By Joseph Iuso
UseMyServices Inc.
Editor's Note: This article originally appeared in E-Finance and Payments Law and Policy, January 2010; reprinted with permission. © 2010 by Joseph Iuso.
The Canadian online banking industry is in constant movement and is modernizing rapidly. This article examines developments identified as potential market changers and revenue generators in the Canadian banking and finance sector and evaluates their potential impact on the online banking industry within the next five to 15 years.
Firstly, there was a change in the standard protocol for wide area network communication. Although TCP/IP was not thought of as a major market changer at the time, the vast majority of ATM and POS devices, in 1999 in Canada, were still connected to the X.25 protocol. Part of this situation was due to the passage to the year 2000.
However, in the past decade, this has been completely replaced with the quicker and more cost effective TCP/IP connection, using the Internet and related technologies.
Not only has this improved the offer of products and services, it has also allowed a wider variety of offerings at ATMs and POS devices - everything from linking loyalty cards to reward programs and managing these from the very same internal networks that were once just the domain of the banks.
Consumers now have access to a lot more information as it relates to themselves, the banks, the retailers and merchants.
In late 1993, I was involved with a pilot at the Canadian Imperial Bank of Commerce that dabbled in adding statement printing and passbook updating to ATMs. For non-Canadians, this means that there is no monthly statement; you just keep a passbook with all the transactions and update it whenever you go to the branch.
This system is still around. Who would have thought, in 1993, that the CIBC alone would save an estimated $20 million to $40 million annually?
Despite electronic bill payment and presentment being novel concepts, they were implemented to some degree in Canada in the past 10 years. With the merger of eRoute and ePost early on in the decade, the one stop for any company that needed to issue an invoice was solved.
An invoice can now be provided through most major banks so any consumer can pay the relevant invoice right away by using online banking. The only problem that remains is automation to the point that it is a 'click and pay' scenario. Meaning, as of today, only the delivery of the invoice through online banking has been accomplished.
The pay portion has not changed since electronic bill payment was originally introduced. It is still a manual setup process through online banking.
With the advent of Mint and the acquisition by Intuit, I suspect this final piece will be accelerated in the next five years, and a seamless solution will be implemented where the consumer will be able to click on the invoice and simply make the payment without the hassle of setting up the payee and then making the payment.
The idea back in 1999 was to allow as many points of entry for personal and business customers to access their transactional data for debit, credit and other financial products. At the time, this was a novel concept.
With the advent of such technologies as those developed in Apple iPhones and Google Androids, through Web browsing account consolidators such as Cashedge and Yodlee and through one-click bill presentment and payment companies such as Billeo and Mint, real-time transaction availability has been essentially achieved.
Banks will most likely be following once their usability people are able to push the benefits through. How easy it will be.
The idea here was to extend banking relationships through online banking with various partners, retailers and distribution channels. This included issues such as loyalty programs, reward programs and additional cross-selling opportunities, as they related to the products and services being offered through the multiple channels.
At the end of 2009, the evidence was clear. In order for banks to leverage their brands, they have created, worked with and implemented some of the most interesting and successful programs in Canada. Everything from bank sponsored credit cards, such as the CITI-Petro Canada Mastercard, to the BMO Credit Card that offers AirMiles.
This seems to be a strategy that we will see continue and be broadened to all aspects of the Internet between online banks and the co-branding opportunity through the retailers and distribution channels, now widely available on the Net. Don't be surprised if this includes your favorite social network site or tweet.
In late 1999, security was a very hot topic. So hot that phishing and man-in-the-middle (MIM) had yet to be fully adopted as terms to describe what was happening. Banks did not see any real threat, as they felt that the security of user IDs and passwords was adequate at the time. And, of course, why would a consumer ever give out their online user ID and password?
The arrival of Web 2.0 turned it all upside down. A few years later, phishing and MIM attacks had become mainstream, and banks were looking for solutions to combat this huge threat. Over the past decade, many banks outside North America opted for some sort of scratch pad, RSA device or other off-Net, one-time code. Canada, for the most part, is still far behind in this respect.
Canadian banks have only deployed a challenge/response based solution where the online banking customer selects a few questions and answers. Whenever the bank determines a new device is being used to access online banking, the challenge is presented, and the proper response is expected to gain access.
There are only a few banks which have added an extra step and implemented an off-Net solution. One example is ScotiaBank where, anytime a new payment is being issued, a one-time code must be inputted. This one-time code only comes through your e-mail account and must be preset at the bank level via the branch or over the phone.
However, when compared with the rest of the world, this is still only a small step to the ultimate step, which will require a serious off-Net solution, as e-mails are still interceptable if consumers' computers are hacked.
Back in 1999, little did one know that Apple, Google and many others would make this idea huge. At the time, none of the following was really available through online banking:
In 1999, many of the above had yet to be determined. In the decade that ensued, online loan origination, online insurance origination, and buying and selling stocks have pretty much been embedded in most banking applications.
There is still the potential for banks here in Canada to leverage the Apple and Google experience to combat potential market changes. These include PayPal's PayAnyone API and Google and Apple's dominance in the application space, as it relates to everything someone wants to do on their smart phone versus their PC. The next few years will see a replication of many of the same functions commonly done on the PC to a smart phone.
At the time, it was just becoming clear that offering instant credit based on lower criteria and a smaller risk factor would allow for the expansion of the "don't-pay-until" concept. And it certainly has proven to be so.
As late as 2007, it was becoming clear that extending this type of credit into things such as cars, homes and vacations was an extreme burden. In 2008, through a series of mismanagement practices, it became clear that this could not go on. Now, in 2010, banks in Canada have pulled the reins on this and allow this to be done by third parties and others. It is suspected banks will not get back into this kind of game for some time.
With security a big concern for consumers these days, and the reality that credit is no longer available for an extended period of time, Canada will start to see more banks getting involved in the prepaid market.
To be clear, to date, the Canadian prepaid market has been dominated by a few low-key credit unions and third-party payment processors. This is not surprising: why would banks add something else to their portfolio of activities when debit is so pervasive in Canada?
The fact is, if they do not get into this market soon, there may not be any further opportunities, as the market will soon reach saturation point. BMO has taken the plunge recently and introduced a prepaid travel card and decided to keep their regular credit cards safe.
With most nonbanking Internet providers getting in the game, banks are starting to follow. Around the world it has already begun. Mexico, the U.K. and some U.S. banks have joined in.
Today, most banks have a message-based system where you can leave your query and get a response pretty much immediately. Soon, most Canadians will enjoy the ability to talk to a bank service representative directly through their online bank interface. It will be as common as telephone banking.
Joseph Iuso is CEO of UseMyServices Inc. You may contact him at info@usemyservices.com.
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