Pricing Strategies For Online Bill Payment (NetBanker)

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 reasonable strategy, especially if you are trying to recoup your outsourced bill payment expenses. However, if your strategy calls for increasing online bill payment penetration, you should consider more creative pricing strategies.

It’s difficult to determine the average price of online bill payment in the United States. In many cases the posted price is meaningless because fees are waived for a significant number of users based on their total relationship or other product usage.

With that caveat, the average online bill pay list price across 361 banks and credit unions surveyed in mid-2000, was $4.29. If you remove the 74 companies that provided bill payment free of charge, the average increases to $5.39. The mean price across the entire sample is $4.95.

The most popular price was $4.95 to $5.00, used by 94 financial institutions, 26% of the sample. Second most popular was $5.95 to $6 with 77 charging that fee, 21% of the sample. Third most popular was $0, with 74 financial institutions, 20% of the sample. Keep in mind this is more than 1.5 years old data. More than likely, fees have declined since then.

Yahoo’s bill pay program has two fee options: $2/mo plus $0.40 for each transaction; or $4.95/mo for the first 12 payments, then $0.40 each thereafter. Note: links to interbank funds transfer and aggregation.

U.S. Bill Payment Fees*

Source: Thomson Financial, Directory of Online Banking & Financial Services, 2001 Edition, (2000 data)

*List price; many banks waive the fees for certain customers or certain types of accounts. Excludes transaction charges often levied for very heavy usage.

Fee-Based Programs

Service fees for “plain vanilla” consumer programs top out at about $6/month. For certain niches, such as small businesses and individuals with more complicated finances, service fees could be in the $20-25 range and higher. However, if you want to get more customers hooked on the service, you may want to bundle it with other accounts so that consumers don’t see an explicit monthly fee month after month.

Flat Monthly Fees

Description: Each registered users pays the same monthly fee no matter how many bills are paid.

Rationale: On paper, it’s easy to make a case for a small monthly fee, such as $3 per month. After all, consumers save $0.33 in U.S. postage for each bill paid electronically (more if you count the cost of the paper check). At $3/month, to breakeven on postage savings, a household would have to convert 9 paper payments to electronic. That’s perceived as achievable for most households, although in reality the average number of bills paid online is substantially lower. Checkfree, with more than three-quarters of the market, 4.3 transactions per subscriber per month during calendar year 2001.

Pros:

Simple flat fee is understandable and promotes active participation
Covers most direct costs

Cons:

Irritates users who think they are saving the bank money by participating in the program
Discourages light users (1 to 4 bills per month) and trial by new users
Very heavy users (20+ trans/mo) aren’t paying enough

Transaction Charges for All Payments

Description: The ATM pricing model with charges for each transaction. This approach is not widely used, primarily because many bill-pay service providers charge a significant monthly fee per registered user, regardless of bill payment volume. Another option is to charge a small monthly fee in addition to a charge for each transaction. Yahoo offers this option with a $2/mo fee plus $0.40 for each payment

Pros:

Compares favorably with known postage costs
Low-cost option for infrequent users
Covers variable costs

Cons:

Probably won’t get used much unless it’s very well integrated with your online banking program and/or constantly marketed to users; consumers just won’t think its worth the trouble to figure out
Cost-prohibitive if your service provider charges a flat monthly fee and/or maintenance fees for inactive users

Monthly Fee Plus
Transaction Charges

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

Rationale: Typically, the monthly fee covers the first 15 to 25 payments. Thereafter, each additional payment costs $0.40 to $0.50 each. Since the vast majority of online households pay fewer than 20 bills per month, most consumers pay just the monthly fee, never incurring transaction fees. But business and other heavy users pay a higher fee, commensurate with the increased value received from the service.

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 transactions, 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.

Pros:

Vast majority of users pay fixed monthly cost
Covers fixed and variable costs
Higher fees for very heavy users

Cons:

The potential transaction fees are confusing and make the service sound more expensive than it really is for most users
Discourages trial

Free Basic Services with
Fees for Premium Options

Description: Users receive a base level of service free-of-charge, then pay extra for optional upgrades such as paper check delivery, expedited payments, insurance, etc.

