The real question: Does subsidizing bill payment improve profits more than spending that money in other ways, e.g., better service, better branches, better website, and so on? Only individual financial institutions can answer the question, factoring all the alternative uses of capital. However, we caution against blindly jumping on the fee-less bandwagon. Think of free bill pay as just one more strategic choice, not a mandate from the marketplace.

The simplest approach is a breakeven analysis
(see Table 8, right). In other words, will my current bill pay base, and the new customers attracted to a free offering, bring in enough extra business to cover the $50 to $75 annual subsidy?¹

On the deposit side, the case is pretty weak: to offset a $60 annual subsidy, you’d need incremental balances of $3,000 at a 2% spread or $6,000 at a 1% spread. On the loan side, the numbers work better. At a 4% spread, you only need an extra $1,500 to break even. But is subsidized bill payment really the most cost effective way to increase loan balances? If so, you should probably make a more direct tie-in, such as waving bill pay fees for taking a new credit line (see “Bill Pay Credit Lines,” OBR 81

Mini Business Case

A more precise measure of the balance levels needed to cover bill payment fee waivers looks at the total cost of bill pay and the number of incremental customers attracted. For this calculation, use the following assumptions:

·      $90 annual cost for each bill pay customer, including internal servicing costs and outsourced processing

·      50% of bill pay customers would pay $5/mo

·      50% are incremental, drawn by the free offer

·      10,000 total users

So the total incremental cost is:

·      New users: 5,000 x $90 = $450,000

·      Forgone fees from existing users:
5,000 x $60 = $300,000

·      Total incremental costs: $750,000

Table 8

Breakeven Incremental Balances

Source: Online Banking Report, 8/04

Results

Even with a modest base of 5,000 bill pay customers currently paying $5/mo for the service, you may need to attract $25 million or more in incremental balances to make back the $750,000 in incremental costs. Even if you think that’s possible, is that the best return on the $750,000 “investment.” Would that money provide a better return if spent on service upgrades, marketing, or employee education?

When deciding whether you can bring in enough offsetting balances, keep in mind the demographic trend is moving in the wrong direction. Bank of America may have been able to improve overall profit 30% after costs; however, that was against an affluent, early adopter crowd. Going forward into the mass market, will the same profit lift be seen in the 2005 to 2008 period? We doubt it. The newest wave of users is less affluent overall, so it will be harder for them to bring in the balances needed to offset the $50 to $100 subsidy.

¹ Assumes total out-of-pocket and internal costs of bill payment are $6 to 8/mo.