Bill Payment Pricing Research Results (NetBanker)

In the U.S. market, the industry standard pricing model has been free online banking access combined with fee-based bill payment. However, during the past three years, the fees for bill payment have gradually gone away to the point where the most major U.S. banks advertise free bill payment, though it may not apply to all account types or balance levels.

In July, we surveyed the top 50 U.S. banks and found only two that still charged a monthly fee to all bill payment customers. Nearly half, 22 of 50, offered bill payment free to everyone. Three banks did not offer bill payment and the remaining 23 offered it free for certain accounts and/or balance levels. In total, 45 of the 47 (96%) largest banks with bill payment offered a free option . For those charging a fee, the average listed price is $5.63/mo.

Last fall, TowerGroup found 33 of the 50 (66%) largest U.S. banks providing bill payment free of charge to all or part of their customer base. Furthermore, Tower found that bill pay penetration increased from 22% of online banking customers prior to going free, to 38% after the change. This 70% lift was significantly more than what would have been expected without the price change.

History of Free Bill Payment

Although BofA is largely credited with starting the free bill pay movement, Citibank was actually the first to go free. In a major branding campaign in the summer of 1997, the bank hit the streets of Manhattan touting its no-fee electronic banking message (the fee-free policy also applied to ATM transactions and other electronic banking transactions).

But until Bank of America’s high-profile move, most major banks held to a $5 to $7 monthly charge, which not coincidentally covered their monthly bill to CheckFree. Citibank handled payment processing in-house, which may have contributed to their willingness to offer it fee-free.

Fees began to crumble in the fall of 2002 when BofA launched a multi-million dollar television advertising campaign promoting free bill payment. The campaign proved so popular with viewers that it continues to this day. At the time, BofA said it was their most-remembered campaign of all time. In the months and years since, most major U.S. banks have followed suit. The most recent major to go free was U.S. bank earlier this year (see Table 1, below).

One notable holdout is Wells Fargo, which last year said that 40% of its base still paid a monthly fee.¹ Assuming 2 million bill pay accounts, with 750,000 paying monthly fees of $6.95, Wells Fargo is bringing in more than $5 million per month in bill payment fees. While it may lose a few customers to its pricing strategy, the $60 mil/yr can be reinvested into better services, more marketing, or shareholder dividends.

¹American Banker, Wednesday, June 11, 2003

Table 1

Free Bill Pay Timeline

Bank	Date	Comments
Citibank	1997	Part of high-profile strategy to make all electronic services free-of-charge
AmSouth	2001	Free-for-life promotion netted more than 100,000 signups
Charter One	2001	Became free for all
BofA	May 2002	Became free for all
Nat City	Sep 2002	Became free for all
Fifth Third	Feb 2003	Became free for all
HSBC	Sep 2003	Became free for all
Bank One	Aug 2003	Free for all but basic accounts
US Bank	Jan 2004	Web bill pay free for all consumers, MS Money/Quicken still $4.95/mo
WAMU	May 2004	Also offer free to small biz
Hibernia	Sep 2003	Previously $4.95/mo

Source: Online Banking Report, 7/04

Table 2
Summary of Consumer Bill Pay Fees at Top 50 U.S. Banks

Source: Online Banking Report, 7/04

(1) Free of monthly fees; in a minority of cases, fees apply for excess usage and/or account inactivity

(2) Excludes Comerica, whose pricing is not disclosed, and MBNA which charges by the transaction

(3) Average fixed monthly fee, excludes transaction fees for excess usage

Table 3
Consumer Bill Pay Fees at US Top-10 Banks

Source: Online Banking Report, 7/04

¹In June 2003, Wells Fargo reported that 40% of its customers received it free-of-charge.

²Wachovia is the other top-10 holdout; it has said that 70% of customers get it free-of-charge.

Table 4
Consumer and Small Business Bill Pay Fees at Top-50 US Banks
ranked by deposit size, 12/31/03

Source: Online Banking Report, 7/04

Bank of America landing page from Google ad (8/25/04)

The Bank of America Story

Thanks to an unusual openness, motivated by the strategic importance¹ of its free bill payment policy, Bank of America’s internal research results have been widely circulated in print. To recap, in a 2.5 year study of bill pay users compared to a control group of similar customers, the bank found a 30% profit lift (see Table 5 right). Despite conventional wisdom, little of it came from increased retention: the main driver was increased balances.

