Overall, most major financial institutions do a good job with website design. But one thing usually lacking is timely tie-ins with events and holidays. Google is famous for doctoring its logo dozens of times each year to coincide with the national holidays and other big events. For example, for today's big presidential election, the logo has been changed into a voting booth.

Those efforts, while not always directly driving new business, keep the website fresh and show that the bank is paying attention to the events that impact users day to day. And the best ones can increase sales. By leveraging well-hyped events such as the Olympics or Super Bowl, financial institutions can gain valuable PR and attention from customers.

I looked at 3 or 4 dozen large U.S. bank and credit union sites today and found just one riding the election hysteria to make a point. Key Bank's Pick Your President promotion (here) has nothing to do with McCain vs. Obama but is actually a clever way to convince customers to switch to electronic statements. Customers get $1 (George Washington) for every account switched to estatements and $5 (Abe Lincoln) if they take bill pay with that. The bank is also throwing in a pair of $1,000 sweeps prizes to add a few Benjamins to the mix.

Nice job, Key; our vote is with you.

Key Bank homepage with small banner for the Pick Your President promo
(4 Nov 2008)

Key Bank Pick Your President landing page (4 Nov 2008)

It comes as no surprise to anyone that online banking and bill pay customers are more profitable than non-adopters. This correlation, driven by the favorable demographics and lower attrition of online adopters, has clearly been established since the early days of the Web.

What's far more difficult to prove is causation. Does online banking/bill pay actually lead to more profits? The main hypothesis: by locking customers into an electronic service, they are not only less likely to move their accounts, they will also consolidate deposits and other financial activity at the provider of the online services. We'll get back to that.

It's not surprise that ebill users are more profitable
But first, here's some new correlation data from SunTrust that can help you benchmark your own performance or serve as a proxy for your business case. The study was released in late 2007 and was underwritten by ebill provider, CheckFree. The research company, Aspen Analytics, published a short white paper on the project here. And Forrester's Cathy Graeber published a research note three weeks ago here.  The two companies presented their findings in a webinar this week (replay here).

One interesting aspect of this study is that ebill customers were segmented into casual users that viewed one or two ebills per month and heavy users that looked at 3 or more ebills each month. The heavy users owned 5% more SunTrust products and were 20% more profitable to the bank (see chart 1 below).

Source: Aspen Analytics/CheckFree, Nov. 2007
Projections based on 13 months of SunTrust data captured between Feb. 2006 and Feb. 2007

Even more dramatic was the correlation between online product usage and attrition, defined as the closure of the primary SunTrust checking account. Offline customers were six times more likely to close their accounts in the six-month observation period
than heavy ebill users (see note 1). Source: Aspen Analytics/CheckFree, Nov. 2007

The bottom line: 5-year NPV for heavy ebill users was 36% higher than those that used bill-pay only and nearly double the online-banking-only population (no use of bill pay
or ebilling). 

 
Source: Aspen Analytics/CheckFree, Nov. 2007

But does ebill use CAUSE profits to increase?
The correlation data above illustrates the importance of taking good care of bill pay/ebill customers. However, to justify incremental investment, you need to know the expected payback, i.e., how much more revenue/profits can you expect by moving customers into ebilling.

This study made a concerted effort to determine if the use of free ebilling services can leads to more profits. The researchers normalized the population across hundreds of product, tenure and demographic variables drawn from SunTrust's own CRM files and from appended Equifax info. But absent full before-and-after interviews with the subjects, it's still just a model it hard to fully test. There could be important factors outside the SunTrust/Experian datasets that account for lower attrition. For example, perhaps the well-heeled online banking customers who closed their primary SunTrust checking account in late 2006 stayed away from ebills because they had a sense they would be moving in the near future, so why bother setting up ebills.

But with these caveats in place, it does appear this study demonstrates that moving customers into the heavy ebill category causes them to be more loyal, at least in the short term. Cathy Graeber, the Forrester VP participating in the webinar, certainly thinks so.

The following chart shows that about half the decline in customer churn (36 points) has nothing to do with ebill usage but should be attributed to the favorable customer profile of ebill users. However, the remainder of the decline (32 points), is attributable to being heavily involved in ebills (viewing 3 or more per month). Put another way, ebilling decreases the expected attrition of this type of customer household by almost 50%. 

 
Source: Aspen Analytics, The E-Bill Effect:  The Impact on Customer Attrition from Banks that Offer E-Bill, Nov. 2007
Note: Ebill customers in this example are heavy users looking at 3 or more ebills per month.

Bottom line
If those results hold true for other banks' customer bases, it could justify significant investment in ebilling activation programs. For example, if you value an active checking account at $200 per year and it costs $100 to convert them to ebilling, and you achieve a 33% reduction in attrition, the net gain is $230 per new ebill account over five years. Convert 10,000 users and the NPV would be more than $1.5 million (see note 2).

Even if you discount the results due to research bias (it was after all underwritten by the leading ebill provider) or you take issue with the methodology, it does appear that the companies have proven a material reduction in attrition by frequent ebill usage.

And to give it the final "common sense" test. It does seem logical that someone who's taken the trouble to set up online banking, online bill pay, and register three or more bills for delivery, would tend to be less likely to ditch their checking account for that sexy deal across town.  

Notes:

Definition of customer segments:

• Overall = Entire SunTrust customer base
• Offline = SunTrust customers that do not use its online banking or bill pay/ebills
• Online = SunTrust customers who use online banking but NOT bill pay/ebills
• Bill pay only = SunTrust customers who use its online bill pay system, but NOT ebills
• E-bill = SunTrust customers who use its ebill service and view 1 or 2 bills per month on average
• 3+ E-bills = SunTrust customers who use its ebill service and view 3 or more bills per month

1. Attrition was defined as anyone who closed their primary SunTrust checking account between Sep 2006 and Feb 2007 and did not open a new one during that period. It's a pretty short window, so that's one limitation of the findings that you should be aware of. Over a two or three year period, their could be much different results.

2. $200 saved x 5 years x 33% attributed to the ebill program = $330 gain less the $100 cost to convert to ebilling = $230. Across 10,000 customers the total net gain would be $2.3 million. Discounted at 12%, the NPV is more than $1.5 million.

As a one-time bill payment product manager, I've long appreciated the difficulties of making online payments live up to the hype. It was one of online banking's "dirty secrets" in the 1990s that if you wanted your bill paid quickly, you'd usually be better off whipping out your checkbook and dropping the "ink on dead trees" into the so-called snail mail (see note 1). 

Thankfully, those days are behind us. Thanks to CheckFree, Metavante, Online Resources, MasterCard RPPS, and smaller companies such as iPay Technologies, Billeo Inc., Princeton eCom (now owned by Online Resources), and Yodlee, we have reached the point where most bill payment transactions are fully electronic from consumer initiation to posting by the biller. The paper has finally been wrung from the system, at least on the remittance side. There's still some work to be done on the actual billing statement itself.  

Luckily, we have six of these payment innovators appearing at our upcoming FINOVATE 2007 conference to be held in NYC on Oct. 2, although Yodlee will be showing its online personal finance manager and Online Resources will be DEMOing its virtual collection technology. If you are interested in attending the conference, please register now, since there are only 37 seats remaining. Here's the link.

Billeo Inc.
Billeo is an outside-the-box-thinking online payments facilitator that uses the power of Web-based tools to make it easier for consumers to track and manage all their payments, both at the point-of-sale, and one-time and recurring bills. Blue-chip clients include Visa and Target among others. The Santa Clara, CA-based company won an OBR  Best of the Web in 2005 for its toolbar-based interface. The venture-backed company's innovative streak lands it on the pages of NetBanker quite frequently (see previous coverage here) and we look forward to seeing the next generation of its service at FINOVATE in three weeks.  

CheckFree
CheckFree literally created the market for online bill payment in the United States and has worked tirelessly to help convert what was once a large paper-pushing operation into a finely tuned, almost totally electronic, process. They've been the leader not only in creating a smooth back-office system, but also in smoothing out the rough edges in the payee sign-up process, in the customer interface, and in moving billers towards bill presentment. CheckFree, which closed on its acquisition of platform-provider Corillian just a few months ago, has been swept up by Fiserv in a proposed acquisition pending shareholder approval. Every year the company raises the bar for online bill payments, and I look forward to seeing what they have in store for FINOVATE attendees.

iPay Technologies
We've written about iPay Technologies in Online Banking Report a number of times, but unless you've shopped bill payment providers in the past few years, you may not be familiar with the nimble Elizabethtown, Kentucky-based firm. The privately held, 250-person bill payment specialist now handles payments for more than 1,000 banks and credit unions with a total user base just under 500,000. The company is a full-service provider offering not only bill payments, but also person-to-person payments, interbank transfers, gift-oriented payments, and even old-school telephone bill payment. If you haven't met the management team of iPay yet, you are in for a treat. Dana Bowers and her team are a delight, and I encourage everyone to talk to them during the FINOVATE breakout session.

Metavante
Metavante, wholly owned by Marshall & Ilsley, but on a path to be spun out later this year, is involved in almost every aspect of banking from risk management to loan originations and of course payments and online banking. The company's Products and Services page lists 78 items. I've had the opportunity to participate in its user conference the past three years, and it's mind-boggling to see the breadth and depth of its products displayed in one event. Its latest is a joint venture with leading UK-based mobile-provider Monitise, another FINOVATE presenter (press release here). On Oct. 2, Metavante will be demonstrating its Immediate Payments service, something that customers have long valued. It will be interesting to see how Metavante delivers on this tricky payment capability.

Note:
1. For those of you new to the bill-payment business, the reason snail mail beat online payments was that prior to the turn of the century, the majority of "online" bill payments were actually sent via snail mail, often from remote locations, that took longer to traverse the country than if the consumer had sent it themselves.

Today, Buxfer added funds-transfer capabilities to its online personal finance app (see announcement here, previous coverage here). The service is free through the end of August, but could eventually carry 1% to 2% fees to cover transaction costs.

Buxfer co-founder Shashank Pandit has been dangling this bit of news in front of me for the past two weeks. But he would only tell me that they were partnering with a big player to enable funds transfer (note to Amazon attorneys, he did NOT violate the NDA). I figured it would be Chase, Wells Fargo, or perhaps PayPal. Even with the rumors this week of Amazon's new payment services, I hadn't put 2 and 2 together.  

This morning it all makes sense. Amazon.com announced a potentially disruptive payment service, aptly called Flexible Payment System (FPS). And it's announced, in what else, a lengthy blog post at the Amazon Web Services blog (see note 1). The FPS website is here. The company even built an FPS Sandbox where users (see screenshot below), both individuals and companies, can play with the service without moving actual money around.

Buxfer is using Amazon Payments to allow users to settle their debts electronically, a vital piece of a social personal finance app. Online personal finance without payment capabilities is like the Internet without email. Even if the company ends up charging a small fee, the convenience would be worth it for many users. 

Implications
The Amazon service potentially makes it easier for smaller Web-based companies to take on traditional financial institutions. It won't alter the payments landscape overnight, like PayPal did in 2000, but it could usher in a rash of new entrants competing with banks and credit unions for the high-end personal finance customer (note 2). But the big stumbling block: consumer trust still favors incumbent financial institutions. In any event, the game just became more interesting. For more information, see Online Banking Report: Social Personal Finance.  

