FTC: Consumer Privacy Comments Concerning The Huntington Bancshares Incorporated--P954807
The Future of Electronic Money
What It Means to be "Wired"
Systems There is no longer any argument to be made that PCS have a limited market, or that there is any significant portion of the U.S. population that can remain untouched by the Information Revolution. Fewer than half a million units were sold in 1980; as of 1996, there were more than 27 million personal computers sold per year. And that isn't the whole story. In those sixteen years, we have seen the cost of the "ideal PC" remain level or decrease slightly, as the computing power, speed and flexibility available to the individual have multiplied geometrically. From a hard drive of 20 megabytes with a tiny 640 k of RAM able to run applications at a speed of 10 megahertz, today our home computers store a variety of fantastically complex, powerful applications in their 2 or more gigabytes of hard memory, and use their average 32 megabytes of RAM to run them at speeds of 200 megahertz and even more. Today, with innovations such as Java and ActiveX, computers are beginning to do even more, at lower costs.
Those are the numbers. They illustrate something of the magnitude of the change, but little of its quality. As some of the wisest observers, such as MIT's Nicholas Negroponte, have commented, we are not simply shifting work to a new machine; we are experiencing a cultural shift in our whole way of doing things, our expectations of the marketplace, and ultimately our way of perceiving reality. The personal computer has the potential to unify all walks of life, delivering information-and hence power-impartially across all socio-economic lines.*
GRAPHIC - "Americans Are Wired"
* The recent announcement of a new modem by Bell Atlantic, made after the meeting for which this presentation was prepared, will speed change and heighten its effects. The new modem, which is said to move data 70 times fast than today's standard 28.8 speeds, uses existing phone lines to allow data transmission and voice calls over the same line at the same time. The device therefore effectively removes the last major barriers to universal use of the World Wide Web and other home information devices: speed, the need for individuals to add phone lines, and the cost of a more robust communication infrastructure.
What Change Means for Money
Systems The arrival of virtually barrier-free global data communication means two things. First of all, an increasing number of providers of all sorts of goods and services-including financial services-will reach customers and accept payments through an increasing variety of electronic channels.
Directly on the Internet, of course, using world wide web sites, email, and perhaps the improving hybrid of Internet telephony.
Secondly, consumers seeking simplicity will gravitate toward additional, out-of-home electronic delivery channels that will allow their financial transactions to be as integrated as possible. Smart Cards, with smart POS scanners attached to cash registers, vending machines, toll booths and other small-payments locations are already beginning to transform the way even the smallest purchases are made. Video kiosks and public smart phones, and perhaps other new devices, are being or will be deployed for a variety of uses, from bank lending and bill payment to event ticketing, government transactions such as tax payments, and more. Paper checks, paper money, even small change will become less and less common, as transactions are completed and payments finalized and posted in real time, based on the movements of digitized cash. In a little more than two years, according to banking industry specialists, we can expect internet commerce-that is, the direct purchase of goods and services online-to reach about $160 billion a year; at that time, between 70% and 80% of bank transactions will occur electronically.
GRAPHIC - "Electronic Money Will Become the Norm"
The results, for commerce and consumers alike, can energize the economy, improve working conditions and enhance the quality of life, as businesses reach markets, and consumers reach resources and options, all over the world. Information and service can be provided to "markets of one," tailored to the needs of the individual, more cost effectively and more accurately than ever before.
This utopian vision of an achieved information economy is simplified to illustrate the potentials. In reality, there are many complex problems to be solved now, and new issues will continue to arise as the old industrial culture metamorphoses into the new information culture.
First and foremost among these is the need to deploy, nationally and globally, a system for electronic payments that not only is safe, sound, reliable, private and secure, but also is perceived to be safe, sound, reliable, private and secure, by all parties to transactions: buyers, sellers and intermediaries alike.
For, if consumers do not trust the payments system, either because they fear interception by unauthorized individuals (a common concern among the general public today), or because they are concerned about errors or incompetence in the handling of payments at any point in the process, they simply will not use the electronic resources opening to them. If a large body of consumers is uncomfortable conducting real business via electronic channels, then businesses will need to continue to provide traditional channels concurrently with new channels, ultimately involving more capital to deliver less integrated service than they do even today.
GRAPHIC - "Internet
The question then arises: how shall we build, and who shall manage, the best possible system for handling what will eventually be the largest proportion of all payments made in the U.S.
Huntington Bancshares' Experience with Electronic Money Issues
Huntington Bancshares Incorporated has been an active investor in the creation and application of new technologies to benefit consumers of financial services, and to make "back room" handling of transactions safe, secure, reliable and efficient for banks and customers alike, for nearly a decade.
