Many financial institutions use a quasi-breakeven model for bill pay, charging $4-6 per month to cover outsourced payment processing costs. It’s a good strategy, provided your competitors do the same. Don’t count on it. We expect the “street price” of bill payment to rapidly approach zero as aggressive non-banks enter the fold.

Fee-Based Programs

Service fees for “plain vanilla” consumer programs top out at about $6/month. 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 (see OBR 11/97 ).

1.

Flat Monthly Fees

Description: It’s not particularly difficult to justify a small monthly fee, like $3 per month or less. In the U.S., consumers save $0.33 in postage for each bill paid electronically. Research shows that the mean number of bills paid by computer/modem-owning households was 11.3 (OBR 10/96 ). If all are paid electronically, that’s an easy $3.73/month in postage savings. But, 37% of those surveyed paid fewer than nine bills per month. Their postage savings would be $2.97 per month or less.

Bank Goals: Cover costs; provide all-you-can eat service to encourage usage.

2.

Transaction Fees Only

Description: Use the ATM pricing model and charge for bill payments by the transaction. This approach is not widely used, primarily because many bill pay service providers charge a significant flat monthly fee per registered user, regardless of bill payment volume.

Bank Goals: Cover variable costs; encourage trial; compares favorably with known postage costs.

3.

Monthly Fee Plus
Transaction Charges

Description: A common approach, a monthly fee that covers a set number of payments each month, with a transaction charge for “excess” transactions.

Typically, the monthly fee cover the first 15 to 25 payments. Thereafter, each additional payment costs $0.40 to $0.50 each. Since 88% of PC/modem owners pay 16 of fewer bills per month (OBR 10/96 ), most consumers pay just the monthly fee, never incurring transaction fees. But business users end up paying a variable fee based on usage.

Another variation on this theme, which we’ve only seen a few times, is to charge a very low monthly fee that covers just a handful of payments. For example, $2/month for the first five transaction, then $0.50 each thereafter. This approach would satisfy casual users paying 2-3 bills, while charging heavy users a fee commensurate with the value.

Bank Goals: Cover costs; encourage light users; charge heavy users.

4.

Dollar Volume-Based Fees

Description: Although not used by anyone at this time, another possible approach is to base bill pay fees on 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:

We think this approach would make sense to users, especially when combined with payment guarantees and/or payment insurance programs (e.g., monthly payments guaranteed in the event of death or disability).

Bank Goals: Match bill pay fees more closely with value received, e.g. higher fees for higher levels of household income/expense.

5.

Annual Fees

Description: Instead of a pesky monthly fees assessed 12 times per year, 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 (OBR 11/97 ).

Bank Goals: Cover fixed costs while reducing the number of times fees are assessed.

7.

Premium Pricing for Small Businesses

Description: Take a cue from the phone companies, differentiate your business bill pay
with several value-added features, such as integrated email messaging, and then charge 3 to 4 times the consumer price. As we discussed in our Sep. ‘98 Small Business issue, business users might pay as much as $250/month for Virtual Bookkeeping services (OBR 9/98,).

Bank Goals: Profitable fee revenue; new business generation; incremental loan outstandings; cross sales.

Bundling Strategies

7.

Bundled with Loans

Description: Pay-anyone bill payment with bundled bill payment overdraft line of credit and/or credit card.

Example Pricing:

• $15 to $50 annual fee for a bill payment and credit line bundle covering the first 15 payments per month
• $0.50 charge per payment after the first 15 each month
• 16.9% APR on bill payments charged to the credit line, with a three day interest-free grace period

8.

Bundled with Online Checking

Description: Pay-anyone bill payment bundled with special “online” checking accounts that have monthly fees or balance requirements higher than they would without the bill pay feature.

Other Strategies

9.

Free, Free, Free

Description: To use the latest Web terminology, become a free “portal” to users’ bills. Then layer transactive services on top of basic bill payment, such as email payment alerts and confirmations, user-defined reminders, checking account balance alerts,
e-mail confirmations of high-dollar DDA transactions, and so on.

Bank Goals: New customer acquisition; increase Web traffic; PR; build positive brand image online.

10.

Compensating Balances

Description: Many banks routinely waive monthly checking account service charges if the customer maintains a given balance level. Since customers are conditioned to this pricing for checking, it may make sense to follow the same strategy with bill payment. Wells Fargo and numerous major banks use this approach.

Bank Goals: Cover costs either through fees or higher balance levels; can be positioned as a “free” service provided minimum balance is maintained.