Netscape is beefing up its Web site, already the second busiest on the Web with 25 million visitors in February, in an effort to compete with other successful Internet jumping off points, or portholes, such as Yahoo! and America Online. One of its new sections, Professional Connections, includes moderated forums and online “events,” interviews with industry experts followed by interactive questions and forum member comments. Online Banking Report Editor, Jim Bruene, was selected as one of the first six industry experts to appear in the Events section. The interview is scheduled to appear in early April at form.netscape.com/directory/community/html/pc_main.html (registration required). Following is the full transcript of our conversation with Netscape.

Q: John Paczkowski, Netscape: Already many banks have created and launched online banking services. Clearly, they are comfortable with security and encryption issues. Still, many folks are hesitant to transact over the Internet . How secure are our transactions?

A: Jim Bruene, Online Banking Report: Security is a huge issue with current and potential users of online banking services…and rightly so. Once you enable your accounts for online bill payment, you've provided yet another way for a thief to drain everything from your checking account AND max out your overdraft line of credit. In most cases, consumers can expect to be fully reimbursed for any loss, but it could be a major inconvenience to say the least.

Efforts such as SET and other encryption schemes have made the actual transaction instructions relatively secure (nothing is 100%), but banks and others need to do a better job educating users so they are more comfortable banking online. Here are three ideas we’ve been advising our clients to use:

1. Offer ironclad fraud guarantees in plain English. In 25 words or less tell users that they will suffer NO financial loss due to fraudulent transactions. Period. Guaranteed.

2. Provide users with more tools to monitor their own accounts. Banks could send an email to users each time a bill payment is authorized, each time a POS transaction is authorized, each time a change of address notification is received, etc. This way consumers would have an immediate heads-up in the very slim chance they were being defrauded, and the peace of mind of knowing that nothing unusual was going on most of the time.

3. Add additional layers of security around bill payment. Users should be able to access read-only checking account and credit card data with simple logins and/or cookies for automated login. Though there are privacy issues with account data, a would-be thief can’t do much damage knowing that check number 1227 for $76.12 cleared on Aug. 3. But bill payment should be highly secure running under full encryption with an additional unique bill pay password required. Not only does this increase actual security, it provides users with more peace of mind that their funds are protected.

Q: The common denominator of banks with the most success online seems to be the absence of user fees. Clearly, users do not want to pay for basic online banking services. But as sites add additional functionality and personalization features — emailed financial alerts and mortgage updates, data delivered ready made for Quicken or Microsoft Money — this model may begin to change. When will we have to begin paying for online banking access? What will we be paying for in the future?

OBR: The six largest online banking programs in North America, NationsBank, Wells Fargo, Citibank, BankBoston, Chase Manhattan, and CIBC (Toronto), all offer free basic account access.
I don’t think that is going to change. Here’s why:

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1. U.S. banking customers are accustomed to paying for transaction services via hidden costs (low-interest deposit balances, late fees, overdraft charges, etc.).

2. There is no precedent for charging users for ACCESS to their own data either in branch, in the mail, over the phone, or at bank-owned ATMs. Users won’t stand for it. (The same holds true outside banking: Would you pay American Airlines to view your frequent flyer statement?)

3. Even if users would pay, competition is going to keep the price at zero for the foreseeable future.

But just like Web sites that feature free traffic-building content, with charges for premium/custom services, banks will use the same model to charge
for a host of optional value-added online services
such as bill presentment/payment, data delivery to Quicken/Money, email/voicemail balance-level
alerts, etc.

Q: Online banks are already beginning to create vast data warehouses — enormous databases of customer activity — which may in time allow them to develop extensive individual consumer profiles. What trends do you see developing in dynamic, direct marketing efforts on the Web? How will this benefit consumers? Is the day coming when online banks will offer personalized financial advice over the Internet?

OBR: It’s inevitable that banks and others will use financial information to create customized services and personalized marketing pitches, “one-to-one banking” to borrow a term from Don Peppers & Martha Rogers. Whether the consumer views this as an invasion of privacy or a value-added service depends on the situation.

For example, if you receive an email warning you that you are about to bounce a check, and you save $25 by replying back to the email, you’ll be happy the bank “mined” your data for this useful bit of advice. However, if you get a call from a bank sales rep each time your checking account tops $2,000, you may think differently.

We expect to see the most aggressive programs develop first in the lending arena, where margins are higher and consumers are more receptive to marketing pitches. Banks will capitalize on the “captive eyeballs” logging in to check account balances to deliver customized loan pitches based on user profiles and periodic credit checks.

Think how tempting this might be over time. Assume you visit your bank’s Web 10 times each month to check your account balance, pay bills or whatever. Each time you log in, the bank greets you with, “Hi John, if you could use an extra $10,000 interest free for the next 30 days, press enter to transfer it to your checking account NOW.” Over the course of a year, you’d have 120 temptations to click the button and drop 10 grand into your checking account. That may prove difficult even for the most credit-averse consumer to resist.

