Ma Bell has her dial tone, Microsoft has its Windows, electronic communications has the Internet. What’s the closest equivalent in banking? Payments. U.S. banks already provide universal payments connectivity through the 240-year old paper check system¹; but what’s holding back equivalent connectivity through far more efficient electronic means?

The infrastructure is already in place, the ACH system in the U.S., so it’s not a technology hurdle. So what exactly is keeping U.S. banks from hooking their customers together electronically? Could it be lack of demand? No way. Nearly every consumer has a need to transfer funds from time to time among accounts or other trusted recipients such as family members. And the 15 million registrants at PayPal demonstrate high demand as well.

Are banks hesitant over fraud concerns? That argument doesn’t hold up when you consider the billions lost with bad paper checks. It’s hard to imagine any system that would be more open to abuse than our antiquated paper check system. Electronic transfers, with sophisticated authentication and approval algorithms, should cut
fraud substantially.

Is it a revenue issue? Many banks are reliant on the stream of fee income from current payment vehicles: interchange from credit card and signature debit; NSF/OD fees from checking accounts. Perhaps banks are worried about losing revenue to low-cost, real-time, authenticated payment systems, but that would be a gradual change, nothing that would impact 2002/2003 numbers in a material way. 

What about deposit run-off? Perhaps banks think that making it easy to transfer money in and out of their bank will cause an outflow of deposits. For those providing crummy service and poor rates, it’s a legitimate concern. But for most banks with competitive pricing and service levels, there shouldn’t be any net outflow.

What’s left? It’s only a matter of priorities. Since so few banks offer Interbank transfers, adding the service doesn’t rise to the top of anyone’s “to do” list. But that’s shortsighted. Interbank connectivity is desired by customers, again witness the PayPal phenomenon, and is a logical extension of online banking systems.

Interbank Transfer Pioneer: X.com

When X.com launched in late 1999, the Internet-only bank featured interbank connectivity, the first and so far only Net-oriented bank to make Interbank transfers as easy as internal intrabank transfers, e.g., from savings to checking.

When our company was looking for a place to park idle cash in 1999, X.com’s interbank transfer system was the primary reason it was chosen. Unfortunately, six months after we signed up, X.com decided to focus all efforts on developing the PayPal system. The company closed its Internet bank, refunding the money to depositors. How? Through interbank transfers, of course.

As you can see in this old X.com screenshot², the company placed a “Move Money” function on the top-left corner of its account summary page. Move Money could be used both for internal and interbank ACH transactions. X.com’s user interface and signup process won it our Best of the Web 2000 designation in April 2000.

¹For a brief history of the paper check, refer to  Commerce Net’s Website www.echeck.commerce.net/library/history.html

²X.com (now called PayPal, Inc.) withdrew from full-service Internet banking in Dec. 2000 to concentrate entirely on its PayPal payment service.

Action Items

Payments are the dial tone of online banking. Banks must be proactive when it comes to offering a state-of-the-art payments system. It’s too late to enter the auction payment game, PayPal, BillPoint, and C2it, have too much of a lead, but there is still a significant opportunity to simplify a user’s other payment-related needs.

We believe a significant point of differentiation could be gained by providing users a single, simple, integrated interface for moving money between accounts at any bank in the U.S., and through major banks internationally as well. We call this broad electronic capability interbank connectivity (IC), and it encompasses the following transaction types (see the table below):

• interbank funds transfer (my deposit account to my deposit account)
• automatic savings/investing plans (my deposit account to my savings/ investment account)
• balance transfer (my loan account to my loan account)
• loan payments (my deposit account to my loan account)
• payments (my deposit account to someone else’s accounts)

Pioneers would also be in the position of licensing the service to other providers, a strategy employed by National Interbank .

Interbank Connectivity Matrix

Source: Online Banking Report, 4/02

*Account definitions:

My primary accounts = Accounts owned by the user at your bank

My other accounts (owned by user) = Accounts at other banks that are owned by the user; user can electronically move money in and out of these accounts (ACH debit or credit)

Other’s trusted bank accounts (owned by friends and family) = accounts at your bank or other banks that are not owned by the user, but are owned by trusted friends and family who have provided their account number to the user for the purpose of transferring funds into the other account (debit only); no withdrawals (credits) allowed

Sharebuilder from NetStock Direct features automatic ACH transfers from any deposit account. Four banks currently offer it:

•   Bank Atlantic
•   EastWest Bank
•   National City Bank
•   Wells Fargo Bank

It is also offered by several dozen credit unions (partial list):

•   Boeing Employees CU (left) www.becu.org
•   Desert Schools FCU www.desertschools.org
•   First Tech CU www.1sttech.com
•   Golden1 CU www.golden1.com
•   Kinecta CU www.paymaster.org
•   Langley FCU www.langleyfcu.org
•   Schools Financial CU www.schools.org
•   State Employees’ CU www.ncsecu.org

How it Works

Interbank connectivity should be integrated closely into your online banking module, especially in the funds-transfer area. Once outside accounts are registered and authenticated, external transfers should be as easy to make as internal ones. This will transform your online banking program into the user’s “money-moving hub,” linking together all their deposit and loan accounts.

Over time, account aggregation can be added to the mix, creating a full-fledged financial hub. Refer to for more information on account aggregation.¹

Once users registered their other accounts, you could create a “transfer grid” like the one shown below. Color-coding or symbols could be used to show the anticipated timeframe for completing each type of transfer. Users should be able to choose their own name (i.e., nickname) for each account. Actual account numbers would be masked for security/privacy.  

¹Editor’s Note: We will be updating our account aggregation report this summer.

Hypothetical Interbank Connectivity Summary Screen (viewable by end-user)

maximum time required to complete transactions in days