In this issue:
Internet, INC.
Working on the Web
Internet Backlash
Locating the Sale
What's Taxable?
Virtual Banking
E-Currency
From the Comptroller: Fraud Relief
Scholarships Go Online
Texas stats -- Fiscal and economic data
The world of commerce has come to the consumer's doorstep. By logging on to the Internet, the potential homebuyer, stock purchaser, airline traveler or bank customer is exposed to a staggering array of goods, services and information.
More and more businesses are deciding they cannot afford to miss out on the virtual marketplace. The World Wide Web, the graphics-supporting portion of the Internet, has created an environment in which the struggling entrepreneur can compete with mega-corporations in the contest to grab consumer interest. In the Web world, the right combination of imagination and marketing skills can reach potential customers from coast to coast and beyond.
The new medium also has dished up a major headache for state and local tax authorities, who are anxious to establish jurisdiction over this mushrooming business base but have yet to agree on the means for doing so.
Just how big is electronic commerce? Estimates vary widely, but a report prepared for the Interactive Services Association (ISA), a trade association serving the Internet and on-line industries, estimated 1995 activity between $2.1 billion and $2.7 billion.
For now, only a few companies are actually profiting from on-line offerings; among them are the firms providing Internet access or sales of computer hardware and software. Internet access services had revenues of about $250 million in 1995, ISA reports. Consumer on-line services brought in an estimated $1.2 billion to $1.8 billion. Advertising accounted for another $131 million. Firms selling consumer products such as music, books and apparel through the Internet saw about $500 million in revenue.
Predicting the Internet's dizzying rate of growth is difficult, but ISA ventures to estimate that cyberbusiness in 2000 will range from $13 billion to $20 billion.
This month, Fiscal Notes looks at the many forms of business transactions being conducted on the Internet and the associated problems. With one in seven American households already equipped to navigate electronic commerce with the click of a mouse, this phenomenon appears capable of fueling new levels of business activity and communications.
Working on the Web
Texas companies among thousands doing
daily business on new interactive mediumFew media have offered the kind of immediate mass market access that the Internet now provides--and many companies have been quick to capitalize on this new way to reach potential customers.
In fall 1996, about 250,000 commercial sites were on-line, just a few years after the first commercial sites appeared on the World Wide Web (www). At the same time, an estimated 47 million Americans were using the Internet or on-line services. Obtaining information about products and services was one of the top three pursuits of on-line users, according to a national survey by IntelliQuest Inc. of Austin.
Texas-based industries and firms are among those using the Internet to conduct everyday business. Real estate brokers, classified ad services, investment firms, publishers, airline ticket sales services and catalog merchants have proven popular and potentially profitable on the Internet.
Virtual realty: For home buyers, scanning the newspaper listings for homes, followed by trips all around town to promising locations, used to be the standard scouting procedure. Technology, and more recently the Internet, has begun to change this tradition. Apartment and home locators have used CD-ROMs--digital storage disks that can store photographic images and other data--for several years to show prospective homes. Even so, prospective buyers still have to travel to a real estate agency to view the disks.
The Internet now makes it possible for buyers to get an early preview of available properties--even in other cities. Real estate agencies have set up a number of sites on the Web, including extensive listings put together by the International Real Estate Directory (IRED) at www.ired.com/ that feature links to real estate agents, home builders and locators with homes for sale across the state. IRED groups its links by region, with subdirectories containing links to real estate agent and builder sites with complete newspaper-style home listings.
Many sites have color photographs of homes for sale or separate Web pages with information on a home--more than could be listed in a newspaper ad. A small but growing number of listings contain interactive video, allowing viewers to pan around and into a house, traveling from room to room and clicking on points of interest.
Some interactive sites quiz buyers about their specific needs, then match them with homes listed in their preferred price range and location.
The National Association of Realtors (www.realtor.net/seltx.htm) also operates an on-line directory with search capabilities for homes in Texas. This site has listings for more than 30,000 homes in 12 Texas cities, and is expected to expand to Houston-area homes.
The first with this capability was the Austin Board of Realtors (www.abor.org/), which represents nearly 4,000 real estate professionals. This site's Virtual Market Place contains a Realtor store that will take orders for maps, yard signs, stickers and publications.
Cyberhomes (www.cyberhomes.com/) operates a national on-line real estate search service with listings for homes in El Paso, Fort Worth, Tyler and Corpus Christi. A site for Midland is currently under construction.
