Impact of Internet Banking on Security

Internet banking: history, features and technology, benefits and risks, and the future

Internet banking, despite its relatively brief existence and despite several disadvantages, offers a broad suite of features and resulting benefits to banking customers as well as banking institutions, features and benefits that promise to expand in the future. Evidence from a broad spectrum of research sources—professional journals, magazines, newspapers, reference material, legislative testimony, results of previous research, and commercial web sites—serve to support this thesis.

Brief histories of banking and the Internet are presented, first, as a foundation for discussing the convergence of the two in the mid-1990sinto what became known as Internet banking. From there, Internet banking is shown to have expanded geographically and, within the industry, to banks of all sizes.

Expansion has also occurred in terms of available Internet banking features supported by new technologies that opened new opportunities. Benefits from Internet banking are shown to be available to banking customers as well as banking institutions, and risks, such as those posed by security breaches, challenge customers and banks. Most sources seem to predict a bright future for Internet banking.

This dissertation adds to the existing body of knowledge by demonstrating how the historical development of Internet banking, ever-expanding features, introduction of new technologies, increasing benefits, and a focus on improving security to mitigate risks point to increased growth in Internet banking in the future.

Another contribution made by this dissertation to existing knowledge is the synthesis of features identified in existing sources into comprehensive listing to provide a complete generic view of available services. This listing may be used by customers or others as a basis for evaluating the features offered by various banking institutions and by future researchers as a benchmark for assessing growth in Internet banking.

Glossary

Banking. “The business of dealing in money and instruments of credit” (Columbia Encyclopaedia, 2004).

Bricks and Mortar. “A store (shop, supermarket, department street.) in the real world” (Computer Desktop Encyclopaedia, 2001).

Browser Cache. “A temporary storage area in memory or on disk that holds the most recently downloaded Web pages ” (Computer Desktop Encyclopaedia, 2001).

Clicks and Mortar. “Refers to businesses that offer online services via the Web as well as the traditional retail outlets (offline) staffed by people” (Computer Desktop Encyclopaedia, 2001).

Cyber banking (Cyber Banking). A term used to describe all types of electronic banking including the Internet, personal digital assistant(PDA), land-line telephones, mobile telephones, kiosks, and automated teller machine (ATM) (Cyber banking, 2005).

Cyber crook (Cybercriminal). “A person who gains illegal entrance into a computer system or who diverts financial transfers into his or her own account” (Computer Desktop Encyclopaedia, 2001).

E-Commerce. “The transfer of funds, goods, services, and information online—either over the Internet or across private networks (e.g. Intranets or extranets)” (Leonard, 1998).

Extranet. “Corporate intranet that has been extended beyond the usual company boundaries to include major customers or suppliers”(Hutchinson Dictionary of Computing, Multimedia, and the Internet,1998).
Internet. An “international computer network linking together thousands of individual networks at military and government agencies, educational institutions, non-profit organizations, industrial and financial corporations of all sizes, and commercial enterprises (called gateways or service providers) that enable individuals to access the network”(Columbia Encyclopaedia, 2004).

Internet Banking. “The use of the Internet as a remote delivery channel for banking services” (Has an, p. 6).
Intranet. “An in-house web site that serves the employees of the enterprise. Although intranet pages may link to the Internet, an intranet is not a site accessed by the general public” (Computer Desktop Encyclopaedia, 2001).

Keyboard Logging. “Software installed by a cybercriminal on computer without the computer user`s knowledge, through e-mails, e-mail attachments, Trojans, or Internet downloads. The keyboard logger can then capture passwords or other security and personal information and send it back over the Internet to the fraudsters.” (M2 Press wire, 2005)

Network. “Two or more computers connected for the purpose of routing, managing, and storing rapidly changing data” (Columbia Encyclopaedia, 2004).

Personal Digital Assistant (PDA). “Lightweight, hand-held computer designed for use as a personal organizer with communications capabilities” (Columbia Encyclopaedia, 2004).

