e-Transactions: the impact of the internet on the financial sector.

• Author: Powell, Thomas D.
• Position: Cover Story

It's hardly great news that there has been tremendous growth in the use of the Internet and other electronic facilities to process financial transactions.

According to the Federal Deposit Insurance Corp., transactional Web sites have more than doubled each year for the past six years, growing from one in 1995 to nearly 2,500 in 2000.

This growth is a reflection of the fact that over the past few years, financial leaders have been considering various ways in which to allow their customers to transact business using the Internet. This objective is now reaching beyond the financial services industry into non-electronic business segments, such as the building supply industry. Furthermore, this growth is likely to continue to climb as the number of Internet users, Internet connection speed, and the number of transactional Web sites continue to increase.

Despite these numbers, larger banks are still reporting that the overwhelming majority of their transactions are still manual. A high percentage of manual transactions may be attributed to the fact that most business transactions, such as check cashing and deposits, are still originated by commercial and small businesses. Even so, there are many changes in process that will facilitate and encourage increases in electronic transactions.

The number of adults using PC banking is also growing. With this growth, there is an increased awareness of the benefits of using online transaction processing, thereby fueling the thought that all business should be electronically facilitated.

Gartner predicts that worldwide business-to-business (B2B) e-commerce will total $3.6 trillion by 2003 and $8.5 trillion in 2005. Online financial activity had a slower start, but has had steady growth, from 6 million users in 1998 to 27.5 million users in 2000. During 2000, only 30 percent of the Internet-capable households were using some form of Internet banking, indicating that there is tremendous room for increased use.

The most common types of online transactions have been investment management and trading, insurance transactions, online mortgage services, credit cards applications and payments, and loan applications.

Cash management functionality, such as automated clearinghouse (ACH) and financial electronic data interchange (FEDI), is fueling growth -- banks have developed these systems and are now piggybacking development of other banking services. This is providing substantial potential for growth because currently only five percent to 10 percent of all U.S. businesses use ACH for their disbursements. This is primarily due to high set-up costs. Increased ACH use will come with reduced cost and increased business partner acceptance and demands. Electronic commercial payment and presentment will require a degree of customization due to the customer's need to attach invoices as well as interface payments with accounting systems.

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The e-Commerce Value Chain

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