JAY SPAHR
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Part Two of a Two-Part Series
Internet-only banks. Making sure Web customers are legit. One-stop online shops showing all bill-paying relationships a customer has with a bank. The ability to create photo images of checks.
Are these and other emerging financial services technologies really safe? Who’s using them? How well are existing technologies, such as the ability to conduct banking transactions or apply for a mortgage online, already serving customers? And where do government regulations fit in?
While many of today’s products and technologies have been in use for some time, they continue to evolve. And as 2007 approaches, questions surrounding technology remain hot conversation topics at banks and credit unions, as well as the trade associations and software vendors that serve them.
Many expect certain existing technologies to “take off” next year, furthering customer convenience and security. At the same time, new products are always in the works, as financial institutions work to attract the increasingly rare commodity: the depositor.
Frank Aloi, owner of ath Power Consulting, an Andover financial services industry market research and strategy firm, said those depositors want convenience.
“Rates are important,” said Aloi, “but when people are surveyed it is not the first thing they mention. The first thing is service in general, and we are finding that a lot of that means quick turnaround.”
“Online is the way” to achieve that speed, he added.
Joe Lockwood, senior vice president and chief technology officer of Avon, Conn.-based security software provider and servicer COCC, said he tries to get his clients to “look at technology on two fronts: defensive and offensive.”
Defensive technologies secure data, while offensive ones such as online banking and e-statements are meant to generate new business, he said.
Cell phones will play an increasing role in the new-technologies industry in the next couple of years, as banks and customers focus on the convenience of sending or receiving text messages confirming transactions, Lockwood predicted.
Lockwood said it is noteworthy that many more of the data security breaches in recent years have originated in the retail arena rather than with financial sector.
Despite that trend, banks and credit unions “are the ones that get the black eye, because they issued the credit card,” he said.
Others in the industry, and those regulating it, have offered similar observations.
Indeed, at a recent Boston event, incoming U.S. House Financial Services Committee Chairman Barney Frank detailed an incident involving “one of the big credit unions, which came to me.” The credit union was told by MasterCard it had to cancel the cards it issues through them, he said – presumably because of a security breach.
“Asked why, MasterCard Â… wouldn’t say which retailer [was involved],” Frank said. “Under contract, the retailers are protected.”
Jim Jones, founder and president of First Wellesley Consulting Group, a Wellesley-based firm that specializes in the financial services field, said online retailers are more “aggressive” and “innovative” than the banking industry in trying out the latest technologies.
Peter Blanchard, vice president of member services for the Massachusetts Bankers Association agreed with Jones’ general assessment of the financial industry as “conservative” in regards to rapid use of new technology.
But those working in the banks and credit unions say they’re moving quickly.
“I would say that this bank has been always an early adopter of any kind of Internet technology that would enable us to reach a broader audience,” said Jay Spahr, director of e-commerce for Salem Five, a $2.4 billion bank whose tech-savvy ability was cited by one consultant who does not have them as a client.
In the late 1990s, when just 1 percent of bank customers used online banking, Salem Five created a “virtual” online branch, said Spahr, who joined the bank in 2000. “I would say we were as much out there as anyone.”
Today, he said, 35 to 40 percent of Salem Five’s customers bank online. Spahr credited technological advances at Salem Five to its former president and CEO, William H. Mitchelson, a longtime banker whom he described as “a visionary who isn’t afraid of taking risks.”
Mitchelson has since retired, but is president of the bank’s board of directors.
One new technology Salem Five uses is “remote deposit capture,” Spahr said. The service, also known as check imaging, allows banks and their retail customers to scan checks and transmit scanned images, so both the bank and customer know immediately if a deposit should or will clear.
Salem Five uses it to make sure transactions from the same customer aren’t happening in two places at once, Spahr said.
“We are trying to use technology in a way where we can capture fraud,” he said.
The bank also uses “aggregation,” a service in which a customer can log into online banking and see all the bill-paying relationships he or she has with the bank gathered in one place, he said.
That type of technology has taken a while to catch on, Spahr said, “but I think it’s going to become more popular.”
‘The Simple Things’
Brockton-based HarborOne Credit Union’s Chief Technology Officer Dick Bastiansen said HarborOne introduced check imaging technology in 1997, making the credit union one of the first in the nation to do so. The credit union also uses it defensively, he said.
“One of the historic incidents has been the ’empty envelope deposit’ – people who deposit on Friday night, putting in an empty envelope and hoping the funds will be available on Saturday,” he said. Check imaging helps the credit union avoid that problem, he said, as do other COCC services the $1.4 billion credit union uses.
For example, the credit union also connects to a national database of information about checking accounts that lets it know, virtually instantly, whether a check presented for payment was drawn against a closed account or is otherwise a fake, he said.
Bastiansen said there’s been “a lot of activity and a lot of opportunity to improve security” in recent years.
“We can’t let down our guard. We still have to continually review and make sure we are ahead of the curve,” he said.
Customer education also is critical, he said, offering the example of telephone scams: “If there is somebody on the phone, all the technology in the world” won’t prevent someone from giving out their account number if they’re convinced it’s a legitimate call.
COCC’s Lockwood cites a 2006 survey, by California-based Javelin Strategy & Research, which showed that 63 percent of all identity theft cases could have been prevented by the victim.
“It’s the simple things – the vast majority of identity theft type of situations [involve] losing a credit card, mail stolen from your mailbox, throwing away an unshredded receipt,” he said.
The survey found a much smaller percentage of identity theft incidents were due to so-called “phishing,” hacking or a computer virus, he said.
Some institutions still don’t encrypt their laptops and backup computer tapes properly, despite warnings, Lockwood said. But breaking the code of properly encrypted data can take 30 years to accomplish, he said.
“The criminal element Â… wants results faster” than that, said COCC spokesman Robert E. Bessell.
Lockwood said consumers using online banking actually may detect fraud faster than their counterparts who still get paper statements because they monitor their accounts more regularly.
Bank of America, a national bank that offers a guarantee against unauthorized transactions, instituted “SiteKey,” a technology it created with the help of a third-party vendor, in May, a spokeswoman said. They system serves a way to verify who customers are when they attempt to access an account remotely.
BofA described the technology in a press release as being “like getting a safe deposit box that takes two keys to open. Before the customer and the bank agree to open the box together, they confirm each other’s identity.”
While large banks have the money and resources to develop new technology, industry watchers say that smaller institutions also have an edge in being able to make and implement decisions faster.
Blanchard, of the Massachusetts Bankers Association, noted that complex state and federal laws governing finance also slow the speed at which institutions and the vendors that supply them can add or adjust to new technology.
“It’s tougher in Massachusetts than some other places to initiate something new,” Blanchard said. “But that’s a positive in that it protects the consumer.”
He said the first question many banks ask about any new technology is “what do the regulators say?”
Massachusetts Division of Banks Senior Deputy Commissioner David Cotney said he’s not aware of any “significant” new regulations that would impede the development of certain new technologies.
But DOB does “require all banks and credit unions to comply with state and federal security provisions,” which often parallel each other, Cotney said. “We want to make sure consumer information is secure, as do the banks.”
Assessing new technology – and even staying on top of what’s out there – can be mind-boggling, Blanchard said, which is why the Massachusetts Bankers Association offers seminars to its members on vendor management and due diligence.
“You have to understand, bankers are bankers first,” he said. “They won’t just jump into anything.”