Many of the sites listed on IRED, such as the Texas Real Estate Connection (www.texasre.com/), serve as directories for sites with links to information on interest rates, mortgages, title companies, appraisals, real estate agents and advice on obtaining credit.
Other Texas-based real estate-related pages can be found on the Internet, many of which are not listed on any of the major real estate links pages. Though the real estate market has found an important niche on the Internet, finding the right real estate site can take just as much hunting as finding a house.
Web yellow pages: Classified ad services, such as those used for real estate, are seen by some industry pundits as a potential market for Internet commerce. Classified services are springing up all over the Net, including BigBook (www.bigbook.com/), a service that attempts to recreate the traditional yellow pages phone book with a search engine that can look for specific businesses and addresses in most U.S. cities.
Other services attempt to hone in on specific markets, as the great number of sites sponsored by chambers of commerce and individual cities attests. Many of these offer entertainment or business listings, but not advertisements for sales items.
Yahoo (www.yahoo.com/), one of the Internet's more popular directories, shows about 20 individual classified ad services for Texas, everything from personals and automobiles to an airplane exchange and a listing for neighborhood coupons in the Dallas area. MS Webmasters Inc. (www.cybernetsol.com/), a national classified service, has exchanges for automobiles, airplanes, real estate, boats, motorcycles and recreational vehicles, with separate listings for each in Texas.
Even though local advertising and listings are popular, it is still more common for national firms to attempt to cover the entire U.S. in their directories, instead of focusing on a single market. One such service is EPage (www.ep.com/), a Web service with about 5,000 monthly classified listings that include automobiles, jobs, personals, real estate, services and travel opportunities. Listings can be viewed regionally, with Texas considered its own region. Epage claims Internet users "visit" the site more than 50,000 times a day.
Take to the skies: Air travel is another industry just beginning to realize the potential of the Internet to improve customer services. Many airlines offer reservation services through the Internet, while others publicize flight schedules and prices. Some airlines, including Southwest, United, ValuJet and Alaska Airlines, have gone a step further by offering ticketless travel through Web sites.
Southwest's site (www.iflyswa.com/) allows prospective fliers to fill in their departure city, destination, date and time of day a flight is needed. The site then shows any corresponding flights, with a listing of various fares. Customers select the fare they want, submit an order for the flight, then receive a confirmation number along with an itinerary and receipt. At the boarding gate, the customer need only provide a name or confirmation number. No ticket is needed.
Travel agencies and other services are also springing up on the Internet. Travelocity (www.travelocity.com/) will search for the most economical flights available, and issue and deliver tickets anywhere in the U.S. or Canada. Most of these services also accept orders by phone or fax; none relies solely on Internet orders. Security of transactions may be the main reason the services are not more widely used. When a secure technology is accepted by the general public, such services will likely see a marked increase in use.
Publish or perish: Publishers and booksellers are common on the Internet. These services allow on-line purchases of mainstream and sometimes hard-to-find books as well. Other sites offer novels, poetry or other writings that have not been published in a conventional medium. By placing their work on the Internet, these writers and publishers hope to gain a larger audience and attract consumers.
Many publishing sites are operated by industry giants such as McGraw-Hill (www.mcgraw-hill.com/). or by large book-selling services like Amazon Books (www.amazon.com/), which offers more than a million books for sale through the Internet. Others offer more specialized publications--Dallas' Albion Woods (www.ibisweb.com/awmain.htm) publishes English-Russian/Russian-English dictionaries and handbooks for the oil and gas industry, while Austin's Oak Ridge Research (www.oak-ridge. com/orr.html) specializes in books about the Internet, on-line publishing and running an Internet business.
The Internet holds intriguing possibilities for supplementing public school textbooks. Currently, subject texts are updated in Texas only every six to 10 years. With new technology, textbooks could be kept accurate. At least one publisher has expressed interest to the Texas Education Agency in updating its social studies book on a quarterly basis via the Internet. At the urging of Comptroller Sharp's Texas Performance Review, the Legislature is considering a pilot project to do just that.
A survey by the Texas Association of School Administrators showed that almost half of the state's 6,400 public school campuses now have direct Internet connections.
Schools are rapidly learning how to put the Internet to use. According to the Texas Parent Teacher Association, about 100 Texas public schools have established their own sites on the Web, many created and maintained by students.
The sites typically include student newspaper articles, links to student organizations, e-mail addresses for alumni, even audio files of school fight songs. A Web site allows schools to publicize new programs.
