Many financial institutions have gravitated towards a quasi-breakeven model for bill pay, charging $4-6 per month to cover outsourced payment processing costs. But breakeven service offerings don’t create a lot of excitement at the board meeting. Bill payment, as a core function of your Web banking services, needs to be a profit center.
 

As with most products, there are tangible and intangible benefits of offering electronic bill presentment and payment. But intangible benefits are by definition difficult to quantify. If you can find a business model that relies on a measurable P&L, you’ll be in a much better position to gain approval for appropriate resources to run the profit center. With that in mind we’ll concentrate on tangible revenues.

There are two primary revenue opportunities: service fees and interest revenue from bundled bill pay loans. Service fees for a “plain vanilla” consumer-oriented program top out at about $6/month. Anything more, and you’ll begin to send your customers to online forums complaining of price gouging. (Remember, your customers think they are saving you “hundreds” if not thousands of dollars servicing them online. And they are probably right in the long-term.)

But, a value-added service offering may be able to command higher fees, especially from small businesses and individuals with more complicated finances. You can also sell optional ancillary services integrated with bill payment

Revenue Opportunities

•  Monthly Service Fees: It’s not difficult to justify a small monthly fee. Consumers save $0.32 in postage for each electronic transaction. Last year (OBR 10/96 p. 12) we found that the mean number of bills paid by computer/modem-owning households was 11.3. If all are paid electronically, that’s an easy $3.62 in postage savings. But, 37% of those surveyed paid fewer than nine bills per month. Their postage savings would be less than $2.50/mo.
•  Transaction Fees: Many banks have a limit to the number of payments covered by the monthly fee. For example, U.S. Bancorp, which has been offering PC banking since Jan. 1994, allows 15 payments each month for $5.95. Each payment after the first 15 costs $0.40. With 88% of PC/modem owners paying 16 of fewer bills each month, most will be unaffected by this fee. Yet, it forces business users, paying dozens of bills per month, to pay a higher fee. Though your contracts with payment processors might make this approach costly, we would keep the base monthly fee low, $3 or less per month, but charge $0.60 to $0.75 per transaction after the first 12 to 15. That way the casual user paying 2-3 bills will stick with your offering, while your heavy business users won’t care about paying a few bucks more. Transaction fees are based on the unit number of bills paid regardless of whether they are paper or electronic or whether they are for $1 or $10,000. It might make sense to levy the fee only on non-electronic payments, allowing an unlimited number of electronic transactions.
•  Volume-Based Fees: Another approach would be to charge for the total dollar value of the payments rather than the number. The theory here is that those paying higher dollar amounts would be less price sensitive. For example:



•  Annual Fees: Instead of a pesky monthly fees that users have to justify every month, an annual bill payment membership fee might be more palatable; especially if combined with value-added services such as e-mail confirmations and bill payment credit lines.

Credit Line Revenues

•  Higher Revolving Credit Balances: Become “first in line” when users need to tap additional credit reserves to pay bills and/or pay credit card balances in full.
•  Higher Rates: Ultra convenient, preapproved bill payment credit can carry a hefty price tag; APRs of 15.9%, 16.9%, or more. As long as your rate undercuts the user’s standard credit card rate, you can capture the balances that would have been revolved on a card.
•  Annual Fees: Again, the convenience and peace-of-mind benefits of a bill payment reserve can justify annual fees of $20, $30 or more depending on your market. Consider making the bill payment reserve a mandatory part of the bill payment account.
•  Transaction Fees: In lieu of, or in addition to annual fees, users could be charged transaction fees each time the bill payment account was used.

In addition to bill pay credit reserves, we see a logical connection to other services which could be delivered via the Web, e-mail, fax, voice message, or mailed statement. Ancillary services could be priced on a per use standalone basis, through monthly/annual subscriptions, or bundled into a comprehensive checking/credit bill pay package accounts. We expect ancillary bill pay services to evolve in a similar manner as credit card enhancements. Some examples:

•  bill pay reviews
•  payment reports
•  bill pay guarantees
•  price protection
•  customer service help
•  bill pay audits
•  bill pay insurance services (pays electronic bills in the event of death or disability)

Cost vs. Price Dynamics

Looking just at variable costs and revenues (ignore fixed costs such as marketing and ignore intangible benefits such as customer retention), electronic bill payment in its current half electronic, half paper state, is definitely a cost center.