Point and Click. The “basic method of navigating a web page or multimedia CD-ROM. The user points at an object using a cursor and amuse, and clicks to activate it.” (Hutchinson Dictionary of Computing, Multimedia, and the Internet, 1998)
Portal. “A gateway site typically offering a search engine but also variety of other services, such as free e-mail (sometimes free voicemail as well), chat, instant messaging, news services, stock updates, weather reports, real estate listings, yellow pages, people finders, TV and movie listings, shopping, and even tools to create and post (personal) Web page” (World Almanac and Book of Facts, 2001).

Screen Keyboard. “A virtual keyboard displayed (at the) sign-on Internet site. Customers use the computer mouse to enter their password into the screen keyboard, preventing keyboard loggers (from) capturing the password since the physical keyboard (is not) being used.” (M2Presswire, 2005)
World Wide Web. “Collection of globally distributed text and multimedia documents and files and other network services linked in such a way as to create an immense electronic library from which information can be retrieved quickly by intuitive searches” (Columbia Encyclopaedia, 2004).

Chapter 1 Introduction

“The banking industry of the 21st century is being shaped by an unprecedented combination of pressures. Competition within the industry increasingly is augmented by competition from new participants that are able to target selectively segments of markets traditionally served by banks. Largely gone are regulatory regimes that shielded banks from external competition, or provided unique competitive advantages. Competition is not merely regional or national, but global.
Compounding all this, advances in technology are fundamentally changing the nature of how information is created, processed, and delivered–the heart of what banks do.”
—Gillespie (1997)

Gillespie’s quotation establishes a context for this dissertation through his articulation of the factors that are changing banking in the new century—increased competition from established and new banking organizations without consideration of political or geographic boundaries, reduced regulation, and application of new technologies. It’s the new technologies that are being applied in banking that this dissertation explores with a focus on Internet banking.

The dissertation will show that Internet banking, despite its relatively brief existence and despite some disadvantages, offers abroad suite of features and resulting benefits to banking customers as well as banking institutions, features and benefits that promise to expand in the future. A foundation will be established through a review of existing knowledge on the history of Internet banking (Chapter 2).

Then, existing knowledge on the features of and technology applied in Internet banking (Chapter 3), benefits and risks of Internet banking(Chapter 4), and the future of Internet banking (Chapter 5) will then be explored. Finally, conclusions about the current state of and future possibilities for Internet banking will be presented.
A research methodology was applied in preparing this dissertation. Because the field of Internet banking is relatively young—extending only about ten years into the past—and, because the technology is advancing so rapidly, the bulk of the research was performed using professional journals, magazines, newspapers, legislative testimony, results of previous research, and commercial web sites.

Encyclopedias, dictionaries, and other reference material were used as sources for definitions and other descriptive information. Most references will beta Internet banking in the United States as this form of banking is most popular in that country in terms of sheer numbers (United Press International, 2001) and, thus, has benefited from the most study of its usage. The approach to presenting reviews of existing knowledge represents a logical progression from establishing a historical foundation followed by building a framework of the features, technology, benefits, and risks associated with Internet banking. The capstone of the research segment of this dissertation will be a presentation of selected existing knowledge on the future of Internet banking.

Before beginning the exploration of the history of Internet banking, there is a matter of semantics that should be addressed. Online banking, PC banking, computer banking, home banking, electronic banking, or Internet banking—these are all names used to denote remote banking using a personal computer which connects to the bank’s computer using a telecommunications utility (Harper, 2000). Cyber banking(sometimes referred to by its component words, cyber banking), which Isa relatively new term, is also used. Although these various terms are often used interchangeably, they are not always synonymous.

For instance, the term PC banking can be used to denote the use of proprietary software to connect directly to the financial institution, whereas Internet banking (the term that will be used in this context)is defined as “use of the Internet as a remote delivery channel for banking services” (Has an, 6). The difference between the two terms is that the latter uses the Internet as a communications medium and the former does not. Cyber banking is a more encompassing term that refers to all types of electronic banking including the Internet, personal digital assistants (PDAs), land-line telephones, mobile telephones, kiosks, and automated teller machines (ATMs) (Cyber banking, 2005).

