Half of the U.S. adult population now bank using smartphones and tablets; that’s 29 million people more than last year who are using mobile banking, according to a May 2016 report from research-based consulting firm Javelin. And the traditional bank branch is now used by just 32 percent of customers, according to a 2015 study by Roy Morgan Research. With those numbers in mind, it’s hard to imagine there was once a time when all banking was conducted at actual brick-and-mortar financial institutions. Even the simple task of checking your account balance used to require a trip to the bank.
Although so many people take advantage of the digital banking tools offered online today, most people don’t know the full history of online banking. Learn how this innovative form of banking evolved and gained mainstream popularity.
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The History of Online Banking
Banking has come a long way since the days of regular visits to tellers. Now a customer can take a picture of a check with his phone to deposit it into a savings account. The evolution of online banking started in the 1980s, when the definition and the practice of internet banking were far different than what exists today.
What Is Online Banking?
When the term “online banking” initially gained popularity in the late 1980s, the phrase referred to the use of a terminal, keyboard and television or computer monitor to access one’s bank account using a landline telephone. Now the online banking definition, or internet banking definition, includes any electronic payment system that allows customers of a financial institution to conduct financial transactions through the financial institution’s website. Today, online banking services include mobile internet banking technology, such as person-to-person payment smartphone apps and text banking.
Online Banking: The Early Years
The early version of what was considered online banking began in 1981. New York City was the first place in the U.S. to test out the innovative way of doing business by providing remote services as four of its major banks — Citibank, Chase Manhattan, Chemical Bank and Manufacturers Hanover — made home-banking access available to their customers. Throughout online banking history, customers have been slow to adopt this new method of banking. In 1981, customers didn’t take to the new initiative, so the online banking system failed to gain momentum until the next wave of innovation in the mid-1990s.
In October 1994, Stanford Federal Credit Union became the first financial institution in the U.S. to offer internet banking to all of its customers. A year later, Presidential Bank became the first bank in the country to offer customers access to their accounts online. Internet banking systems began to catch on as many other banks soon followed Presidential Bank’s lead. At the same time, the now-defunct Security First Network Bank became the first dedicated online bank in the U.S. SFNB opened its virtual doors for business with basic offerings for national online banking, including no-fee checking and an ATM card.
The evolution of internet banking continued with the first truly successful internet-only bank: NetBank was founded in 1996 and closed in 2007. The NetBank name and domain were acquired by BofI Federal Bank in 2012. Bank of Internet USA was officially founded as part of the incorporation of BofI Holding, Inc. on July 6, 1999, making it America’s oldest internet bank; it opened for business on July 4, 2000.
The conveniences and perks of internet banking became obvious to many customers: online interest rates that were higher than those of regular banks, greater access to accounts, and online banking transfers, to name a few. Still, other customers were hesitant at first to use this new banking method because they were unsure of how it worked and didn’t trust the security features of online banking.
Online Banking in the 2000s
As the evolution of online banking continued, it slowly began to gain popularity in e-commerce. When big-name banks began to offer online products and services, internet banking seemed to gain legitimacy for consumers. By 2000, online banking had become mainstream: An overwhelming 80 percent of banks in the U.S. were offering internet banking services. In 2001, Bank of America made history as the first financial institution to gain more than 3 million online banking customers, about 20 percent of its customer base.
In 2009, Ally Bank joined the ranks of internet-only banks. “The Ally Bank brand was launched to provide customers with a straightforward, customer-centric approach to banking as consumer preferences continue to shift toward online banking,” said Diane Morais, Ally Bank deposits and line of business integration executive.
In a 2010 survey on consumer billing and payment trends, Fiserv found that online banking and mobile payments were growing at a faster pace than the internet. Online banking has continued to evolve as more innovations and conveniences have been offered. Bank of Internet USA has introduced a number of new and technologically advanced products and services since its inception, including mobile internet banking apps for the most popular mobile devices, MyDeposit for check deposit by mobile or computer scan, Popmoney for money transfer via text or email, and EMV-chip debit cards.
Online banking has become so widespread today that customers expect accounts to include free online banking, and many banks only operate on the internet, effectively decreasing overhead costs to offer more competitive rates and enjoy higher profit margins. “As an online bank, Ally doesn’t have branches, which allows it to offer customers great rates, 24/7 service, and innovative and competitive deposit products,” Morais said.
Online Banking Security: How Accounts Stay Safe
Today, online banking is one of the most popular ways for people to manage their money. Banks ensure internet banking security for customers by using encryption technology — such as secure sockets layer — verifying internet banking account activity, incorporating account safety features, and constantly warning consumers of ways to avoid threats such as identity theft.
Since early 2015, banks around the world, from Ecuador to the Philippines to Qatar, to name a few, have been the victims of security hacks. Society for the Worldwide Interbank Financial Telecommunication — or SWIFT, the messaging network that connects the world’s banks — warned its member banks as late as August 2016 to increase their security in the face of ongoing attacks. Banks have been focusing on providing comprehensive security measures. JPMorgan Chase, for example, has begun limiting employees’ access to the SWIFT software.
And Bank of America’s online banking service, for example, incorporates industry-leading safety features that give customers greater security and peace of mind as they manage their money. The FDIC has also taken measures to ensure that this highly convenient banking method is safe.
