During the next few years, bill presentment and bill pay will be one of the biggest draws for Web-based financial firms, with 4 to 5 billion transactions annually by 2002 in the U.S. alone (see forecast, OBR 1/99.) Competitive pressures will do away with most, if not all fees. And with many bill pay users maintaining low checking account balances, the primary path to profits will be through lending services. Every bill pay account should be tied to an integrated line of credit. Following is a pro forma product offering:

Product Profile: eBillPay* Account
(with integrated credit line)

Interest Rate: Variable APR tied to prime; margin above prime depends on your market and pricing strategies; 2% discount, provided at least one bill payment is made from the account each month.

Monthly/Annual Fee: None, provided you make at least one bill payment per month, otherwise $5 per month.

Transaction Fees: None for first 20 bill payments each month, then $0.50 each; none for online transfers to and from credit line; none for automatic overdraft advances; 2% for in-person, telephone, paper check, and mail transfers.

Enhancements (see OBR 1/99 for more):

•  payment guarantees (see OBR 11/97 )
•  interest-free grace period of a few days (to make up for perceived loss of float)
•  usage incentives such as frequent flyer miles

One reason credit card marketers seemingly drop a preapproved solicitation in your mail box every day is that they know the importance of timing. It’s not enough to have a good brand name and killer offer, successful card solicitations must arrive when the prospect is feeling a need for additional credit. This
is hit-or-miss proposition in the snail-mail world.

Virtual Financial Services, sister company of First Internet Bank of Indiana ), shows a preapproved car loan ad in its home banking demo.

As every marketer knows, certain times of year are better than others. As a result, mail boxes fill up with solicitations before the holidays, tax season and summer vacations.

But Web-based bill pay changes that picture. Financial marketers can get an unobtrusive offer in front of users at precisely the moment they are thinking about their finances. Credit access via buttons, bars and banners can be presented to qualified customers during the bill payment process. To maximize loan sales you’ll want to offer at least the following four payment options:

•  pay the bill directly from an existing credit line
•  charge the bill to an existing credit card
•  request a line increase to pay the bill
•  request a new loan to pay the bill

Preapproval still important

Timing isn’t everything. To generate new loans, you’ll also need to make it exceedingly simple to apply. Prime credit prospects are conditioned to expect preapproval. Try showing the following banner to prequalified customers during bill payment sessions:

If you served a “Get $5,000 Now” banner to bill pay customers three times per month for a year, what do you suppose your cumulative response rate would be? 5%? 10% 25%? It depends on your customer base and pricing, but we’d wager it beats direct mail by a large margin for a fraction of the cost.

In lieu of preapproved credit, you could offer an instant credit application with approval guaranteed within a few minutes. For example, NextCard tells applicants they will be approved within 30 seconds.

To illustrate the power of looking at your online channel as a loan generation engine, we must make a number of assumptions. Use the chart at right to determine the NPV per incremental loan for various loan balances and interest rates. For example:

1. Incremental Loan Balances (i.e., outstandings): Assume each new bill pay customer builds up an incremental $10,000 in “bill pay” balances over time. (Note: For the sake of simplicity we’ll assume the loan balances are in place immediately.)

2. Net Interest Margin: Since many users are relatively price insensitive to this type of credit, expect net interest margins of 5% to 10%.

3. Annual Profit Contribution: At a 6% spread, the loan would generate $600/yr in profit contribution.

$10,000 balance x 0.06 = $600/yr

4. Lifetime Value: Satisfied bill pay customers are likely to stay with you for a long time, especially as the switching costs to unwind their electronic connections grow with each new service you provide. Assume the bill pay loans stay on your books an average of 10 years. This gives each new bill pay credit line a lifetime value of $6,000, or $3,700 discounted at 10%.

$600/yr x 10 years = $6,000

Discounted at 10% = $3,700*

* This is also called the Net Present Value (NPV). See chart at right for life-time NPV for other combinations of loan balance and interest margin.

5. Acquisition Costs: How much would you pay to acquire new loans each with a lifetime value of $6,000 (NPV of $3,700)? $300? $500? $1,000? Whatever the figure, you can use it to establish a realistic budget for your online channel. Assume you want to attract 250 new accounts each month, 3,000 in a year, and are comfortable spending $500 to acquire each one. That equates to a $1.5 million budget.

Bill Pay Metrics*
Loan Value per Bill Paid

*For illustration purposes only, these numbers are NOT derived from actual financial institution results, although they are within the relevant range from our experience at three superregional banks.

**Includes bill payments set up on automatic recurring payment.