Buxfer homepage noting Amazon Payments

My default account page at Amazon's payments sandbox (I have not made any transactions, so the ledger is empty)

Note:

1. The post is signed by Jeff, which is Amazon evangelist Jeff Barr, not the slightly more famous other Jeff (Bezos). 

2. Another company using Amazon Payments is FreshBooks, a small-business billing service.

When the last paper check is dropped in the mail, it will be a business check. All signs point to that day being over the horizon.

Not that no efforts are afoot to squeeze business checks out of the payments system. At least a dozen companies around the world are trying to automate business payments with so-called order-to-pay software systems, including, in the U.S., Bottomline Technologies, Harbor Payments, and Xign Corp.. Various business payment card systems continue to emanate from the nation’s banks. And advocates of routing business payments through the automated clearinghouse have been working diligently at the task for years.

But checks remain stubbornly alive: According to the Federal Reserve's landmark 2004 Payments Study, total check volumes between 2000 and 2003 only declined from 41.9 billion items to 36.7 billion items. And according to the US Census Bureau's 2005 Statistical Abstract of the United States, consumer payments made by check between 2000 and 2003 only declined from 28.8 billion items to 26.8 items. The 10 billion item difference, says a Fed spokesman, can be considered business checks. This suggests some little progress in squeezing paper out of the system, but no reason to write checks’ obituary.

The most progress in eliminating paper checks is seemingly being made in online bill payment. According to the American Banker’s Association, less than half of all consumer bills—49 percent—were paid by check in 2005, compared with 72 percent in 2001. Since bills represent a large fraction of consumer checks written, this suggests an accellerating trend away from consumer checks,.

But if civilians seem to be edging away from checks, business is apparently sticking to the tried-and-true. This is actually counterintuitive, since businesses would seem to have a lot to gain by giving up paper checks, if only for efficiency’s sake, while civilians, who get free checking, have no such incentives.

As usual, things look different once you’re in the weeds. In this case, a superficial analysis ignores simple balance-of-power and treasury-management issues, not to mention the tyranny of sheer habit.

Aside from sheer convenience, consumers have little to gain from paying their bills online, but as indicated by the numbers, that matter alone–combined with minor carrots and sticks from billers and banks–seems to have turned the tide.

Businesses, on the other hand, not only have a lot more power in their financial relationships than a typical consumer, but also are loath, to say the least, to abandon a treasury-management game that businesses have been playing since prehistory: demand immediate payments (even prepayment), but don’t pay yourself until the sheriff is coming up the driveway; meanwhile, use the float for a hundred purposes.

The irony is that the vendors of order-to-pay software systems can make a very good argument that discarding those old-fashioned treasury-management techniques is good business. Companies using order-to-pay systems, they say, free up working capital from their balance sheets, and that what they lose in float, they more than gain from being able to pinpoint exactly how much money they have on hand.

Tom Glassanos, for instance, president and chief executive of Xign Corp., points out that 19 Fortune 500 companies use his firm’s order-to-pay products, including Charles Schwab & Co., MetLife, Pacific Gas & Electric, and The Williams Companies.

But even he will concede that not every company thinks order-to-pay is a good thing. "There are good reasons why this hasn’t happened yet and continues to go slow,” he says. “There’s a certain (business) population that would like to get on board, but can’t get remittances across. And there’s a lot of work involved in telling your suppliers that you’re going to pay them via ACH instead of by check.”

The result, says Glassanos, is that “Just to get it to work, they find out, seems to them to be a lot more work than the value they get back, and they also have to deal with losing some float. So when they add the plus and negative columns, it doesn’t come out to be all that different, and they decide to go with what they’ve been doing.”

Banks are likewise not overly enthusiastic about the order-to-pay idea, except for US Bank, which has a patented order-to-pay product it calls PowerTrack. Even Glassanos concedes that only one bank uses his stuff, JP Morgan Chase & Co., which uses Xign in conjunction with Vastera, the trade receivables system which it bought early last year. Glassanos says two other big banks have recently signed on, but that he couldn’t disclose their names at NB’s press time.

Why the slow uptake at banks? The reasons are pretty simple. Banks make too much money from the various fees attached to business checking to embrace order-to-pay; for one thing, when you can charge your customer for removing every paper clip in a pile of checks, it’s a hard business to give up. For another, there’s no reason to expect checks to be disappearing anytime soon, so there’s little reason to close a profitable department, especially when most banks’ revenues are under pressure in the first place. And, banks tend to view change as something that has to be adapted to the bank’s interests, leading banks to come up with ideas that make sense for the bank, and not necessarily for the customer.

Card-based corporate payments systems, like Bank of America’s new ePayables product, are a good example. Cards would seem to answer a lot of problems for corporations, including digital data streams, easy tracking, and a means to mimic traditional pay-at-the-last-minute treasury-management games.

There’s only one fly in this particular ointment: The payee has to pay to get their money, in the form of interchange. The alternative would be to accept a discounted invoice in order to get paid early. “If you’ve been paying cash or check or anything for a transaction, the payor has been footing the bill, but here the recipient is paying for the transaction,” an unappealing prospect at best, says Penny Gillespie, president of Gillespie International, and one that payees can easily block.

Looked at this way, it’s not surprising that checks will likely linger—some would say malinger—for many more years. But there’s another reason, one that many overlook: Most businesses aren’t the Williams Companies or Pacific Power & Lights of the world. According to the U.S. Census Bureau’s 2001 Statistics of U.S. Business, only 26,000 companies had sales over $50 million, out of a total of 5.5 million; and only 103,000 of America’s 4.9 million firms that have any employees at all had more than 100 employees, although those larger companies employed 74 million of the nation’s 115 million workers.

That’s the real rub. There are some 5 million companies in the U.S. that have little time to  automate their accounts payable and receivables departments, which means that trying to sell them an order-to-pay system is a waste of time. At a minimum, the annual return on such a system is not enough to make a compelling case for expensive, complicated software. And payment cards likewise have little application, since smaller companies tend to pay higher discount rates.

This being the case, banks aren’t foolish to hold on to their business checking departments. And your local Postman probably isn’t headed for the unemployment line. (Contact: Xign Corp., 925-469-9446; Gillespie International Inc., Penny Gillespie, 703-815-0706)

The electronic bill payment and presentment (EBPP) headlines in 2006 will be mostly about vendors offering integrated EBPP platforms, spawning in turn a clutch of M&A stories, says Ron Averette, Princeton eCom Inc.’s ceo. Expect to see the number of payments players this year dwindle.

“You’ll continue to see core processors looking to add bill pay as an ancillary capability to their other product offerings,” he says. Averette cited Fiserv’s July 2005 acquisition of BillMatrix for $350 million as an example of a big payments shop, interested in having a bill payment capability, using an acquisition as the foundation of an integrated family of EBPP products. In the coming year, he says, all of Fiserv’s competitors will be jumping into the pond.

Continue reading "Electronic Bill Payment & Presentment Predictions" »

The inbox is a key to serving online customers profitably. It’s where your customers will be reminded to pay bills or bump up credit lines. Urgent emails to home and work will notify them when balances have dropped perilously low or if someone in Timbuktu has tried to use their debit card number.

However, the inbox is also the epicenter of a fierce war between legitimate marketers, those with permission to communicate, and hucksters of all shapes and sizes. We believe that tools to control inbox clutter and spam will eventually win out, but it’s going to get worse before it gets better.

Even though more than 500 billion marketing messages will clutter U.S. inboxes in 2003 , financial institutions shouldn’t be discouraged about expanding their own electronic messaging programs.  While users are increasingly skeptical about email pitches, by a 3-to-1 margin they prefer it over postal mail for receiving marketing messages.* Despite spotty service standards by merchants, email is now the preferred way to communicate with customer service, favored by 57% of users, up 7 points from 50% last year.

In researching this report we looked at the messaging programs of the 47 largest North American financial institutions as measured by registered online users. While several banks, including Bank One, Citibank, Charter One, and Zions, have embarked on aggressive outbound messaging programs, most are still on the sidelines with programs on the planning board for 2003 or 2004. On the
e-statement front, credit unions are more active with hundreds already in production and more coming online every month. 

This report covers four major types of financial e-messaging:

• Alerts/confirmations: Account-specific activity or balances
• E-statements: Statements or statement notifications
• Service messages/alerts: Primary goal is to inform (non-sales)
• Marketing messages/email lists: Primary goal is to sell

Table 1

U.S. Email Marketing Forecast

billions of messages, billions of dollars

Source: Forrester, 8/01 as cited in eMarketer’s Email Marketing Report, 8/02              CAGR = compounded annual growth rate

Table 2

U.S. Financial E-statement¹ Forecast

millions of messages

Source: Online Banking Report, 1/03        HH = household       CAGR = compounded annual growth rate

(1)       E-statement defined as any periodic statement of a bank, loan, or credit card account delivered to cardholders; the statement can be delivered in the message, attached to the message, or through a unique link to a stored copy of the statement (excludes simple notification message, e.g., you have a new statement, log in to your account at www.yourbank.com/login to view)

(2)       Number of statements received per household that subscribes to any financial e-statement

(3)       Col 1 x Col 2

(4)     Col 1 x Col 2 x 12

Table 3

U.S. Financial E-messaging¹ Forecast

millions of messages

Source: Online Banking Report, 1/03        HH = household

Notes: (1) E-statement defined as any periodic statement of a bank, loan, or credit card account delivered to cardholders; the statement can be delivered in the message, attached to the message, or through a unique link to a stored copy of the statement (excludes simple notification message, e.g., you have a new statement, log in to your account at www.yourbank.com/login to view)

(2) Number of statements received per household that subscribes to any financial e-statement; (3) Col 1 x Col 2; (4) Col 1 x Col 2 x 12

Table 4

U.S. Financial E-statement/E-message Combined¹ Forecast

millions of messages

Source: Online Banking Report, 1/03        HH = household

Note: (1) Number of e-statements and e-message received per household; (2) Col 1 x Col 2; (3) Col 1 x Col 2 x 12

Source: CheckFree, 9/02 except EPP rev. est. by *Financial DNA 2/02 EPP = electronic payments and presentment

Atlanta-based CheckFree is the dominant third-party electronic bill-payment processor, controlling an estimated 2/3 of the market . Founded in 1981 by its current CEO, Pete Kight, CheckFree has grown to 3,000 employees and $493 million in revenues (FY02), up 14% from the previous year. Pro forma net income was $17 million in FY02, compared to a pro forma loss of $15 million in FY01. CheckFree offers a wide variety of electronic bill payment and ACH processing services for consumers and small businesses. Its clients include 9 of the top 10 consumer banks along with major consumer financial services players such as Yahoo , MS Money, and Quicken.

Number of Customers

Currently, 6.6 million consumers are signed up to pay bills online through CheckFree clients; however, only about 5 million are considered active, having paid a bill during the past 90 days (see Table 1). The vast majority of users come to the company indirectly through partners. However, the company does maintain a lightly promoted consumer-direct business featuring “Scout the bill retriever.”

Total payment volume last quarter (May/June/July 2002) was 88 million, or 29 million transactions per month. Annualized, its current volume is running at 350 million transactions per year, more than 2% of the 15 billion bills paid in the U.S. each year.

