Online banking is swiftly charging from its position as an extravagant application used by a select few to a convenient functionality craved by the growing horde of Internet users. Research from International Data Corporation (IDC) indicates there were nearly 6.6 million households banking online in the United States alone in 1998. By 2003, that number will increase substantially -- to more than 32 million.

"A combination of factors is driving the explosive growth in online banking," says Paul Johnson, senior analyst with IDC's Internet and eCommerce Strategies program. "There has been a proliferation of low-cost PCs and other networking devices in the home market, which is causing a surge in the number of Internet users. Because many of the security concerns have been alleviated, these Internet users are becoming comfortable using the Internet as a transaction-based medium."

The increasing number of banks offering Web-based banking services is also triggering the market's growth. IDC estimates the number of banks offering online banking services will increase from 1,150 in 1998 to 15,845 by 2003, primarily via the Web. These numbers represent 6 percent and an incredible 86 percent, respectively, of all U.S. commercial banks and credit unions. "Banks are beginning to realize that online banking offers competitive advantages, operational efficiencies, and direct marketing capabilities," Johnson explains.

According to IDC, online banking is evolving through three phases:

• The first phase offers functionality similar to what is available through telephone banking systems - access to account balances and transaction data. The access is provided through a dial-up or browser-based service.
  
  
• The second phase emphasizes interactive technologies such as online bill payment and personalized reminder services.
  
  
• The third phase involves direct marketing of credit and lending services, personalized financial management features, and services such as securities trading and insurance offerings.

And it's not only everyday consumers who are displaying a rising interest in online banking. This rush of consumers hopping on to the Web to do their online banking is also giving rise to new generation of business owners who have taken their business banking on the Net, according to a report from Meridien Research. In fact, the firm says, the increased interest in online business banking is so significant that within five years, the Internet will be the dominant electronic channel for small business banking.

According to Meridien, the use of the Internet for the delivery of small business services now accounts for barely 20 percent of electronic usage in this market. However, it is expected to overcome all other electronic channels within four years, achieving 65 percent dominance by 2003.

"A strong link exists between banking, bill payments, and the Internet," Johnson comments. "Although there is still uncertainty in the bill presentment market, banks must seize this tremendous opportunity in front of them. Online banking may be the critical service that enables banks to maintain their role as the dominant provider of financial services."

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