In the E-money: Investors and brokerage firms alike have learned they can save money by conducting stock and bond transactions through the Internet. Several large brokerages offer their services on the Web, often at discounts of up to 25%. Brokerages are able to cut costs by having investors conduct their own transactions without the use of a paid stockbroker. Brokerages, in turn, pass this savings along to the investor. Two of the largest services are E*Trade (www.etrade.com/), an Internet-only brokerage, and SchwabNOW! (www.schwab.com/), a service of industry giant Charles Schwab & Co. Inc.
Both E*Trade and SchwabNOW! offer customized portfolios that track stocks customers purchase through the services, from the New York Stock Exchange, NASDAQ or AMEX. They also offer access to investor news, tips and personalized Web pages where customers can keep up with the stocks they own or are interested in, as well as various economic indicators and investment news.
Other financial services offered through the Internet include stock tip sheets, stock tracking services and general investor advice and information. Austin's Onramp Access offers a comprehensive directory of financial and on-line investment sites at www.onr.com/stocks.html.
Some banks allow customers to open accounts through the Internet and transact all sorts of business. (See article, page 10.) Other sites like Bank Rate Monitor's InfoBank (www.bankrate.com/) evaluate bank services, showing where to find the best rates for mortgages, home equity loans, auto loans, personal loans and certificates of deposit. InfoBank evaluates credit cards as well, rating the best deals for people who carry a balance and those who pay off their balance each month.
How soon is now? Day-to-day money-making on the Internet has not yet arrived for most companies. Users' lack of confidence in existing security measures on the Internet is one reason more companies are not doing daily business online. A secure electronic cash or other payment scheme that is trusted by the everyday consumer could send businesses scurrying to the Net.
Until then, the ability to make money on the Internet may be limited. According to the promotions surrounding the Internet, the days of businesses making big money on-line are right around the corner. But that's been the claim for some time now. The next major breakthrough may send thousands of businesses online, to reap huge profits from a savvy, educated market.
Entrepreneurs are only now discovering what businesses and services are best suited for the Internet. New ideas appear almost daily. Sooner or later, the right business will get together with the right technology, and the commercial age of the Internet will begin.
Editor's note:
The World Wide Web addresses listed in this article were current as of April 9, 1997.Contributing to this article:
Greg Mt.Joy
Internet BacklashThe newest trend surrounding the Internet is predicting its demise. IBM Chairman Louis Gerstner is not alone among corporate leaders who complain that the on-line industry has become directionless. Industry "food fights" such as the browser war between Microsoft and Netscape have begun to turn off consumers.
Congestion on the Internet has become so bad that the Federal Communications Commission called for public testimony to determine what's causing the problem and how providers might be persuaded to provide more high-speed connections to users.
Industry leader America Online (AOL) has caused colossal problems with its new pricing model--charging a set fee for unlimited service--to attract new customers. Huge traffic jams occurred from the overload of subscribers, resulting in some AOL users staying online for days at a time for fear they wouldn't be able to get back on.
After a major service blackout in 1996, subscribers began suing because they could not get access to the "unlimited" service they had paid for. Three dozen states threatened lawsuits as well, prompting AOL to pledge to spend more than $350 million on 150,000 new modems and rebates.
Other technologies have yet to live up to their promise. The new cross-platform programming language JAVA is a good example. Despite months of promotions, the only evident usefulness is the entertaining animated logos and icons created using "applets" of JavaScript. Live pitch-by-pitch baseball coverage shows promise, but is no more informative than a radio broadcast. More useful applications are promised.
Some Internet insiders are prophesying doom, warning of a backlash against the industry. Lack of solid Internet commerce remains a problem, as seen by the commercial sites that have yet to yield a profit.
Many Web users are turned off by the preponderance of advertising, while others balk at paying $10 to $20 a month in subscription costs for a particular service. Costs for running banner advertisements atop a Web page vary depending on the popularity of the site. Popular Web sites such as those run by PC Multimedia and Entertainment Magazine and Netscape charge anywhere from $250 to $46,000 a month, according to Chicago-based SI Software. Attempts to regulate Internet content may have adversely affected the public's perception of the medium.
Another problem may be that the explosive growth of the Internet, especially the World Wide Web, has peaked. Most Americans likely to get on the Net may have already done so, leaving little room for growth, according to researchers at Georgia Tech University. A survey of Web users by the university's Graphics, Visualization and Usability Center reported that the percentage of new users on the Internet fell dramatically in 1996, with the number of respondents that had been on-line for less than a year down from 60% in 1995 to 36% in 1996.
