Establishing an Internet banking system is not quite the chore that some might think. Just ask executives at Southwest Bancorp in Stillwater, Okla.

In late 1997, executives with the $1 billion-asset bank company decided that the bank needed an electronic relationship with its customers.

In a matter of a few months, Southwest, which operates as Stillwater National Bank and Trust Co., signed a contract with Q-Up Systems, an Austin, Tex., company that designs and implements Web-based banking sites.

By last August, the site was up and running, offering a full complement of banking services, including electronic bill-paying and the ability to move money from one account to another.

The bank company's rapid launch illustrates a comforting message for small banks: establishing Internet banking has become quite manageable.

In Southwest's case, the bank company spent about $75,000 on a package of consumer and small-business banking services and about $50,000 on equipment to support the services.

"The technology is inexpensive enough that if you can get the human resources to organize the project, you can provide Internet banking fairly easily," says Robert L. McCormick Jr., chairman of Southwest.

Although most observers do not expect on-line banking to become a profit center for banks anytime soon, bankers increasingly believe that customers will migrate away from institutions that do not offer the ability to complete banking transactions at a Web site.

At the same time, many bankers believe the Internet can serve as a lure for numerous cross-selling opportunities. For example, checking account customers might turn to the same institution when they want a credit card or a mortgage.

And some banks even see an opportunity to build stronger ties to their community by becoming Internet service providers, a gateway to a variety of Web-based offerings.

But how should banks considering an electronic banking foray go about it?

The first step, by all accounts, is to develop a clear-cut business rationale.

This is necessary to ensure the support of senior management and will help identify which features are vital. This, in turn, will guide a bank in making technology decisions. One question worth asking at this juncture is: "who are we trying to serve?" The answer will drive the kinds of features contained in the on-line banking service. For example, banks with plenty of commercial customers need to develop a more sophisticated cash management offering.

Once a bank's executives are in agreement about what they hope to accomplish, the first big technology decision concerns whether to build, buy, or utilize the aid of a service bureau, a vendor that provides all the online banking operations from its own computer systems.

Whichever route is taken, the process for handling on-line transactions is provided by computer software that takes instructions from a bank's Web site - perhaps to query account records or to initiate an electronic bill payment - and delivers them to the bank's core data processing system.

Deciding which way to provide the service will be based partly on a bank's assessment of its technological capabilities and partly on its view of what consumers want.

By taking the build-it approach, the bank is actually creating its own customized software. Naturally, this is the option with the greatest expense as well as the greatest requirement for in-house technical skill. At the same time, if done right, this approach can yield exactly the service a bank wants.

With the buy option, the bank purchases packaged software to operate on its own computers. The installation is done by either software vendors or the bank. The software would then operate on the bank's existing computers, with some modification or additional equipment routing electronic traffic.

With outsourcing to a service bureau, the bank hires a vendor to process transactions on the vendor's computer system. The vendor and the bank exchange batches of the information, such as tranaction and new account information.

Entering into a relationship with a vendor can cost as little as $35,000 for setting up the system, with additional fees based either on number of customers or number of transactions.

Although this option may limit what banks can offer their customers, outsourcing may be the best approach for banks lacking Web-savvy talent.

Though it may be the least flexible approach, it has the endorsement of many consultants and banks that have already tried it.

"The Internet lends itself to an outsourced environment," says David Koto, executive vice president of Brintech Inc., a bank technology consultant in New Smyrna Beach, Fla.

Mr. Koto contends that community banks should not give building or buying serious consideration. Transmitting batches of transaction data to and from an Internet outsourcer, he says, is no different than exchanging data with ATM networks and telephone banking vendors, both of which work well.

Southwest decided to adopt the "buy" approach by purchasing software from Q-Up as well as the equipment to run it on.

"Unless you have an information systems department with really talented programers," says Terry Almon, Southwest Bancorp's senior vice president for marketing, banks should only consider outsorcing or purchasing software.

Moreover, she says it is more important to move quickly to provide the services that account for most customer use rather than load consumers down with clever features that they will rarely use.

"They want it now," she says. "But what they want is not that sophisticated."

That is not the view, however, at Salem Five Cents Savings Bank in Salem, Mass., which has used the "build" approach to make its way into electronic banking. The bank has more than half a dozen vendors supplying separate components to its service.

"We need to deliver functionality before the customers begin demanding it," says Michael Fitzgerald, head of marketing and strategic implementation for the $1 billion-asset bank.

Even if building a system or buying packaged applications that provide specific transactions requires stronger in-house technology skills, such approaches may be within reach of many banks that want added flexibility.

Most of all, managing the communication between a Web site and a core data processing system requires the involvement of a skilled network manager.

"You have to remember that most banks these days have a fairly substantial network staff," says Forrest A. Watson, executive vice president of United Bank Corp. in Zebulon, Ga., a $415 million-asset bank company. "Even though that's not our core business, we have a lot of money tied up in providing information and communication throughout our branch system."

United Bank hired an independent programer two years ago to write software that provides on-line banking. Given the increased availability of commercial Internet banking products, the bank probably would not build its own system today, Mr. Watson says.

But maintaining and upgrading the system has posed few problems, with a part-time employee handling much of the required programing.

Mr. Watson estimated that United Bank has spent $200,000 on software development and equipment related to its Internet banking service.

At the core of most Internet banking products are tools that allow consumers to review account histories, move funds among accounts, and pay bills.

Historical information often can be moved into financial management software such as Quicken or Microsoft Money.

Many banks also offer financial calculators, check images, and links to check printers, enabling the consumer to order new checks when necessary. Some take loan applications on-line, but the information on the application still is frequently handled manually.

Still others offer insurance quotes and securities trading within their banking service.

While it is relatively easy to provide the features and functionality that customers want from an on-line bank, the main challenge is ensuring security. This depends as much on policies, procedures, and the configuration of a system as on the technology developed by a vendor.

"What (bank network administrators) know well is day-to-day administration of the system," says Hermann Kelley, a security expert with the consulting firm Grant Thornton. "What they do not know well is Internet vulnerabilities and hacking techniques."

Security risks grow with the proliferation of Internet banking, says Mr. Kelley, who is retained by banks to evaluate security measures after a vendor installation is completed.

But many security issues also are parallel with those in the traditional bank lobby. For example, banks must be able to identify their customers and know who within commercial accounts has what authority.

In evaluating vendors, bankers should be concerned with the systems staff's ability to control access at a detailed level, says Bazile R. Lanneau Jr., executive vice president of $180 million-asset Britton & Koontz Capital Corp., Natchez, Miss.

Mr. Lanneau, who is also president of Sumx Inc., a Dallas-based company offering its own Internet banking products to other institutions, explained that the system should be able to support different levels of access for different staff members at commercial clients.

It is also important not to lose sight of human judgment when developing systems that execute transactions ever more efficiently. For example, Southwest Bancorp's Mr. McCormick says banks take great risk when allowing on-line customers to initiate wire transfers, unless the system flags transactions over a specified size and requires a banker's approval to complete the process.

Even when the Internet does not create a new risk, Mr. McCormick says "it creates access for more people who may have an inappropriate intent."

Mr. Stoneman is a freelance writer in Albany, N.Y.

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