The company is also the leading third-party bill consolidator with total bill presentment volume of 1.3 million per month, representing an annual run rate of more than 15 million bills, about 0.1% of the total U.S. bills dropped in the mail each year.

Table 1

CheckFree Transaction Volumes, FY 2002

Source:  CheckFree 9/02

1.   Volume = average monthly transactions in April, May, and June 2002; Subscriber and biller totals are as of 6/30/02, CheckFree’s fiscal 2002 year-end.

2.   Active subscribers have paid a bill within the past 90 days

3.   Number of financial institutions and other clients who have enabled both bill viewing (presentment) and bill paying.

4.   Primary billers deliver at least 100,000 bills per month

Outsourcing options grow:

Definition: Retail Epayment

Any funds transfer or non-point-of-sale payment (aka bill payment or remittance) initiated online; including consumer-to-consumer, consumer-to-business, or account-to-account.

The tech sector may be on the decline, but banks have more choices than ever for outsourcing bill payments and funds transfers. Two of the newest entrants, PayCast and iPay  provide clever solutions to allow your users to electronically redistribute funds among their own accounts at any financial institution or send money to other individuals. And don’t overlook the payment specialists that have not only survived that past two years but continue to innovate at a surprising pace, especially CashEdge which is about to announce a much-needed overnight funds transfer option.*

Another new entrant, ATM switches such as First Data’s NYCE
 and Concord’s Star System. These ATM giants are in the final stages of enabling real-time transfers between any cardholder. Star System is the most aggressive, mandating that all member financial institutions be able to receive card-based interbank transfers by April 1, 2003. NYCE, which already has the real-time infrastructure is place, expects dozens of implementations by year-end, but isn’t mandating compliance until year-end 2003. Although the systems aren’t interoperable, a Star System cardholder won’t be able to transfer funds in real-time to a NYCE card, third parties such as CertaPay, CashEdge, and PayCast are developing workarounds that will route outside transactions through the ACH,
so users will be able to transfer funds to anyone in the U.S.

In the first three parts of this series published earlier this year, we made the case for banks to take a creative approach to electronic payments, using the FedEx model of reliability, speed, and tracking to create premium-priced payment options. Two years ago that would have required a multi-million dollar project. Next year, many banks, especially those in the Star and NYCE network, will be able to create these new revenue streams for less than $100,000.

It’s an exciting time for those involved in the online payments business. After a decade of talk, epayments are finally going mainstream. But for many traditional players, the victory is bittersweet. The most popular programs are not the DDA-based, pay-anyone systems that had a 10-year head start on the market. The market leaders are coming from outside retail banking. Here are the three biggest drivers of consumer adoption:

•          Auction Payments: PayPal has taken some lumps of late, especially after baring its soul in an IPO prospectus. But with 15 million users and ever-growing expertise in Internet delivery, customer service, and fraud prevention, the company has the potential to do for payments what eBay did for swapping collectibles. If anyone remained doubtful of PayPal’s competitive threat, its entry into traditional electronic bill payment serves as notice that the company has its sights set on the entire epayments market. 
•          Account Management (a.k.a. EBPP): The widely cited Gartner estimate that 32 million U.S. adults are managing credit cards and other bills online was an eye-opener for many.  Although only a minority of the 32 million settle their bills online, we expect that within a few years the vast majority will pay their outstanding balance while logged in to their account. Look at Capital One’s experience. Last year it came from nowhere to become one of the country’s 50 largest ACH originators, with its 5 million registered users paying 16.3 million Capital One bills online in 2001, up 10-fold from the previous year and now accounting for 18% of the company’s entire repayment volume.
•          Extreme Simplicity: The major roadblock to electronic bill payment adoption has been the “getting started” problem. Wary consumers are reluctant to invest time in learning a new system that might not work so well. The way to develop new users is to get them to sample epayments with little effort or risk. That’s why bill payment during account management sessions is proving so popular. And look for the credit card issuers to leverage that activity into broad-based bill payment programs built into their cardholder interfaces

The question remains how to translate all this end-user activity at PayPal, Capital One, and Citibank into profitable programs at YourBank.com. Last month, we laid out several dozen epayment products and services. This month, we prioritize and arrange them into product bundles to fit various strategies common to community banks, credit unions, and larger regional players

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

As with Web portal, bill presentment is a term that has outlived its usefulness. It’s a throwback to the days when analysts expected bills to be presented by third parties on behalf of the end biller. The only debate was whether “thick client” would beat out the “thin client.”¹

Now we know from actual results that consumers are flocking to billing Web sites. Third-party presentment systems are all but dead. Industry leader, Checkfree, distributed only 6 million  (0.04%) of the country’s 15 billion bills in 2001.

The exceptions are user-controlled aggregation systems such as Yodlee, uMonitor, and TekNowledge², which are poised for rapid growth.

A new term has surfaced recently³ that we think is much better at describing what consumers are actually doing: (online) account management. It sounds like a good thing; what spouse wouldn’t want to explain they were online “managing their accounts.”

¹For the record, we never joined the “thick vs. thin” debate; expecting direct models to eventually predominate

²TekNowledge was recently selected to power FiServ’s aggregation system

³We first saw it used by Gartner Group

Building services your customers and shareholders both like

Last month we suggested you look at electronic payments from the perspective of a non-financial company, specifically Federal Express. That’s how PayPal built its billion-dollar business.¹ But you don’t have to be a venture-funded Silicon Valley company to improve on the current state of the art in online payments.

Consider the experience of new customers using a typical bank online bill payment system:

• Slower payment time than with paper checks – typically 5 days online vs. 1 to 3 days in the mail.
• Lack of trust – through experience consumers have grown to trust the U.S. mail system; but online it still requires a leap of faith every time you press the submit button.
• Little integration with other systems – bill pay is often isolated, lacking integration with other bank systems, email communications, or merchant accounts receivable systems.
• Antiquated customer service – instead of being able to track payments and troubleshoot problems online, users are often required to telephone customer service to determine payment status.

¹ market cap, 3/14/02

Internet-Enabled Bills (billions)

Number of U.S. consumer bills, bills delivered online, and bills paid online

Source: Online Banking Report estimates, 3/02, (+/- 33%); (1) Total bills = total number of bills sent to U.S. consumers via postal mail or email; (2) Net-enabled bills = bills that can be viewed online; (3) Payments = All non-POS (bill) payments authorized online, does not matter whether the original bill was Net-enabled or not

Building a better mousetrap

Given existing contracts and the high cost of transitioning your user base, you may feel locked into your current bill payment program. To a great extent that is correct; however, financial institutions of all sizes and circumstances can still make improvements in product delivery without drastic system changes, even if it’s just clarifying service standards to staff and customers. Keep in mind the overriding goal: to make the online payment experience better than the offline equivalent.

Following are the building blocks of a good program:

•          Fast, guaranteed payments
•          Payment tracking and self-service options
•          Automated payment options
•          Understandable service standards and performance guarantees
•          Wired customer service with same-day
           email response
•          Integration with other bank products, especially checking and loan accounts
•          Basic services for newcomers and/or those with simpler financial transactions
•          Premium services for power users and/or those with complicated financial needs such as small business owners
•          Integration with email so messages can be sent along with payments

During the next two months, we’ll provide material to help you build payment services that click with users. This month we concentrate on products
 pricin, and the business model. Next month we’ll bring it all together and suggest ideal programs for various institution sizes, and list vendors that can help
make it happen.
 

FedEx Payments*

Here’s our response to the hypothetical “How would FedEx approach the payments?” We envision a three-pronged approach using a Web front-end in combination with an ACH and package-delivery back-end.

1. FedEx Platinum Pay: Guaranteed next day delivery directly to the office or lockbox of the biller.

Program features:

•    Web, phone, and email tracking
•    Confirmation numbers emailed to the user after each session
•    Confirmation when payment cleared (deposited
     by biller)
•    Payment from any bank/CU deposit account (checking, savings, money market)
•    Payment from any credit card (subject to cash advance fees)
•    Payment from FedEx credit line (cobranded with a major bank) up to $50,000 with prime plus 2% interest rate
•    Payment from PayPal account
•    VIP customer service via email/phone
•    Quarterly credit bureau monitoring
•    10% discount on FedEx shipments
•    Free FedEx supplies with preprinted labels

Cost: $75 annual fee plus transaction fees as follows

•  $0.75 per payment scheduled a week in advance
•  $5 per payment scheduled within 48 hours
•  $10 per payment scheduled within 24 hours
•  $25 for same-day delivery (limited merchant availability)

2. FedEx Gold Pay: Same as above except only 5% discount on FedEx services, credit line up to $25,000 with prime plus 4% rate, and credit bureau monitoring available ala carte.

Cost: $25annual fee plus transaction fees (same fee schedule as Platinum Pay above).

3. FedEx Ala Carte: Simplest version with no annual fee and no extra benefits. Maximum $10,000 credit line at prime plus 7.5%

Cost: No annual fee, but higher transaction fees as follows:

•  $2 per payment scheduled a week in advance
•  $10 per payment scheduled within 48 hours
•  $15 per payment scheduled within 24 hours
•  $35 for same day delivery (limited merchant availability)

*Fictitious example; we have no information on whether FedEx is or isn’t looking at the payments business

PayPal knows how to make payments easier for its key market segment, eBay users. After winning an auction, users can call up the winning lot number in their browser and click on the yellow-and-red “Pay Now! with PayPal” button at the bottom of the auction listing.

Clicking on the button causes a PayPal window to open containing a “bill” created on the fly on behalf of the seller. Users merely supply their PayPal password, add shipping to the total if the seller had not provided a fixed amount, and press enter. 

Amazingly, this is done through clever programming without the cooperation of eBay, which would prefer everyone use its in-house system, BillPoint.

PayPal’s “Smart Logo” changes from a referral button (left) to a payment button (right) immediately after the auction closes. Sellers have the option of letting PayPal automatically add the buttons to all the seller’s auctions.

PayPal (Palo Alto, CA) continues to innovate at an unprecedented pace, at least for the payments business. Its venture-funded Silicon Valley roots help; so does it lack of regulatory oversight, so far.

The two latest developments are the launch of a limited-merchant “pay anyone” bill payment service and Auction FastPay, a new feature that allows users to automatically pay for eBay purchases from a single PayPal screen.¹ The Best of the Web award is for the screen-scraping process used to present “bills” using Auction FastPay or Smart Logo (see Table 21).

¹Auction FastPay was pulled off the site after a few days. Due to the quiet period surrounding the company’s impending IPO, it’s difficult to get an official response, but the Biz Dev analyst that answered my email said the new feature was “temporarily” offline.

Table 1
PayPal Screen-Scraping Billing & Payment Tools¹

(1) Tools are optional for buyers and sellers

(2) Temporarily unavailable as of Feb. 14, 2002 (see footnote 1 at left)

PayPal has been using screen-scraping techniques for more than a year, primarily with tools aiding the seller. The Smart Logo works much like the ill-fated wallet schemes promoted by a number of companies during the past few years. Users clicking on the Pay Now! button launch a script that screen scrapes the eBay auction grabbing the relevant information and presenting it in a “bill” for the user to pay with a single click (login required). The drawback to this system is that it requires users to visit each winning lot on eBay to find the PayPal button.

Auction FastPay eliminates this problem by automating the process even further. Under the new system, after a one-time registration of their eBay username and password, eBay buyers simply log in to PayPal and select Auction FastPay.