Similarly, the rapid growth fueled by universities and schools linking to the Internet the last two years has cooled. Growth rates may stay flat, at least until the next innovative technology--perhaps WebTV or the Internet phone--becomes affordable and widely used.
Contributing to this article:
Greg Mt.Joy
Locating the Sale
Changing nature of electronic
commerce makes tax policy elusiveElectronic commerce is proving to be a thorn in the side of tax collectors as the purchase of goods and services via the Internet fundamentally challenges traditional tax bases.
With the value of computer-based electronic commerce expected to multiply by the turn of the century, government officials at all levels are grappling with how to tax an industry that changes faster than the tax laws.
The problem, explain tax and legal authorities, is that electronic commerce alters the basic idea of a transaction, thereby weakening the enforcement of existing state sales tax laws. In many states, including Texas, sales tax means a transaction tax on goods and some services. In cyberspace, however, a "sale" involves the transfer of intangible information, which may represent tangible property or taxable services. A product such as a music compact disc could change from taxable to nontaxable as it is transmitted electronically.
Neither tax collectors nor taxpayers have many answers. In fact, they are just beginning to identify the questions. Here are some of the main ones:
Because most state tax laws were written before anything resembling an electronic sales transaction had taken place, the answers to these questions differ in each state.
* With digital cash and the potential to buy and sell anonymously, how should each transaction be traced for a sales tax?* Can an out-of-state company be shown to have a "presence" within the state for tax purposes if its product is "delivered" to a resident's e-mail address? A teen-ager in the Netherlands has gained worldwide notoriety for her ability to avoid enough "presence" to pay taxes. Offering a popular product for sale, she moves her home page to servers in different parts of the world--a process that takes about an hour--and remains one step ahead of international tax authorities.
* What sort of taxes should be paid by a "virtual" corporation--one that has decentralized itself by electronic means?
Global confusion: Many of the tax laws affecting commerce are obsolete for today's technology. Tax systems vary among the states, and tax rates vary among the jurisdictions within the states. State governments face an enforcement nightmare when both money and products exist as streams of electronic bits.
Businesses may fear they will lose their competitive edge if they strictly follow tax codes, while entrepreneurs who are more lax risk being hit with big tax bills.
According to a KPMG Peat Marwick survey of U.S. companies doing business over the Internet, more than two-thirds of financial officers said tax laws governing electronic commerce are ambiguous, and more than half said the ambiguity inhibits their involvement in selling products electronically.
The federal government is neutral when it comes to taxation of the Internet, because new or additional taxes on these transactions could impede electronic interstate commerce, according to a U.S. Treasury report.
Two congressmen want to go further and put a moratorium on state and local taxes on electronic commerce. They say the federal government should develop a plan that addresses taxation and the Internet.
The Interactive Services Association (ISA), a trade group serving the on-line services industry, proposes establishing a uniform definition of the tax adopted among all states and a single rate within each state which would be imposed on the purchaser, per transaction, and attributed to the state into which sales are billed.
To tax or not to tax: One of the greatest inconsistencies in taxing electronic commerce is the states' varying positions on taxing access to on-line services. Thirty-three states do not tax access.
In Texas, access charges to the Internet are considered taxable information services. Therefore, on-line service providers must collect and remit the state sales tax.
Florida imposes a sales tax on non-residential use of telecommunications services, which include e-mail and Internet access. New Jersey taxes the cost to transmit telecommunications services rather than the value of what is transmitted; while e-mail and computer information services are not taxable, Internet access is. South Carolina taxes communications, including e-mail and database access.
Internet service providers in some states claim they are subject to double taxation when they offer access through dedicated telephone lines. They argue that they pay tax on the telephone lines, as well as on the services they provide directly.
Tax officials, on the other hand, contend that Internet access is similar to other taxable services, such as data processing and local and long-distance telephone service.
In Texas, a sale for "resale"--the sale of a taxable service to a purchaser who acquires the service for the purpose of transferring or reselling it--is exempt from the state sales tax. So, on-line service companies may present "resale certificates" to telephone companies and avoid double taxation.
States also struggle with defining and taxing information services. In Texas, these are defined as the furnishing of general or specialized information as well as electronic data retrieval or research, and they have been part of the sales tax base since 1987.
Only a handful of states tax information services. Connecticut taxes computer and data processing services; New York taxes the provision of electronic information but excludes e-mail. Ohio taxes electronic information services, but most commercial on-line services are exempt. Hawaii, New Mexico and South Dakota impose a sales tax on all services.
