Annual Meeting

Credit Unions and the Internet in the 21st Century

Gary C. Kessler
May 1998

Although this paper reads like a talk, it is not a script for a speech. There is no particular flow to the paper; it is a set of freely associated thoughts about the "future" of the Internet and its relationship to credit unions, particularly those in Connecticut. Although not a technical paper, many acronyms are used below; all are defined at the end of the paper.

The Internet is affecting people world-wide in a way that almost nothing has ever before in human history. I say that absolutely non-pejoratively — whether the Internet is the best thing ever or the spawn of the Devil is a matter for another talk. The fact is that it has affected all of us in some very fundamental ways.

Some have claimed that the Internet is the fastest growing phenomenon in human history. Maybe. The ARPANET, the network that evolved into the NSF-run Internet, was started in 1969 with four nodes. When the NSFNET was fired up in 1986, it had a few hundred nodes. The Internet broke a million nodes in 1992. And 2 million in 1993. And 4 million in 1994. And 8 million in 1995. And 16 million in 1996. And was at about 29 million by the end of 1997. The Internet has been doubling in the number of nodes about every 10 months for the last 7 years. A new network is added about every half-hour. Traffic volume is doubling every 100 days. WWW content probably doubles every 60 days and the Web accounts for well over 50% of all Internet traffic.

While these numbers are just numbers, Metcalfe's Law helps provide some perspective: "The value of a network grows as the square of the number of nodes." Given this observation, the impact and importance of the Internet is obvious. This is the network we've been looking for all along....

But there's something else. The Internet, particularly the World Wide Web, has been more quickly adopted by the general population than almost any other technology. Consider:

  Year Invention Years Until Mass Use
  1873 Electricity 46
  1876 Telephone 35
  1886 Gas automobile 55
  1903 Airplane 25
  1906 Radio 22
  1926 Television 26
  1953 Microwave oven 30
  1969 APRANET 25
  1975 PC 16
  1983 Mobile telephone 13
  1991 The Web 7

The Internet is a fundamentally different network service than anything that has preceded it. First and foremost, there are things on the Internet that I want. Commercial users first saw the Internet in the late 1980s in the form of e-mail. Then they saw applications like remote login and file transfer. And they wanted it!! No one forced FTP down my throat; rather, I begged for it! I begged for more and I got the Web. And I didn't care who I got it from.

And then something else came along. The Internet provides services and applications based on the TCP/IP protocol suite. Lo and behold, these same protocols — and applications — can be used on the premises. And so begat intranets. And today, intranets are a potential $10 billion market. And TCP/IP is the most commonly employed protocol today on corporate networks.

I have been asked to predict the future of the Internet. I'll try to make some observations that people can actually use, but let me warn you — Neils Bohr once said, "Making predictions is hard. Especially about the future." There are many unknowns that will affect the future of the Internet and most of those unknowns have nothing to do with technology. If it were just technology, this would be a fast talk because I could just tell you, "The Internet will get larger, faster, better, slightly more expensive, and there will be more and better applications."

So, what is the impact of the Internet?

The Internet is nothing less than OSI! Ignore the hype about the OSI protocols being dead; OSI was about non-proprietary protocols and multivendor connectivity. That sure sound like TCP/IP.

The Internet is nothing less than ISDN! Ignore the hype about ISDN being to little, too late; ISDN was about integrating services over a single network infrastructure and a single set of protocols. That sure sounds like the Internet.

The Internet is nothing less than the Advanced Intelligent Network (AIN). Ignore the hype about the concept being dead as too cumbersome and expensive. The Internet uses TCP/IP, a modular, platform-independent protocol suite that allows anyone to define their own applications. And if the application is useful, it can be shared with the world; you merely let people download it from your FTP site! The original AIN concept suggested that users could build applications in telco switches. But with a PC on the desktop, the ultimate intelligent peripheral is within reach of almost everyone in the business environment and even most in the residence (at least in North America). Why build the application in the telco switch when you can build it into the peripheral and distribute worldwide? It is easy to experiment, collaborate, update, etc.

This points to another related issue. The story (undoubtedly apocryphal) is told that AT&T, in the early 1930s, predicted that by the mid-1950s, every woman of working age in the U.S. would be employed by them as an operator. All of these operators would be necessary, they said, to handle the expected increase in call volume based on the traffic growth at the time and the available technology.

This scenario, of course, never became reality. The paradigm shift, however, was not in the rate of the increase in call volume but in the switching technology. In particular, as individuals were able to place their own calls without operator intervention, we have seen a distribution in network service control. Even 30 years ago, it was difficult to place a long distance or international call without operator intervention in the United States; today, it is faster to dial direct.