PayPal then logs into eBay on behalf of the user, scrapes information on recent winning bids, matches them with seller information, and presents a bill for each item. The user need only confirm the information, choose a funding source (if different than their default), and press enter to pay their eBay obligations in a matter of seconds.

Email confirmations keep buyers and sellers apprised of the transaction. Someday, all bills will be this easy to pay.

PayPal provides a full-range of funding sources including all major U.S. credit cards, ACH (electronic) transfers from any deposit account, or from a prepaid PayPal balance.

PayPal also added free bill payment to its program on Feb. 1. It becomes one of the few major companies to buck the industry trend of offering “pay anyone” bill payment. PayPal opted for a much simpler closed-merchant system offering payment to 1,000 fully electronic payees that are paid through MasterCard’s RPPS. Bill Pay payments must be funded with a PayPal balance or ACH from a bank account; credit card funds cannot be used.

Billers not on the RPPS list can still be paid through the normal PayPal system (e.g., email payment). The downside to this option is the cost, nearly 3% of the transaction charged to the recipient of the payment.

Because PayPal’s BillPay uses only preset merchants, adding new ones is a breeze. Users simply search the biller database, select a new biller, and add their account number. (see “biller add” screen below).

Table 1

Historical U.S. Payment Transaction Volume by Type: 1995 to 2000
billions of transactions

Source: Federal Reserve Bank of Chicago, 12/01

(1) Bill payments authorized online are generally paid via ACH or paper check so they would be included in the categories above; a minority paid internally through the bank provider (e.g., on-us transactions) would not be included in the above totals    (2) Not a payment transaction, volume would be included in currency totals   (3)

Table 2a

Total U.S. Consumer* Electronic Payments by Type, Year 2000

Source:  National Automated Clearing House Association (NACHA), 2001; eMarketer’s ePayments Report, 11/01 (see enclosed flyer); Federal Reserve, 11/01

*Credit card and bill payment totals include some business activity

(1) OBR estimate +/- 33%; most online bill payments are made with credit cards or ACH, so they are also included in the totals below

(2) The recent Fed study identified 25.2 billion checks worth $9.2 trillion written by consumers; the study also found 6.0 billion checks worth $6.6 trillion from unknown parties; assuming 50% of the unknown checks were written by consumers, we estimate the total number of consumer checks is 28 billion, worth $12.5 trillion, plus or minus 20%; there is also some controversy over the methodology used in the Fed study, with at least one analyst claiming the Fed understated check volumes by 10 to 15 billion (see American Banker, “Fed Study Fails To Back Up Claims On Check Volume,” Jan. 18, 2002, Letter to the Editor from H. Leon Majors 3d, President, ESP Consulting, paymentsresearch.com

Epayments Market Size

Until 2001, the ebilling and payments market grew at a much slower pace than most analysts expected. But as millions of users get their first taste of easy-to-use services such as PayPal and value-added credit card account management such as Citibank’s Cardmember Central, we expect the entire market to grow quite rapidly in popularity (Table 12, below). Within 10 years, 3 billion bills, 16% of the total, will be paid online. Most of those bills will be completely digital, from bill delivery/presentment, through payment and posting.

Table 2b
Online Payments Forecast
millions of U.S. households

Source: Online Banking Report, 2/02

1)        Household used any online financial account access and/or non-POS online payment service within the past 90 days, (+/- 20%)

2)        Includes any non-POS (point-of-sale) payment initiated online; does not include preauthorized debits or recurring credit card payments unless they were initiated online

3)        Pays bills to one or more billers at a third-party site (not the biller’s site); the third party can be a bank, non-bank, Web site, Quicken, or Money; does not view the bill online (+/- 25%)

4)        Views and pays bills directly at the biller’s Web site, or pays directly via a response to an email message from the biller (+/- 35%)

5)        Views and pays bills at a third party’s site, or pays via the third party in response to an email message from the third party; the third party can be a bank, non-bank, Web site, Quicken, or Money; includes scan-and-pay volume at PayTrust and others (+/- 35%)

6)        “Notational funds transfer”(thanks to Gary Craft for the term), meaning the transfer of funds to any person or business using email notification and third-party settlement via on-us, ACH, or credit card (most of the volume is through PayPal); excludes point-of-sale payments (+/- 35%)

7)        Includes other non-POS payments initiated online, which often involve fulfillment with a paper money order, e.g., BidPay/Western Union, Wells Fargo cashiers checks, etc. (+/- 75%)

8)        Households can use more than one online payment type (+/- 25%)

Table 3

Forrester’s Online Bill Payment Market Size Estimates: 1999 to 2005 (mid-year)

millions of U.S. households

Source: Forrester Research, Bill Payment Goes Mainstream, by Kenneth Clemmer, 7/01; Breaking the EBPP Stalemate, by Catherine Graeber, 11/01

Table 4

Online Banking and Payment Segments, March 2001

percent of total U.S. online consumers

Source: Forrester Research, Bill Payment Goes Mainstream, by Kenneth Clemmer, 7/01

Table 5

Number of Online Bills Paid by Tenure

monthly activity per U.S. household

Source: Forrester Research, Bill Payment Goes Mainstream, by Kenneth Clemmer, 7/01

*Forrester’s research found that online households paid an average of 11 bills per month; most other research pegs the number somewhat higher, in the 12 to 15 per month range (see also Table 6)

Table 6

U.S. Consumer Bills by Industry

number of bills per year

Source: Tower Group, 2001 as cited in eMarketer’s ePayments Report, 11/01 (see enclosed flyer)

Table 7

Jupiter’s Online Bill Payment and Presentment Forecast: 2001 to 2006

millions of households*

Source: Jupiter Communications, 12/13/01, PAY01-CO6

*Households can only be in one pay category or one view category, i.e., if they view a single bill online they are in the “bill view and pay” category even if they pay 10 other bills without viewing; same goes for those viewing bills, if they pay a single bill online the household is classified as “bill view and pay”

Now that most Internet users have a number of account statements to view online, they have become voracious users of the service. Gartner says that at year-end, 32 million users viewed statements online compared to 20 million last year. Furthermore, they predict that in less than four years (year-end 2005), nearly 100 million users will manage accounts online, nearly 50% of the U.S. adult population (see Table 8, below). Much of the current activity is with online credit card accounts, with nearly 26 million users, 2.5 times the 11 million consumers managing other types of bills online.

Many billers send email reminders when a new statement posts to the Web. The emails usually contain a link directly to the user’s online account (login required). In the future, we believe more and more billers will provide summaries via email, satisfying the information needs of most customers.

Security Note: To thwart hackers that use email spoofs or other methods to gather usernames and passwords, account numbers and sensitive personal data such as social security number, should be masked, even within password protected billing sites.

Table 8
Gartner Online Statement Forecast (U.S.)

millions of users (NOT households)

Source: Gartner Group, SAP-14-8984, 12/3/01            *Columns do not add due to overlap of those accessing both types of accounts online, see last row

Table 9
OBR Online Account Management and Bill Presentment Forecast (U.S.)

Source: Online Banking Report estimates, 11/01,+/- 20% in 2001, +/- 40% in future years

(1)       Includes credit cards, loans, insurance, utilities, and telecom

(2)       Includes accounts with a financial value such checking, investments, frequent flyer, etc.; excludes accounts at online retailers such as Amazon; OBR estimate +/- 33%

(3)       Excludes bills that are made available online, but are not viewed by the end-user, OBR estimate +/- 40%

(4)       Includes non-POS payments through PayPal, bills paid directly at biller sites (including credit card bills), bills paid online that are received through snail mail, and bills paid automatically by a third party, such as PayTrust; does not include preauthorized debit; Derivation: 2001 – an estimated 10 to 12 million users will pay about 3 bills per month, for a total of 400 million payment transactions; 2006 – 25 to 30 million users will pay 4 to 5 bills per month, for 1.5 billion total transactions; 2011 – 30 to 35 million users will pay 7 to 8 bills per month for 3 billion total transactions

Table 10
 Future Viewing Locations of Online Billing Statements (U.S.)¹

millions of bills viewed by consumers and small businesses

Source: Online Banking Report, 11/01; +/- 67%

1.   Only includes bills received (aka presented) by the user via the given method, the bill does not necessarily have to be paid by the same method; this is a purely speculative estimate provided as an illustration of how many ways the bill presentment pie will be divided; complex and unpredictable market forces will shape the actual results; does not include electronic payment of bills received via snail mail; if a bill is viewed in more then one electronic form, e.g., in an email from the biller and at a bank Web site, only the first view is counted in the above totals; maximum of 1 view counted each month even if user logs in and looks at a bill multiple times; includes financial institutions if they are the originator of the bill, e.g., credit card issuers

2.   Includes users who receive an email bill summary and do NOT click through to view bills

3.   We count users of aggregation services by where they first enter the system; e.g., if they access their aggregated bills through Myciti, they are counted as financial institution user even though their bills are aggregated at Yodlee; only users entering the system directly through Yodlee are counted in the “aggregation specialist” column

4.   Only includes users viewing third-party bills at their financial institution; does not include viewing the financial institution’s own bills which are included in “biller direct” categories above

Since our last major report on online bill payments three years ago, we’ve seen the rise and fall of Internet retailing, portals, and telecom companies of all shapes and sizes, but bank-branded online bill payment looks suspiciously the same:

•          Checkfree is still the dominate player, even more so today than in 1999.
•          Pay-anyone bill payment is still expensive to operate and fraught with customer service problems.
•          Bank-branded electronic bill payment is still used by a minority of online banking customers; with the penetration falling to 23% at year-end 2001 compared to 36% three years earlier

But in the broader category of online payments, it truly is a brave new world:

•          Consumers’ willingness to interact online with trusted parties (such as their bank) is nearly a non-issue; in 1999 it was a major stumbling block.
•          PayPal, which didn’t exist 3 years ago¹
  now has more than 13 million users,² and remarkably was able to post a pro-forma profit in Q4 2001. At press time PayPal was scheduled to go public Feb. 15.
•          In early 1999, so few people looked at bills online, it was difficult even to estimate market size; in round numbers, it was essentially zero. Today, 32 million users view bills online according to Gartner .

So is the glass half-full or half-empty? Three years ago the glass was definitely cracked. Today, with most of the cracks fixed, the glass is half-full and rapidly filling. Now is the time to review your online payments program , consider new strategic options, and move aggressively forward.

Table 1

Online Bill Payment Forecast*

millions of households

Source: Online Banking Report, 1/02; historical estimates, +/- 20%, future estimates +/- 40%

 * Includes all types of payments initiated online except those made a the point of sale (POS); multiple categories allowed;

¹PayPal was formed Dec. 3, 1998
²In its Jan. 18 SEC filing, PayPal reported 12.8 million accounts as of 12/31/01

Online bill-payment services are often like Laundromats that feature washing machines with no dryers, operation instructions written in Hungarian, and no refunds for defective equipment.

-- Marty Jerome
from his review of 10 bill payment services,
Ziff-Davis Smart Business Magazine, Oct. 2001

Table 2

Smart Business Magazine Bill Payment Ratings

Source: The Big Payoff, Ziff-Davis SmartBusiness, Oct. 2001

What’s a banker to do?

