Virtual Banking

TABLE OF CONTENTS

01.00............ EXECUTIVE SUMMARY
02.00............ TRENDS IN RETAIL BANKING
03.00............ ABOUT THE INTERNET
04.00............ VIRTUAL BANKING AND APPLICATIONS
04.01............ SMART CARDS
05.00............ EXAMPLES
06.00............ SECURITY ON THE INTERNET
06.01............ CRYPTOGRAPHY
06.02............ FIREWALLS
06.03............ TRUSTED OPERATING SYSTEMS
07.00............. REGULATIONS AND PROBLEMS
08.00............ CONCLUSION .

09.00………. REFERENCES

01.00 EXECUTIVE SUMMARY

The Internet is emerging as an efficient delivery channel for financial services.
With Internet banking, customers do not need to have special bank-issued
software. Banks maintain their identity and can differentiate themselves by
customizing the services and information they provide over the Internet.

02.00 TRENDS IN RETAIL BANKING

What does better customer mean? Increasingly, customers are demanding more
convenient ways to do their banking. An Ernst and Young study (Technology in
Banking Report) concluded that "nothing changes in the banking world if
customers cannot get financial services when and where they wish...this means
anywhere, at any time." Statistics show that ATM's, telephone banking, and home
banking account for over fifty percent of all banking transactions today, and
total non-branch activity is growing at fifteen percent a year. In one survey
(Web-Tech, Inc., May 17, 1995), eighty-two percent of 18- to 34-year olds polled
preferred banks with 24-hour service.

Customers are also demanding a more sophisticated mix of products
tailored specifically to their financial needs, and non-bank competitors are
better fulfilling these needs. Banks today hold only 20% of household financial
assets, versus 34% twenty years ago; they have 30% of business deposits, versus
42% only seven years ago. Nonbank credit card providers have gained inroads
against banks, holding a 25% market share versus 5% in 1986 (WebTech, Inc., May
17, 1995).

Internet banking offers an attractive solution to this redesigned products and
services. Customers have 24-hour graphical-interface access to their accounts
and appreciate that their bank is doing something to make banking easier for
them.

03.00 ABOUT THE INTERNET

The Internet has exploded in the last two years thanks to the invention of the
so-called "browser." A browser is a point-and-click software program that allows
"surfers" to navigate around the Internet without knowing any UNIX commands. The
first browser was developed by the National Center for Supercomputing
Applications, a government agency. With a browser and access to the Internet,
you can order a pizza, listen to and purchase a CD, stroll through the Louvre,
or view satellite photographs of Scotland.

Although it may get congested from time to time, the Internet itself is
extremely reliable. There is not actually any one network that is the Internet;
it is made up of thousands of networks that connect to each other through common
routes, and they all agree to carry each other's traffic. There is a lot of
money flowing up from local access providers to these national players,
guaranteeing that the infrastructure will continue to expand to meet demand.

Because so many resources are shared, the Internet is also very efficient. It
costs a lot less to connect a business to the Internet than to lease telephone
lines that customers dial into with their modems. Most likely Internet users
will continue to be charged for the size of the "pipe" connecting them to the
Internet.

The number of commercial entities with an Internet presence doubled in the first
three months of 1995. Modems will keep getting faster, allowing more information,
better graphics, and full-motion video to be downloaded more easily. However, in
five years most households will probably buy their Internet access from their
cable company, who will provide them with a 10 megabit-per-second connection
through their cable wire. A 10-MB connection would download in one second a file
that takes a 28.8K modem five and a half minutes to download (WebTech, Inc., May
17 1995).

04.00 VIRTUAL BANKING AND APPLICATIONS

Picture a bank without any branches. No tellers. No rows of desks. no racks of
brochures, no automated teller machines outside. Picture, in fact, a virtual
bank, one that for the customer exists only in his or her office or home, as
images on a computer screen. US financial institutions are moving towards
"virtual banking." This strategy is about making bank products and services
available to customers any time and any place they want them. As virtual banking
becomes more popular, it is very likely that more customer service will be seen
while the number of traditional teller-staffed branches will decline. Bank
customers will move away from traditional banking and will become more dependent
on electronic transactions using ATMs or PCs (Britt, Savings&Community Banker,
February 1995, p.9).

Thanks to the revolution, financial institutions are using software programs,
online services, and even the Internet to allow customers to check balances, pay
bills, and transfer funds among accounts, Bankers promise that, in the near
future, we will also be able to more easily buy certificates of deposit, mutual
funds, and other investments, and even apply for loans electronically.

