Cyberlaw Encyclopedia

On-line Banking

By Alan Gahtan - May 23, 1997

Until fairly recently, use of the Internet by banks has been to provide static information about the institution and their products. Their Internet Web sites were primarily a collection of product brochures and press releases. However, a number of both large and small Canadian banks have recently begun experimenting with using the Internet as an alternative delivery channel to provide full-fledged banking services.

Most Canadian banks have been offering electronic banking services accessible through personal computers by customers for some time. These typically require customers to use proprietary software and/or use a private communication network. However, access to banking services through the Internet provides a number of advantages and a number of Canadian financial institutions have recently launched Internet banking services. Examples include the Royal Bank’s Royal Direct, Canada Trust’s EasyWeb and Bank of Montreal’s mbanx.

Unlike PC banking, Internet banking does not require proprietary software or access to a private network. Any customer who has arranged their own Internet access facilities can participate. One effect of the trend towards Internet banking is to level the playing field so that even smaller financial institutions can offer the type of sophisticated services customers would normally expect only from a large bank.

Internet banking isn’t just restricted to some of the country’s largest financial institutions. Some of the more regional players, such as credit unions, are also making their mark. In some cases, the smaller size of these institutions has allowed them to out-manoeuvre some of their larger competitors. Citizens Bank of Canada, a subsidiary of Vancouver City Savings Credit Union, set up shop on the Internet last year. More recently, HEPCOE Credit Union, the eighth largest credit union in Canada, launched its Internet banking service on April 30, 1997.

Unlike some of its competitors, the HEPCOE on-line banking facility provides a number of functional improvements. One nice touch is a relationship summary screen which shows a customer’s current balances for various accounts, term deposits, RRSPs, loans and mortgages. A click on any of these balances provides access to a transaction history that can span several years (compared to some on-line banking facilities where access is only available to transactions made in the current month). Coming soon are on-line applications for various banking products.

Offering services through the Internet can be especially appealing to financial institutions whose "members" are not located near branches. In HEPCOE’s case, over 15,000 of their 65,000 members do not live near one of HEPCOE’s 18 branches.

In addition to providing existing customers with access to banking services, Web sites operated by financial institutions may also be used to solicit new customers. For instance, Bank of Montreal’s Web site invites visitors to apply on-line for one of the Bank’s credit card products. In some cases, a decision can be provided within minutes. Some US banks have gone one step further and allow new customers to even open a chequing or savings account on-line.

Some of these new on-line banks are attempting to portray themselves as "virtual banks". A virtual bank is one where customers are serviced exclusively through electronic channels other than tradition brick and mortar branches. Others see the Internet as simply one more tool to provide greater convenience to their customers.

An American study conducted last year by Booz-Allen projects that by the year 2000, 16 million US households will be using Internet banking. While these numbers do not appear to be significant as compared to the total population, each Internet user is projected to be 50-250% more profitable than the average banking customer. It is expected that these Internet customers will be some of the banking system’s most profitable customers representing close to 30% of all retail banking profits. The study projects that by 1999, 1,500 banks will have Internet Web sites and at least 500 of these banks will be offering full-fledged Internet banking services.

The impact of a growing selection of Internet banking alternatives will likely be to turn such service into a commodity. All banks on the Internet will have the same geography, hours of operation and, presumably, equivalent service levels. Some will attempt to compete on price. Others will attempt to compete by developing and offering new and different products. For instance, mbanx offers a number of mortgage options not offered by Bank of Montreal through its traditional branch distribution network.

Increased competition and the ability to update materials almost instantaneously will likely mean shorter new product development cycles and possibly an increased level of innovation. Legal advisors will be under increasing pressure to provide quicker turn around time.

Financial institutions proposing to provide services through the Internet are having to confront a number of legal issues. These include the problems of authentication, electronic formation of contracts and issues related to the creation and protection of content being provided on a financial institution’s Web site.

Regulators are also taking an interest as foreign financial institutions are increasingly able to solicit domestic residents. As well, the potential that electronic cash will be increasingly adopted as a medium of exchange for transactions conducted across the Internet is raising concerns that existing forms of regulation may not be adequate.

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