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Yesterday I discussed why electronic payments are great for customers and banks, but terrible for small businesses dealing in high value, low volume transactions. This morning, Finextra relays the press release announcing the partnership of S1 and PayPal. S1 provides integration with online banking, so that person-to-person payments can be made directly from an individual's bank account. The actual payment is made through the PayPal infrastructure, giving the security and support that is needed for this to actually fly.

This news is interesting, since it is giving smaller institutions such as credit unions the opportunity to offer competitively priced money transfer capabilities. It starts to put in place a real competitor to the legacy fund automated clearing house (ACH) and wire transfer systems used by the banks for Electronic Funds Transfer. EFT is perceived as being highly complex and may be considered one reason why electronic payments are going to be such an expensive proposition for small businesses. If you make a payment to a small business electronically through an online banking site such as Bank of America, its likely that the bank prints and mails a check. The small business owner has the inconvenience of the paper check still. This is not an end to end electronic solution, it just suits the customer, and the bank gets to hold your money for longer.

If PayPal and S1, or similar propositions start to really compete in the marketplace, I hope this could put pressure on the big banks to start providing better and cheaper check-free approaches for business to business payments, completely integrated with real small business online banking. This is what small businesses want, direct integration, not another service that they have to transfer funds to so they can pay a third-party. The rather hefty charges, and complexity of funds transfers to the PayPal account before making the payment need to be reduced, and competition is the only way it will happen.  

A post from the Improving It blog

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Protecting online banking accounts - is there an app for that?

Losses from falsified online banking transactions tripled in the third quarter, and it seems that the banks have no way to stop them, reports Joseph Menn for the FT. At $120m, this is only about 17% of the total cost of identity fraud and bad checks / cheques, amounting to a total of $700m, although significant enough that you would believe banks would be working hard to stop the problem. The issue for businesses it seems is that many banks are not feeling much of the $120m cost, ensuring that the losses remain with the business account holders. Compensation is something the banks are avoiding, unlike the losses from fraudulent use of a credit card. While they continue to do so, the direct financial cost to banks may mean that they push off the problem for later.

It seems that a "trojan" named Zeus is being sold by hackers to criminal organizations who are wanting to use it to empty business bank accounts. Zeus makes it easy for online banking passwords to be recorded by the criminals, then used to transfer funds from the account through the standard, legitimate online banking system. The FT story claims that new versions of the trojan also allow criminals to bypass some of the additional physical security that banks are employing, such as tokens with rotating passkeys and SMS confirmation messages. If this really is the case, it is a worrying development, although I can't technically understand how the hack could do that unless these security systems are incredibly poorly implemented.

If the additional security measures that banks employ are being bypassed by hackers, it seems that banks may eventually have to act. If the losses start to approach those of other fraudulent transactions, and banks continue to push responsibility to the customers, the large base of small and mid-sized businesses may just mutiny finding a way to protect their money without feeding the coffers of the worst offending banks. How long will it be before we see a league table of banks and percentage of losses due to fraudulent transactions - at least with this type of information companies could pick the most reliable bank, reducing their risk.

When banks finally decide to act, and they find that they are unable to secure online accounts and transactions through a web-browser, some may just decide that it is time to develop full, installable, self-validating applications as the only access mechanism to online banking facilities. If "there is an app for that", the flexibility for accessing accounts from anywhere is lost, but it may be the only way security can be maintained.

A post from the Improving It blog

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