Huntington began to build its integrated information infrastructure in 1989, and launched the first full-time, full-service telephone banking service in the U.S., based on European models, in 1992. Huntington Direct live banking representatives and Voice Response systems now handle tens of millions of calls annually. In addition, Huntington Direct provides an information infrastructure that has enabled our company to expand the number of channels and processes through which our customers can access service. We have it invested resources in experimental technologies, often forming innovative alliances with technology companies and with other banks, to test advanced ATMs, video kiosks, smart cards and smart phones, and other ideas have been tested and either deployed effectively, or suspended as the results warranted. Before launching our own internet bank, for example, we became a partner in the first completely web-based bank, Security First Network Bank.
Huntington has also been closely involved in building working relationships between banks to support the growth of cost-effective, efficient electronic transfer of funds throughout the nation. Huntington provides the patented technology that allowed the creation of the National Check Clearinghouse Association (NCHA),the first national organization of banks to send and receive checks across the country through direct bank-to-bank presentments with net settlement through the Federal Reserve. In its first year, NCHA handled approximately two hundred thousand items per month. In March of this year, its 121 participating banks, including the Bank of New York, Bank One, Citibank, First Union and Keycorp, generated some 85.5 million items with a dollar value of nearly $59 billion.
As an active member of the Smart Card Forum, Huntington helped significantly to establish the broad definition of consumer privacy adopted in the Forum's recently released position paper, Consumer Privacy and Smart Cards - A Challenge and an Opportunity. The paper begins with the premise that "in the arenas of consumer acceptance and policy development, no issue is more visible or perhaps more important than privacy. As a result, smart card business propositions will only be successful if consumers, policymakers and Forum members understand the role this technology can play in protecting privacy while efficiently and securely delivering services and benefits."
Huntington's most important contribution has been on a topic that, judging by comments from private individuals published by the FTC at the website for the government's draft Policy for Global Electronic Commerce, is indeed of overriding concern to American consumers. That is, defining "privacy of information" in an inclusive way, to indicate the individual consumer's sole and complete ownership of all information (not just financial information) that may be part of an electronic transaction or customer file. In the words of the Forum's paper, "privacy in the consumer context is commonly defined as the consumer's interest in knowing how personal information will be used by a business or government agency, the benefits which will accrue to the consumer for such use and how the consumer can choose to limit or prevent that use."
Our involvement in electronic banking issues has been a direct response to consumer needs and consumer expectations, and the demand for change, driven by the constant improvements in technology that make banking and commerce increasingly convenient and universally accessible, continues to grow rapidly. Either banks-or other entities-will find ways to meet the demand.
There are other forces at work today, in addition to consumer demand, that are building pressure on our national economic system for fast implementation of measures to improve the safety, soundness and privacy of the payments system. Today, while millions of people have no access to banking services, the government has mandated that its own payments will be made entirely electronic; we must provide a way for the "unbanked" to receive the social security, dependent support and other payments upon which they depend. Even beyond this specific need, the fact is that today's payments system is inefficient and too costly. We spend something on the order of 2.5% of our total GDP to support check and credit card payments systems: 1%, or $75,761,000,000 on the check processing system and 1.5%, or $189,403,500,000 on the credit card system. Of that amount, some $20 billion was the result of check fraud, and another $1 billion came from credit card fraud.
Now, if we commit to the transition to an electronic payments system with strong, universally applied authentication, encryption, and certification procedures, we can reduce payments fraud as well as the overall cost to process payments in the U.S.
With electronic protections in place, we can improve upon today's results, maintain a closer watch on personal privacy, and guard against the growing potential for unregulated companies to take unethical advantage of the power of the internet.
Assessing the Non-Bank Options
While Huntington Bancshares, along with a number of the leading banks in the U.S., has been developing expertise with electronic delivery of financial services and the requirements of electronic payments, so have a variety of other, non-bank companies. Other types of businesses, however, have approached electronic payments from the standpoint of delivery of technology, because that is the foundation of their expertise.
An outstanding example of this difference is the implementation by Microsoft of its OFX, or Open Financial Connectivity, platform, which is designed to allow individual banks to offer financial services over the world wide web with limited investment on their own part in new technologies. OFX, like such creditable competitors as Integrion Gold and HP/Verifone, provide easy-to-implement options that allow banks and commercial enterprises to implement online sales and service offerings quickly.
These systems provide strong, in some places elegant, solutions to the technological difficulties inherent in the complex series of information transfers required to move information from host computers using two decades' worth of variety of operating systems, communication systems and applications, to a world of user terminals that are similarly variegated. They do not, however, and based on the demands of their marketplace ultimately cannot, provide what is most needed: a unified, entirely open and interoperable set of standards, procedures and protocols that reliably ensure a safe, sound, private and secure payments system.