To avoid disappointing users, you need to ensure you’re delivering a service that makes life easier and doesn’t needlessly complicate an everyday task. Fortunately, bill-payment needs can be met in a number of ways using relatively inexpensive Web services (more on that in part 2 next month).

Having personally managed a bill-payment program in 1993 and 1994 at U.S. Bancorp, I have long urged a cautious approach towards EBP, knowing firsthand the customer service problems inherent in the first-generation, paper-and-baling wire service.¹

But the bill payment dam has finally broken, primarily due to the widespread use of bill presentment at credit card sites (see Table 3, right). And now that users have tasted the convenience of viewing and, in some cases, paying their credit card bill online,² we expect users will be far more likely to respond favorably to new pitches for online billing and payment.

However, prospective users evaluating their bank’s bill pay program will expect something akin to a credit card statement: rich in data with a real-time payment option. Many pay-anyone bill-payment programs will seem rudimentary if the user’s first experience with online payment was at Citibank or First USA.

¹For example, I’d Rather Use a Checkbook, NY Times, Feb. 11, 1996 or Glitches Short-Circuit Miracle of Paying Bills Online, Wall Street Journal, Feb. 7, 1996.

²Citibank reports that 2.2 million (37%) of its 6 million Cardmember Central registered users pay their cards electronically.

Table 3

Online Credit Card Statement Users (U.S.)

aka Bill Presentment Users

Source: Companies, except Capital One, estimated by OBR, +/- 33%

(1)       According to a Jan. 28, 2002, update to Citibank’s Web site, it has more than 6 million U.S. users of Cardmember Central (confirmed in a 2/10/02 email with a company representative), including 2.2 million who pay their card electronically; 15% of the 2.2 million, or 330,000, have given up their paper credit card statement, an option encouraged during enrollment. Worldwide the company has “Internet relationships” with 15.3 million customers according to its Jan 29, 2002 earnings release.

(2)       In Dec. 2001, Discover Card said it had registered 6 million cardholders for its online services, 22% of its card base.

(3)       AMEX year-end 2001 total for U.S. only, from its Feb. 8, 2002 investor presentation; up more than 2 million year-over-year (last year it reported 3.5 million users worldwide; U.S. cardholders logged in 83 million times in 2001, assuming an average user base of 4.5 million during the year, the average user logged in to their AMEX account 18 times last year.

(4)       Capital One announced it had surpassed 1 million registered users on Sept. 19, 2000; 16 months later, at the end of January 2002, the company tells us they've grown to 4 million registered users; in terms of active usage, a third-party measurement by Compete in July estimated traffic of 4 million unique users with one-third (1.3 million) logging in to their accounts each month; in August, Capital One was quoted in US Banker as saying that 30% of its users paid their bill online.

(5)       MBNA.com, introduced in the first quarter of 2000, now serves more than 5.6 million customers, including 3.3 million enrolled in Access, MBNA's online banking service; 600,000 were new enrollments in
Q4 2002; for the full year, MBNA added 900,000 new customers via the Internet. Source: Jan 10, 2002 earnings release.

(6)       Unique users assumes 40% overlap, i.e., each user is registered at 1.4 of the above sites.

Table 4 Participants in Electronic Payments

Source: Online Banking Report, 1/02

Where are you now?

To assess your strategic epayment options, its helpful to take a hard look at what you are doing today, and what your customers think of your efforts. Keep in mind that your early adopter bill payment customers are usually more forgiving of problems than the next wave of users.

Table 5

Online Bill Payment Program Self-Assessment

Source: Online Banking Report, 2/02; Service Quality Management,  www.servicequality.co.uk  1/28/02

Adding Value

To determine where best to add value and/or reduce costs, look at each aspect of the bill payment process. Table 6, below, looks at every step of the process from an analytical perspective. Table 7, takes the consumer view of the process.

Table 6

Reengineering the Billing Process for the Net

Source: Online Banking Report, 1/02

Table 7

Epayments from the User’s Perspective

Source: Online Banking Report, Jan. ‘02

Table 8

Statistical Analysis: Factors Effecting Electronic Bill Payment & Preauthorized Debit Adoption

Source: “Why do consumers pay bills electronically? An empirical analysis” by Brian Mantel, Program Manager, Emerging Payment Studies Department, Federal Reserve Bank of Chicago, 2000; data based on responses from 956 consumers, 556 that use electronic payments, 400 who do not

*EBP: Electronic bill payment, which includes preauthorized debits or PC/Web-based authorizations

How to read: For example in line 1, females are 49% more likely to use EBP than men; in line 3 credit union members are 61% more likely to use than non-members

Table 9

Ranking of Statistically Significant Factors from Table 6

Source: “Why do consumers pay bills electronically? An empirical analysis” by Brian Mantel, Program Manager, Emerging Payment Studies Department, Federal Reserve Bank of Chicago, 2000

*Electronic bill payment includes preauthorized debits or PC/Web-based authorizations

What would FedEx do?

If you’d like to develop a meaningful point of differentiation for your company, an area ripe for picking is electronic payments. In our view, few providers have developed a payment program geared towards genuine user needs.

However, we recognize the difficulty in thinking “outside the box” in the electronic payments arena. Constraints from vendors, auditors, senior management, and industry experts, not to mention a challenging business case, makes it easy to get bogged down in implementation details even before you can get started.

Try this exercise: Think of yourself not as a heavily regulated checking account provider, but as the director of FedEx’s new payments division.¹ It’s your job to develop products that leverage FedEx’s core expertise in expedited shipping and tracking. Optional homework assignment: Develop a three-year plan to make FedEx into a major player in payments.

We think you’ll be pleasantly surprised by the number of opportunities uncovered during this exercise. Too busy for homework? Don’t worry, next month we’ll present our plan for FedEx Payments.

¹This is fiction, but it wouldn’t surprise us if FedEx jumped into the payments business; it already provides C.O.D package-delivery services as well as the occasional envelope of cash.

Internet person-to-person payments (P2P), aka email payments, has been a hotbed of activity in the three months since we first reported on the sector. The combined growth in the user bases of the two biggest players, PayPal and X.com¹, has been more than 6,000 accounts per day since launch. To put that in perspective, the entire US online banking user base across all financial institutions, has grown about 9,000 users per day during the past two years. Another way to look at it: PayPal gets as many accounts in one day as Net banking pioneer SFNB got in its first three years! ¹Disclosure: OBR Editor, Jim Bruene, had a minor consulting role in X.com’s initial product planning in mid-1999.  To recap some of the numbers:

•  300,000+ users signed on with PayPal in the 100 days from its mid-Nov launch, a success chronicled in a Wall Street Journal Marketplace section cover story (2/16/00,
  p. B-1; includes a quote from OBR).
•  PayPal and X.com, which announced a merger on Mar. 2, 2000, are each adding 10,000 new users per day, and already have a combined user base of more than 600,000.
•  During Feb., X.com had more Web traffic than any other bank according to PC Data. Its 1.8 million unique visitors was 500,000 more than second place Wellsfargo.com, and more than third place Citibank.com (850,000) and fourth place Bankamerica.com (829,000) combined.
•  X.com, with more than 250,000 accounts, is now the largest Internet-only bank measured by number of accounts.
•  Nearly 8% (307,000) of the 4 million auction lots on eBay now feature PayPal or X.com payment options, with growth of more than 10,000 lots per day .

Since our Nov. 29 report four new P2P companies have launched: dotbank.com on Dec. 7; X.com on Dec. 15; Mambo.com, concentrating on the “event/fundraising payments” niche, on Jan. 19; and PayMe.com from idealab. In addition, Wells Fargo got into the game, purchasing a 35% stake in eBay’s P2P unit, BillPoint. Finally, X.com partnered with AuctionWatch for auction payments and agreed to merge with PayPal March 2.

PayPal banners run free-of-charge on thousands of auction pages .

We predicted P2P payments would be popular, but we didn’t expect it to be this fast. There are five reasons for the hypergrowth:

•  Liberal new account bonuses of $20, split 50-50 between the new account holder and the person that made the referral. PayPal users can earn up to $1,000 in referral fees.
•  New users can sign-up and use it in just minutes.
•  It completely reengineers the ecommerce sales cycle for smaller merchants and individual sellers lacking access to the Visa/MasterCard system, especially at online auctions. Compared to mailing paper checks and waiting for the check to clear, auction participants using PayPal can slash the turn-time from winning bid to shipment, from two or three weeks to just a day or less.
•  Competition: X.com and PayPal are subsidizing the hyper-growth with millions of venture capital dollars. PayPal landed more cash from idealab and Goldman Sachs in February, then merged with X.com on Mar. 2. The IPO can’t be too far away.
•  It’s free.

We are still waiting to hear how the credit card associations will react to this interesting application of their merchant rules. Essentially, anyone in the U.S. with a valid (or stolen) credit card number and postal address can immediately begin accepting credit cards without the hassle of applying for a merchant account, paying discount fees, and following credit card association rules including chargebacks.

Other developments at PayPal:

• Launched a “bill presentment” option so individuals can easily send email bills; once registered with PayPal, recipients can pay with a single click.

•  Added a Group Payments function that automatically splits a tab among numerous parties and allows it to be collected via PayPal.
•  Made it much easier to earn $10 referral fees by creating unique URLs that users can post on a Web site or email to others. The $10 bonuses have really boosted word-of-mouth advertising on eBay. Sellers don’t just casually list PayPal as a payment option, they actively sell it. We’ve seen listings where the seller uses more space praising PayPal than describing their auction item.
•  Made dozens of ease-of-use improvements including integrated email messaging, stored email addresses of past recipients, and so on.

PayPal has been adding tabs faster than Amazon.com. It seems as if every time I log in, the company has added new, useful functions. Most recently, the ability to select payee email addresses from a drop-down list of previous recipients.

From our personal experience using PayPal, there are a few rough edges behind the scenes. During the last two month we’ve had three problems:

1. In early January, it took two weeks for a colleague to withdraw funds by check. The company blamed it on lack of staffing, understandable at a company adding 10,000 accounts per day.

2. The more puzzling incident (as quoted in the Wall Street Journal, 2/16/00, p. B-1) occurred when sending two $1,000 payments to the same address within an hour of each other. Without giving us a chance to explain, our PayPal account was frozen, the transactions reversed, and we received a curt email explaining that it appeared we were attempting to take a cash advance in violation of company rules (ironically, the reason we sent two identical payments is that we wanted to make sure the first one went through before sending another).

We speculate that our account was flagged by PayPal’s audit department after sending two identical transactions within an hour; then a human assigned an incorrect code to the activity. The customer service rep would neither believe our explanation nor let us speak to a supervisor. Finally, after reluctantly playing the “reporter” card, PayPal unfroze the accounts, but told us they could not reinstate the transactions. So we repeated the payments and they went through without a hitch. All was fine until two weeks later when PayPal mysteriously, and without warning, reinstated the original transactions and we were temporarily out $2,000.

3. Finally, as we went to press, we repeatedly had a $10 transaction “declined by our credit card company” even though we were able to charge a $1,000 PayPal transaction to the same card in between denials of the $10 transaction. We haven’t figured that one out yet.

Newcomer X.com had similar growing pains, but unfortunately its dirty laundry was aired in the New York Times. During its first month in business, the company’s procedures for authenticating new accounts set up for user-initiated ACH credit transactions apparently were a bit lax. (ACH credit transactions are used to electronically transfer funds from an account at another bank into an X.com account.)