But that will change over the next five years as bills are zapped electronically to users, who zap payment back in real-time. And it appears the major presentment powerhouses, MSFDC and Checkfree, will compete with each other by offering interchange-like payments to banks of a few cents per bill who host the bills on their Web sites. So banks would get compensated indirectly from the billers for handling payment transactions and customer service queries. EBP may end up as a profit-center in its own right, or at least a break-even proposition.

Call it the Laffer curve of bill payment. There is an interesting dynamic between price and cost at work here. As you increase monthly fees, average usage increases as infrequent users drop the service. So the higher the monthly fee, the higher the variable cost per subscriber. There may be a sweet spot in the $2 to $3/mo range where the fee is low enough to attract infrequent users to help offset the cost of heavy users. Heavy users can also pay transaction charges after a certain number of “free” transactions. The problem with transaction fees is they tend to bog down the sales process.

Possible Pricing Scenarios (Alternatives to $5/month.)

1.

End-User Oriented Program Focused on Increasing Loan Balances

Description: Pay-anyone bill payment with bundled bill payment overdraft line of credit.

Pricing:

•  no fees for payments to electronic merchants
•  $0.35 per transactions to non-electronic merchants
•  $15-50 annual fee for bill pay and the credit line
•  16.9% APR on bill payments charged to credit line

Other Pricing Options:

•  waive all bill payment fees for direct deposit
•  provide the first 5 paper payments free-of-charge, then $0.50 per item thereafter

2.

Bill Presentment Services for Small Business Account Acquisition and/or Fee Revenues

Description: Biller-oriented program focused on collecting fees from biller and/or acquiring new business clients.

Pricing:

•  $1-3 per biller’s customer as a start-up fee
•  $0.25 - $0.75 per transaction from merchant
•  (optional) 2% discount fee of presented amount for immediate funds availability (with full recourse if user fails to pay within 60 days)
•  $0.30 per transaction for non-customers (of bank)

Other Pricing Options:

•  transaction fee waived if biller places linkages on their billing site directing users to your site, e.g., “check my balance at XYZ Bank,” “charge to XYZ Bank line of credit,” or “pay-anyone at XYZ Bank”

3.

Non-Transactional Bill Pay Services

Description: Information services triggered from information extracted from your checking account database, or that are programmed on your Web server. For example, user-defined payment reminders by e-mail; user-defined bill presentment on the Web; checking account balance alerts; e-mail confirmations of high-dollar DDA transactions, and more.

Pricing:

•  $0-50/year for unlimited use of Web and e-mail based services

Other Pricing Options:

•  services could be offered in non-Internet versions for extra fees such as $0.25/transaction for fax or voice messages

4.

Bill Payment as a Consumer Account Acquisition Technique

Description: Internet billing/presentment used as a technique to gain new end-user relationships, especially if you are the bank providing presentment services to the biller.

Pricing:

Offer Internet bill presentment services to area billers at a highly subsidized rate (if not entirely free) in exchange for exclusive status as the “preferred banking provider” on the payment area of the biller’s Web. Users entering the biller’s Web directly from your site would view a cobranded billing area.

Users entering the biller’s payment area from anywhere else on the Internet would see your name when they selected a payment option:

Other Pricing Options:

Depending on your relationship with the biller, it could be a tough sell getting your bank listed as a preferred payment provider on the biller’s Web. Start with your best clients first, then as the momentum builds, you can approach other billers.

You may need to be creative in gaining prominent placement on their bill payment screens, for example:

•  offer commissions for new accounts generated from their site
•  offer revenue sharing from new accounts
•  bundle with discounted credit card processing
•  bundle with collection services

promote the biller’s presentment service through advertising, cross promotions, PR, etc.