One could argue that, in some sense, AT&T's prediction did come true. As intelligent telephone sets, from tone dialing to ISDN, have appeared on people's desktops, all users are providing what once was an operator service; just picking up the phone to make a telephone call used to require an operator. The payback, of course, is that we are receiving faster and more flexible services than ever before.

The Internet adds to this scenario. If I do a little more work, like check out a site on the Web, I can obtain a great of information about almost anything. I have to do more work myself, but I perceive a greater level of service. I may be able to do better research myself than by having an assistant do it for me; the results will generally be more precisely what I want, and at the right level and the right amount of information. I have lost count of the number of times I gave gone to a Web site to get some technical information about something, obtaining what I need almost immediately. I save time, I save the hassle of waiting on the phone for tech support (which may not know the answer anyway and for which I have to wait for their operational hours), I may actually save money (for the phone call or tech support time). The vendor saves money, too, by perhaps requiring fewer tech support personnel and/or fewer phone lines. Yet, all-in-all, I perceive a greater level of service and satisfaction.

Finally, the Internet is becoming the communication nerve center of the world. Is this an over-statement? I don't think so. Look how the Internet threatens totalitarian and ideological societies. Many mid-Eastern countries fear the Internet not as much for the introduction of Western ideas and pictures of naked people, but rather because individuals can communicate directly, one-on-one with people from around the world — and around the region. I read a short interview recently that included a 22 year old man from Saudi Arabia describing his interactions with people on a chat room from all over the Middle East, including Israel. He regularly participates in this forum, up to 4 times per week. And he is questioning why he has been taught his whole life that Israelis are his enemies, when they seem so much like him and they all have so many interests and concerns in common. This is a major paradigm shift for the leaders since they are no longer the sole source of information. It is possible, maybe even likely, to disagree with someone with whom you are in dialogue; but it is harder to kill or hate someone with whom you are actively engaged in sincere discussion. Look at China, where users of the Internet have to register with the police. Controlling communication has always been the key to controlling people and the Internet is merely the most recent and biggest example of how effective communication can be. It's hardly the first such example, however; during the breakup of the Soviet Union just in this decade, where were the Moscow Police and Army to be found? Not at the Kremlin; they were defending the TV and radio stations. The ability for individual communication is a deadly weapon against government that rely on limited education, misdirection, and propaganda to survive.

So how are new ways to use the Internet? Knowing that requires that you know your business and imagine how you would innovate it. And the fact of the matter is that innovation is hard. It is very hard. Consider the telephone. In the 1870s, a newspaper editorial noted that "...carrying human voice over copper wires is impossible and even if it was possible, the thing would have no practical use." Even the inventor(s) of the telephone didn't have a good idea for its use, which is why Bell (and Gray) waited so long to file their patent(s).

When telephones first became available, people tried to fit the new technology into old patterns of behavior. Before the introduction of telephones, for example, a doctor might dictate to his or her receptionist a message for a doctor in another town. The receptionist, in turn, would give the message to a messenger, who would take it to the telegraph operator, who would send it to the other town. At the destination side, the process would work in reverse.

When telephones were first introduced, the initial reaction was "So what? By the time the telephone operator dictates the message to the other telephone operator, we could have telegraphed the message." It took a leap in imagination to see that the telephone easily allowed direct, doctor-to-doctor communication. This, of course, threatened the telegraph industry! But even as telephones became an increasingly indispensable communications medium, they did not obviate the need for the primary communications network of the day because the telegraph was still able to handle some types of information better than the telephone (e.g., lists of names, numbers, and places). What occurred, instead, was a huge growth in the amount of communication that took place between people and the way in which it happened. Indeed, we saw the development of a new revenue stream!

The challenge, then, is not to look at any particular technology or plan in a vacuum and attempt to determine its worth but to what problems you are trying to solve and how different approaches can help you solve the problem. Indeed, the discovery of new technologies often predates their applications; automobiles, airplanes, penicillin, television, and the PC were once considered novelties or toys but are now staples of modern civilization.

(As an aside, when automobiles first came out, they were merely viewed as an automated horse, hence the term "horseless carriage." Traveling farther and wider than ever before was not why we had them, and travelling faster certainly wasn't a consideration since the first speed limits kept you to horses' pace. It is also interesting to note that seat belts were mandated for cars a good 30 years after the effects of speed and accidents were identified and reported publicly.)

So what is the raison d'être of the Internet? Simply, to provide a catalyst. From one perspective, the Internet doesn't solve any problem. It is the applications that run on the Internet that are solving communications problems today. The Internet, then, is a communications infrastructure that supports solutions.

