Consumers born after the early 1980s do not know a world without online banking. By the time they were old enough to open bank accounts and start paying their bills, online options were already beginning to emerge. For those of us who are older though, things were not always so easy.
There was a day – prior to the emergence of the internet – when all banking was done at brick-and-mortar bank branches. Workers would stand in line every Friday to cash their checks. Businesses would run to the bank every day to make deposits. Paying bills was handled in-person or by sending a check or money order in the mail.
Today’s workers do not have to cash checks. Most get paid with direct deposit. We don’t worry a whole lot about finding ATMs because electronic payment systems let us pay for virtually anything without having to carry cash. Even bills can be paid online using plastic cards or bank account transfers.
All of what we take for granted today is made possible by the emergence of four technologies that were unheard of back in the 1970s. If you are wondering whether or not online banking is right for you and you can find out here, consider how big a role these technologies play in every other area of your life.
1. The Internet
Make no mistake about it, the internet is the engine that drives online banking. There would be no such thing as online bill pay or direct deposit without the internet. That is one of the reasons survivalists fear a breakdown of global power systems. There is no internet without power. Without power there is no banking system.
The internet was born as a military project designed to enhance communications. It was developed by researchers at the Defense Advanced Research Projects Agency (DARPA) in the early 1960s. What began under the auspices of DARPA research eventually became the Advanced Research Projects Agency Network (ARPANET), a network communication system powered by computers.
By the 1970s, the research that build ARPANET was also being employed to build private networks. That led to the birth of the public internet in the 1980s. The public internet gave rise to e-mail, online bulletin boards and newsgroups, websites and, eventually, the e-commerce that would open the door to online banking.
2. Electronic Funds Transfers
While researchers were busy developing ARPANET, the U.S. government was working on legislation for initiating electronic transfers among banks. Passage of the Electronic Fund Transfer Act in 1978 sealed the deal. That legislation gave financial institutes the green light to begin transferring funds electronically rather than trucking cash back and forth.
Also known as EFTs, electronic funds transfers allowed for faster settlements between banks. They also opened the door to widespread credit card use and the introduction of debit cards and automatic teller machines (ATMs). EFTs are even responsible for introducing the world to direct deposit.
Every time you pay a bill online you are utilizing an EFT. The same goes for using your credit or debit card. Even purchasing things by tapping your cell phone or charging an online account are all handled via EFT.
3. Electronic Settlement Systems
There must be a means of finalizing transactions among financial institutions if online banking is going to work. The fact that the system works is proof that such means are in place. They are, via electronic settlement systems. Modern banking technology relies on two kinds of systems: domestic and international.
Electronic settlement systems come in many forms. For example, consider the automated clearing house (ACH). It processes transactions in large batches so as to facilitate larger single settlements rather than settling every single transaction separately.
A real-time gross settlement system (RTGS) also processes transactions in batches, but it does so in real-time rather than being delayed. ACH systems are used for low value transactions while RTGS settlements are intended for high-value transactions.
Clearing house systems are also used to settle transactions internationally. There are a number of international networks that handle the majority of such transactions, processing them in batches. Both retail and commercial banks make use of the networks to send billions back and forth. All of this is done automatically by computer systems.
4. Computer Encryption
Last, but certainly no less important than the other three, is computer encryption. None of what we do in terms of online banking would be worthwhile if networks and data were not secure. Encryption is at the heart of banking security. It protects data flowing across networks both domestically and internationally.
Computer networks communicate by transferring information back and forth using a predetermined protocol. As well as the system works, information can be intercepted by enterprising hackers who know what they are doing. This is not too big a problem in the sense that it is a known entity.
Even before there was an internet, military communications were subject to interception. That is why units began communicating using encrypted messages. The enemy would have to crack the code, so to speak, if intercepted communications were to be of any value.
Computer encryption accomplishes much the same thing. It is based on the understanding that bad actors will intercept data. Encrypting the data makes it useless unless the encryption can be cracked. As time marches on, hackers are finding it harder and harder to do so. That is why they have turned their efforts toward things like identity theft, stealing credit card information, etc.
The modern world is exceptionally convenient due to a variety of technologies. Some of those technologies have given rise to online banking. Thanks to what they bring to the table, most of us can go for long periods of time without carrying cash or visiting a bank. Most of us barely write checks anymore.
From receiving your weekly pay to paying all of our bills online, online banking is the way we do things in the 21st century. It is pretty amazing when you stop and think about it.