Here is how the problem was described in the
Jan. 28, 2000 New York Times article by celebrated tech columnist John Markoff www.nytimes.com/library/tech/00/01/biztech/articles/28secure.html

In what may prove to be a cautionary tale about the headlong rush into electronic commerce, (X.com) permitted customers for almost a month to transfer funds (out of anyone’s) account in the nation’s banking system.

Markoff reported that at least one person successfully defrauded an account in this manner. However, X.com CEO, William Harris, said that only five to 10 transfers among thousands handled by X.com were “problematic.” The processing flaw was quickly corrected after it was brought to light, but it was in place for about a month.

What the article fails to point out is that this was not a new “security hole,” but simply a thief exploiting a known weakness in the ACH system that could have been perpetrated at dozens of places online. We contacted NACHA for comment, but they weren’t willing to discuss the specifics of the X.com case, other than to reiterate NACHA’s policy that it is up to the initiating financial institution to authenticate transactions and that we could “draw our own conclusions.” I believe that is called “damning with faint praise.” In any event, the mini-fiasco doesn’t seem to have slowed X.com, which hit 250,000 customers by Mar. 1.

Killer app or line extension?

killer app: adj. short for killer application: The application that makes a mass market for a promising but underused technology. First used in the mid-1980s to describe Lotus 1-2-3’s impact on IBM PC adoption. Now a part of every Web business case, “(my product) is the killer app for (my industry).”
– Source: Jargon File on Dictionary.com

Online banking needs a killer app. Something with obvious user benefits that is super easy to use. Electronic bill presentment was expected to fill that role, but its rollout has been painfully slow. There are still more Beanie Babies auctioned on eBay each week (about 50,000), than bills presented and paid online.

Within the last few months, three killer app candidates have emerged. We don’t view any as being strong enough on their own to reach killer app status. But a company (not necessarily a bank) integrating all three could see market share grow exponentially. On Nov. 8, PayTrust became the first company to actually offer two of the three. A few days later, Intuit announced its plans to offer two of three on Quicken.com and AOL. But neither company has added the third, and perhaps most important virtual service, person-to-person (P2P) Internet payments
. P2P payments are powerful because they possess a unique “viral” marketing component. Whenever someone emails money, the recipient must register with the service to retrieve the funds, becoming a “customer,” whether they want to or not; a very powerful marketing tool.

The Class of 1999: New Virtual Banking Services

Source: Online Banking Report, 11/99

When we entered this century, pioneers looked to banks to safeguard their precious metal assets and make commerce on the frontier safe, reliable, and efficient. Now 100 years later, cyberspace pioneers want much the same: peace of mind they won’t lose hard-earned digital assets, and a convenient, reliable, and secure means of buying and selling goods and services online.

The American Bankers Association in a program with Digital Signature Trust, a subsidiary of Zions First National Bank, offers a digital certificate-based site verification program.

Banks can continue to be the dominant providers of secure ecommerce services if they quickly reorient their thinking from steel vaults and human security guards to data encryption and digital certificates. Here are some of the issues on the minds of your users. You might want to arrange a focus group, on or off-line, to explore the security concerns of your profitable customers.

eCommerce Safety Concerns

•  purchases at Web merchants and/or from individuals are free of fraud
•  checking account and credit card numbers do not fall into the wrong hands
•  all financial records remain confidential and kept from prying eyes of bank employees and others
•  bank deposits are safe
•  loan repayment records are not lost
•  credit report info is accurate and kept private
•  no one steals my identity, on or off-line
•  account records at all Web sites remain confidential
•  emails remain private
•  financial records stored on local hard drive are not stolen, lost, damaged, or hacked
•  Y2k and other catastrophic failures

Source: Online Banking Report, 4/99

Trust is a significant barrier to entry in financial services

During the past three weeks we’ve met with four start-up banking companies all looking to grab a significant share of the Net-based financial services market. We have varying impressions of their prospects, but we think all four underestimate the degree to which consumers distrust unknown financial services companies and unknown Internet companies. The combination of the two, a new Internet financial services company, will require a huge investment in brand and credibility building in order to make a go of it.

The best evidence for this is to look at account growth at the two pure public Net banks, SFNB (now part of Royal) and Net.B@nk. (Telebank is not included because it started as a telephone bank.) For comparison, we show account growth at the two soon-to-be-public Net-only loan providers, NextCard and E-Loan:

Net-Only Depository and Lending Companies

Source: company reports, 4/99

Notes:

(1) 3.5 years after launch

(2) 2.5 years after launch, through 4/30/99; of the 29,000 account total, 4,900 (17%) were generated in April 1999

(3) loans closed

(4) OBR projection of total loans closed through 6/30/99 based on actual production of 7,500 loans through 3/31/99

TriSense

David Lamm, President & CEO
418 Gateway Blvd
Brownsville, MN 55337
(612) 890-9500
paysense@trisense.com
www.trisense.com

Electronic Bill Pay Volume: in pilot stage.

Status Report:

•  Its flagship product is PaySense, an e-mail-based bill presentment service designed to duplicate today’s paper-based systems, replacing postal service delivery with email. Users get an exact replica of their paper bill attached to the email, except that names and account numbers are masked for security.
•  Piloting the program with Five Points Bank (Grand Island, NE; $265 million).
•  Competes with Brinkman’s NextBill.

M&I Data Services
Obtained from Travelers Express

Tim Patneaude
1100 W. Lake Park Drive
Milwaukee, WI 53224
(414) 577-8969
tim.patneaude@midata.com
www.midata.com or www.midirectnet.com

Electronic Bill Pay Volume: 1.6 million payments per month across all products: PC, Web, dial-up, tele-phone. Payments are 43% electronic, drawn on 700 financial institutions, and sent to 400,000 payees.

Status Report:

•  Acquired the MoneyLine Express business unit of Travelers Express in January 1999; conversion will be completed in early May.
•  Acquired ADP’s Electronic Banking Services Division in March 199 with 120,000 business users, 110 financial institution clients, and annual revenues of $40 million; acquired products include: ADP Business Express, CashExpress, and FORTE/FORTExpress.
•  Provides bill payment services to 170 financial institutions.
•  M&I’s DirectNet, the largest service bureau for S1, is currently used by 75 financial institutions, projected to grow to 150 this year.

Bill Presentment Plans: Expected to be announced after acquisitions are assimilated.

Service Providers Using
M&I Bill Payment

Source: M&I Data Services, 3/99

Electronic Funds & Data

Gary G. Glanz, President
365 County Road 39A
Benton Plaza, Suite 16
Southhampton, NY 11968
(516) 287-9300
gglanz@billsite.com
www.efd.com , www.billsite.com

Electronic Bill Pay Volume:
We estimate less than 5,000 per month (plus/minus 50%).

Claim to Fame: The only bill presentment vendor enabling smaller banks to offer complete turnkey solutions to small- and
mid-sized businesses.

Status Report:

•  EF&D has assembled a virtual team of service providers that
  can handle any or all of a client’s billing needs, from reading the utility meter and collecting walk-in payments to processing electronic payments. EF&D partners include: Access Communications Systems, Home Financial Network, @work Technologies, SafePay, Lockheed Martin (back office data processing), and Specialized Computer Services.
•  For two years, has been working on a promising program with Suffolk County National Bank (Riverhead, NY; $910 million) to handle billing and presentment for Riverhead Lumber and Suffolk County Water Authority. (OBR 11/97). The lumber project has fizzled but the water dept. signed a 3-year deal on April 2 to present 100% of its bills at EF&D’s Web, www.billsite.com
•  Offers bill presentment and payanyone services from its billsite.com Web.

Checkfree

Esther J. Pigg, VP Product Mgmt.
Hayden Reed, VP Payment Solutions
4411 East Jones Bridge Road
Norcross, GA 30092
(770) 441-3387
www.checkfree.com

Electronic Bill Payment Volume: 10 million payments last month across 2.6 million consumer accounts for an average of 3.8 bills per customer per month; more than 5 million, or 50%, were electronic. That percentage is expected to improve substantially as all clients migrate to its new system by year-end.

Claim to Fame: Invented the electronic bill pay industry; still maintain the dominant position, and are expected to open a bill pay center with Yahoo!

Status Report:

•  In an extremely favorable investment analysis recently published by Deutsche Bank Securities, it was estimated that Checkfree was poised to capture 90% of the bill pay business from a total market size of 12 to 19 million bill pay users by 2004.
•  One cloud on the horizon, the lawsuit filed by minority owner Intuit (which owns a 19.1% stake) seeks to keep Checkfree from cutting deals with portals other than Yahoo!
•  Earlier this year, the company successfully moved 16 banks to its new Genesys system.
•  Checkfree is two years into a
  10-year deal with Integrion that included taking over the bill payment functions previously performed by Visa Interactive.
•  Checkfree now processes payments for more than 350 financial institutions, including nine of the country’s top 10 banks. The financial institutions have a combined total of more than 150 million checking and savings accounts.
•  The company launched a non-profit entity called the Electronic Banking Association with a Web site that promotes electronic banking, bill presentment, and Internet payments in general at www.e-banking.com It includes a “find your financial institution” search function and has been logging more than 1,000 visitors a day, with nearly 30% of clicking through to an individual financial institution.

Bill Presentment Plans:

 Checkfree has maintained its front-runner position as it moves to electronic bill presentment, inking deals with 43 of the nation’s top 100 billers. Most are in small-scale pilot stage. Eighteen billers are currently presenting bills at Checkfree’s site.

 AT&T is scheduled to implement in early 2000.

•  Partners include: Bell & Howell, BlueGill, eDocs, EDS, Intuit, Just in Time, Mobius, Oracle, and Total Systems Service.

• Checkfree E-Bill 2.0, will launch this summer. It’s a clever hybrid approach that combines the user-friendly feature of single enrollment and login with the biller-friendly option of sending users directly into the biller’s Web site during the session using so-called “customer magnets” embedded in the bill notification. Billers can turn the magnets on or off for each customer each month.
   
•  The new product also allows billers to change billing amounts during the payment session. For example, utilities could allow customers to enter their own meter readings, then recalculate the amount owed, prior to payment being authorized.
   
•  E-Bills 2.0 also allows billers to migrate from consolidator models to direct billing, if desired.

Call Me Bill

Dana Smolnski, President
232 W. Poplar Street
Elizabethtown, KY 42701
(800) 925-6784
danas@callmebill.com
www.callmebill.com

Electronic Bill Pay Volume:
Less than 10,000 transaction per month, more than half via telephone; sister companies process 150,000 per month.

Claim to Fame: Unique pricing with a low, flat monthly charge for an unlimited number of users and transactions during the first year of a new contract; calls each new user to improve activation.

Status Report:

•  Have 57 banks and credit unions under contract and projects
  8 to 10 new clients per month
  during 1999.
•  Processes for Net-only newcomer, USAccessBank
  (OBR 2/99).
•  New Web front end this month.
•  A low-cost way for the smaller financial institution to get started with a $2,500 set-up fee covering telephone and Internet bill pay.
•  14 years of payment processing experience at sister companies Fort Knox National Co. and Military Services Incorporated.

Bill Presentment Plans: Watching and waiting for the industry to develop.