(Which brings me to another side issue. For several years, the industry has declared that using the Internet — using the Web, actually — has to be as easy and intuitive as using a browser. Clearly, Microsoft has attempted to make the case that a browser-centric operating system is pivotal to their ability to innovate even though no one has been asking for a browser interface to the operating system! But all of these "visionaries" have missed the point. What makes anyone believe that a browser is easy or intuitive? To me, this is comparable to suggesting that using a magnifying glass makes a map easier to understand? The Web has to be as easy to use as a TV remote control or telephone keypad! A microwave oven is about the limit in ease and intuition for most people. A VCR has clearly gone over the edge...)

The amazing thing about the Internet, and perhaps key to its success, is that no one is in charge. The Internet is like anarchy, but not as well organized! The Internet represents the epitome of sharing ideas and information, rewarding things that work, and discarding things that don't work. The creed of the Internet pioneers, stated so eloquently by Dave Clark from M.I.T. was: "We reject kings, presidents, and voting. We believe in rough consensus and running code." When a group has an idea, they implement. They then document and share information. If other groups find the idea to have merit and application, it may become an Internet Standard.

And all ideas evolve. The concept of hyperlinked documents — books that automatically allow you to jump off into other books — is an idea that is at least 30 years old. In the modern era — in Internet time — we have the World Wide Web. But the original 1992-era browsers only did text. It wasn't until 1993 that we saw images added to hypertext documents. And then voice. And then video. And then animation. And then Web cams. And then 3-D. And then Java. And then ... we're still counting...

The Internet is fundamentally affecting the telephone companies in the U.S., particularly the local telcos. There is a lot of talk today about convergence of the Internet with telephone companies and maybe even the telephone network. This is not just idle chatter! U.S. telephone companies generate about $15 billion annually from circuit switched services. About 18% of that is from facsimile. What happens as much of this fax traffic is eliminated due to e-mail or to fax-over-IP? What are the telcos going to do to make up this lost revenue?

Most view ISP-telco convergence as "the telephone companies will become the only surviving ISPs in the future." Watch this carefully. It might be that ISPs become the telephone companies of the future. The WorldCom and MCI merger points to a fascinating thing. Their merger will make them a huge telephone company. But that's not what everyone's complaining about; they're complaining about the Internet backbone piece. Yet it is telephone network monopolies that traditionally scare us, and for cause!

Note that even three years ago, there were few Internet services offered by local telcos; now they all are ISPs. One can argue that ADSL is a bypass technology; it certainly bypasses the local telephone switch. As soon as a telco puts in ADSL, then, they effectively become an ISP. So if the Internet and telephone networks converge, what happens to the telcos as we know them today and other ISPs? The Internet is uncontrollable because what makes the Net the Net is the content and the applications. The network infrastructure itself — that is, the routers and the switches — never even see the content and the applications! So the telcos and ISPs become provides of high-speed pipes to the network.

So the telcos not only have to get into the ISP game but they have to transform themselves from technology providers to service providers. As an example, notice how the SNET Web site emphasizes this aspect: The new SNET. We're not just a phone company anymore. They emphasize their role as providing more than just technology; they are a "partner" and they "provide business possibilities."

But telephone companies and data network providers have different cultural backgrounds that must be overcome:

Users of the telephone network share resources per a contract. Users and providers have a marriage based on capitalistic principles. The Internet cultivates relationships based on socialistic principles; it is anarchy, but not that well organized! This, then, is the convergence that has to occur: the Internet is driven by an environment of innovation and today that means being able to make money — a culture of socialism meets the imperatives of capitalism.

Telcos, to be successful in this environment, will have to embrace this new cultural mix. They will also have to focus on a service-orientation rather than being technology-based.

That also means that they will have to rollout services differently than they have in the past. Let me visit ISDN briefly. ISDN was first introduced in the U.S. in the 1984-1985 timeframe. Let us start by ignoring the political reality of AT&T's divestiture for a moment, although that event was certainly a singularity in history that did nothing to help ISDN. But the telcos that did try to rollout ISDN tried to do so as they did every other new service. To wit: I am a customer. I call my local telephone company. I tell them about my IBM mainframes and my DEC minicomputers and my 3270 workstations and my ASCII terminals and the new batch of PCs that just arrived.... and they say, "Now, now, Mr. or Ms. Customer, don't you worry, we'll take care of you. Just tell us where stuff goes in and where it goes out and we'll get it there for you."