Consumer Responsibility for Secure Online Banking
According to a survey by Accenture, most consumers trust their banks over other businesses — such as mobile phone networks and online retailers — to securely manage their personal data. Still, online banking customers should take measures to practice safe internet banking. The FDIC advises consumers to take the following precautions:
- Research a bank prior to opening a paid or free online banking account.
- Be aware of fraudulent websites made to look identical to actual bank sites.
- Always make sure the bank is FDIC-insured.
- Keep personal online banking information secure.
- Know your rights.
The Pros and Cons of Online Banking
Every tool or service has its pros and cons, even the most convenient technological advancements — such as being able to access bank accounts from any place at any time as long as there’s an internet connection. The advantages and disadvantages of a resource should be weighed carefully by customers when their money is concerned. Many features of internet banking are positive, but some negative possibilities also exist in the digital world that could keep more cautious consumers away.
The Advantages of Online Banking
“Bank customers are now accustomed to being able to manage their finances online, 24 hours a day, seven days a week,” said Tyler McConvill, a digital marketing manager with Bank of Internet USA, the oldest online bank dedicated to service via internet. This supreme convenience is a major selling point of internet banking. Other advantages of online banking include:
- Better rates: Because online-only banks lack the overhead costs associated with brick-and-mortar banks, online banks are able to pass on the savings to customers in the form of better interest rates.
- Ease of use: Customers can quickly and easily monitor balances, check on spending and be alerted to low balances.
- Services and tools: Resources such as online bill payment and online tax forms, loan calculators, budgeting tools and even investment analysis tools are often available — and usually free of charge.
- Mobility: Access to a bank account and up-to-date balance information are available to customers any time they have a device with an internet connection. Customers are able to access their accounts seamlessly from computers, tablets and smartphones.
- Electronic transfers: Transferring money between accounts and banks is as easy as signing into an online banking account and clicking through a few steps.
- Environmental friendliness: Banking online can go hand in hand with paperless notifications. Customers are given the choice to opt out of paper statements and mail. Instead, they can be reached via the message center within their online bank account, by email or even by text message.
- Security alerts: With 24/7 access to their online banking accounts and balance information, customers can be alerted to unusual activity and security breaches almost immediately.
The Disadvantages of Online Banking
Although the advantages of online banking are significant, some critical disadvantages of this modern means of banking do exist:
- Diminished relationships: Because banking is conducted mostly and sometimes completely online, there’s a lack of face-to-face interaction and little opportunity to develop relationships between customers and bank representatives.
- Lack of comprehensive or special services: Brick-and-mortar banks are able to provide services such as notarizing financial documents, which can’t be done by an online bank.
- Transaction issues: For clients who frequently deposit cash, online-only banks might not be as useful. Additionally, ATMs for some online-only banks can be hard to find.
- Security issues: As with any institution in possession of secure data and personal information, online banks are vulnerable to security risks. Hacking, phishing and viruses are some of the associated risks that banks try to provide protection against.
Majority of Depositors Use Online and Mobile Banking
Despite the known risks and disadvantages associated with online banking, customers’ preference to do bank business online has only grown over the years. A 2015 survey about online banking conducted by the Federal Reserve Bank revealed that 74 percent of people had used internet banking and 35 percent had used mobile internet banking during the last 12 months — with just 33 percent saying they had used telephone banking.
The Federal Reserve Bank dug deeper to learn more about internet banking and related demographics, finding the following information about respondents who used mobile banking in the past 12 months:
Over 66 percent of those surveyed who were between the ages of 18 and 29 had used mobile banking. Of survey participants age 60 or older, almost 26% had used mobile banking.
An equal number of men and women — 52 percent of each gender surveyed — use mobile banking.
Mobile banking usage increases with the level of education attained — 44 percent of users have a college degree or some college education.
Mobile banking use tends to be more popular than not, regardless of income level.
A Consumer Reports survey showed that banks that operate mostly online earned the highest overall satisfaction levels seen for any banking service:
- 93 percent of customers reported they were highly satisfied.
- 11 percent of virtual bank customers complained about the service they received.
- 32 percent of those who banked at Bank of America, Chase, Citibank and Wells Fargo had complaints.
The Future of Online Banking
Despite the slow adoption rate in the early part of the history of internet banking, online banking has proven it’s here to stay. Features have greatly evolved from the first days of internet banking history — from the need to use a landline to access account balances in the 1980s to having the ability to transfer funds, pay bills and deposit checks with just the click of a mouse or on a mobile device today. As technology continues to advance, banking online will likely become even easier and more ingrained in the average consumer’s lifestyle.
“Looking ahead, Bank of Internet USA is no longer serving a niche client base,” said McConvill. “Customers who use the internet to do their banking are now the norm, not the exception. Our goal is to provide the optimal banking experience for all banking customers, not simply the optimal banking experience for online banking customers.”
“This should be the goal of any bank that wishes to remain competitive in a world that is rapidly shifting away from the traditional ways of conducting business,” McConvill said. “Banks that fail to realize that online banking is really just banking in its new conventional form will soon find themselves struggling to survive.” In other words, the best internet banking practices will soon be the best banking practices, period.
Laura Woods contributed to the reporting for this article.