The other tax: The corporate income tax, specifically regarding where income is earned, is another policy glitch in cyberspace. Generally, corporate income is determined by the "source" of the income-producing activity. But traditional methods of determining where income is earned are clouded. Some "virtual" corporations have no physical addresses, and new ways of doing business involve information networks through multiple sellers, buyers and products or services.
The U.S. Treasury predicts that electronic commerce will spur "residence-based" income transactions, based on the geographic location of the buyer, over "source-based" transactions, which are tied to the geographic location of the seller.
"In the world of cyberspace," says a 1996 Treasury report, "it is often difficult, if not impossible, to apply traditional source concepts to link an item of income with a specific geographical location. Therefore, source-based taxation could lose its rationale and be rendered obsolete by electronic commerce. By contrast, almost all taxpayers are resident somewhere."
Dan Bucks, executive director of the Multistate Tax Commission, opposes residence-based taxation of the Internet due to the potential for double taxation on vendors who have headquarters (source-based) in one state but have customers (residence-based) in another state.
One option for preserving the tax base is to target the "transmission," not the transaction, by taxing the number of bits moving across the wires rather than their value. The idea, proposed by economists in Canada and the Netherlands, is gaining attention, particularly in Europe where the primary consumption tax is the value-added tax (VAT). The VAT taxes goods and services at various points of production.
Meanwhile, as more consumers "shop" in the electronic marketplace and states muster to protect their tax bases, policymakers must consider the potential benefits of on-line commerce. States with a healthy "cybercommerce" might anticipate new sources of revenue from expanded employment, increased profitability and expanded use of telecommunications services.
Contributing to this article:
Julie Crimmins
What's Taxable?Just where to draw the tax line in cyberspace often confounds taxpayers and tax collectors alike. Here is where Texas stands on the issues.
Subject to state sales and use tax:
* Internet access services The local tax on information services is based on the location of the service's place of business.* Data processing services (except for transcription of medical dictation)
* Computer software Software is considered tangible personal property, so software manufacturers may claim a sales tax exemption for the manufacture of the product. If a taxpayer buys, modifies and sells software, he may receive a tax exemption because modification qualifies as "manufacturing." The taxpayer may claim a tax exemption on computer hardware, software and printers used to code the software.
* Charges for maintaining a site name and link on the Internet
* Creation or posting of Web pages
* Information or data scanned into the Internet or the creation of HTML documents
* Graphic arts or logos created for a home page
* Information transferred between automated clearinghouses and merchants
This is taxed as a telecommunications service. For example, an Internet dating service has been held to be a taxable information service.
SOURCE: John Sharp, Texas Comptroller of Public Accounts.
Virtual Banking
Banks foresee savings and profits with on-line transactionsFor more than a century, successful Texas banks have weathered economic downturns, federal tax reform and deregulation. Now, electronic commerce and the Internet offer new services for bank customers and new challenges for Texas bankers, from independent community institutions to out-of-state megabanks with operations in Texas.
Long regarded as a conservative industry, banks today are among the most aggressive users of technology. Beginning in the early 1970s, the use of digital computers and automated teller machines (ATMs) grew like wildfire. Computers became more sophisticated and telecommunications improved, allowing banking by telephone and through personal computers (PCs).
As access to the Internet improves, banks are developing ways to attract new customers and conduct financial transactions through new forms of currency, as well as to compete with non--bank institutions such as credit unions, brokerage firms, financial services, mortgage and insurance companies and other firms offering services traditionally offered by banks.
The information highway: Thanks to the Internet, many banks have seen geographic boundaries disappear, and Internet users are free to choose from banks all over the world. The Internet creates a more even playing field, allowing small banks to carve a niche in the on-line competition.
In banking, as in other industries, being "on the Net" usually means having a World Wide Web site. Most banks have informational sites only, rather than interactive sites that allow financial transactions. Informational sites typically describe a bank's products, such as the checking accounts offered or consumer loan interest rates, and list locations and operating hours of bank offices and ATMs. Some go further and make check re-ordering, bank statements and loan or interest calculators available on-line.
More than 500 U.S. banks had home pages by the end of 1996, according to CS First Boston. As of mid-March 1997, about 50 banks with a presence in Texas had informational sites. La Grange State Bank (www. lonestarbank.com/) claims to be the first registered Web site offered by an independently owned Texas bank.
