VoIP's big selling point used to be the long-distance bargain, but then phone companies cut their rates. These days banks switch for customer-service benefits, advanced functions, and ease of administration.
Bypassing phone lines, Voice over Internet Protocol technology transmits ordinary telephone calls over the networks that carry data. It is fast becoming a standard way to transmit voices. In a September study, Radicati Group predicted that worldwide revenue for VoIP technology would grow to $9.9 billion in 2009, from $1.5 billion last year.
The biggest obstacle is the life left in existing telephone equipment. That explains why banks install VoIP most often when adding a branch or to get a fresh start in telecommunications.
In 2003, Parish National Bank of New Orleans acquired a mortgage company in Florida with an antiquated phone system. Equipment and services to connect the company's offices to Parish's phone system would have cost about $30,000 a branch, said Jeff Van Houten, the bank's advanced technology manager. VoIP cut that to about $18,000, and it is now $10,000, said Mr. Van Houten, a senior vice president.
In addition, he said, the advantage in flexibility has helped the $400 million-asset bank save $6,000 a year in bandwidth charges. Instead of running T-1 telecommunications lines to each of its Florida branches, Parish can create a hub for groups of them that consists of, say, one long T-1 line and two shorter ones. With T-1 lines in Florida priced by the mile, Parish is saving $500 to $600 a month for every branch or two, Mr. Van Houten said.
Parish's Louisiana telephone equipment still had some value, so the migration there has been slower. Still, most of its branches and about half of its users now connect by VoIP, Mr. Van Houten said.
As the technology spread throughout the organization, Parish realized benefits apart from the savings. For example, in some locations Parish uses bandwidth freed by VoIP for video conferencing, so it didn't have to add capacity.
The bank has moved to a universal in-box. E-mail, faxes, and voice messages are available through one system, so users can listen to e-mail over the phone and receive faxes through their PCs. VoIP has also let the bank add redundancy to its phone system at a low cost.
As for long-distance charges, "they're about the same as before," Mr. Van Houten said, even though the bank has added Florida offices.
Customer service is why the five-branch Bank 10 of Belton, Mo., went with VoIP about two and a half years ago to replace an out-of-date phone system.
"We wanted one location to be a central receptionist," said Bill Delphia, the network administrator at the bank, a unit of the $1.2 billion-asset Exchange National Bancshares Inc. of Jefferson City, Mo.
Customers who called a branch with a problem often needed to call another location and explain it again, he said. The new phone system lets a bank representative brief a colleague before the customer is transferred.
The system has also streamlined Bank 10's multibranch morning conference calls. One branch used to call another, put it on hold, and dial another until everyone was on the line; as more branches joined the call, the sound got worse. Now everyone dials into a central location.
The $1.8 billion-asset Woodforest National Bank of The Woodlands, Tex., opened a new VoIP-equipped data center in August 2004.
Woodforest had concluded that it made sense to put all data and voice communications on one network. "Cost savings definitely was not a huge driving factor," said Jim Duke, its executive vice president of technology. More important, he said, was the ability to dynamically use the full bandwidth at any time.
Mr. Duke said the biggest benefit has been how easy it is to make changes to the phone system. With traditional systems, phone numbers are associated with jacks, so moving a phone to a new location requires rewiring. Not so with VoIP, which treats phones as nodes on the network, allowing administrators to reprogram them from afar.
Though VoIP can trim telecom bills, the up-front costs can be high. "One should not underestimate the cost of putting in this equipment," said Lisa Pierce, a vice president at Forrester Research of Cambridge, Mass.
Mr. Van Houten of Parish National warned against trying to install VoIP on a "pieced-together network" that has grown through the addition of different makes of routers and switches. The quality of VoIP communications will suffer, he said.
Banks should have a robust network already or be willing to invest in one - and "if you're looking at a complete infrastructure upgrade, it's going to be pretty tough to chew on," Mr. Van Houten said.
Mike Plumer is the vice president of sales at Altigen Communications Inc., a VoIP-system provider in Fremont, Calif., with about 150 bank customers. He said banks may not want to upgrade networks that are still adequate for data communications.
"A five-minute delay on e-mail is OK, but not for voice," he said, and "the cost of upgrading the network could be equal to or more than the cost of the phone system."
Security is also an important consideration. Because VoIP runs on the Internet protocol, it is subject to the worms and viruses that roam the Internet.
And the number of threats against VoIP systems is rising. Last year 33 bulletins were issued about VoIP threats, up from six in 2004, according to Internet Security Systems, an Atlanta provider of security systems.
In just the first two months of this year, about a dozen VoIP-related bulletins were issued. Typical threats include unauthorized call monitoring and denial-of-service attacks, in which bogus traffic eats up bandwidth, overloading the system.
Exchange Bank of Santa Rosa, Calif., has been beefing up its network security for two years. Bob Gligorea, its information security officer, said that is essential for any implementation of VoIP. Banks that have not taken precautions such as installing intrusion detection and prevention systems "should seriously reconsider their decision to use VoIP," he said.
Exchange, which needs to replace telephone equipment in its branches, plans to install VoIP this spring, Mr. Gligorea said. Over the next few months it will also be installing intrusion detection systems on all of its servers and desktops; it has already done so with the other segments of its network.
Exchange expects a three-year payback on the investment, which includes new switches and routers to upgrade its data network. "For a comparable bank without security in place, you'd have to look at a six-figure expense on security measures," Mr. Gligorea said. "That would extend your payback by a couple years."
Mr. Gligorea is also in charge of business continuity planning at Exchange Bank. He said VoIP is enabling it to implement new backup measures for the phone network. If problems with the telephone company arise, VoIP will let the bank route voice traffic through other channels, he said. The new routers the bank is installing can send traffic through T-1 lines, cable lines, satellites, or microwaves. If traffic through T-1 lines were compromised, the routers would automatically funnel it through another path.
"VoIP provides a higher probability we'll be able to communicate after a disaster" than traditional telecommunication systems do, Mr. Gligorea said. This is not a trivial point, he emphasized, because the chance of a catastrophic earthquake hitting California sometime in the next 24 years is 62%.
The technology is also getting better. Six or seven years ago, when Mountain America Credit Union of Salt Lake City installed a small VoIP system for disaster recovery and testing, voice quality was not adequate, said Ray Causey, its vice president of technology.
"It is now," Mr. Causey said. The 42-branch bank installed VoIP companywide about two years ago, when it moved into a new corporate office.
Banks can switch over to VoIP gradually - first for the customer service department, for example, then for others, as time and resources allow. Alternatively, they can install VoIP to support internal communication among branches but use traditional telephone lines to connect to the outside world.
"A more gradual approach is more affordable and controllable," said Forrester's Ms. Pierce.
But with Internet-based telephony becoming the standard, staying with old-fashioned phones may no longer be an option. "It's really not about cost savings anymore," Ms. Pierce said. "The issue is how long the old technology will be supported."
