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So Far, Online Banking Is Mostly Wishful Thinking

Finance: Institutions are eager, but many consumers are hesitant. And then there's that pesky issue of profitability.


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.

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