New way to shift bank funds
Once you've switched to online banking, liberating yourself from the chore of writing checks for monthly bills, any transaction that still requires paperwork can seem downright pesky.
What if you want to move money from your savings account at the neighborhood bank to a money market account at your credit union? Or quickly send $100 to a child who's off at college with an empty bank account?
Until recently, your options were basically limited to sending a check or wiring the cash (and paying a $10 to $25 fee).
Secure online services, such as PayPal, have filled part of the void. But now banks, which offer broader consumer protection because of industry regulations, are starting to offer a cheap way to move money electronically.
These transactions - known as account-to-account or interinstitutional fund transfers - are already available to customers of some small and midsize banks in the United States. (They're also widespread in Asia and Europe.)
"It's a natural evolution of the delivery of banking services over the Internet," says John Dorman, CEO and chairman of Digital Insight in Calabasas, Calif. The company supplies online banking to 1,600 institutions in the US and is considered a leader in this new realm of fund transfers.
"Most people have accounts at more than one financial institution, and the ability to easily and quickly and securely transfer funds between those accounts at a reasonable cost is very attractive," he says.
Twenty banks have signed up for the new service since Digital Insight launched it in January. When customers log on to their online accounts, they now see a "payment manager" button and a demo that explains how fund transfers work.
With the "pay people" option, all they need to do is designate the account from which the payment should be drawn, supply the name and e-mail address of the recipient, and make up a password (which should be discussed over the phone, rather than by e-mail, for an added layer of security).
On the receiving end, people don't need online bank accounts. They just enter their account information into a secure site and create a profile, so subsequent transfers will require only the shared password.
Currently, customers can shift funds among checking, savings, and money-market accounts, but plans are under way for other types of accounts, such as loans, says Digital Insight product manager Paymon Farazi.
There are three options for verifying accounts at other banks before the first transfer. One way, which offers instant verification, is via a secure online site. For people who are still uncomfortable with typing in sensitive information such as their Social Security number and the PIN for their account, there are more traditional options, such as faxing a voided check or having the customer verify the amount of a trial deposit made by the bank.
Each bank decides on its own fees. Most Digital Insight clients let customers make deposits into the accounts at the host bank at no cost, but charge $1 or $2 for outbound transfers. They also tend to charge a premium for the money to be available in one day instead of the standard three days.
So far, feedback has been good, Mr. Farazi says. And Digital Insight hopes to partner soon with networks that run ATMs, so fund transfers eventually should be available at the corner store and in real time.
Steve Schutze, director of E-strategies for the American Bankers Association in Washington, says Digital Insight's approach is appealing because the company manages all aspects of the online fund transfers.
The bank has to pay another fee to Digital Insight, but does not have to hire and train extra staff. "I think it's a great service and I'm glad to see them do it," Mr. Schutze says.
But it's not clear how quickly account-to-account transfers will be available at a bank near you.
"So far, such capability has not been provided by any of the 15 to 20 top [American] banks," says Gwenn Bézard, a senior analyst who wrote a report on the trend last fall for Celent Communications, a research and advisory firm in Boston.
If a dozen or so large banks do set up the transfer option this year, the report says, PayPal could be out of business by 2005.
Electronic payments may be the wave of the future, but meanwhile, banks still have to transport up to 40 billion paper checks a year.
After someone deposits a check, it often moves through several processing centers and travels by truck and plane before arriving at the bank of the person who wrote it.
The proposed Check Truncation Act would change that by allowing banks to process checks electronically and create paper "substitutes" - prints of the electronic images that would serve as legal equivalents to original checks.
In a hearing April 3 before the US Senate Committee on Banking, Housing, and Urban Affairs, representatives of the Federal Reserve and a number of banking associations testified about the proposal's benefits, including:
• Cost savings that could be passed on to consumers.
• Better service for rural customers, because deadlines for deposits in ATMs could be extended.
• The development of better check-imaging technology, which would make it easier for bank representatives to quickly examine checking records if consumers have questions or disputes.
Criticisms of the proposal center around consumer choice and protection.
A loophole would make it more difficult for customers to have money quickly restored to their account while the bank investigates a disputed payment, according to a representative of four consumer organizations who testified at the hearing.
Banking officials respond that a number of banks already have agreements with customers allowing them to process checks electronically and not return originals, and these arrangements have not resulted in consumer complaints.
Sen. Richard Shelby (R) of Alabama, who chairs the Banking Committee, supports the Federal Reserve's proposal and is confident that consumer concerns can be worked out as the legislation is drafted, says committee spokesman Andrew Gray.
He did not know how soon a check-truncation measure would reach the Senate floor.