So ISDN becomes available and the telcos tell all of us that we need it and, then.... they're surprised that no one wants it 'cause it's expensive and there's little to do with it.

The bottom line is — Do not allow yourself to focus on technology. It is almost impossible to even be technology-poor. You have to focus on being service/application-rich!

As the Democrats would say, "It's the services, stupid, not the technology."

The Internet must be understood to be used effectively. The Internet is neither pure and pristine nor the next television that will suck our kid's minds of the ability to think and reason. By viewing the Internet — or anything else, for that matter — in that polar fashion, we don't take the time to really understand what we're analyzing and, worse, we don't look at how this really fits in with the world at large. The author Arthur C. Clarke once observed that "Any technology sufficiently beyond our understanding is indistinguishable from magic." Well that is surely the Internet. And not just because only 3% of the users understand TCP/IP! It's because just a fraction of the users can see how the Internet fits into the lives of people, corporations, countries, and all types of social, economic, and political structures. And every time there is a debate about the Internet's flaws or virtues, the black/white nature is emphasized; an Internet-utopian says that everything about the Internet is good and an Internet-Ludditte tells how everything about the Internet is bad.

And like every debate, the truth lies somewhere in the middle (ok, it lies somewhere in between; nowhere in the middle, actually, it's tilted towards the "good" side!).

So what? The young users of today will grow to be the consumers and leaders of tomorrow and tomorrow's not that far off! And the youth today are more astute about the technology. In a recent Volchok Consulting survey, 6th graders generally did better than Fortune 100 executives in many things Internet. Ok, it's slightly humorous that 93% of the kids could explain the function of a modem while only 23% of the executives could. It is less humorous that 98% of the students knew that no one owned the Internet while 68% of the executives thought that it was controlled by some corporation; and 23% of them thought that the Internet was a part of Microsoft. Knowing these latter facts affects the way you make decisions; without this base knowledge, it would be like studying world history while ignoring geography.

So after all this, where is the Internet going? There are a lot of trends that you have to keep in mind to help you frame your own answer. Think an integration of voice, audio, video, image, animation, and other services. Think of customized information. Think of constant, on-line data services that provide users with immediate access to information (and the significance of transforming raw data to useful information is not mere semantics!).

The space travelers in The Hitchhiker's Guide to the Galaxy attempt to learn the meaning of life, the universe, and everything. As it happens, the answer is easy (it's "42"); it's the question that's hard.

Define the term virtual presence. Imagine that you could have this virtual presence. How would that affect your business? How could you redefine your business? What would your business look like? What services and/or products would you offer?

Nicholas Negroponte (Director of M.I.T.'s Media Lab), in his book Being Digital, makes the observation that more and more businesses are in the business, fundamentally, of selling bits rather than atoms. There are some obvious ways in which this can transform businesses. Consider some examples:

This certainly isn't all. I am fond of noting that "people are multimedia devices." By that I am really referring to the fact that we have five senses — touch, smell, sight, taste, and hearing. We already digitize audio, image, and video, which of course require specialized input/output devices. Speech uses a microphone and hearing needs a speaker. Digital cameras and displays take care of sight. Special suits can convey the sensation of touch over distance.

Can the digitization of smell and taste be far behind? If I can understand it and measure it, I can digitize it. And when this happens — not if — there will be another paradigm shift in the definition of virtual presence.

Credit unions seem to be pervasive in the U.S., Canada, and Australia. Yet, their presence on the Internet and/or World Wide Web is limited, to date. Let's look at Connecticut for a moment. According to the State of Connecticut Department of Banking's "Credit Unions in Connecticut" web page, there are approximately 235 credit unions in the state; 78 chartered by the state (as of 3/31/98) and 157 federally-chartered (as of 6/97). Of those, only 17 have Web sites (4 state, 13 federal). Most of the Web sites provide information about current loan and share rates, and accept on-line loan, membership, and/or credit applications. All list the location of their branches; yet not one lists their Web address on the "branch location page." There is room for huge growth in the use of the Web as an on-line collateral to any other information about the credit union and issues affecting the credit union members.

Like banks and savings & loan associations, credit unions are financial institutions that provide a savings function and offer consumer credit to their members. One of the things that makes a credit union different, however, is that they are cooperatives whose members must have a "common bond." In the U.S., the National Credit Union Administration (NCUA) has regulations that establish three categories of common bond: occupational, associational, and community-based. Credit union members in the occupational category are employed by the same enterprise or in the same trade. Members in the community category have a common bond based on employment or residence in a geographic area with clearly defined boundaries. An associational common bond refers to groups of individuals who participate in activities that develop common loyalties, mutual benefits, and mutual interests.