Internet banking is a segment of the much larger technological world of what is known as e-commerce. E-commerce, in simple terms, is “the transfer of funds, goods, services, and information online—either over the Internet or across private networks (e.g., intranets or extranets)”(Leonard, 1998). E-commerce, then, encompasses PC banking and Internet banking as well as home banking, computer banking, electronic banking, and cyber banking.

Chapter 2 Historical Development of Internet Banking

Internet banking is but the latest episode in the saga of banking, a story that traces its roots to ancient times. This chapter begins with a brief discussion of the birth and evolution of banking, which Columbia Encyclopaedia (2004) defines as “the business of dealing in money and instruments of credit.” Following the introduction to banking, a brief presentation on the history of the Internet, which the same source defines as the “international computer network linking together thousands of individual networks,” will be offered. These separate discussions of the history of banking and the Internet will then converge into a presentation of selected existing knowledge on the relatively recent history of and developments in Internet banking.

Historical Development of Banking and the Internet

The Columbia Encyclopaedia (2004) traces banking back to its simple beginnings as it was practiced in temples in Egypt, Babylonia, and Greece. “Bankers” of the time accepted deposits of gold and silver then made loans of these deposits, charging high interest rates for their lending services. By 600 B.C., private banking was born then later developed by the Greeks, Romans, and Byzantines. The predecessors of modern banks were chartered for specific purposes. For instance, in1171, the Bank of Venice was chartered to make government loans and, in1609, the Bank of Amsterdam was chartered to receive gold and silver deposits. Each society established its own variations on the banking theme to support its economic and social life.

Switching now to a discussion of the origin and evolution of the Internet, Leonard (1998) recounts its birth in the 1960s “as a defense department and academic research tool.” She continues her story of the history of the Internet by describing its evolution by the 1990s into a more user-friendly communications method that provided ready access to “entertainment-related content” and information. Later, with the addition of security measures, the Internet became a “transmission media” for e-commerce and for transforming the way governments and the private sector interface with the individuals and communities they serve. The Hutchinson Dictionary of Computing, Multimedia, and the Internet (1998) furnishes more detail about the history of the Internet, stating that it began as an effort by scientists in the United Sates to develop a data-sharing network that could withstand a-bomb attack or other disaster. Later, in the 1980s, the Internet grew as universities implemented mechanisms to share facilities and information. But it was the establishment of the World Wide Web in the1990s that fuelled the current expansion of Internet availability to many, many people in virtually every part of the world.

Historical Development of Internet Banking

“You can bank on it. Banking at home could be the first profitable breakthrough on the information superhighway.” So wrote Lackey more than ten years ago, in 1994. His words turned out to be prophetic. This segment consists of a presentation of existing knowledge on the historical developments in Internet banking.

In the early days of electronic banking, dial-up services that connected directly to the bank’s computer system using telephone lines were used (Hogarth, 2004). This was before the Internet was used extensively by individuals. One example of this, dating from 1995, was at Barclays Bank. Barclays’ service required that customers have computer and modem, run a proprietary Microsoft Windows application, and access a central number to perform computer banking transactions.

Even a decade ago, Barclays was already offering these services: making bill payments, obtaining interim statements, requesting balance inquiries, and transferring funds (Gold, 1995). And, in 1995, First Interstate Bank in the United States began seven-day, 24-hour per day online banking services with the following features (Cambridge Telecom Report, 1995): (1) access to checking, savings, money market, overdraft protection, credit line and credit card accounts and balance information; (2) transfer of funds between accounts; (3) payment of bills through a service without writing a check; (4) downloads of statement information into customers’ personal computers; and (5)receipt of answers to questions through a built-in private e-mail system.

Even in the mid-1990s, banking institutions were already exploring new technology as Moral (1994) wrote: “Developments in home banking have pushed the banking industry to develop its communication technology and have triggered an increasing number of alliances with credit card services, banks and communication technology vendors.”

Then came the Internet, featuring the World Wide Web, to banking customers everywhere. Garvin (2000, citing American Banker Community Banking, 1999) claims that the Internet, as a communications medium, is growing faster than either television or radio grew in their early years. With the popularization of the Internet, according to Hogarth(2004), in the United States “the use of electronic banking became more widespread among…households between 1995 and 2003 while the proportions of households using traditional (non-electronic) banking methods declined.”

