Banking

Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a safe place to store extra cash and credit. They offer savings accounts, certificates of deposit, and checking accounts. Banks use these deposits to make loans.

A bank is a financial institution that accepts deposits from the public and creates a demand deposit, while simultaneously making loans. Lending activities can be performed either directly or indirectly through capital markets.



Online banking, also known as internet banking or web banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website. The online banking system will typically connect to or be part of the core banking system operated by a bank and is in contrast to branch banking which was the traditional way customers accessed banking services.
Some banks operate as a "direct bank" (or “virtual bank”), where they rely completely on internet banking.
Internet banking software provides personal and corporate banking services offering features such as viewing account balances, obtaining statements, checking recent transactions, transferring money between accounts, and making payments.

Precursors

The precursor to the modern home banking services were the distance banking services over electronic media from the early 1980s. The term 'online' became popular in the late 1980s and referred to the use of a terminal, keyboard, and TV (or monitor) to access the banking system using a phone line. 'Home banking' can also refer to the use of a numeric keypad to send tones down a phone line with instructions to the bank.

Emergence of computer banking

The first known deployment of home computer banking to consumers came in December 1980 at United American Bank, a community bank headquartered in Knoxville, Tenn. United American partnered with Radio Shack to produce a secure custom modem for its TRS-80 computer that would allow bank customers to access account information securely. Services available in its first year included bill pay, account balance checks, and loan applications, as well as game access, budget and tax calculators and daily newspapers. Thousands of customers paid $25-30 per month for the service.^[1]
Large banks, many working on parallel tracks to United American, followed in 1981 when four of New York's major banks (Citibank, Chase Manhattan, Chemical, and Manufacturers Hanover) offered home banking services,^[2][3][4] using the videotex system. Because of the commercial failure of videotex, these banking services never became popular except in France (where the use of videotex (Minitel) was subsidized by the telecom provider) and the UK, where the Prestel system was used.
The developers of United American Bank's first-to-market computer banking system aimed to license it nationally, but they were overtaken by competitors when United American failed in 1983 as a result of loan fraud on the part of bank owner Jake Butcher, the 1978 Tennessee Democratic nominee for governor and promoter of the 1982 Knoxville World's Fair. First Tennessee Bank, which purchased the failed bank, did not attempt to develop or commercialize the computer banking platform.^[1]

Internet and customer reluctance

When the clicks-and-bricks euphoria hit in the late 1990s, many banks began to view web-based banking as a strategic imperative.^[5] In 1996 OP Financial Group, also a cooperative bank, became the second online bank in the world and the first in Europe.^[6] The attraction of banks to online banking are fairly obvious: diminished transaction costs, easier integration of services, interactive marketing capabilities, and other benefits that boost customer lists and profit margins. Additionally, online banking services allow institutions to bundle more services into single packages, thereby luring customers and minimizing overhead.
A mergers-and-acquisitions wave swept the financial industries in the mid- and late 1990s, greatly expanding bank's customer bases. Following this, banks looked to the Web as a way of maintaining their customers and building loyalty. A number of different factors are causing bankers to shift more of their business to the virtual realm.
While financial institutions took steps to implement e-banking services in the mid-1990s, many consumers were hesitant to conduct monetary transactions over the internet. It took widespread adoption of electronic commerce, based on trailblazing companies such as America Online, Amazon.com and eBay, to make the idea of paying for items online widespread.
By 2000, 80% of U.S. banks offered e-banking. Customer use grew slowly. At Bank of America, for example, it took 10 years to acquire 2 million e-banking customers. However, a significant cultural change took place after the Y2K scare ended.
In 2001, Bank of America became the first bank to top 3 million online banking customers, more than 20% of its customer base.^[7] In comparison, larger national institutions, such as Citigroup claimed 2.2 million online relationships globally, while J.P. Morgan Chase estimated it had more than 750,000 online banking customers. Wells Fargo had 2.5 million online banking customers, including small businesses. Online customers proved more loyal and profitable than regular customers. In October 2001, Bank of America customers executed a record 3.1 million electronic bill payments, totaling more than $1 billion. As of 2017, the bank has 34 million active digital accounts, both online and mobile.^[7] In 2009, a report by Gartner Group estimated that 47% of United States adults and 30% in the United Kingdom bank online.^[8]
The early 2000s saw the rise of the branch-less banks as internet only institutions. These internet-based banks incur lower overhead costs than their brick-and-mortar counterparts. In the United States, deposits at most direct banks are FDIC-insured and offer the same level of insurance protection as traditional banks.