For most people, today's best option may be plug into their bank through one of
three leading home-budgeting software programs: Intuit's Quicken, Microsoft
Money, and Managing Your Money.

By charging $5 to $20 a month for such services, banks are sure to cash in on
the high-tech superhighway. For customers, the job is made easy. All that is
required is a personal computer, software and a modem. On-screen instructions,
laden with colorful graphics and pictures, explain how to select and work on
various tasks. The system automatically calculates and updates account balances
and keeps records of bills.

A handful of banks have already set up home pages on the Internet to provide
information to their existing and potential customers about upcoming services.
They started their transactions. Internet banking differs from the traditional
PC banking model in several ways. In most home banking ventures, the bank sends
an application software program to the customer which runs on the customer's PC.
The customer then dials into the bank with their modem, downloads data, and runs
the programs that are resident on their computer, perhaps sending back a batch
of requests such as transfers between accounts. It demands more and more space
and speed from the customer's computer. With Internet banking, on the other hand,
there are potential customers who already have all the software they need to do
their banking, since all they need is a browser. The actual banking software
resides on the bank's server in the form of their home page. This software can
be updated at any moment with new information, such as new prices or products,
without having to send anything to the customer; it can also continue to expand
and become more sophisticated without becoming cumbersome for the customer to
operate. Banking with a browser, on the other hand, involves a continuous,
interactive session, initiated by a local telephone call to a local access
provider or online service.

A home page in the Internet is not only a customized product tailored
specifically for that bank's customers, but an advertisement for the bank as
well.

Early entrants in the Internet banking market will benefit on multiple fronts.
These banks will appeal to a vast new potential market who represent an
attractive demographic segment: educated, professional, affluent. These new
customers will save banks money because they will visit branches less frequently
and will switch from paper to electronic transactions. More importantly, by
developing internal expertise today, banks can position themselves to react
quickly to competitive moves and consumer trends as the financial services
industry evolves. These banks will see the benefits of early players and they
will enjoy the public relations boost that comes from being a market
leader(WebTech, Inc., May 17, 1995).

INTERACIVE APPLICATIONS

In Columbus, Ohio, Huntington Bancshares Inc. has put its stamp on the virtual
bank concept with Huntington's Access, an automated branch office that's always
open. The Access branch houses both traditional and advanced-function automated
teller machines that use imaging technology to display deposited checks for
verification and to cash a check to the nearest dollar. Also on site is the
Personal Touch screen, interactive video kiosks where customers can conduct a
variety of transactions. At the touch screen, customers are able to talk face to
image with a customer service representative. Banks find themselves facing a
window of customer opportunity. "In a lot of their other business transactions,
the retail customer in general is learning to self-serve. And, of much more
importance, he or she is learning to self-sell," says George Bollenbacher,
manager of strategy and business development for worldwide financial services at
Unisys Corp. In short, they are ready for self-banking. Some progressive banks
already have a presence on the World Wide Web. Wells Fargo Bank of San Francisco
gives customers access to current account balance information and transaction
histories at its Web site Using browsers from Netscape Communications Corp.
First Union Bank, in alliance with Open Market Inc. plans by year's end to offer
full Web transaction services to its 10 million customers (Kay, A.,
Communications Week, August 14, l995, p.36-40).

05.00 SMART CARDS

Employees at Bank of America, Chemical, Wells Fargo, and other large U.S. banks
use them to buy lunch and snacks. Smart cards-plastic cards with computer chips-
are starting to be used for prepayment, debit, and credit purchases all over the
world. In the U.S., smart cards can be only used at a contained group of
machines, or for one purpose. "They are part of the broader shift to electronic
delivery, to making ATMs more functional, to using PCs and the Internet to do
home banking, to going to POS terminals to get cash back, to getting electronic
benefits transfer off a card." says Edgar Brown, senior vice- president of
alternative delivery products at First Union, Charlotte, N.C. One of the
advantage of using chips on cards with or instead of magnetic stripes is better
security. Microprocessor chips are very difficult to alter or forge. Chips can
carry more information than magnetic stripes can. A microprocessor chip can
store up eight kilobytes of data. Smart cards make possible cheaper and faster
payments. Money can be deducted from a chip without on-line authorization. This
makes for a two-second transaction versus an up-to-two-minutes one, and
telecommunications costs are saved (Lunt, P., ABA Banking Journal, September
1995, p.46).

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