Five days from the U.S. income tax deadline, tax prep ads are everywhere. I don't usually notice them because I still file the old-fashioned way, via CPA (note 1) and paper check. However, yesterday I noticed H&R Block's banner strung across the top of TechCrunch (screenshot below).

It caught my eye for a several reasons:

• 24/7 access to live tax help, a real benefit to the legions of last-minute filers.
• The "Tango" branding really intrigued me. How could a tax service be interesting enough to have its own brand, especially one as off-beat as Tango (note 2)?

The Tango product, complete with YouTube videos, <wannatango.com> URL, and more, deserves a post of its own, but here I want to focus on Block's pricing/segmentation.

The tax-prep giant divided its online services into two distinct categories, both catering to the computer savvy do-it-yourself crowd. Block calls the segments: "Do it Myself" and "Do it With Me" (screenshot below) with pricing as follows:

Do it myself:

• $14.95 for 1040EZ
• $29.95 for 1040 with itemized deductions
• $59.95 for 1040 with state return

Do it with me:

• $70 Tango option -- complete online and submit yourself with unlimited 24/7 support (includes state return)
• $99.95 (+$34.95 for state) complete yourself and then route to an H&R Block agent to review and e-file
• $99.95 (+$34.95 for state) and above (note 3) to fill out an online questionaire and submit your data to have someone at H&R Block complete the return for you

NetBanker strategic action item
Banks, take notice. Block's pricing strategy is brilliant and if applied to online banking, could revive the difficult business case. Online banking, like electronic tax prep, is a mature business, and has long ago proven itself as valuable and convenient.

Now it's time to cash in on that convenience. While levying fees across the board would create customer ill-will, it's possible to segment your online banking base into customers who want plain vanilla services for free and those that want the best, and are willing to pay for it. Block's Tango is a good example of how to price for those who want to go it alone for the lowest cost and those that want high-tech online services AND high-touch tech support.

A bank or credit union could mimic the Block program:

• Do it myself (FREE): Download data, set up my bills, create triggered alerts, monitor my own security settings, read my own credit report, store my own statements on my hard drive, and so on
• Do it with me ($5/mo): 24/7 access to an online specialist who will provide advice, assistance, and help doing any of the above. Added bonus: lifetime storage of all transactions, statements, and check images!!!

Call it VIP Banking and start turning online banking into a profit center. With dedicated fee income you will have fewer problems during the looming crisis in online banking measurement. 

For more on online banking pricing and how to develop a premium-priced online banking service, see our Online Banking Report: Pricing - The "Fee" vs. "Free" Controversy (#109).
 

H&R Block Banner on TechCrunch (9 April 2008, 1 PM Pacific)

Landing page from TechCrunch banner (9 April 2008)

Tango homepage (9 April 2008)

Notes:

1. In testing Turbotax and TaxCut, I have found both to be intuitive and surprisingly easy to use, even for relatively complicated returns with business deductions. This year, I did my teen's return on the free TurboTax online site, which was very slick. My son's already deposited his $2 refund into his online bank account.

2. H&R Block's Tango actually has a Wikipedia listing (within the H&R Block entry). That's something you don't see too often. According to Wikipedia, the Tango service first appeared last year for 2006 returns, but was plagued by computer glitches that forced the company to issue refunds. But it received good reviews this year, scoring an 82 here, just two points less than leader TurboTax Online. Tango finished ahead of the other four sites reviewed (here).

3. My federal returns would cost $199.80 through this most expensive option, about $500 less than my CPA.

For someone whose job it is to stay on top of innovations in financial services, I hate to admit I'm late to the party on the so-called "reward checking" phenomena. Last year, I'd noticed a number of smaller financial institutions launching high-yield checking accounts, but I hadn't realized it was a national trend primarily powered by a single bank tech supplier, Austin, Texas-based BancVue (see note 1).

According to a November BankRate article, more than 350 U.S. banks and credit unions now offer so-called "reward checking accounts" powered by BancVue with 30 new ones coming on board each month. These checking accounts usually pay high rates of interest, typically 6%, if users meet high levels of electronic banking activity each month.

Typical requirements to earn the high yield:

• 10 to 12 debit card transactions each month
• Electronic statements (no paper)
• Online banking usage

Typically, the following benefits are paid ONLY when the above requirements are met:

• 5% to 6% interest on the first $25,000 to $40,000 in balances
• ATM refunds up to $10 to $15/mo

And most seem to include:

• No monthly fees regardless of activity or balance levels, so the account can be marketed as "free"

Marketing
Another distinguishing characteristic of these accounts is the innovative marketing and website design. With the help of BancVue, smaller banks and credit unions are able to offer a level of design and pizzazz that meets or exceeds the typical megabank high-budget program.

