humans as consultants may also be threatened
by new "intelligent agents" on the net. These programs
are trained to recognise consumer preferences and to anticipate
their next requests. They can hunt around the net searching for
better financial deals, for example. They will also help retailers
so that - say - someone who buys a set of golf clubs yesterday,
is offered a golfing holiday when connecting today.
Collaborative filtering using Firefly Network and
similar products also allows preferences to be guessed by the agent
after analysis of the behaviour patterns of thousands of other people
with similar profiles of net activity. "Push" technology
is also a major threat, with relevant information arriving at the
PC without action taken by the user. The net of the future will
be dominated by advertising on the back of free information and
entertainment. One click to a product, two clicks to a sale.
How many are Home Banking?
Estimates vary for the numbers using home banking
options today. Diogo Teixeira, President of Tower Group, Texas,
believes it could be as high as 1.5 million in the US. This is a
sixfold increase in just twelve months. However it is still less
than 1% of all customers. Jupiter places the figure lower, at 700,000,
but estimates that 75% of all US homes will be running their accounts
on-line, rising to 95% by 2010. This is partly aided by the provision
of free local calls by Telecom providers
in most states. Huge numbers access PC banking via programmes such
as Quicken, through intermediary servers. This allows people to
find a house loan from one bank, and a car loan or insurance deal
from another. Banks could turn into little more than wholesalers
of financial services.
Saloman Brothers (Wall Street) said recently: "This
may not sever an institution's ties with its retail customer base,
but weaken the ties, onshore brand value and steal much of the remaining
profits." Customers will have a far stronger relationship with
a personal finance program than with a single bank. Intuit, owner
of Quicken, has been swamped by banking transactions and on 17 September
agreed to sell its on-line banking and bill paying service to CheckFree
for $227.6 million. Assuming the sale proceeds, CheckFree will provide
home banking and bill payment to 180 financial institutions and
to more than a million customers. CheckFree and Visa Interactive
are thus the two leading processors in the US. Intuit retains a
23% stake in CheckFree.
US export ban on strong encryption
collapses (May 1997)
The US government ban on 128 bit SSL encryption export
is over - for financial services. The position was unsustainable
and will be welcomed by financial institutions world-wide. However
the ruling does not apply yet to web browsers. Most experts accept
128 bit SSL encryption as secure enough for international banking.
However, SSL only encodes the transmissions between two computers.
It does not guarantee the identity of the individual or of the bank.
Meanwhile the British government has announced (May
1997) plans for possible legislation allowing it to access any encrypted
messages using a third party key. Banks will vigorously oppose such
measures.
Security on the net is a boom industry with hundreds
of products and companies. However there are just three issues when
it comes to on-line banking security:
Confidentiality - is the
line secure from listeners ? Authentication
- is the computer really part of the bank?
Is the other computer really owned by the customer
?
Identification - is the
user of the customer's computer really the customer ?
However we also need to ask how secure other banking
systems are before demanding an overly expensive and inconvenient
solution for on-line systems. Systems available today offer security
many factors greater than that obtained with normal telephone instructions,
fax or e-mail. A US survey shows that most people are more worried
about personal details becoming public than about actual fraud.
Methods of Encryption
Until recently all methods of encryption involved
both parties using the same key. These systems are called private
key or symmetric systems. The best methods (algorithms) are ones
that preserve security even if the actual method of encoding is
revealed. Symmetric systems are fast but key management is difficult.
A bank computer has to use a different key to communicate with every
client. There is also a problem in distributing such keys in a secure
way on a regular basis. Asymmetric keys overcome these problems.
Each key is in two parts: the public and the private. Anyone wishing
to send a message can use the public key to code, but it can only
be decoded with the private key. However the system is slower. It
relies on "one way function" in mathematics. This is a
calculation which is easy to perform in one direction but takes
an extremely long time to reverse.
A "trapdoor function" is one where reversal
of a "one way function" is easy if you know another piece
of information. Public key systems are all based on trapdoor one
way functions. The larger the key, the greater the security. However
it is impossible to prove mathematically that the trapdoor is indeed
one way only. One can only say that it is highly unlikely. It is
possible that a new algorithm may be invented one day to open the
door. The key is a very large number, typically the factor of an
even larger prime number. Prime factoring involves splitting a large
number (integer) into two prime numbers. Multiplying two primes
is easy, finding them is hard.
Digital
meltdown of financial services - Web TV
Future
of Banking - Powerpoint - October 1999
Future of Banking
- January 2002 feature
Growing demand
for cyberbanking in British survey
The Future of Outsourcing
Business processing outsourcing, call centre, IT, offshore HR services, customer support, legal and accounting. Truth about outsourcing impact on emerging economies, US and Europe. Benefits and risks.
Why small businesses insurance often fails to protect
Many small business owners taking huge risks
Patrick Dixon
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Future of Ukraine - economy and country
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Impact of ageing population in Europe and Russia
Purpose of fund management - by Patrick Dixon
Fund Management Risks - Potential Crisis - Patrick Dixon
Wild cards - low probability, high impact events
Why market research gives wrong results - blogging
The world is changing faster than you can make decisions
Future of Malaysia
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Why ports, ships and shipping will dominate global trade
Economic growth of former Soviet Bloc nations, Russia etc
Too late for outsourcing?
Outsourcing in India, China, Asia and Central Europe
Mobile phones, banking and financial services trends
Bottom of the pyramid - selling to the world's poor and making a difference
Microloans, microfinance, microcredit and future of banking
Business values - corporate and social responsibility really matters
Global brands, mergers and demergers
Customer focus and call-centre disasters
Women consumers rule - female customer trends
Insurance market in India, China and rest of Asia
Future of the Petrochemical Industry
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Commodity shortages and prices - global trends
Retail revolution in India
Demographic impact on business
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Institutional blindness
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