Magazine article The Journal of Lending & Credit Risk Management

Internet Banking Is in the Future of Community Banks

Magazine article The Journal of Lending & Credit Risk Management

Internet Banking Is in the Future of Community Banks

Article excerpt

In the days of typewriters and carbon paper, a community bank president noticed a copy machine in a competitor's bank. "Why would a bank need that?" he wondered. "If I really needed to make a copy, I could just walk across the street to the law office and use theirs." Ken Martin, the man who eventually succeeded that president at Cashmere Valley Bank in central Washington state, chuckled at his former boss' story. But in the early 1980s, Martin had similar thoughts when he saw a fax machine in a bank. Today, he knows that technology just keeps moving forward and Martin is making sure that his small bank is not left behind in the brave new world of Internet banking. "We're a very traditional community bank with a lobby and tellers and I don't expect that to change," says Martin. "That's why people bank here. But with every high school graduating class, there will be more people that will expect a delivery channel for our products through the computer. It's like drive-up windows. Not everybody drives, but everybody wants drive-up windows at their bank."

Suitable for Bank Customers of All Ages

It's not just young people who are hopping on the Internet. Last year, 62.8 million persons had Web access, up 61% from 1997, according to International Data Corp. (IDC), a Framingham, Massachusetts-based technology research company. By the end of 1999, IDC expects the number to grow another 29%, to 80.8 million persons.

Meanwhile, Internet banking applications quickly are becoming the panacea for banks hoping to increase their market share and retain customers. IDC research shows that sales of these applications topped $93 million in 1998 and will jump to over $326 million in 1999.

IDC attributes the strong growth to widening acceptance of the Internet and seismic changes in the financial services industry that leave banks, insurers, and brokerages competing for customers in a free-for-all environment.

More than 1,200 banks and credit unions in the U.S. signed with online banking applications vendors and providers to build fully transactional Web sites in 1998. In 1999, 7,200 more will acquire online banking applications. By the year 2000, IDC expects Internet banking applications to account for almost one-third of the overall U.S. banking applications market.

This Bandwagon Stops for Community Banks

As they become more accustomed to using the Internet for investing and making purchases, consumers and small businesses are becoming more interested in and comfortable with banking online, say industry experts. Although not all experts agree, many believe it will be necessary for community banks to offer online banking services for these reasons:

* Banks will need it to defend their market share as competitors introduce the service and then increase the number of services available on their Web sites.

* As Web TV gains popularity, more people will use the Internet.

* A Web site is a good vehicle to sell other bank products, such as home mortgages, insurance, and online trading.

* Internet users represent a more profitable customer base.

* Online banking is a convenience for customers.

Bill Ware's family-owned Amarillo National Bank became the first bank in Amarillo, Texas, to offer Internet banking in 1997. "It's the future," says Ware. "Our decision was driven by competitive reasons. NationsBank was getting ready to come to town and we knew they would have an Internet banking deal." With 4,300 registered users, the $1.3-billion-asset Amarillo National Bank is not concerned about whether the Internet site will make money for the bank. "Does an ATM make money?" asks Ware. "No, but it handles a lot of transactions and there arc a lot of customers who use the bank because the ATMs are a convenience. They want to do their banking at a bank that has them."

The Small Business Customer

Recognizing the importance of the small-business market, Amarillo National has a small-business Internet banking product. …

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