Banks are finding they need to
offer their customers e-banking
services or risk being left behind

Remember how exciting a trip to the bank was before ATMs? Every Saturday morning you would race down to the bank, queue up for half an hour, make your deposit or get your cash. The only alternative you had was to spend your lunch hour shuffling along the bank queue. Then, when ATMs came along, you could do all of that 24 hours a day, any day.

If you thought that was good, then Internet banking is going to blow your socks off. Now, you can schedule your bill payments through next year, order cheques, check the status of your account, give electronic gift certificates ..., and it won't be long before you will even be able to handle your business' finances entirely online. In fact, an online account offers far more options and flexibility than a regular account.

That's because Internet banking allows banks to tailor individual products precisely to the needs and tastes of individual customers, instead of the current one size fits all approach. And in Hong Kong, most banks have concluded that they will have to offer their customers Internet banking services or get left behind.

"The growth of Internet banking is thought to be like that of ATMs: if you didn't provide ATMs you would lose your customers. So if you don't offer your customers e-banking then you will lose out," said Arthur Wong, senior manager, E-commerce, Dao Heng Bank.

Why just now?

"It takes time," said Matthew McGarvey, Internet analyst, IDC Asia/Pacific. "As Western banks were merging with the 'new economy,' Asia was still struggling with an economic crisis. In times of crisis, banks tend to focus on core competencies rather then expansion. As the crisis subsided, Y2K held them back from investing into new technologies."

David Carse, deputy chief executive, Hong Kong Monetary Authority (HKMA), said he feels banking over the Internet is likely to take off here because Hong Kong has the necessary supply of financial services, sufficient demand and a technologically aware population.

"The physical infrastructure for e-business and the penetration rates for the various forms of electronic delivery channels in Hong Kong are already among the highest in the world," Mr Carse said at a business luncheon earlier this year.

Over 50 per cent of households in Hong Kong have PCs, while 30 per cent of the population is connected to the Internet. Add to this the fact that 55 per cent of the population use a mobile phone and that WAP and m-commerce is just around the corner (see page 44), and it would seem that Internet banking is set to become the norm, rather than the exception.

How banks charge for Internet banking services often stimulates lively debate. Quite clearly the Internet does offer banks the chance to cut costs. Mr Carse said, "It is often cited that the cost of conducting a transaction over the Internet may be only one-hundredth of the cost of doing the same transaction via a bank teller."

According to a survey on Internet banking conducted by the HKMA, banks expect cost savings from the Internet to be minimal over the next four years. That is mainly due to substantial increases in IT spending, on both front and back-end systems. However, the survey showed that on average banks expected to spend about 1.5 per cent of total operating expenses on IT.

They are also expected to reap substantial savings by reducing the number of manned branches they operate. Self-service e-banking "centres" have now replaced a number of manned branches, which have swollen queues at neighbouring branches with human tellers.

But even the banks, it would seem, are feeling their way down the charges line, and in most cases are pushing e-banking services as an extension of their preferential service packages.

Mr Wong at Dao Heng said the bank typically charges customers 50 per cent less for online services than bricks and mortar services.

Lirranna Sun, vice president, of Citibank's Global Transactions Services, said, "Each particular e-product will have a different charge scale, based on the nature of these services in line with what the bank charges on its fee scale."

Banks do not expect an "e-charge war" but admit that once all banks start offering online services, natural forces will most likely determine fees.

Online corporate banking
Some banks are exploring business-to-business (B2B) services, including bill presentment, payment services and trade finance, but they will most likely not be readily available for another two to three years, or at least until the wrinkles in the consumer e-banking services have been ironed out.

B2B offers probably the greatest opportunities for making money out of e-banking, because of the high transaction volumes involved. But the big question seems to be, do businesses know what they want?

Obviously banks offering online financial services is a crucial part of the whole e-commerce puzzle, but whether it is the missing link remains to be seen. That all depends on what sort of online services banks offer businesses.

The venerable Letter of Credit payment method would seem to most likely be one of the first payment modes to go electronic. But due to the cumbersome procedure of evaluating and receiving documents, in addition to setting up the interface with corresponding banks to accept whatever electronic LC comes their way, it is going to take another two to three years before it becomes a reality, Mr Wong said.

Instead of waiting that long, banks are considering providing other forms of payment.

"HSBC, while slow on the B2C uptake, has been extremely active at providing solutions for businesses looking to conduct online transactions and process payments," Mr McGarvey at IDC said. "HSBC is a member of Identrus, a consortium that was founded by the major banks around the world to provide a global framework of trust and security. As security and the Internet develop, a single standard is starting to emerge and HSBC is a committed member of that. As well, HSBC's development of a payment gateway is allowing more and more companies to process payments online."

According to Mr Carse, a number of banks have formed joint ventures with commercial companies to provide the necessary payment gateways to facilitate e-commerce.

Such joint ventures include third-party solutions, such as TradeCard, a B2B e-commerce infrastructure that allows online payment settlement.

Kurt Cavano (left), chairman and CEO of TradeCard, speaking in a telephone interview from the United States, said he doesn't feel banks going online will threaten TradeCard's future. Quite the reverse.

"We're very excited about banks coming online, because the banks are beginning to sign up with TradeCard in the States. By having the banks represent us it will help speed acceptance in the market," he said.

Though banks traditionally have had a "let's do it ourselves" approach, the market is moving so fast that they cannot afford to invest in building new systems themselves, he said.

TradeCard signed an agreement with Hong Kong's Dah Sing Bank to provide its members export financing. It also has agreements with a couple of Taiwan banks ?Chinatrust, and Sinopac ?to provide online business financing solutions.

On Sept. 5, it announced an agreement with MasterCard International to develop and pilot an online payment system that will basically allow businesses to complete B2B e-commerce transaction using the trusted credit card.

The transaction limit for the card will be decided upon during the pilot programme which started this autumn, along with interest rates should a company for some reason be unable to settle in full the due amount by the due date.

Hong Kong's Dao Heng Bank has also signed an agreement with a major credit card company, Visa, to offer the "Visa Business Card." According to a survey conducted by the Hong Kong Productivity Council and the bank, Hong Kong's SMEs spend between HK$30,000 and HK$200,000 a month on business expenses, which the card will be able to honour.

Security
The security of transactions over the Internet is probably the biggest concern among the HKMA, banks and consumers. Banks would appear to be the perfect target for hackers, and unauthorised access and alteration of information are banks' biggest concerns about Internet banking.

However, technology has reached such a level that it would take months and even years to break encryption codes. And even then, digital keys would be able to determine that the information had been tampered with and so rejected.

All the banks that The Bulletin spoke to in researching this article said that technology provides sufficient security to protect themselves and their customers.

"Security wise, because the banks never before have been so exposed in that they in effect are letting the public have some control of their account, we of course have to ensure the proper checks are in place," Mr Wong said.

Likewise, Ms Sun feels the level of today's security technology can secure services.