Source: Online Banking Report, 2/99

*If you developed a nationwide biller database, it could potentially be leveraged into a cobranding relationship with an Internet portal.

**Direct fee revenue is higher than direct expense.

E-Billing Participants

*banks, thrifts, credit unions, mortgage brokers, credit card companies, stock brokerages, insurance companies, and mutual funds

Last month we discussed the importance of e-billing to three deep-pocketed industry segments (see chart above). The reasons for billers and Internet portals to be interested in this business are readily apparent. Billers want to save money, primarily in the vast customer service infrastructure needed to support billing. Portals are interested in capturing a chunk of the 4 to 5 billion transactions projected for 2002 (see OBR 1/99).

The motives for financial institutions are less clear-cut. Most have found electronic bill payment to be a money pit and customer service challenge. And with the slim likelihood of ever being able to charge a fee that covers costs, let alone delivers a profit, retail banking execs have been forced to justify the program with intangibles: customer retention, competitive positioning and so on. While those arguments do hold water, it’s much harder to justify the necessary investments when you can’t show a direct profit.

Long-term, you must find a way to correlate bill pay activity with revenues. The three most likely profit-making strategies:

•  Incremental Loan Outstandings from consumer and small business credit lines tied to bill pay accounts
•  Prepaid/Guaranteed Transactions from consumer-to-consumer, consumer-to-business,

Wells Fargo offers three fee-based prepaid products within its Net banking program: cashier’s checks, traveler’s checks, and foreign currency delivered to your door.

and business-to-business money orders, foreign exchange, and so on (see screenshot above).

•  Fee-Based Billing and Payment Services for small businesses, self-employed individuals, and certain highly compensated individuals (OBR 9/98).

In this issue we suggest a series of metrics that can be used to evaluate the impact of e-billing on your company’s bottom line.

The next time you brainstorm new services and product enhancements, try thinking of yourself not as provider of checking accounts, but rather as delivering payment simplification or payment assurance services. For a moment forget the regulatory constraints and operational realities you face and think like an Internet start-up. What could you do, on- or off-line to ease the hassles of paying the bills each month?

Reengineering the Billing Process for the Net

Source: Online Banking Report, 1/99

For years we’ve urged a cautious approach in bill payment. Having run a bill pay program in 1993 and 1994, we knew firsthand the customer service issues inherent in the cobbled together systems of that day. Times are a-changing and 1999 is the time to move aggressively forward.

Why is the time finally right to make a serious move into bill payment? Four things have occurred that will make this long awaited service a reality in 1999-2000.

1. BIG, HUGE MONEY has arrived. You have to look no further than Transpoint, an e-billing joint venture of three of the most powerful companies in the world: Microsoft, First Data, and Citibank. And with the current economics of Web companies (traffic = market value), companies have a real financial incentive to make e-billing work sooner rather than later.

2. Competition is accelerating investment and innovation. As we said when Microsoft/First Data entered this business through what was then called MSFDC in mid-‘97, competition will be good for the industry. The main competitor then as now is Checkfree, which has since boosted its stature with strategic alignments with the Integrion/IBM/VISA and Intuit camps. In addition, at least a half dozen major banks including First Union and Bank of America are mounting efforts to become full service
e-billing players themselves.

3. Web portals are angling to become major
e-billing hosts to boost traffic and serve this potentially lucrative ecommerce need.

4. In the last 12 months consumers have gone from wary to enthusiastic in their use of ecommerce. Look at some of the leading indicators:

•  10+ million online credit card applicants
  (OBR 11/98)
•  10+ million online buyers during the holidays
•  6+ million Amazon.com buyers
•  5+ million active online traders
•  1+ million active online auction buyers

Due to the convergence of these market factors, we think bill presentment could become a highly hyped Internet service in 1999 or 2000. The resultant buzz could increase usage significantly beyond the 18 million online bill payment households we forecast for year-end 2001 (OBR 12/98).

E-Billing User Needs Matrix:

Matt Cone, biz development whiz at Microsoft, calls bill presentment a “$0 billion” dollar industry. This statement serves to bring people back to reality, for all its promise, bill presentment has yet to generate material revenues. And given e-billing roots as a cost-cutting tool for billers, it might have been slow to take hold had one thing not occurred. The run-up of Internet stocks, especially in the ecommerce and retailing sectors, during the past 12 months has dramatically changed the business case for e-billing, making it even more challenging for retail banks to compete.

Source: Company reports; closing stock prices on Feb. 3, customer totals year-end 1998

The new risk and reward equation

What does the Internet stock bubble have to do with bill payment? Internet investors are currently rewarding companies that show rapid growth on the Net, regardless of whether there is a rational profit motive. This makes bill payment, and banking for that matter, relatively untapped sources of traffic. The two pure Internet plays in retail banking, Net.B@nk and TeleBank, have seen their market values more than double in the past 45 days to valuations per customer significantly higher than even Amazon.com (see table above). Now, there is a strong incentive for Internet banks to rapidly build their customer base to boost market caps dramatically. Witness Ameritrade and E*Trade who’s combined market value of $10 billion is up almost 10-fold since Oct.

Second, because of the ubiquity of bill payment and the enormous transaction volumes, Internet portals have joined the gold rush for the 5.2 billion transactions see table from 21 million electronic bill-paying households (year 2002). And because of their enormous market valuations, Internet favorites possess a highly valuable currency in which to make acquisitions.
They could buy their way into an e-billing leadership position. Ironically, while bankers were looking over their shoulders at Microsoft, it’s really a bunch of Yahoos in northern California set to make off with the business.

Internet-Enabled Bills (billions)

Total number of consumer bills in the U.S., number that can be paid online, and number that are paid online.

Source: Total bills/Net-enabled bills, Intuit, 11/97; Payments (includes all remotely authorized bill payments whether or not the bill statement was presented online), OBR, 1/99 (+/- 25%)

If you are Yahoo!, Intuit, or AOL/Netscape and think about how Wall Street might value a bill payment play, you must get real excited. If you could get 10% of the nation’s bills presented through your Web, you’d potentially have 1.8 billion bills creating 5.4 billion transactions from 10 million households.

Transaction Volume Forecast (U.S.)

Source: Online Banking Report estimates (+/- 25%), 1/99
*Assumes three transactions per payment: (1) receive/read the bill; (2) pay the bill; (3) receive confirmation; EPB = electronic bill pay

But it’s not just the raw traffic that will make investors froth, it’s the nature of the traffic. Households logging in to the Yahoo! Bill Payment Center* will not only pay their bills, they’ll think about their financial situation and plan for the next round of expenses and investments.

While users are in this “ecommerce frame of mind,” it’s the perfect time to pitch loans, investments, tax planning, or consumer goods. And because users will need to be registered to pick up their bills, Yahoo! will be able to deliver customized financial product pitches at high CPMs, or the company may elect to simply pitch its own co-branded financial products which currently include the Yahoo/First USA credit card, the Yahoo/QSpace credit report, and the Yahoo/E-Loan mortgage.

Another factor is that financial services companies themselves account for some one-third of all bills generated. To be successful, a portal will have to cut deals with financial institutions and/or their service providers (Checkfree, Transpoint), or develop ways to pull the bills directly out of biller sites by logging in as the user, and pulling the statement information into the portal (see MaxMiles OBR 8/98). They could potentially do the same for bank statement information as well. The danger in this scenario is that your customers end up doing all their day-to-day financial work at portals and never come to your Web. One more reason to keep building email-based programs.

An oft-cited reason why portals will NOT succeed in banking and bill payment is the trust factor. Will users trust Yahoo! to take care of their bills and payments? Maybe not on their own, but consider a co-branded offering such as:

Yahoo! Bill Pay Center
powered by Citibank

The center would include an FDIC-insured logo, a VeriSign authentication scheme, privacy certification by TRUSTe, and an ironclad delivery and security guarantee from Citibank. This product will be more trustworthy than FortKnox.com. See the tables
for more on Web site trustworthiness.

*Speculation on the participants in the unannounced project include Checkfree, which will only say is has budgeted $4 million for an Internet distribution deal and TeleBank, which has said that a strategic integration with Yahoo Finance will be announced at the end of first quarter.   What’s a banker to do?

Consumers are looking to banks for e-billing. In a recent Transpoint-sponsored study of Internet users interested in e-billing, 40% percent indicated a preference for their bank as the source of bill presentment and payment, 19% preferred the biller’s site, and 12% selected an Internet portal.

Recent pilot results (see table right) and common sense seem to back up this research. The prospect
of paying a single bill won’t motivate users to go to
a biller’s Web site and enroll in a new service. Billers need partners to educate users, create market awareness, and provide the convenience of a single sign-up and access to multiple bills. It looks to us
like a two-horse race between financial institutions and portals.

Luckily, there is a legion of vendors looking to help banks win this race: from the major players, Transpoint, Checkfree, M&I, and Princeton Telecom, to a number of smaller vendors such as Trisense, and Brinkman. Next month we’ll provide a status report and contact information for each vendor.

Biller Direct Model Lacks Usage

Source: 1999 Guide to Internet Billing Systems, Longwood Information LLC, 1/99; *Many signups are actually from First Union’s bill presentment program

As analysts and consultants are fond of saying to banks, “it’s your market to lose.” We would put a more positive spin on the situation: e-billing is a potentially rich source of shareholder value you can dominate if you move fast enough.

At a minimum, to defend your turf in 1999 you must:

•  open a bill pay center on your Web or in partnership with others)
•  market the center to Internet users in your market (especially your customers)

Trust Builders

Source: StudioArchetype, Cheskin Research, 1/99; from online survey of 315 adults, full report is available at www.studioarchetype/cheskin/

The Elements of Trust

Source: StudioArchetype, Cheskin Research, 1/99; from online survey of 315 adults, full report is available at www.studioarchetype/cheskin/ 

Far more involved than the other ideas, statement consolidation involves strategic partnerships, systems integration with other companies, moderate-to-heavy programming, and extensive user education. But the payoffs are much higher as well, potentially offering a long-term source of service differentiation.

Barclays (London, UK; $325 billion USD) is the first bank we’ve seen use this approach. Six merchants in its BarclaySquare online shopping area participate in the SmartStatement program which combines purchases made at all participating merchants onto one convenient online record of past purchases, status of pending orders, and account informatioin.

Barclays is pioneering integrated online statements at its UK Web site www.barclaysquare.co.uk

Barclay’s effort is just the tip of the iceberg. Financial institutions could create a statement consolidation “engine” that integrates all types of non-financial statements with bank and credit card account info. For example, a user checking on a bank balance could also click on a utility statement or frequent flyer mileage statement. Below are some of the statements that could be integrated into a personalized statement area running on your server, e.g. <mystatements.yourbank.com>:

The logistics of a fully electronic integrated statement is beyond the scope of this Report, but you could start with something simple and local. Using the Quicken approach, users could do their own data entry on your Web site. ð

For example, frequent fliers would enter their account balances manually each month. You could make the task simpler by prompting users for input each month through Web-based and/or email-based reminders. Emails could have a hyperlink to the Web-based input form, or the email could serve as the input form allowing users to update their database by replying back to the email with new numbers.

Of course, any program requiring users to enter data month after month will have limited appeal. Many of the users wishing to track matters so closely are already doing so with Quicken or a spreadsheet.

