Banking on the Internet

Suddenly, in less than five years, a gigantic new market has emerged. Consider its profile: 30 million people; upscale income; highly intelligent; average age about 26; reachable anywhere in the world at a small fraction of the cost of mail or telephone. We're talking Internet-- or rather, the avid, amorphous global community of people who are "on" the 'net. Don't take the 30 million figure too seriously. It may be half that or it may be more. Like everything about the 'net, there's no sure way of accurately measuring anything about it. With a market like that, it's no wonder that businesses are excitedly searching for ways of selling their wares to "internauts." Indeed, although the Internet banned commercial applications in the first 23 of its 25 years, business "hosts" now outnumber those dedicated to education and research. Where commerce is, can banking be far behind? Well, yes. Not many banks are on the net even now. A key reason for banks' laggard position is, of course, their special responsibility for the security of the funds they handle. The free-for-all Internet culture seems to invite electronic eavesdropping and larceny. Besides-enabling shoppers at "electronic malls" to pay for their purchases from their personal computers, the Internet may become the main way that bankers will be able to keep in touch with their customers as communications technology whirls through changes as revolutionary as the typewriter and telephone were in their day. Warns Bill Smart, Bank of America's vice-president for advanced technology: "Bankers shouldn't worry about competing, but surviving. If they don't keep up with the new developments, banking will lose its close relationship with its customers and be reduced to second- and thir&ievel backroom services." Basics and roots The Internet is often said to be the prototype of the much discussed "information superhighway." Some would say it is more than a prototype. In any event the highway analogy is useful, up to a point: the Internet is a network of networks tied together by fast, high-capacity electronic channels called "backbones." Another term, National Information Infrastructure, more ap- propriately suggests the Internet's maze of large and small networks. At the lowest level, users at personal computers dispatch messages to "servers," which prepare the messages for their journeys on the 'net. Be- fore they get to the big regional, national, and transoceanic backbones, these messages travel over telephone lines, satellite links, and microwave relays. The Internet was born in California in 1969 as a way of ensuring that defense-related research at universities and government laboratories would be secure even if a bomb disrupted the communications lines. Its earliest version was fully funded by the Defense Department. Later, the National Science Foundation took over, subsidizing expansion to more universities and government laboratories and over time phasing out federal subsidies altogether. Until 1993, commerce of any kind was strictly forbidden on the Internet. Now, academic and commercial networks serve their two constituencies using the same facilities, separately priced and administered. The e-mail engine By far the most popular use of the Internet is e-mail, by which someone at a personal computer can communicate almost instantly with any one of the millions of other people on the 'net. It's cheap. Using a commercial service, it can cost less than a nickel to send a three-page letter to New York or San Francisco or Tokyo. It costs even less if users are sharing resources via a local-area network (LAN) and the equipment needed to package messages in the Internet's format. Gary McQuown, an ABA economist, uses e-mail to swap notes with economists around the world. For example, he might learn from a penpal in Tokyo that Japan is in for a very hot summer that will affect the rice crops and in turn government farm subsidies, imports from the United States, and the value of the yen. …