Now think about the Internet. The entire Internet community — all 100 million users — represent a group with a common bond; probably not "occupational" although arguably "community-based," but definitely "associational." So, where is the First Virtual Credit Union of Cyberspace? Don't laugh yet; there are several banks on the Internet that have no physical location but provide real financial services from a virtual presence in cyberspace. Of course, those are banks; given the current legislation such as H.R. 1151, one could argue that a credit union might not even want a potential user community of 100 million people.

What other kinds of things are being done and can be done by credit unions via the Internet? Consider:

The Internet is the tool for the future. The large number of banking mergers is being enabled by the high-speed global computer networks that sell everything from simple checking accounts to mutual funds and insurance policies. According to the Wall Street Journal (4/23/98), "Unlike 10 or 15 years ago in the banking world, there are virtually no business or strategic decisions that are not either driven by technology or have immediate massive implications for technology." New technologies like computerized check imaging are cutting costs, and recent agreements on Internet standards are making it easier to link online operations between banks with disparate systems. And the ubiquitous ATM is transforming from a cash machine to a selling tool — offering customers brief, personalized messages on IRAs or investment opportunities.

One cannot discuss the Internet — and particularly financial applications on the Internet — without talking about security. Don't avoid the issue! Most executives don't want to hear about security issues with the Internet but they must be tackled head-on. In the early days of the ARPANET, pretty much every user literally knew every other user. Like any small community, there was an implied trust. As the Internet has grown from small town filled with family members into a huge city filled with strangers, community members must take more precautions. And like a big city, it takes only a few people to make the entire city look bad and to make things hard on all of us.

And it's even taken the Internet community a while to understand this. While security has been a major consideration for years, it has focused on firewalls and protecting oneself from outsiders. It has only been the last year that there has been a focus on using the same firewall to protect outsiders from members of one's own site. That is, I have a responsibility to build my firewall to not only protect me from attackers but also to prevent my users from launching attacks.

There are many security issues to think about but I will only list a few here:

Markets in cyberspace will grow in a very different way than markets in real space. Consider WalMart, perhaps the largest retail chain in North America. WalMart started as a single store. As it was successful, Sam Walton decided to expand. So he grew his stores in his home state of Arkansas. Then he targeted other large markets such as Atlanta, Chicago, and Los Angeles. Then the chain continued to grow even into the smaller markets (such as Vermont).

On the Internet, the process is greatly simplified. As you get on the Internet, you have a worldwide presence and can access a worldwide market. Wherever you can find consumers, you will find a market. And where you find consumers, you will find people who will discover how to pay you. And there is definitely a global marketplace. People from all over the world buy items such as books and CDs from North America because, even with shipping costs, the price is less than what it might cost if purchased locally, what with customs and duty. And, the product is often available sooner than it would be in their home country. Do the purchasers pay taxes on these purchases? That is unclear. And whether this "tax evasion" is good or bad isn't even the point; it's real!

This suggests the issue of a global economy. To date, there is a global economy even though there is no global currency. Should there be? Will the Internet be the impetus for such a currency? I can't imagine this happening in the near future, but who knows?

It is interesting to note also that money does not control access to Internet-based access but local culture. many countries — notably China and most of those in the Arab region — severely limit Internet access and content. Other countries — such as Botswana, India, and Ireland — encourage its use specifically to bolster the local economy, particularly focusing on "clean" industries such as call centers and software houses. And these latter countries are creating good jobs for their people, creating wealth and employment, and extending their lifetime.

The Internet is a wave (no pun intended). If you ride the crest of the wave, you have a good ride. If you ride the back of it, you get left behind.


ADSLAsymmetric Digital Subscriber Line
AINAdvanced Intelligent Network
ARPANETAdvanced Research Projects Agency Network
ASCII American Standard Code for Information Interchange
ATMAutomatic Teller Machine
EDIElectronic Document Interchange
FTPFile Transfer Protocol
IPInternet Protocol
ISDNIntegrated Services Digital Network
ISPInternet Service Provider
NSFNational Science Foundation
NSFNETNational Science Foundation Network
OSIOpen Systems Interconnection Reference Model
PCPersonal computer
TCPTransmission Control Protocol
URLUniform Resource Locator
WWWWorld Wide Web

At the time this paper was written, Gary C. Kessler was the V.P., Information Technology at Hill Associates, a telecommunications training and education firm with headquarters in Colchester, VT. Gary is the author of ISDN, 4/e (McGraw-Hill, 1998) and over 50 articles for industry publications. His e-mail addresses is