You can make money with electronic payments. The original consumer epayments product, the credit card, has been a moneymaking machine for
most of the past two decades.

Other kinds of epayments, however, have so far not
 enjoyed a strong business case. Why not?

1.       Users HATE paying bank fees: If you’ve been in a focus group discussing online banking, you’ve no doubt heard customers ranting about fees (this is true with just about any banking service). Users incorrectly assume they save the bank money with each online or ATM transaction and are incensed over any fee. Bankers rely on less obvious ways to make a profit on many accounts such as interest income and interchange on card products; float and NSF fees on checking accounts.

2.       Users have little tolerance for perceived product shortcomings: Techie customers can’t understand why it takes 5 days to pay a bill when they can send an email anywhere in the world in a few seconds. The dissatisfaction is exacerbated by the fact that many customers have reluctantly agreed to pay monthly fees with the expectation they are buying a premium quality service.

3.       Internal transaction and support costs:
Not only does Checkfree take a big bite every month, hidden management and customer service costs to resolve problems can be significant.

There are no easy answers to these problems. But you can eliminate number 1 and mitigate number 2 by providing basic bill payment services free of charge. However, on a standalone basis, this makes electronic bill payment an even bigger money loser, not the kind of proposal you want to take to senior management in this environment.

Three promising business models

There are ways to make money, or at least minimize the losses. We recommend expanding your efforts in these three areas:

•          Integrated credit line: Your best bet to offset bill payment expenses is to bundle it with a credit line and estimate the incremental loan outstandings generated by the bill payment activity
•          FedEx-like premium services: Another unexplored but promising area is offering expedited, trackable, and fully guaranteed payment services, i.e. become the FedEx of payments
•          Epayment & billing solutions for small and microbusinesses: Here is the only retail segment that won’t balk at paying fees if you can demonstrate clear bottom-line impact
   

Choosing the right P & L

Maybe you can forget about trying to craft a business case for epayments. It’s time to consider classifying epayments as a cost of doing business in the checking account area. Now that more than half of your customers are online, it’s no longer a niche service.

It’s time to treat online payments like ATM access. Just as you don’t charge to withdraw cash from your proprietary ATMs, basic epayment services such as online bill payment should be bundled into most checking accounts at no additional charge.

And you need to work with your vendors to rework contracts to allow you to offer it to everyone with total costs averaging no more than $0.30 to $0.50 per transaction. Bill payment could still be offered as an optional fee-based add-on to lifeline or free checking products.

Epayment Business Models

Source: Online Banking Report, 2/02

¹How you measure success

²Direct fee revenue less direct expense