Since our last major report on online bill payments three years ago, we’ve seen the rise and fall of Internet retailing, portals, and telecom companies of all shapes and sizes, but bank-branded online bill payment looks suspiciously the same:

•          Checkfree is still the dominate player, even more so today than in 1999.
•          Pay-anyone bill payment is still expensive to operate and fraught with customer service problems.
•          Bank-branded electronic bill payment is still used by a minority of online banking customers; with the penetration falling to 23% at year-end 2001 compared to 36% three years earlier

But in the broader category of online payments, it truly is a brave new world:

•          Consumers’ willingness to interact online with trusted parties (such as their bank) is nearly a non-issue; in 1999 it was a major stumbling block.
•          PayPal, which didn’t exist 3 years ago¹
  now has more than 13 million users,² and remarkably was able to post a pro-forma profit in Q4 2001. At press time PayPal was scheduled to go public Feb. 15.
•          In early 1999, so few people looked at bills online, it was difficult even to estimate market size; in round numbers, it was essentially zero. Today, 32 million users view bills online according to Gartner .

So is the glass half-full or half-empty? Three years ago the glass was definitely cracked. Today, with most of the cracks fixed, the glass is half-full and rapidly filling. Now is the time to review your online payments program , consider new strategic options, and move aggressively forward.

Table 1

Online Bill Payment Forecast*

millions of households

Source: Online Banking Report, 1/02; historical estimates, +/- 20%, future estimates +/- 40%

 * Includes all types of payments initiated online except those made a the point of sale (POS); multiple categories allowed;

¹PayPal was formed Dec. 3, 1998
²In its Jan. 18 SEC filing, PayPal reported 12.8 million accounts as of 12/31/01

Online bill-payment services are often like Laundromats that feature washing machines with no dryers, operation instructions written in Hungarian, and no refunds for defective equipment.

-- Marty Jerome
from his review of 10 bill payment services,
Ziff-Davis Smart Business Magazine, Oct. 2001

Table 2

Smart Business Magazine Bill Payment Ratings

Source: The Big Payoff, Ziff-Davis SmartBusiness, Oct. 2001

What’s a banker to do?

To avoid disappointing users, you need to ensure you’re delivering a service that makes life easier and doesn’t needlessly complicate an everyday task. Fortunately, bill-payment needs can be met in a number of ways using relatively inexpensive Web services (more on that in part 2 next month).

Having personally managed a bill-payment program in 1993 and 1994 at U.S. Bancorp, I have long urged a cautious approach towards EBP, knowing firsthand the customer service problems inherent in the first-generation, paper-and-baling wire service.¹

But the bill payment dam has finally broken, primarily due to the widespread use of bill presentment at credit card sites (see Table 3, right). And now that users have tasted the convenience of viewing and, in some cases, paying their credit card bill online,² we expect users will be far more likely to respond favorably to new pitches for online billing and payment.

However, prospective users evaluating their bank’s bill pay program will expect something akin to a credit card statement: rich in data with a real-time payment option. Many pay-anyone bill-payment programs will seem rudimentary if the user’s first experience with online payment was at Citibank or First USA.

¹For example, I’d Rather Use a Checkbook, NY Times, Feb. 11, 1996 or Glitches Short-Circuit Miracle of Paying Bills Online, Wall Street Journal, Feb. 7, 1996.

²Citibank reports that 2.2 million (37%) of its 6 million Cardmember Central registered users pay their cards electronically.

Table 3

Online Credit Card Statement Users (U.S.)

aka Bill Presentment Users

Source: Companies, except Capital One, estimated by OBR, +/- 33%

(1)       According to a Jan. 28, 2002, update to Citibank’s Web site, it has more than 6 million U.S. users of Cardmember Central (confirmed in a 2/10/02 email with a company representative), including 2.2 million who pay their card electronically; 15% of the 2.2 million, or 330,000, have given up their paper credit card statement, an option encouraged during enrollment. Worldwide the company has “Internet relationships” with 15.3 million customers according to its Jan 29, 2002 earnings release.

(2)       In Dec. 2001, Discover Card said it had registered 6 million cardholders for its online services, 22% of its card base.

(3)       AMEX year-end 2001 total for U.S. only, from its Feb. 8, 2002 investor presentation; up more than 2 million year-over-year (last year it reported 3.5 million users worldwide; U.S. cardholders logged in 83 million times in 2001, assuming an average user base of 4.5 million during the year, the average user logged in to their AMEX account 18 times last year.

(4)       Capital One announced it had surpassed 1 million registered users on Sept. 19, 2000; 16 months later, at the end of January 2002, the company tells us they've grown to 4 million registered users; in terms of active usage, a third-party measurement by Compete in July estimated traffic of 4 million unique users with one-third (1.3 million) logging in to their accounts each month; in August, Capital One was quoted in US Banker as saying that 30% of its users paid their bill online.

(5)       MBNA.com, introduced in the first quarter of 2000, now serves more than 5.6 million customers, including 3.3 million enrolled in Access, MBNA's online banking service; 600,000 were new enrollments in
Q4 2002; for the full year, MBNA added 900,000 new customers via the Internet. Source: Jan 10, 2002 earnings release.

(6)       Unique users assumes 40% overlap, i.e., each user is registered at 1.4 of the above sites.

Table 4 Participants in Electronic Payments

Source: Online Banking Report, 1/02

Where are you now?

To assess your strategic epayment options, its helpful to take a hard look at what you are doing today, and what your customers think of your efforts. Keep in mind that your early adopter bill payment customers are usually more forgiving of problems than the next wave of users.

Table 5

Online Bill Payment Program Self-Assessment

Source: Online Banking Report, 2/02; Service Quality Management,  www.servicequality.co.uk  1/28/02

Adding Value

To determine where best to add value and/or reduce costs, look at each aspect of the bill payment process. Table 6, below, looks at every step of the process from an analytical perspective. Table 7, takes the consumer view of the process.

Table 6

Reengineering the Billing Process for the Net

Source: Online Banking Report, 1/02

Table 7

Epayments from the User’s Perspective

Source: Online Banking Report, Jan. ‘02

Table 8

Statistical Analysis: Factors Effecting Electronic Bill Payment & Preauthorized Debit Adoption

Source: “Why do consumers pay bills electronically? An empirical analysis” by Brian Mantel, Program Manager, Emerging Payment Studies Department, Federal Reserve Bank of Chicago, 2000; data based on responses from 956 consumers, 556 that use electronic payments, 400 who do not

*EBP: Electronic bill payment, which includes preauthorized debits or PC/Web-based authorizations

How to read: For example in line 1, females are 49% more likely to use EBP than men; in line 3 credit union members are 61% more likely to use than non-members

Table 9

Ranking of Statistically Significant Factors from Table 6

Source: “Why do consumers pay bills electronically? An empirical analysis” by Brian Mantel, Program Manager, Emerging Payment Studies Department, Federal Reserve Bank of Chicago, 2000

*Electronic bill payment includes preauthorized debits or PC/Web-based authorizations