First online banking services by region

The United Kingdom

Online banking started in the United Kingdom with the launch of Nottingham Building Society (NBS)'s Homelink service in September 1982, initially on a restricted basis, before it was expanded nationally in 1983.^[9] Homelink was delivered through a partnership with the Bank of Scotland and British Telecom's Prestel service.^[10] The system used Prestel viewlink system and a computer, such as the BBC Micro, or keyboard (Tandata Td1400) connected to the telephone system and television set. The system allowed users to "transfer money between accounts, pay bills and arrange loans... compare prices and order goods from a few major retailers, check local restaurant menus or real estate listings, arrange vacations... enter bids in Homelink's regular auctions and send electronic mail to other Homelink users."^[10] In order to make bank transfers and bill payments, a written instruction giving details of the intended recipient had to be sent to the NBS who set the details up on the Homelink system. Typical recipients were gas,
electricity and telephone companies and accounts with other banks. Details of payments to be made were input into the NBS system by the account holder via Prestel. A cheque was then sent by NBS to the payee and an advice giving details of the payment was sent to the account holder. BACS was later used to transfer the payment directly.

The United States

In the United States in-home banking was "is still in its infancy" with banks "cautiously testing consumer interest" in 1984, a year after online banking went national in the UK.^[10] At the time Chemical Bank in New York was "still working out the bugs from its service, which offers somewhat limited features".^[10] The service from Chemical, called Pronto,
was launched in 1983 and was aimed at individuals and small businesses. It enabled them to maintain electronic checkbook registers, see account balances, and transfer funds between checking and savings accounts. The other three major banks — Citibank, Chase Bank and Manufacturers Hanover — started to offer home banking services soon after. Chemical's Pronto failed to attract enough customers to break even and was abandoned in 1989. Other banks had a similar experience.
Since it first appeared in the United States, online banking has been federally governed by the Electronic Funds Transfer Act of 1978.^[11]

France

After a test period with 2,500 users starting in 1984, online banking services were launched in 1988,^[12] using Minitel terminals that were distributed freely to the population by the government.
By 1990, 6.5 million Minitels were installed in households. Online banking was one of the most popular services.
Online banking services later migrated to Internet.

Japan

In January 1997, the first online banking service was launched by Sumitomo Bank.^[13] By 2010, most major banks implemented online banking services, however, the types of services offered varied.^[13] According to a poll conducted by Japanese Bankers Association (JBA) in 2012, 65.2% were the users of personal internet banking^[13].

Banks and the World Wide Web

Around 1994, banks saw the rising popularity of the internet as an opportunity to advertise their services. Initially, they used the internet as another brochure, without interaction with the customer. Early sites featured pictures of the bank's officers or buildings, and provided customers with maps of branches and ATM locations, phone numbers to call for further information and simple listings of products.

Interactive banking on the Web

In 1995, Wells Fargo was the first U.S. bank to add account services to its website, with other banks quickly following suit. That same year, Presidential became the first U.S. bank to open bank accounts over the internet. According to research by Online Banking Report, at the end of 1999 less than 0.4% of households in the U.S. were using online banking. At the beginning of 2004, some 33 million U.S. households (31%) were using some form of online banking. Five years later, 47% of Americans used online banking, according to a survey by Gartner Group. Meanwhile, in the UK online banking grew from 63% to 70% of internet users between 2011 and 2012.^[27] By 2018, the number of digital banking users in the U.S. reached approximately 61 percent.^[28] The penetration of online banking in Europe has been increased as well. In 2019, a date shows that 93 percent of the Norwegian population access online banking sites, which is the highest in Europe, followed by Denmark and Netherlands.^[29] Across Asia, more than 700 million consumers are estimated to use digital banking regularly, according to a 2015 survey by McKinsey and Company.^[30]

Operation

To access a financial institution's online banking facility, a customer with internet access will need to register with the institution for the service, and set up a password and other credentials for customer verification. The credentials for online banking is normally not the same as for telephone or mobile banking. Financial institutions now routinely allocate customers numbers, whether or not customers have indicated an intention to access their online banking facility. Customer numbers are normally not the same as account numbers, because a number of customer accounts can be linked to the one customer number. Technically, the customer number can be linked to any account with the financial institution that the customer controls, though the financial institution may limit the range of accounts that may be accessed to, say, cheque, savings, loan, credit card and similar accounts.
The customer visits the financial institution's secure website, and enters the online banking facility using the customer number and credentials previously set up.
Each financial institution can determine the types of financial transactions which a customer may transact through online banking, but usually includes obtaining account balances, a list of recent transactions, electronic bill payments, financing loans and funds transfers between a customer's or another's accounts. Most banks set limits on the amounts that may be transacted, and other restrictions. Most banks also enable customers to download copies of bank statements, which can be printed at the customer's premises (some banks charge a fee for mailing hard copies of bank statements). Some banks also enable customers to download transactions directly into the customer's accounting software. The facility may also enable the customer to order a cheque book, statements, report loss of credit cards, stop payment on a cheque, advise change of address and other routine actions.