Rationale: This approach gives banks the best of both worlds – a no-cost entry-level program to get new users started, plus fee income from add-on premium services.

Pros:

Encourages trial
Can advertise free bill pay
Solidifies customer relationship
Premium services cover at least some
program costs
Differentiates your online banking program
Could license premium services to other banks

Cons:

Development costs for the value-added services
Makes program more complex, harder to use
Increases customer service load/complexity

Dollar Volume-Based Fees

Description: Although we have yet to see it tried, another approach is to base bill-pay fees on the total dollar value of payments transmitted rather than the number. For example:

Dollar-Volume Pricing

Monthly Dollar Volume Paid*	Monthly Fee	Optional Insurance**
$0 to $1,000	$2	$2
$1,000 to $3,000	$3**	$1 + $1/per $1k
$3,000 to $5,000	$5	$1 + $1/per $1k
$5,000 to $10,000	$10	$1 + $1/per $1k
$10,000+	$25	$1 + $1/per $1k

*U.S. households pay an average of $2,500 in monthly bills according to The Nilson Report.

**Optional insurance functions like credit life; in the event of death or disability, users would have their bills paid for a given length of time.

Rationale: The goal is to help users think of bill payment not just as buying a transaction, but paying for convenience, peace of mind, and a better way to handle monthly payments. Dollar-volume pricing helps move users away from comparing bill payment fees to the price of stamps. Rather than thinking, “why does the bank charge me $5 to pay seven bills, I would save money buying stamps,” they would (hopefully) think, “paying $5 for the bank to guarantee $2,700 in monthly payments is a wise investment.” It would be important to provide user-friendly performance and service standards, backed by understandable guarantees.

Pros:

More closely aligns price with value; e.g. higher fees for greater household income /spending
Focuses on the value of money moved vs. transaction price

Cons:

Unusual pricing may take some getting used to, especially if converting from flat fee pricing.
Higher prices for heavy users may cause concern, internally as well as with customers, especially with a conversion.
Your pricing may not stack up well with the competition, especially Web-based competitors.

Annual Membership Fee

Description: Instead of a pesky monthly fee 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. The annual fee could be all encompassing or it could be combined with transaction fees.

Pros:

Only one opportunity each year for user to question the cost.
Creates a more “exclusive” feel to the program
Users are accustomed to annual fees for membership-based programs.

Cons:

Users undecided on the value of bill payment, would be motivated to cancel when they saw the annual fee; but you could mitigate this risk by waiving the fee for a year when you get a complaint or account closure.
Will have fewer non-users who keeping paying monthly fees because it doesn’t seem worth the trouble to call to save $5.
More customer service activity with users canceling and requesting a reversal of the annual fee.

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. Better yet, take it to the next level by creating Virtual Bookkeeping services which could command monthly fees of $50, $100, or more depending on the size of the business and the complexity of their accounts payables and receivables.

Pros:

Profitable fee revenue
PR and marketing value of differentiated checking and deposit services

Cons:

Development costs
Increased customer service
Potential regulatory, compliance, and
security issues

Prepaid Blocks of Electronic Checks

Description: Just like paper checks sold in books of 200 for $10 to $20, sell prepaid blocks of electronic checks at a similar price point; for example, 40 “postage-paid” electronic checks for $20. You could even bundle paper and electronic orders together, 100 paper checks and 40 electronic ones for $25.

Rationale: Customers are used to paying for paying for paper checks in advance, it might help some users make the conversion to electronic methods.

Pros:

A familiar pricing plan for users of paper checks
Simple one-time price, customer knows they won’t be locked into long-term monthly fees
You get the fees in advance of delivering the service
Helps users understand exact costs per transaction

Cons:

Development costs
Low end-user demand
If used as a pricing option, complicates the decision process for users and your
front-line staff
Customers service costs to explain the program

Bundling Strategies

Bundled with Credit Lines

Description: Pay-anyone bill payment with bundled overdraft credit line and/or credit card so users can choose to pay a bill directly with credit.

Example Pricing:

$0 to $50 annually, or $0 to $5 monthly fee for first 15 payments per month, then $0.50 each
16.9% APR with a 3-day interest-free grace period to emulate paper-check float
No transaction/cash advance fees for the loan advance

Rational: Uses the credit card business model where much of the profit comes from revolving balances.

