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Will online banking pay off?

Banks are rushing to provide online banking services, but some consumers question the reliability and security of the system. Businesses who receive electronic payments themselves say the technology is force-feeding them extra costs and more work.

Banks are rushing to the Internet to allow bill payments online largely to cut their expenses through reduced paperwork. But while they like the convenience, some consumers question the reliability and security of the system, and some businesses who receive electronic payments say the technology is force-feeding them extra costs and more work.

About 1.1 million households, or 10 percent of the U.S. households that are online, take advantage of online banking services, according to analyst Karen Epper of Forrester Research. The services often are free. By 2001, that number will jump to over 10 million users, she said.

This year, banks are projected to spend $5.4 billion on new technologies, and almost 20 percent is targeted directly at online banking, said a spokesman for the American Bankers Association. A recent study indicated that between 1995 and 1998, home banking will leap 600 percent, he added.

While financial institutions are bracing for online growth, it's apparent that both customers and businesses will have to become more comfortable with this next generation of banking before it becomes pervasive.

Andrew Collins, creative director at a small Internet firm T3, has been banking online with BayBank's HomeLink for the past month. He checks his balance, but is still skeptical about paying his bills with the service.

"I'm the biggest proponent of technology, but there is a concrete feeling of paying bills by writing checks and putting them in the mail. It seems that there is a less chance that something will go wrong if I just lick a stamp."

Richard Johnson, sales development coordinator at Tiffany, agrees. He has been paying his bills online through his credit union for the past year as well as working with the bank to set up regular, fixed payments for his student loans that are made electronically and automatically each month. He has experienced only one problem, and his credit union cleared it up for him. But Johnson still doesn't feel totally secure and monitors his account to make sure the transaction he makes really go through.

The payment product manager at Bank of America, Jane Wallace, said that, in fact, problems are minimal. This is because the funds between the customer and merchant are guaranteed--that is, bills cannot be paid and debits cannot be made unless the money is actually in the account. If a problem does occur, the bank takes the reins to resolve it with the business.

At the receiving end of online payments, problems with the system are also at a minimum, according to Boston University's director of student loans and collections Vinny Simonelli.

Simonelli even recommends online payments. "Please do," he said. "It is a boon for us because the chance for missing payments is reduced." But smaller businesses are not as excited about customers paying online, complaining that it translates into extra work and extra costs.

McKesson Water Products, a unit of McKesson, a pharmaceutical management firm, gets 21,000 payments a day, 2,500 to 3,000 of which are electronic payments. Senior Finance Manager Thomas LaFrance said that employees are working "about one-and-a-half hours extra per day" to absorb the additional work.

By contrast, payments received through the regular mail "are sorted automatically, read automatically, endorsed automatically, and sent to the bank," LaFrance said. The online payments must be handled manually and are 10 to 15 percent more costly, "which we hate," he added.

Banks are taking a financial hit as well, at least in the short run. For the world's first Internet bank, those costs have been substantial. Security First Network Bank announced a widening loss for it third quarter ending September 30 of $4.8 million, compared to a net loss of $453,000 for the same period last year. The company attributed the increased loss to mounting expenses for developing the Internet banking operations and software.

Simonelli said he isn't concerned by these kinds of calculations. Any additional cost that Boston University has incurred due to online banking "is the cost of doing business. A business has to keep up with modern technology."