Normally, we don’t pay much attention to studies correlating bill payment with higher profits. It’s a function of the early adopter demographics and will gradually diminish as bill payment becomes a mainstream service. However, Bank of America’s results deserve a second look because they used a control group of similar non-bill payment customers to compare profit lift.

We have serious doubts that you will be able to recreate these results within your own customer base. Here’s why:

What really caused the profit lift? Was it the bill payment in isolation, or was it the entire online banking experience at BofA’s award-winning site.

· Did households in the control group already have one foot out the door? Perhaps the control group didn’t adopt bill payment at Bank of America because they were already in the process of moving their balances to another financial institution. If so, the control group was predestined to have lower profits no matter what factor was evaluated.

· Was the control group really that similar? Although, they may have been in the same demographic segment, it seems to us that a household using bill pay in 2001 was fundamentally different in their financial behavior than one that didn’t use bill pay.

· Would the same profit lift be seen with any new product geared to affluent customers, e.g., a new diamond credit card? In other words, it may not be that bill pay causes balances to grow; it’s merely that those with growing balances tend to sign up for new upscale services regardless of what they are.

· Finally, even if you take the results at face value, does BofA’s experience with early adopters during the past three years have any correlation with what you might expect with mainstream users during 2005 to 2008?

¹Besides the free publicity, the bank has an ulterior motive for promoting free bill payment across the entire industry. The bank took a 16% interest (10 million shares) in CheckFree in Q2 2000; the deal was valued at $400 million at the time.

Table 5

Bank of America Results

index of profitability with 100 = to profits prior to the household using electronic bill payment

Initial customer profitability	100

+ deepened relationships (+27)	127

+ increased retention (+3)	130

+ reduction in servicing cost (+1)	131

- cost of bill pay service (-9)	122

Source: Bank of America, increase in customer profitability during a 31-month period ending in 2002, results of an analysis of 300,000 customers comparing profits from bill payment users vs. the profits of a control group of similar households not using bill pay

Results from Online Resources

Online Resources, a major bill payment processor with more than 500 financial institution clients, found that bill pay penetration was 40% for free vs. 28% for those with monthly fees of $5 or less
(see Table 6 below).

Table 6

Online Resources results
Aug 2003

	Monthly Fee
	Free	<$5	>$5	Lift
% of ORCC client’s charging this fee¹	33%	36%	31%	n/a
Online banking adoption²	18%	14%	13%	30%
% Bill pay conversion²	40%	28%	20%	60%
Bill pay adoption²	7.2%	4.0%	2.5%	120%

Source: Online Resources, 7/04

(1) January 2004 data

(2) June 2004 data

That’s a 30% lift in conversion of online banking users to bill pay; and an even more impressive 120% lift in total bill payment adoption across the bank’s checking account base. However, it’s been achieved at a hefty cost. Not only are the banks giving up the $5 to $6 monthly free from their existing bill pay customers, they’re paying several dollars per month for a whole new group of customers.

It’s also difficult to ascertain how much of the increase in online banking adoption was accounted for by the free bill pay offer. Since the first to offer free bill pay tended to be more aggressive in their overall marketing of online banking, some of the lift is from better overall marketing, regardless of the price.

Results from Compete Inc.

Ecommerce researcher Compete Inc., which has a financial services practice run by Stephen Franco, a high-profile analyst at US Bancorp Piper Jaffray during the height of the bank technology boom. He found that banks offering free bill payment had a higher share of their customer’s electronic bill payments. At major banks that charge for bill pay, 18% of their customers used biller-direct payments. In comparison, those offering it free-of-charge had a third fewer customers (13%) using biller direct services (see Table 7 below).

Table 7

Bank Bill Pay vs. Biller Direct
Feb 2004

		Penetration of:
Segment	Number	Bill pay base	Online banking base
Bank online	28.7 mil	n/a	100%
Any pay online	11.3 mil	100%	39%
Bank only	5.7 mil		20%
Billers only	4.6 mil		16%
Both	1.0 mil		3%