The more exciting possibilities are hosting statements published on the Internet. For the large national merchants, you will probably need to wait for the solutions being rolled out late this year by MSFDC, Checkfree, Princeton Telecom and others. But statements from smaller billers in your market could be published on your Web.

For example, your business clients may have an account at a local printer. The printer might be interested in publishing billing statements on your Web provided it fit within the parameters of their existing billing procedures and it promised faster payments. For larger billers, you could work with an Internet billing solutions provider to develop a data feed directly from the biller’s accounting software or print stream to your Web.

Smaller merchants could simply input the billing data directly into a password-protected form running on your Web. The printer’s bookkeeper would log in and update customer records with the amount due, transaction detail, etc. Upon hitting “Send Bill,” the bill summary would automatically be loaded and archived on your Web, and an email or fax would be sent to the biller’s client inviting them to your Web to make payment. Billers could even send second notices by logging into your Web, accessing the unpaid bill, and clicking “Send Second Notice.”

We see real benefits to statement hosting, especially for community banks and credit unions:

•  Simplifies billing and collection for small companies.
•  Provides an opportunity for you to be the first in your market to offer “bill presentment.”
•  Adds value to your home banking services.

According to the U.S. Commerce Department’s Bureau of Economic Analysis, U.S. Personal Consumption Expenditures in 1996 totaled just over $5.2 trillion. But of that, $1.2 trillion is the imputed value of goods and services received in-kind. The following tables show the mix of payment vehicles used to purchase the remaining $4 trillion in goods and services. Note: Since including them would amount to double counting, we do not include repayments of purchases made originally on a credit card or prepayments of future expenses such as purchase of a prepaid telephone card. Refer to The Nilson Report for additional analysis and detailed future projections, (805)983-0792.

Composition of 1996 Consumer Payments: Total = $4,058 billion

in billions

Source: The Nilson Report, 11/97 (#656, 632, 599) *Compounded annual growth (CAGR) Index: 1990 = 100

Total Dollar Volume

in billions

Source: The Nilson Report, 11/97 (#656, 632, 599) *Compounded annual growth (CAGR) Index: 1990 = 100

Number of Transactions

in billions

Source: The Nilson Report, 11/97 (#656, 632, 599) *Compounded annual growth (CAGR) Index: 1990 = 100

Annual Payment Volume per Household

average values per U.S. household

Source: The Nilson Report, 11/97 (#656, 632, 599) CAGR = Compounded annual growth Index: 1990 = 100

Unless you are a numbers junkie, looking at page after page of statistics on electronic banking and online usage is mind numbing at best. That’s why we’ve selected the seven numbers you should know. Commit these to memory or cut out this list and keep it in your Day Timer so the next time someone is arguing about the number of households with PCs, you can settle the dispute quickly.

Checkfree’s E-Bill online bill presentment program held its “public” unveiling last month with nine pilot merchant customers and promises of more to follow in coming months. Oddly for a new payment program, testers are limited to simply viewing billing statements; the all-important payment link won’t be operational until June.

Checkfree’s newly designed Web includes a flashing link to its E-Bill demo in the lower left-hand corner.

At the bottom of its opening Web page, Checkfree provides a drop-down box with links to 100+ financial institution clients offering home banking.

More than a year in development, E-Bill lets consumers view graphical representations of utility, phone, and other bills aggregated on a single Web site. For now, that site is located on Checkfree’s cyberturf at <getbills.checkfree.com> (Checkfree has also registered the domain name <ebill.com> and is using <www.pay.mybills.com> for its own WebPay bill payment program), but the company is seeking banking partners to take over front-end duties. Eventually, the point of bill presentment could be on a bank’s site , at a software company , or anywhere else .

Surprisingly, the only financial services organizations involved at this time are Capstead Mortgage Corp and The CUNA Mutual Group (insurance only). No banks have signed onto the program yet, but Checkfree officials are optimistic they will once the company has drawn enough billers into the fold — and there’s no shortage of merchants eager to give E-Bill a try, said Checkfree spokesman Matt Lewis (770.734.3404, matt_lewis@atl.checkfree.com).

At E-Bill’s official March 4 launch, five organizations were in the midst of small pilots and four others publicly announced they were planning E-Bill trials.

Capstead Mortgage Corp., a national mortgage banking firm in Dallas (assets $10 billion), won’t expand E-bill beyond an initial pilot test until online bill presentment and payments are linked, said Sally Wilson, Capstead’s VP of Business Development (214.874.2336). Capstead has tested E-Bill with about 100 customers since December. “Having the payment capability is the more valuable feature, so we’ll (wait) to do something more promotional in nature when it’s available,” Wilson said. Capstead is planning on delivering complete mortgage account information at its Web <www.capstead.com/pages/custctr.htm>.

Checkfree has signed up other billers but isn’t naming names. “We don’t want anyone else to know what a fast start we’re off to,” Lewis said.

Vendors begin to surface
Checkfree is one of at least nine companies that have announced bill presentment programs in varying stages of development. Online payments specialist CyberCash, of Reston, VA, and four partners began pilot tests of the PayNow service in February and expect to offer it to consumers in the second half of the year. Visa expects to offer its Epay service later this year, but it has been slow to evolve, and may be stalled due to internal issues surrounding its Visa Interactive unit. Other companies who are believed to be working on bill presentment programs for merchants and/or financial institutions: Princeton Telecom, Electronic Funds & Data Corp. <www.billsite.com>, InteliData <www.intelidata.com>, Home Financial Network <www.homeatm.com>, International Billing Services <www.billing.com>, and BlueGill Technologies <www.bluegill.com>.

Analysts have called bill presentment the Holy Grail of electronic bill payment, which has floundered for a number of reasons, including lack of true end-to-end electronic transactions and the public’s general reluctance to change bill-paying habits. But if people can see and manipulate their bills online, they might be more encouraged to pay them online as well, said Karen Epper, an online banking analyst with Forrester Research in Cambridge, MA. For more information on bill presentment, refer to the Online Banking Report.

How it works
Bills are delivered to Checkfree from its biller partners. It’s up to the billing organization to determine what detail is presented. In the case of GPU Energy, its bills list user name, meter number, current and prior month’s meter readings, electricity used, and payment due.

Users log-in to the Checkfree bill presentment secure Web site, <https://getbills.com> with username and password to pay their bills. Checkfree wisely uses outbound e-mail to notify users whenever a bill has been waiting four days without viewing.

Users can schedule payments using either of two approaches. With the express view (first screenshot below), users check a “pay” box beside each bill they want to pay, then hit enter and it’s done.

Alternatively, users can select the full three-frame view (second screenshot below) that provides complete billing details and an online “check” for payment.

Checkfree uses three scrollable frames to present the bill detail, bill pay menu, and payment device. While normally we don’t like frames, especially three to a page, this implementation works. Each frame has a distinct use, and it makes sense to separate them into unique scrollable units.

• Right-hand frame: This is the Web “real-estate” devoted to presenting the bill. Biller clients can personalize the look with logos, text, hyperlinks, and online advertisements. In this example, GPU has three menu choices at the top of the bill: Marketing, Terms and Conditions, and Customer Care. Each takes users to text located underneath the billing detail.
• Upper left-hand frame: Checkfree scores points here for ease-of-use. A check metaphor is used to authorize payment. The “check” is already filled out with the current date, payee name, payment amount, and user name. All that’s required for payment is a tap on the “click to pay” button.
• Lower left-hand frame: This is the menu for Checkfree’s bill presentment module. In the demo, users are linked to Checkfree customer service, the user’s filing cabinet of pending bills, the express screen of all new bills (screenshot previous page), what’s new, add new biller, or “zoom in” which turns the right-hand “bill presentment” frame into a full-screen view. Bank involvement coming soon.

Most companies establishing bill presentment programs seem to more-or-less agree that banks will play a key role in helping consumers make the shift to digital bill payment. With some 200+ financial institution clients, Checkfree is counting on its solid standing to come out on top. Forrester’s Epper gives the company the early lead. “CyberCash, even with its reputation, is an Internet startup and doesn’t have as well grounded a history as Checkfree does,” Epper said.

Checkfree will offer banks two options: set up E-Bill on a bank’s in-house Web server for institutions that want total control, or provide the service behind the scenes on Checkfree’s Web server for institutions who’d rather farm out the work.

E-Bill will also be available in an e-mail only version too, for banks that want to go that route, Lewis said. Whatever the option, Checkfree and its bank partners will split an unspecified transaction fee from merchants who use the service. Checkfree will also collect transactions fees from banks for any bills paid through its system.

Coming enhancements
E-Bill and other bill presentment programs could get a boost next fall with the release of new versions of Quicken and Money 97 that include Open Financial Exchange specifications supporting bill presentment. “So in Quicken, for example, you’ll have a button or icon that flashes and says you have a bill, you’d click on it, it picks up the bills at the (Web) site and brings them to you to pay,” Lewis said.

Realizing that most bills are pretty routine, Checkfree will be adding custom payment options to make it even easier to get the bills paid. Users will be able to define acceptable bill pay “authorization” parameters that trigger automatic payment of the bill. For example, if your cable bill is generally $22.50 each month, you tell Checkfree to pay it automatically if it is less than $25. If you (or your kids) got carried away with pay-per-view and the bill is higher than your limit, you’ll be notified so that you can review the billing before making a final payment authorization.

Ultimately, push technology and customization features will be critical to widespread acceptance of online bill presentment and payment. “Whether it’s Marimba or Pointcast, Netscape or a software program is irrelevant. We have to ensure data and bills that we format can run through any of those,” Checkfree’s Lewis said.

Here are some value-added online banking ideas for checking accounts & bill payment.

Web-based services:

• build your own checking (or package) account
• set maximum number of checks/bill pay requests allowed per day, week, month
• set maximum dollar value of checks/bill pay requests allowed per day, week, month
• set maximum check/bill pay amount
• set merchant names/types authorized for bill payment or ACH debit
• preauthorize exceptions to above parameters
• sign-up/modify automatic check-printing service: delivers new checks automatically after x% of most recent order are depleted (user defines ‘x’)
• bill payment/presentment (even if only to one merchant or to your own loan accounts)
• statement generator: develops custom statement from check-box entry
• transaction search engine with saved searches: allows users to search for a certain check number or transaction type; searches can be saved for future visits (e.g. all ATM withdrawals since last statement)
• triggered alerts greet user when logging onto bank’s Web (e.g. balance less than $1,000)
• payment analysis: which payments could be set up on an automatic average payment schedule

E-mail/push services:

• deposit confirmation: e-mail message whenever a deposit has been credited
• balance notification service: e-mail, fax, or voice message whenever deposit levels go above or below preset limits
• OD/NSF notifications via e-mail, fax, or voice message
• overdraft protection notices when credit line reaches x percent of limit (user defines x)
• statements (hourly, daily, weekly, monthly, quarterly, annually) delivered via e-mail, fax, voice message, voice mailbox, Web page, or PFM/OFX-compatible file
• notification when a bill is due for payment
• notification when a new bill has been presented
• notification when a bill authorized for payment has not cleared within x days (user defines ‘x’)
• notification of new electronic merchants
• notification of “special offers” from merchants on the user’s payee list
• notification when printed check supply appears to be running low
• ACH pre-note notification
• confirmations of all bill payment requests received
• confirmation of new merchants added and/or payments made to new merchants