History The recent hyperbole around online banking is not simply the latest Wall Street fad. Financial institutions were interested in turning the online banking concept into reality as early as 1970. Many banks invested millions in research and development, certain that online banking was to take off. In October 1981, The American Banker had a set of articles promoting the virtues of online banking. In answer to the question:" Will online home banking be a major force in the market by 1985?" an executive vice president of First Interstate Bank replied'" Absolutely! And I want to be there”. The most popular approach of the 1970s was home banking via a touch-tone telephone, which enabled customers to check account balances, transfer funds and pay bills. With telephone banking, customers use a numeric password on a push-button telephone to access banking services. As most people have telephones, the telephone was believed to be the ideal home banking technology. Despite the initial optimism, results were very disappointing. The telephone was an awkward technology for home banking, since there is no visual verification, which is important to customers. Also, touch-tone phones were not common in the 1970s. In the 1980s, cable television also was considered as a possible medium for home banking. Although this approach solved the graphic limitations dilemma of the telephone, it had other drawbacks. The primary obstacle was that the necessary two-way cable was virtually nonexistent, as only a small percentage of Americans had two-way cable TV. Since the PC has both visual display and two-way communication, it has been considered a leading contender for the home banking and medium. During the 1980s and the late 1990s, several banks offered home banking services and invested hundreds of millions of dollars in home banking. Just like telephone and the cable systems of the 1970s and early 1980s, home banking from a PC was initially a failure: the absence of a critical mass of PCs and a PC-friendly population stunted the growth of the concept and resulted in the failure of efforts such as Chemical Bank's Pronto System. Trends that lead to online banking: Five distinct factors contribute to the new competitive environment: 1) Changing Consumer needs: Consumer requirements have changed substantially in the last decade. Customers want to access account-related information, download account data for use with personal finance software products and transfer funds between accounts and pay bills electronically. Of course, along with these services, banks must be able to guarantee the privacy and confidentiality that customer's demand, which is not a trivial matter to implement on the part of the banks. 2) Cost Reduction: As banks merged to reduce their operating costs, they are obviously growing in size. Online technology can deliver services far more economically than the traditional methods, as infrastructure cost is shared with the consumer. 3) Demographic Trends: Consumers are increasingly careful about their personal finances. Social, demographic and economic changes have altered the way people value their time and money. The companies that are taking advantage of this opportunity by targeting the appropriate customers with appropriate services and products will have a lasting competitive advantage. 4) Regulatory Reform: Banks occupy a unique strategic position as they act as intermediaries in redistributing capital from areas of excess to areas of scarcity. This role has made financial services a closely watched and regulated industry. Recent years have brought about far- reaching regulatory changes that have removed many of the competitive protections banks enjoyed for a long time. 5) Technology based Financial Services Products: The growing importance of computer technology is another factor that enhanced the online banking structure. Development of electronic cash, such as smart cards, can stimulate further banking consolidation.