Few banks offer interactive home banking, but the service is expected to grow rapidly. According to Security First Technologies, a consultant to banks on Internet services, only three U.S. banks in early 1996 allowed customers to make account transactions on the Internet; 300 banks planned to do so by the end of 1997 and 600 by the end of 1998. A November 1996 poll by New Jersey's Datapro Information Services Group indicated that 7% of banks worldwide offered Internet services in 1996 and 36% would by the end of 1997.
Among traditional commercial banks, BankAmerica Corp. and Wells Fargo & Co. are national leaders in Internet banking. Many Texas companies and banks have taken the plunge as well. They range from large companies like Plano's Electronic Data Systems, which is involved in Internet banking products and processing, to small companies like Mesa Internet Systems Inc., an Austin-based Internet service provider working with the Independent Bankers Association of Texas.
Having heavily invested in computer technology to provide new services and attract customers, banks have had higher productivity growth than any other finance or service industry, according to an August 1996 analysis by the U.S. Bureau of Labor Statistics. Technological improvements and industry consolidation also have played a part in eliminating banking jobs. In Texas, employment in commercial banking fell by an average 0.7% annually between 1988 and 1995, or roughly 4,600 jobs in total.
Security First Network Bank (www.sfnb.com/) is the first bank to exist entirely online. SFNB opened in October 1995 as a consumer bank and software testing site for other banks considering offering Internet services. With 12 initial employees, SFNB provided on-line banking to 7,000 customers and had $20 million in FDIC-insured deposits at the end of its first year. In December 1996, SFNB opened a self-service branch in Atlanta with ATMs, PCs and a small staff for the rare occasions that customers want personal contact with an employee; branches will open in 1997 in Boston and Palo Alto, Calif.
The Texas connection: Fewer than a dozen Texas banks with an Internet presence offered home banking in early 1997. One of the first to do so was City National Bank of Taylor (www.cnbt.com/). This independent, 96-year-old bank near Austin has been one of the most aggressive technology users in the U.S., offering home banking on the Web, as well as a weather link and a live view of the town's Main Street.
City National began in mid-1996 by offering a VISA card over its Web site, through which the bank received applications from all over the world. Now it plans to offer the option of bill paying. Edify Corp., which assisted the small bank with its on-line banking products, says City National is the first community bank in the U.S. to offer "live interactive service for its customers via the World Wide Web."
The Texas Bankers Association (www.txbanc.com/) provides assistance to banks in establishing Web sites. The Independent Bankers Association of Texas (www.ibat.org/) is helping its members establish Web sites and has announced the creation of a consortium to provide on-line banking services through 730 Texas community banks. The new system, called Money-Xpress, will use the Pulse ATM network.
Home banking: Home banking through personal computers was used by some bank customers even before the Internet was widely accessible. Chase Manhattan Bank, a pioneer in the field, started offering home banking products in 1984. The advantages to consumers are many--banking services are available 24 hours a day and customers can pay bills electronically, saving on postage, envelopes and checks and avoiding late fees. Customers can also check account balances, transfer funds between accounts, trade equities and secure loans.
Banks benefit from on-line banking by needing less paperwork and fewer employees. The American Bankers Association reports that processing a teller transaction costs $1.07, compared to 35 cents if the same transaction is conducted on the phone, 27 cents if it occurs at an ATM or 10 cents if done on the Internet. As home banking use grows, fewer bank branches may be needed.
Home banking charges vary by institution and range from a one-time cost to monthly fees. A bank in Corpus Christi charges a one-time software cost of $5.95 and a $7.95 monthly fee for on-line banking. One Waco bank's price is $20 for the software and $4.95 for the monthly fee. A NationsBank survey indicates those people most interested in online banking are 35 to 54 years old and have above-average incomes.
Customers who are least interested in on-line banking say they question the privacy and security of the system and their money, especially after a much-publicized breach of banking security in 1995 involving a Russian hacker accused of pilfering $3 million from Citibank's electronic banking system. The electronic intruder is awaiting trial in the U.S. Most of the money has been recovered.
High-tech security: Bank customers' concerns about home banking security are understandable, because the complex networks and systems used are hard to explain in simple terms.
On-line banking systems use multilevel security features to protect accounts, including passwords, cryptography/encryption, authentication, firewalls, filtering routers, gateways and internal controls. Passwords are mailed to on-line bank customers to maintain confidentiality. Encryption changes data into a format that can be transmitted without someone being able to read or alter it. Authentication verifies the bank customer's identity.
Firewalls control traffic between the outside Internet and that of the internal bank network, acting as barriers that only verified transactions can cross. Filtering routers check the source and destination and let only verified transactions through. Gateways and internal controls are procedures and rules established by an on-line bank to regulate transactions.