Q Quicken and Microsoft Money offer Web-enabled versions of their software. Are the futures of personal finance software and online banking inevitably linked?

OBR: The product managers behind Quicken and Money are very savvy and forward thinking. They will find ways to create new revenue streams to replace shrinking margins in their core shrink-wrapped software products. Linking to financial data online is an absolute requirement for the future.

It’s ironic for the banking industry. As they do a better job for their customers by delivering data in a standard format ((OFX, Integrion or whatever), it will foster a new breed of Web-based competitor such as Intuit, Yahoo! and CNNfn, that will take standard data feeds from multiple financial institutions, aggregate the information, and create a host of customized features that compete with those offered by the financial institutions that created the data in the first place.

Q: Credit cards are perfect for making inexpensive purchases online, but as Internet commerce evolves and it becomes possible to purchase more expensive items online — cars, vacation homes, boats, antiques — might online banks become a means of actually financing large purchases on the Internet? If this does begin to happen, will online banks evolve into the commerce processors of choice on the Internet?

OBR: Credit cards do work well for transactions involving well-known merchants and smaller dollar amounts. But for larger purchases, or for purchases ð from individuals without the capability of accepting credit cards, a new method is needed. Buyers need to know that what they paid for will actually be delivered and/or they can get their money back if the goods are defective. Sellers need to know that buyers won’t chargeback the purchase on their credit cards and/or claim the goods never arrived.

A new type of business has evolved to meet this need, the online escrow service such as Tradesafe www.tradesafe.com Escrow companies earn a commission by holding the funds until both the buyer and seller have approved the purchase. But what if the escrow company goes belly-up or loses all its records in a fire? We think banks could have a huge role in this area, either by opening their own online escrow services, or partnering with existing companies. And as you mentioned, they could also finance big-ticket items held in escrow.

Q: Citibank, Visa, MasterCard, and Chase are conducting a stored value card trial in Manhattan. Fisher International Systems is experimenting with a stored value card system that a customer can use with a 3.5 inch PC floppy drive to create a home ATM. The system is intended to be distributed through banks specifically for Web banking customers. What is the future of the stored value card? Are we moving towards a checkless society in which all transactions are enabled by the Web?

OBR: One of the biggest gripes today about online banking is: “I still need to go to an ATM to get cash.” Eventually, you will be able to download electronic cash into a chip-based smart card and avoid the green stuff altogether. It’s likely that financial institutions will play a significant role ensuring that the digital cash is handled safely and securely.

We see stored value as a key feature in future multi-purpose cards which can be used a credit card, ATM card, prepaid card, and digital ID. But because of the retail infrastructure needed to accept the cards, we think widespread adoption is 5-10 (or more) years away. Cash will remain a tough competitor at the point of sale for smaller purchases.

Checks are more vulnerable, especially for bill payments. Processing paper checks, while highly automated, is still a ludicrous waste of resources when compared to electronic methods. It’s equivalent to sending an email by printing it out, sending it through snail mail, scanning it into the recipient’s computer,

then reading it. The large billers, with help from banks and technology vendors such as Checkfree and MSFDC, will soon make it far easier and cheaper to pay electronically, gradually shifting consumers away from paper checks. But with more than 63 billion paper checks written each year, it will be several decades before we approach a truly checkless society.

Q: Citibank, American Express, and Wells Fargo have all collected well over 250,000 subscribers to their online services. Boston’s BayBanks managed to get 7% of their customer base (65,000 subscribers) to participate in their online service in its first month. Yet, Security First Network Bank, the first Internet-only bank, has only booked about 14,000 accounts after several years of operation and quite a bit of publicity. Will Internet-only banks ever succeed?

OBR: The first all-Internet bank, Security First Network Bank, was recently sold to Royal Bank after garnering just $50 million in deposits in 30 months. We think it will be difficult for Internet-only banks to succeed if their business plan is based on attracting low-cost deposits. Why would consumers send their money off to a bank in a far-off locale when they have so many choices locally offering equivalent Internet-based services?

But we do think Internet-only lenders, banks and non-banks, have a great future. Consumers looking to buy a used truck on or off-line will be more than happy to have Nonamebank.com send them a check for $10,000 to complete the purchase as long as the process is simple and fast, and the loan is competitively priced. Some examples of interesting online lending programs include:

•  E*Loan www.eloan.com won an “OBR Best of the Web” award from us last September for their pioneering work in creating an interactive home mortgage process.
•  Bank of Montreal www.bmo.com was our “Top Milestone of 1997” for its real-time mortgage approval program launched a year ago.
•  Beneficial National Bank www.bnboll.com was a runner-up in our Milestones of 1997 for its Two-Minute Loan which takes two minutes to fill out the form and another two minutes to receive loan approval.