Online bill payments already number nearly a half-billion per year, about 7 per online household per year. Within 5 years, that number will nearly triple to 20 per online household per year

With competitive and consumer pressure to do away with most, if not all fees, and with many bill-pay users maintaining low checking account balances, the most likely path to profits is 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: iPaid* Account

Description: A single account that pays interest on deposit balances and collects interest on credit balances. Alternatively, it could be a traditional checking account with an overdraft line of credit attached.

Interest Rate: Positive (debit) balances earn interest based on the national average for interest checking accounts plus a small margin (e.g., 25 basis points); negative (credit) balances pay a variable APR tied to prime plus a margin which would depend on your market and strategies; 0.50% APR discount when at least one bill payment is made from account in the month; can be secured by home equity for tax advantages (with or without an APR reduction).

Monthly/Annual Fee: No charge, provided you make at least one bill payment, otherwise $5 per month.

Transaction Fees: No charge for first 20 bill payments each month, then $0.50 each; $20 for guaranteed overnight delivery of any payment.

One reason credit card marketers drop a preapproved solicitation in your box seemingly 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. Even though certain times of year are more productive (tax time, year-end holidays, etc.), it’s still mostly a hit-or-miss proposition in the snail-mail world.

Virtual Financial Services, recently acquired by Digital Insight, shows a preapproved car loan ad in its demo.

But Web-based bill-pay changes that picture. Using buttons, bars, and banners financial marketers can get an unobtrusive offer in front of users at precisely the moment they are thinking about their finances – while paying bills. To maximize loan sales, offer several 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

Simplicity is vitally 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.

If you served this 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 many factors, but we’d wager it beats direct mail by a large margin for a fraction of the cost.

Back-of-the-envelope ROI

To illustrate the power of your online channel as a loan-generation engine, let’s crunch some numbers. The results are expressed at right as Net Present Values (NPV) per incremental loan for various loan balances and interest rates. For example, if you originated a single line of credit with an average loan balance of $10,000 with a net interest margin of 6%, its NPV would be $3,700. Following is an explanation of the calculations and assumptions:

1.       Incremental Loan Balance (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% (even after loan losses have been factored out).

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% (NPV) = $3,700

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.