One last hurdle: Other than security concerns, the remaining obstacle to increased use of electronic banking services is lack of access. The more heavily used services are those requiring the least investment in new technology by banks or their customers. Interactive banking by telephone, for instance, is offered by almost all institutions, and is used at least once a month by one in three households, according to Payment Systems Inc. Internet banking is expected to grow much faster once most American households have Internet access either through WebTV, a special screen telephone or a PC.
Currently, most home banking customers use a PC and either Quicken or Microsoft Money software to organize personal finances and keep track of banking, credit card and investment accounts. Quicken, released by Intuit in 1984, is the best-selling personal finance software product with a 75% market share and more than 9 million customers. Using Quicken's Bank-Now program, on-line banking is available through America Online.
Microsoft and Intuit have announced the "Open Financial Exchange," which will create a common platform that provides a direct link over the Internet between Quicken or Microsoft Money and the bank.
The drawback to using any PC-based banking software is that customers cannot tap into account information from anywhere in the world, unless they take a computer with them. For banks, the chief disadvantages are the need to distribute new software versions to thousands of bank customers every time an upgrade occurs and the open nature of the Internet, which raises security issues.
Many banks have been on the offensive since Microsoft Chairman Bill Gates announced in 1994: "Banks are dinosaurs. We can bypass them."
In response, the 125 largest U.S. banks formed the Banking Industry Technology Secretariat (BITS) to prevent high-technology firms and other non-banks from repeating history by encroaching into banks' territory, as they did with mutual funds and credit cards.
Banks also have fought for control of home banking systems to eliminate the dependence on Quicken and other PC-based programs. With software based at the bank's Web site, customers can access their account from any Internet connection in the world, and banks can more easily upgrade software, installing the new version on one Web site versus thousands of PCs.
To address software and security concerns, some of the leading banks have teamed up to build Integrion Financial Network, a system of banking intranets that will be more secure than Internet banking.
Prospects: American Banker magazine reports that by 2000, on-line banking will generate 30% of banks' retail profits. This estimate assumes that almost all households will use computers within five years.
Security First Technologies predicts that 4% of U.S. households will bank electronically by the end of 1997, with half of those using Internet banking. Estimates are that by 1999, 16 million households will perform their banking duties online.
No one really knows what the future holds for electronic banking, but it stands to reason that banks offering the most convenient and secure services will advance the fastest.
Contributing to this article:
Diane Thomas
E-CurrencyElectronic money is a broad term used to refer to any payment system outside the financial networks of banks, currency and checks regulated by the Federal Reserve System. Plastic and electronic forms of money are unlikely to replace all currency, at least as long as people like to carry change in their pockets.
PC-BASED MONEY: E-money is maintained by computer programs or software that can be programmed or earmarked for specific purposes. A diverse group of companies offer this option.
First Virtual Holdings Inc. In 1994, this San Diego company introduced the first fully operational Internet payment system. It allows Internet users to conduct on-line transactions without encryption, special software or equipment after registering for their unique VirtualPIN. These systems use conventional forms of monetary transaction and email for on-line transactions and The NetBank (NetCash).
E-cash This system was developed by DigiCash, founded in Amsterdam, as a secure way to hold cash through personal computers. It claims to be the first secure peer-to-peer payment system for the Internet. Customers can transfer money from an e-cash mint (at Mark Twain Bank of St. Louis) to their computer hard drives.
CyberCash Founded in Reston, Va., CyberCash offers an "electronic wallet" that can be used with the browser of the customer's choice, offering secure real-time credit card authentication over the Internet using digital signatures. CyberCash is connected to more than 95% of U.S. banks and credit card processors. The system allows banks to make secure Internet payments to customers. CyberCash is working with VISA and MasterCard to develop the Secure Electronic Transaction protocol for on-line credit card transactions.
Many consumers hesitate to use these systems for fear of giving out a credit card number over the Internet. Another concern is that digital dollars usually are not insured. Little recourse exists if a customer's computer hard drive crashes, the e-bank fails or a hacker drains the account. Companies offering digital currency disagree, stating that digital cash is safe and that breaking the encryption codes protecting such transactions would take years and offer little return.
SMART CARDS: VISA, MasterCard, Citibank and Chase Manhattan Bank have announced a joint plan to offer electronic purse cards or stored value cards. This plastic "smart" card contains a microchip that expands the power and functions of traditional debit or credit cards. The cards can be "loaded" with cash at an automated teller machine (ATM) or other terminal.