Hogarth (2004) contends that computer banking grew by a factor of five in the six-year period from 1995 until 2001 and by a factor of three between 1999 and 2003. She added a caveat that “a large proportion of consumers still conduct at least some banking business ‘in person’.” Hogarth (2004) establishes a correlation among personal computer ownership, Internet access (especially high-speed Internet access), higher income levels, awareness of available Internet banking services, and the use of Internet banking. Newman (2005) also establishes a parallel between high-speed Internet access and growth in the use of Internet banking.

Larger banks were the first to offer Internet banking services to customers. The Xinhua News Agency reported in 1999 that large banks were “early adopters” of Internet banking technology but that community banks were beginning to offer it. Grim (1997) writes that Internet banking “is growing at the top and bottom of the financial food chain, “referring to its adoption by larger banks as well as smaller ones. Community banks, typically smaller banks without branches, were slow to accept Internet banking. In 1998, Marshall stated: “Internet banking is still far from a common—and many would say, necessary—product, especially for community banks,” citing as reasons the lack of financial resources and know-how as well as the question as to whether Internet banking would be profitable.

Just one year later, Gold (1999)claimed that community banks were a driving force in Internet banking and that technology had offered an “electronic equalizer” for smaller banks to more effectively compete with larger ones. Davidson (2000)states that Internet banking may play a “pivotal” role in helping community banks to compete with larger banks, particularly in deriving what he suggests is more than half of their revenues from nontraditional bank services. The Chairman of the United States Federal Reserve in Chicago Michael Moscow confirmed comments by Gold and Davidson in a 2001 speech (EFT Report, 2001):
“While smaller banks traditionally have been at a disadvantage by comparison to their larger competitors, the Internet has served to level the playing field to some degree.”
“By forging cooperative alliances with technology, insurance, brokerage and other firms, many small banks are keeping pace with larger organization(s). Larger banks can utilize their brand identity and larger budgets for technology and marketing, but smaller banks often better understand the needs of their customers and respond quickly with personalized service.”

The downside effects of a lack of financial resources and know-how in community banks may be mitigated by third-party Internet vendors that furnish their systems and expertise to multiple banking institutions. Teresina (2001) confirms Gold’s statement about the role of third-party vendors in assisting smaller banks in competing with larger ones using Internet banking. In 1999, Gold wrote that Internet banking had gone “mainstream.” Interestingly, the reasons why large banking institutions and smaller community banks enter the Internet banking arena may be quite different.

Europe media (2002) reports: “The electronic banking sector is not particularly attractive to large, strong banks that have been active in the market for several years. Internet banking constitutes an opportunity for smaller banks aggressively prospecting for clients to spread their strengths. For traditional banks, the electronic channel is a defensive, not an offensive weapon.”

Up to this point, the historical development of Internet banking has focused on banks that offer Internet banking in addition to services offered in their physical banking locations. But a new age in banking is dawning—the virtual bank. This phase of continuing banking evolutionist dramatically different from traditional banking. Contrasted to traditional banks that only offer services from physical banking locations (known as bricks and mortar banks) and banks that offer services from physical banking locations and via the Internet (known as clicks and mortar banks), virtual banks offer no services from physical banking locations; instead, their services are only available to Internet customers (italicized terms quoted from Computer, 2001).

Intelligent Finance (2005) is one example of a virtual bank offering savings and investment accounts, mortgages, personal loans, credit cards, and insurance. Other Internet-only virtual banks have such intriguing names as Egg and Cahoots (Pritchard,2002). ING Direct is an example of a virtual bank thriving in today’s Internet banking market. ING DIRECTV’s web site touts the following benefits of their banking institution (ING Direct, 2005):
• great interest rates;
• no fees;
• no minimums;
• 24-hour access to accounts;
• fast account opening (less than five minutes); and
• mortgages and certificates of deposits.

ING Direct splits the cost savings it realizes from Internet banking with its customers by offering higher interest rates. ING Direct has spent millions of dollars on marketing in an effort to convince prospective customers to use the Internet as their banking gateway(Australian Banking & Finance, June 16, 2003).