Non-bank companies like Microsoft, Integrion and Verifone do have much to contribute in effective technology. But, as I suggested at the opening of this presentation, the real question before us is not one of technology at all, but of the way we live. It behooves us, I think, to examine possible solutions to the problems posed by the arrival of digital money not merely in terms of technological effectiveness, but in terms of the ways they reinforce or improve the strength and vitality of the economic system as a whole. This requires that consumers and businesses who depend on the system are in fact protected, and also feel confident and secure, against invasion of privacy, fraud, and even error or mismanagement.
The Dollar: A Metaphor for Reliability
In the past, consumers have grown to trust the national currency implicitly: the expression "as sound as a dollar" is over a century old, but it is still understood, and widely accepted, today. Just as completely, the American public trusts its banks, as the accepted intermediaries between payor and payee. When an account-holder writes a check, both payor and payee know that as long as sufficient money has been deposited, the bank will faithfully execute the transaction.
We can make electronic money more than merely "as sound as a dollar"-reliable, safe, private and secure-in fact, we can make it more resistant to fraud. But it is a task daunting in its complexity. From the process that identifies and authenticates the holder of a chip card to the method of RSA encryption that protects the electronic message, to a system of standards, specifications and protocols and the way servers using that system are certified, with all the detailed technical work and maintenance involved in the creation and upkeep of such a massive interrelated system, every detail has an impact on the accessibility and reliability of the whole.
The Banking Industry Contribution
The competitive situation of banks has sharpened in recent years; both as a result of regulatory changes and the new opportunities created by information banking, all banks can compete with all other banks, as well as with non-banks, for the loyalty of customers far beyond the geographic boundaries that once limited them.
At the same time, the most progressive leadership of our nation's most influential banking companies has realized that in the information marketplace, successful competition demands that banks be able to support the changed expectations of the Information Customer. To do so, there must be agreement on the fundamental infrastructure that makes business possible.
As a result of this thinking, the banking industry as a group has been working systematically on the questions of safety, security, privacy and reliability for electronic payments, during nearly two years, and has made substantial progress toward finding answers.
In 1995, the Bankers Roundtable, a consortium of the 125 largest banks in the U.S., formed a Technology Task Force with Huntington CEO Frank Wobst as the chair. As a result of this work, the Roundtable in 1996 officially established the Banking Industry Technology Secretariat, or BITS, with a 12-member Board of Directors that includes the CEOs of ten of our nation's largest banks*, as well as representatives of the American Bankers Association and the Independent Bankers Association.
In the course of 20 months of work, BITS, currently chaired by Frank Wobst, has made substantial investments of more than $1 million for research, consultation with technology experts, and the creation of an organization that will serve consumers and the banking industry well. In May, 1997, BITS announced the appointment of its first Chief Executive, Catherine Allen, formerly CEO of the Santa Fe Group and former Citicorp executive.
* The BITS Board of Directors includes the CEOs of: Citicorp, Chase, Bank of Boston, Huntington Bancshares, Nationsbank, First Union, Norwest, Bank of America, Mellon, and Banc One, as well as representatives of the ABA and the IBAA.
In her first address to the Roundtable, Allen articulated the objectives which BITS is pursuing, through three major working initiatives which, when successfully implemented, will allow bank customers to enjoy the same high degree of confidence in the safety and soundness of electronic payments, as they have in the banking system that exists today. They are:
Working Toward the 21st Century
In his short but influential work, Creating a New Civilization, Alvin Toffler puts the changes we are experiencing today into context with other major social and cultural shifts in Western history. He points out that just as the Industrial Revolution had adverse affects upon many individuals who were successful in the preceding agrarian economy, so too the shift to an Information Economy can be expected to unsettle many businesses and individuals, and make a variety of laws and regulations obsolete, until the economy has had time to adjust and build appropriate systems and protections.
Today, however, we are in a position to minimize these effects. Partly because the transition is happening so quickly that its dimensions are easier to see, partly because we have the benefit of historical experience to help us understand the potential effects, and partly because the same technology that is creating change also allows us to control it, we can now take action to ensure that people, commerce and the economy are not disrupted through an unregulated, unmonitored movement of digital financial documents.
GRAPHIC - "The Future is at Hand"
In such an effort, the participation of an actively concerned and highly knowledgeable organization of industry professionals will be an invaluable contributor, both as a source of ideas, and as a partner in the process of building a payments system that remains as sound as a dollar, and safe as banks.