Smart cards are viewed as an alternative to coins and small bills for making purchases of less than $10. Prepaid cards are becoming common for telephone calls, mass-transit fares, toll roads, vending machines and parking meters. Each card has its own computer chip, so using one does not require a connection to telephone lines. This allows for faster transactions and use in remote locations.
Meanwhile, Mondex International of London has come up with a technology that is being used around the world as an alternate to both physical and virtual currency. AT&T and Wells Fargo & Co. have announced plans to form a U.S. affiliate of Mondex that will offer cash loaded onto a smart card. They have been joined by Chase Manhattan, Dean Witter (Discover), First Chicago NDB, MasterCard and Michigan National Bank.
A user, for example, can purchase a $20 device that allows computers to read and write information from the computer chip on the card, or transfer funds onto and off the card at an ATM. This allows customers to load electronic cash from their bank accounts onto their Mondex cards, then spend it on the Internet or at stores accepting the card. No one knows how readily consumers will accept this product. VISA tested smart cards at the 1996 Olympics in Atlanta.
THE DOWNSIDE: Along with new payment methods come new complications. The U.S. Treasury has warned that "national borders and the capacity of central banks are changing via the Internet." Federal authorities estimate that roughly $300 billion a year in illegal assets is floating around the international financial system. For now, the Internet makes it easier to conduct anonymous internal cash transactions--a criminal's dream come true.
The U.S. Federal Reserve has no plans to regulate new electronic payment systems but is carefully observing developments. The few laws governing electronic monetary transactions are vague because of a lack of government regulation. Always interested in audit trails, the federal government is considering applying Regulation E to some on-line payments. Regulation E makes credit and ATM card users liable for only the first $50 in losses if a card were stolen.
Contributing to this article:
Diane Thomas
From the Comptroller:
Fraud ReliefOne of the reasons we implemented the Lone Star card in Texas was to reduce the widespread fraud seen under the old paper food stamp coupon system. In just 15 months since the electronic benefits transfer system went statewide, there has been plenty of evidence that it's working.
Houston law enforcement recently busted nearly 250 people through a unique sting operation, proving that with the Lone Star card police now have a powerful new tool to wage war against fraud.
The Houston bust, which was a combined effort of federal, state and local authorities, used the electronic trail created by the new card to track illegal transactions. The authorities caught customers who wanted to illegally scan their cards for cash--not food. Those so-called customers now face the possibility of prison time.
Under the old federal paper system, police had to catch people in the act, and too often food stamp fraud went undetected. But with this new technology of the Lone Star card, no cash changes hands during a legitimate food stamp transaction and police can stay one step ahead of the most creative scam artists.
Fraud control can always be strengthened; in fact, the Legislature is studying ways to do so. Lawmakers are looking into ways of ensuring that the AFDC monthly cash allotments which may be withdrawn through individual Lone Star card accounts is spent only for legitimate household items.
About two million Texans use the Lone Star card. Our goal is to ensure that the federal food stamp program in Texas does what it was supposed to do--feed hungry children.
Scholarships Go OnlineLooking for scholarship programs to help offset the cost of a college education? Texas students, their parents and school counselors will soon have a new on-line source to aid their search.
Comptroller John Sharp, in conjunction with the Minnie Stevens Piper Foundation (MSP) and the Texas Guaranteed Student Loan Corporation (TGSLC), will open a new electronic site on the World Wide Web, offering information about college scholarships and financial aid. The Web site is the Internet version of the MSP publication, Compendium of Texas Colleges and Financial Aid Calendar.
MSP has published the compendium since 1967 and distributed it to high school counselors across the state. Updated annually, it lists all Texas colleges and universities, public and private, with information on admission requirements, costs, financial aid, application deadlines and scholarships available to Texas students.
The new Web site, located at www.window. state.tx.us/scholars/mspmain.html, reports on federal as well as state financial aid programs and features a short description of more than 100 scholarship programs for which students may apply.
Based in San Antonio, MSP has assisted students since it was founded in 1950. The foundation also operates a student loan program, a distinguished professor awards program, the Piper Scholars Program, Piper Fellows Program and a student financial aid center.
TGSLC's Web site at www.tgslc.org provides information on all aspects of financial aid, as well as on colleges and careers. The site has been recognized by several magazines and Web site awards. Comptroller Sharp serves on the TGSLC board and chairs the Texas Tomorrow Fund, the states prepaid college tuition plan.
Contributing to this article:
Mary Mitchell
Fiscal Notes
April 1997
April 1997