Another relatively new development is the introduction of Internet banking services for personal digital assistants, or PDAs. M2 Press wire reported in 2001 that Nationwide, which was the first institution to offer Internet banking in the United Kingdom in 1997, was enhancing its PDA services to include account transfer and bill payment features. Now Internet banking customers can have bank account access while “on the go”; they are no longer required to access their accounts from a fixed computer location with a hardwired telecommunications connection.

Feign (2004) provides some interesting statistics about the use of Internet banking in the United States today:

• Employees at work use Internet banking extensively; it is the fifth most popular type of Internet site visited for personal business(Feign, 2004, citing the Harris Interactive Web at Work Study, 2004).

• The top three uses of Internet banking (with the percentage of users who avail themselves of the services) are account monitoring (95percent), funds transfer between accounts (64 present), and bill payment (55 present) (Feign, 2004, citing the Michigan Survey Research Centre’s Surveys of Consumers, 2003).

• Convenience was given as a very important reason for using Internet banking by 79 present of users with 71 present of users citing time savings as very important. Another very important factor was24-hour availability of Internet banking services (Feign, 2004, citing the Federal Reserve Bulletin, U.S. Consumers and Electronic Banking1995-2003, 2004).

A spokesperson for the Pew Internet and American Life Project states that “of all the major Internet activities tracked by Pew since March2000, online banking has grown the fastest” (Newman, 2005). The New Hampshire Business Review (2000) cites several reasons for the increasing popularity of Internet banking: the reduction in concerns about Internet security, greater public confidence in conducting business over the Internet, the convenience offered to Internet banking customers, the low cost to customers of obtaining and using Internet banking, and the declining costs to banks associated with installing Internet banking.

In 2000, Robinson reported that, despite marketing efforts by banks in the United States, there has not been the massive move to Internet banking that they would have preferred. To prove her point, she states that, although fifty present of American homes have computers, only five present avail themselves of Internet banking services.

And, many people who try Internet banking later abandon it. Stains (2001) writes that despite predictions of “a cashless and checkless society,” in the United States, electronic transactions “still constitute only a small fraction of all payments made,” although she adds that “the rate of growth of electronic payments is estimated to exceed that of paper checks.” Greenfield (2000) seems to confirm the statements made by Robinson and Stains. He states that the reality of Internet banking has not met the expectations and gives Internet banking the following narrative report card:

“Leaders in Internet banking offer a wide range of services, full integration of the Internet with other delivery channels, intensive marketing of their Internet service and strong customer service support.”
“But a gap looms between the leaders and what smaller banks can offer. Internet banking, often considered a way for community banks to draw even with their big city competition, could actually widen the gap between them.”
Others contend that Internet banking is making significant inroads.

In 2003, Hielscher furnished the following statistics on the top ten banks in the United States based the number of customers who use the service:(1) Citibank (7,600,000); (2) TD Bank/Canada Trust (4,500,000); (3)Bank of America (4,400,000); (4) Wachovia (4,000,000); (5) Wells Fargo(3,300,000); (6) Bank One (3,200,000); (7) Fleet Boston (2,600,000);(8) Chase (2,200,000); (9) US Bancorp (1,400,000); and (10) Fifth Third(1,000,000).

Recently, Lohse (2005) reported that those people who have tried Internet banking in the United States grew by 47 present over the past two years. She attributed much of this growth to increases in the number of men, “tech-savvy” younger adults, and affluent households that pay their bills and manage their finances online. Lohse states: “In the past two years, men are more likely to handle their banking online than women—49 present vs. 39 present—compared with an equal propensity between the sexes two years ago…Those with higher household incomes are more likely to be banking online, with 55 present of Internet users making $75,000 or more trying it, compared with 32percent of Internet users with household incomes under $30,000.”Stavins (2001) confirms Louse’s findings in writing that “younger, more educated consumers with higher incomes” are most likely to make electronic payments.

Despite its growing popularity, Internet banking is not equally accessible to all people. The poor, minorities, the elderly and the disabled are underserved. However, banks are making inroads in assisting individuals with special needs (Lee, 2000; AAP General News,2002). Although certain groups are underrepresented among Internet banking users, one group is heavily engaged—younger people, especially members of Generation X, or those individuals between 28 and 39 years of age (Newman, 2005, citing the Pew Internet & American Life Project).

