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, se