Welcome to Sfnb.com: The Paradigm Just Shifted (1995)

the guinea pig, no doubt it. says James Chip Mahan III, chairman of Security First Network Bank, Pineville, Ky. We've been told that before. This $41 million-assets bank that on Oct. 18 began allowing people to do actual banking for the first time on the Internet is admired but not necessarily envied by its peers. Internet security is still a question in some people's minds (though not at Security First), bank regulators are still deciding how to react to electronic commerce, and the concept of sending money to a bank that they can't physically visit is alien to many Americans. nice to be first, but it's better to be right, commented one banker who asked not to be named. There's no doubt they're a pioneer. Being a pioneer means taking some risk, says David Weisman, senior analyst at Forrester Research, Cambridge, Mass. It's quite possible that this group of smart, aggressive bankers is taking the right risks and that other banks will eat their dust. During the bank's first two weeks on the Internet, 750 people from 32 states opened accounts at it, a third of them from California. Let me put that in perspective for you, says Mahan. We started a traditional bank from scratch in Louisville a year ago, and that bank in 12 months has opened 187 accounts. Furthermore these Internet accounts are noninterest-bearing accounts. Anybody can open a lot of accounts if you pay enough interest. But these accounts are being opened because of the functionality of the product. Why the Web? About 12 million people are estimated to use the Internet now, and by the year 2000, according to Forrester Research, 22 million households will have Internet connections in the home. Security First is accessible to all these people, who can dial a local number to get to the bank. Being on the Internet lets this little bank compete effectively against money center giants for consumer and small business accounts all over the country, while maintain ing a much lower overhead than banks that rely on bricks and mortar. And Security First controls the whole customer relationship, instead of being an option at the other end of a personal financial manager software program. Faith, trust, and confidence in Internet commerce is going to grow daily and exponentially, Mahan believes. A lot of bankers have come to see us in Atlanta [where the Internet portion of the bank is located] to talk about our software and how we did what we did, he says. Most bankers are not convinced that the Internet is safe for commerce, so they are approaching it with a good deal of caution. But when you have companies like Microsoft and the regional Bell operating companies totally focused on delivering Internet access and interfacing with the World Wide Web, you're going to see certain standards and protocols set, and in a year or so, security on the Internet won't even be discussed. Courting the regulators While they may be bold and pioneering, Mahan and his team cannot be accused of throwing caution to the wind. In addition to building a military-level-security operating system for Internet business (see the following article), they set out to win regulatory approval from the Office of Thrift Supervision before conducting their first transaction. (Security First has a thrift charter, but its parent is a bank holding company. No regulator told Mahan that he needed regulatory approval, but I did not want to go out on the Internet without those guys knowing exactly what we're doing and approving the business plan, he explains. The process wasn't easy. We're talking reams of documents, and talking with the OTS and the Federal Reserve for 18 months, says Mahan. The bank even had a group of student 'hackers' try to break its security system at the OTS's request. The students were unable to break in, and regulators gave the go-ahead. Other banks may or may not feel the same need for regulatory preapproval. …