The expansion of Internet banking is occurring worldwide:

• In the United Kingdom, as mentioned earlier, Barclays Bank was an early entrant with its PC banking application in 1995 (Gold, 1995).But, Little (2004) reports that growth in Internet banking among small businesses has slowed significantly with slow Internet access and security fears cited as two reasons for the slowdown.

• In Europe, including the United Kingdom, the number of Internet banking customers nearly tripled in three years to 60 million reportedM2 Press wire in 2003. While most of these users were in the United Kingdom and Germany, the highest per capita number of users was in the Scandinavian countries. For instance, banks in Norway lead the rest of the world in Internet banking penetration as well as in the proportion of banking customers who pay bills or place brokerage orders via the Internet (Brown-Hums, 2000).

• “The rapid growth of Internet banking is transforming the way wealthy Asians manage their finances,” reports Richardson (2000). Wii(2002) reports that, in Malaysia, interest in this form of banking is growing and, although some of the more advanced applications (e.g. Paying bills electronically) are still elusive, more basic functions are being implemented successfully.

• South America’s growth in Internet banking reflects that continent’s recent rapid growth in Internet usage (Jolson, 2002). He writes: “If…the region’s banks follow the lead of a handful of financial institutions in Brazil, Mexico, Argentina and Chile that have implemented among the world’s best practices online, Internet banking rates should soar. Jolson cautions that anyone who expects significant growth should realize that “better marketing may help spread mobile and Internet banking, but it won’t be enough to bring Latin America to an overall level akin to that of North America and Canada.”

• O’Connell (2001) writes that banks have “aggressively implemented “Internet banking in Australia. In this country, “Internet banking now provides a fully virtual option for almost all transactions,” according to Australian Banking & Finance (February 28, 2003). The results are paying off. Poulakis (2005) recently reported that, for the first time, the number of Internet banking transactions exceeded the number of paper check transactions. This is quite a change since 1999, when Australian Banking & Finance reported that “consumers may have learned to bank by ATM, phone, and home computer, but an old-fashioned visit to the teller window is still the most popular way to complete transaction.”

• Sander (2004) writes about Internet banking in South Africa where this technology is also taking hold and compares implementation therewith implementation in Singapore.

Despite the proliferation of Internet banking, it has not been easy for banking institutions to implement. Burgess (2002), in expressing the opportunities and obstacles that technology has presented, writes: “the financial services industry has embraced technology and hurtled forward into the brave new world,” but that “technology has created opportunities and obstacles to financial organisations.”

Some of the obstacles Burgess cites are incompatible hardware and software that have been encountered during banking mergers and acquisitions, cumbersome information technology infrastructures that have restricted product offerings and inhibited effective customer relationship management, and high technology costs that have prevented development and implementation of improved systems. Yet, despite the obstacles, Burgess admits that “technology makes working within the financial services sector easier.”

Hogarth (2004) provides two of the underlying reasons that that may help to explain why Internet banking is growing in popularity: first, people are becoming more comfortable with using the Internet for their banking business and, second, there has been an increase in positive attitudes in each of the years from 1999 until 2003, adding that people also feel more secure about the safety of using the Internet for banking.

Banks are not just waiting for customers to accept Internet banking. Michelson (2002) reports that some banks are pursuing marketing initiative of installing “kiosks” in bank offices to demonstrate the advantages and capabilities of Internet banking by allowing customers to perform Internet banking transactions as if they were using their home computers.

In closing this chapter summarizing selected existing knowledge on the historical development of Internet banking, the words of Patrick Thomas, a senior Internet Analyst at Nielson/Net Ratings, seem to capture the essence of the state of this electronic approach to banking today (Business Wire, 2002): “’For many, online banking has become an integral part of the overall banking experience, helping to spur growth and loyalty for those institutions who effectively meet customer needs.’”

Chapter 3 Features and Technology Associated with Internet Banking

Queue busters are what Pritchard (2000) calls Internet banking services, referring to the time savings and convenience customers