Pros:

More profit potential
Even users who no longer use the bill payment feature could use the credit line for years

Cons:

Convenience users will never use the bundled credit line
Some users may resent being encouraged to use credit to pay routine bills
Potentially increases product complexity
Customer service issues with delinquent loan customers

10.

Bundled with Checking Accounts

Description: As discussed earlier, we believe the time is right to consider bundling basic online payment services with most checking accounts. With 32 million users managing billing accounts online, online payments are becoming an expected feature of all ecommerce sites.

Pros:

Increased trial, usage, and customer lock-in
No customer or employee complaints about fees
Higher user tolerance for service shortcomings
Can be “buried” in overall checking account P&L

Cons:

Increases overall checking account costs
No explicit fee revenue to offset the monthly charges from the bill payment vendor
Will increase the number of registered non-users, may require reworking vendor contracts

11.

Bundled with Online Banking

Description: Instead of offering bill payment as fee-based option to those using online banking, bundle online banking and bill pay together at a nominal fee, e.g., no more than $1 to $2 per month.

Rationale: Even though Web users may think they are saving you money by banking online, if they haven’t reduced their branch and phone usage, they are not saving you a dime. In fact, state-of-the-art online banking is expensive to operate and delivers significant value to the end-user, why not charge for it?

Today most banks recoup online banking costs by charging only for bill payment as a stand-alone fee product. But instead of charging $5 a month to the 20% of users that elect to pay bills, and $0 for the 80% who don’t, charge $1 to everyone whether or not they use bill payment. Total revenues will be the same; however costs will likely increase as more users try bill payment.

Pros:

Sets a precedent that online banking has value that will be charged for; the fee can be increased over time
$1 to $2 per month fee compares favorably to those charging $4 or $5 for bill payment
With no additional fee, bill payment penetration will increase
Online users pay their own way, subsidized less by non-users

Cons:

Decreased usage of online banking overall, especially non-bill-pay users
Backlash from customers/employees used to having free online account access
Inconsistent with free account access via phone

Other Strategies

12.

Free Forever

Description: A very simple and popular pricing policy, free; now and forever.

Rationale: Eventually, electronic payments will be far cheaper than paper-based transactions. It will be paper-check processing that will carry the premium not vice versa. So why not do away with pesky fees for electronic transactions sooner rather than later? Besides, your customers think you are saving a fortune by replacing paper checks, and believe they should get a piece of your “windfall.”

Pros:

Nothing beats free for gaining trial and increasing customer satisfaction
Helps position you as a provider of low-cost high-tech services

Cons:

High costs of providing pay-anyone bill payment, including substantial customer support costs
Fails to charge for the value received
Makes it difficult to charge for similar services in the future

13.

Compensating Balances

Description: Provide discounted or free bill payment for customers that meet balance-level milestones (deposits and/or loans).

Rationale: Many banks routinely waive monthly checking account fees for customers maintaining balance thresholds. 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.

Pros:

Encourages customers to consolidate deposits and/or loans to meet minimum balance levels
Can be positioned as a “free*” service, with the asterisk mentioning the balance requirements

Cons:

The pesky asterisk takes away much of the cache of being “free”
Less explicit fee income to offset program costs
Those that can’t maintain high enough deposit levels may resent “subsidizing” other customers with more money (best bet is to allow loan balances to qualify for fee waivers).

14.

Shopping Discounts

Description: Provide a monthly package of local merchant discounts/coupons that offset the monthly bill payment fee.

Rationale: As I waited for my turn in Starbucks on a recent dreary Seattle morning, the person in front of me paid $4.24 for a triple mocha. It occurred to me that her cup of coffee cost about the same as a month of electronic bill payment service. Since consumers love Starbucks and are ambivalent at best about their bank, perhaps consumers would like bill payment more if they received a coupon for a free mocha, or some other useful product, each month they used the service. That might take the pressure off your fees for a minimal cost.

It might be difficult to get Starbucks on board, but other local merchants would likely provide free or steeply discounted coupons to distribute to online banking customers. Each month a new coupon would be available in the bill payment area.

Pros: