Online Banking: Revolution or Devolution

Online banking has been hailed as the future of banking, but with recent cases of card fraud, system crashes and criticism on the usability of the sites, why are customers still flocking to bank this way?

Over the past few years the nature of banking has undergone major changes with the widespread use of new media in lieu of traditional high street banking. This trend began in 1989 with the introduction of First Direct, the first telephone-only bank account. The bank subsequently launched an internet 'branch' in 1999 and WAP is on the way.

It seems as if people just can't get enough of internet accounts. A cluster has appeared in the last few years including Egg from the Prudential, Smile from the Co-operative bank, first-e and most recently Cahoot, set up by Abbey National in June this year. Cahoot was so popular that, on the day that it launched registration collapsed after 45 minutes because of the high demand

There are many advantages to banking this way. Customers tap into their accounts from home whenever it suits. Also getting a higher interest rates for saving money is one of the biggest appeals, using an internet bank in most cases seriously reduces bank charges in many cases there are none at all. Although, currently there is speculation as to how long these online only accounts can afford to give customers preferential rates.

Banks would have us believe that checking funds has never been so easy- as long as the technology is working- this is true. It is inescapable that as daily life becomes busier, controlling money outside working hours, when high street branches are shut, is becoming a necessity.

What do these accounts do?

Most high street banks are now providing an online service for their business account holders. Barclay's in particular is encouraging customers to bank this way, explaining that this is the main reason behind the recent closure of 171 branches nationwide. It is even offering free internet access to online bankers.

Most of the internet facilities allow customers to pay bills, set up standing orders and direct debits as well as check account statements. The transferal of money to other accounts by using BACS, CHAPS and SWIFT is also available depending on the bank. These websites may also have useful information on other finance issues such as loans, insurance and mortgages. Some also provide tailored products such as the Natwest Bankline cash manager, which is a software package used to monitor cash flow or Barclay's is one of the few banks that offers online euro services.

What about security?

This is very similar to a problem faces by the Halifax which was forced to close its internet broker system for half a day in March following a similar problem. However, none of the banks have actually had hackers gain access to accounts and complete fraudulent transactions.

In fact the biggest risk likely to be faced is credit card fraud. But by law the maximum liability for the misuse of a card is by £50. Many cards are now offering protection against internet fraud including Barclaycard, Marble and Egg

So when shopping online, as long as customers stick to the known companies who display the recognized security symbols where personal information is requested, managing money and spending online is safe. It is important to see the locked padlock symbol at the bottom of the screen; this means that all data is encrypted for added security.

How easy is internet banking?

All of the websites contain a series of instructions on how to subscribe online. Many offer virtual demonstrations of how the banking would work - however until an account is registered it is difficult to get a real feel for it, even for users with internet savvy.

Another thing to take into account is that online banking is impersonal and there are times when it will be necessary to speak to someone either about the account or technical problems. It is also important to remember that withdrawing cash or paying in a cheque is impossible online, the world is not yet a cashless society.

When conducting online banking, people do the obvious and merely make sure that they can log on to an account they already have, this is not necessarily the best option. This could mean a possible loss of money as their bank may not give the best interest rates and may charge for services such as overdrafts and clearing cheques, when another won't. Online facilities are far from equal.

Recently, Gomez a US online specialist along with FT Your Money ranked British online banks, taking into account web resources, value for money and customer confidence. Smile came out on top, unfortunately this is not aimed at business users. For now, the only way to make a comparison is to visit each website that offers business products. This can be tedious, however the odds are that if a customer is happy with his/her bricks and mortar branch they will be happy with the internet version as well.

One thing to keep in mind is that the services can only improve thus having a beneficial impact on SMEs. Frustrating queues in branches will be a thing of the past. The key is to learn to use the site for its strengths not its weaknesses, thus tailoring the whole banking process on an individual basis.

This table was compiled: October 2000