After a false start in the 1980s, home and personal computer banking may yet become a popular product. With more than seven million home computers sold last year alone, at a cost of more than $9 billion, American consumers and small businesses may increasingly use the information superhighway for their banking needs.
A customer with a personal computer can use home banking software to ask the bank electronically for a summary of account activity and current account balances.
Or the customer may send an instruction to the bank to transfer funds between accounts. The program also may allow the customer to transmit an instruction to the bank that a bill be paid.
Upon receipt of the instruction, the bill is paid by electronic, automated clearing house debit to the customer's account. If the payee cannot receive an ACH payment, the payment would be made by a check drawn on the customer's account.
A handful of banks offer their own home banking software to customers, but at least as visible are the off-the-shelf programs from major software companies such as Intuit, Block Financial Corp., Microsoft, and Computer Associates. Examples include Quicken, Managing Your Money, Money, and Simply Money.
A number of legal issues arise for banks that wish to offer PC banking to customers who use some of these off-the-shelf programs.
With some off-the-shelf programs, such as those that offer only a bill payment feature, the bank's role is passive. At a customer's request, the software causes a check to be prepared and sent to a payee; the bank's role is simply to honor the check like any other.
Other off-the-shelf programs may require more bank participation, such as sending account information or accepting customers' funds transfer instructions.
Significantly, these programs may have another feature - electronic instructions from the customer may not go directly to the bank. They may go to an intermediary, a third-party provider that acts as a switch or gateway, collecting and relaying the customer's instructions to the bank. Conversely, the data the bank sends back to its customer may pass through the same intermediary.
In such a case, the intermediary is acting as a processor or, in effect, a computer service bureau for the bank.
Consequently, many traditional elements of a good service bureau agreement should be in the agreement between the bank and intermediary, beginning with a careful description of which tasks are to be done by the intermediary and which by the bank.
From a legal perspective, if a failure occurs, such as a funds transfer or a payment not being made, it is important to know who was responsible for performing the task.
Other critical parts of such an agreement include provisions to ensure compliance with Regulation E and the Electronic Fund Transfer Act, which impose significant requirements on banks such as consumer disclosure, procedures for error resolution, and liability for errors. The agreement should also specify the performance levels expected of the intermediary in such areas as uptime, accuracy, and security.
These sorts of performance standards are common in service bureau and data processing agreements. Moreover, since off-the-shelf programs are developed independently by third parties, banks do not control the programs' features or performance.
When a bank is asked to play a role yet has no control over the software used, it would want to tell its customers that the bank cannot be responsible for the program's performance.
An advantage of off-the-shelf programs is that they have strong brand names that may attract customers to home banking. However, that strong brand identity also may cause some banks to fear their customers will gravitate toward those brands for financial services.
This concern is reflected in a recent study for the Bankers Roundtable, "Banking's Role in Tomorrow's Payments System," which notes that the service banks provide, storing monetary value, has become a low-priced commodity. The addition of value or enhancements, such as increased information or customer convenience, is too often done by nonbank software and technology companies, which are piggybacking on the fundamental systems built by banks.
One would think that, to alleviate bankers' concerns in that regard, software companies would create generic or private-label home banking programs for banks. The software vendor would allow such programs to be offered by any bank under that bank's name and thereby make the vendor invisible to the public.
Visa Interactive is said to be developing this kind of approach with Block Financial Corp. Many banks may want such a program, including its user manual and advertising materials, to identify only the offering bank and not the software vendor or service provider.
Another alternative to off-the-shelf programs from the major software companies is for a bank to develop or license its own proprietary program, which it then offers its customers.
This has been the approach of giants in the securities business, such as Fidelity with its Fox program and Charles Schwab with its Street Smart program. Like any software development, this can be a major task.
Significant effort must be spent at the outset to decide which services will comprise a personal computer banking product and, by extension, which functions the software must perform and what its capacity and performance levels must be.
If customer interest in PC banking continues to grow, pressure may continue to offer more and more services, such as securities, mutual fund, and annuities brokerage, through the PC banking channel. Adding, subtracting, or modifying services or software functionality could be more difficult for a bank relying solely on off-the-shelf programs.
A bank or bank holding company that wishes to buy a software development company should find bank regulatory support for the plan if the company after its acquisition basically acts as a service firm. It would develop software for use by the bank's customers. As with any acquisition, state superintendent, comptroller, or Fed approval would be required.
Likewise, several banking organizations also should be able to ally to own a software development company jointly. Joint venture ownership could spread development costs and still allow each bank to offer the program under its own name as its own product. The program also could be customized for each bank's needs.
Joint ownership reduces cost but increases complexity because of the need for owners to make strategic and operational decisions jointly.
Acquiring a software company or division that owns the best known off- the-shelf personal finance programs may also be legally possible.
No doubt such companies have considered the feasibility and desirability of owning a bank. To the extent such a company, after its acquisition, offered programs to customers of the parent bank, the company might be viewed from a legal perspective simply as a service subsidiary of the parent.
If the company continued to offer programs to those who were not or did not become parent bank customers, the bank would not be using the company as a service subsidiary, and the acquisition would be reviewed by bank regulators on the basis of its permissibility as the offering of a product closely related to banking, such as data processing, data transmission, or investment advice.
To summarize, banks of all sizes may wish to offer home or PC banking to depositors who buy off-the-shelf programs from major software companies. Some of this software requires banks to play an active role and enter an agreement with the software company or an intermediary. Such an agreement should protect the bank's many interests.
Larger banks may have the resources and desire to develop their own proprietary PC banking programs - an effort that should be managed like other significant software development projects.
Large and small banks alike may wish to induce software development companies to create generic or private-label PC banking programs, which banks could license and offer under their own names. The object of such agreements would be to make the software company invisible to the bank customer. The Brown Raysman law firm specializes in computer law. Mr. Aardal, a partner in its Los Angeles office, focuses on banking and technology issues.