Here are some of the more interesting BancVue-powered programs we've looked at (screenshots follow):

• Velocity Checking <velocitychecking.com> from Seattle's Verity Credit Union
  Earn 6.01% on balances up to $40,000 and receive ATM refunds up to $25 when meeting the following monthly requirements:
  - 12 debit transactions
  - 1 online banking login
  - electronic statement in lieu of paper
  
• Turbo Checking <turbochecking.com> from New Mexico's Charter Bank
  Earn 6.01% on balances up to $25,000 and ATM refunds when meeting the following monthly requirements:
  - 10 debit transactions
  - receipt of 1 direct payroll deposit or other automated ACH deposit
  - 1 login to online banking
  - electronic statement in lieu of paper

And our favorite, which substitutes iTunes downloads for the high-yield benefit:

• FreeTunes Checking <freetuneschecking.com> from Oregon Community Credit Union (see note 2)
  Earns 4 free iTunes downloads each month provided the following are met:
  - 12 debit transactions
  - 1 login to online banking
  - electronic statement in lieu of paper

Screenshots

Velocity Checking from Verity Credit Union

Turbo Checking from Charter Bank

FreeTunes Checking from Oregon Community Credit Union

Notes:

1. I began researching this area after reading Verity Credit Union CMO Shari Storm's recent blog post (here) about how she'd changed her payments behavior to make the 12 monthly debits required for its Velocity Checking.

2. Oregon Community Credit Union also offers a high-yield version, Remarkable Checking, that substitutes a 5.05% APY on all checking account balances instead of the free music. Monthly account requirements are the same. 

As noted in our recent research report on the P2P lending market (here), the exchanges need to boost revenues to remain viable. Even with scale, a 1% borrower fee and 1% servicing fee just don't provide enough revenue with the relatively small loan sizes currently being funded.

For example, using Prosper's previous pricing on a typical $7,000 loan, about $130 would be earned in the first year, then another $50 for the remaining two years of the loan (see note 1), for a maximum of $230 in lifetime revenues per loan.

So until loan sizes increase dramatically as secured notes become more common, Prosper has raised its prices for the core portion of its loan demand, the alt-prime and subprime portion. The company left its superprime, class AA price alone because it competes with banks and credit unions for this type of borrower.  

As you can see from the table below, most loan-origination fees increased by 1 point, although C and D loans were increased 2 points. Looking at the company's mix of business during the first half of 2007, the new pricing would have doubled its loan-origination revenue from about $500,000 to just over $1 million. The weighted average fee under the prior pricing was 1.2%, compared to 2.4% under the new formula.

Here's the new price plan effective Jan 4, 2008, as announced in the Prosper blog (here):

Type   New Price   Previous  Change  Avg Loan*  Avg Loan Fee* 
Prime  
  AA           1%               1%             none             $9,000            $90
  A             2%               1%            +1 point         $10,300         $210
Near Prime
  B             2%                1%           +1 point         $9,800          $200
  C             3%                1%           +2 points       $8,400           $250
  D             3%                1%           +2 points       $6,500           $195
Sub-prime
  E             3%                2%            +1 point        $4,500          $135
  HR           3%                2%            +1 point        $3,000           $90

Weighted
  Average*** 2.4%          1.2%

*Average loan size during the first half of 2007 per company
**Loan-origination fee deducted from proceeds of loan; there is no fee if the loan does not get funded
***Using the loan mix from the first half of 2007

Note:
1. It depends how the servicing fee is calculated. At Prosper, it's calculated on the outstanding loan balance which for a $7,000 loan averages approximately $6,000 in year 1, $3,750 in year 2 and $1,250 in year 3.

What's the biggest obstacle to online banking innovation in the United States? No, it's not security, ease of use, or customer education. The biggest problem is lack of fee income.

Unfortunately, online banking came of age in a golden time for U.S. financial institutions, with rate spreads at historical highs, customer loyalty at a peak, and fee income on the rise.

Banks, flush with profits in most business lines, decided not to bother with the difficult task of wringing fee income out of the new channel. So we ended up with near-universal adoption of the FREE model despite little economic justification for the subsidy. Sure, online banking customers are more profitable, but so are safe deposit customers. And you don't offer those free across the board.

The results are predictable. With online banking being cash-flow negative, many management teams have under invested in the online channel, while subsequently over investing in branches (see Online Banking Report #128, The Demise of the Branch). 

Fighting free
There is no way to eliminate free online banking altogether, but you can nip away at the edges, convincing some customers to voluntarily pay fees for value-added services. 

One promising avenue is converting users into a premium, fee-based online banking option, the same way American Express convinces its members to increase their annual membership fee two-fold by trading up to a Gold Card.

But in order to convince customers to voluntarily give up their free service, the fee-based version must have compelling benefits. The following three hot areas could be used to anchor a platinum online banking service. The first two we've looked at before (see previous coverage here), but mobile banking is the newcomer that offers much promise:

1. Unlimited storage: Taking a cue from Google's Gmail that offers virtually unlimited email storage, banks should allow their gold-account customers to permanently archive e-statements, transactions, and images for no additional charge. Everyone else sees their transactions disappear after a few months. And every month, right before erasing another month of data, provide customers with an opportunity to upgrade to premium banking (see Online Banking Report #118, Lifetime Statement Archives).
2. Unlimited credit report access: The second most powerful premium benefit is simple online access to credit reports directly from within the logged-in online banking area. Users could assess their previously downloaded report at any time, and order a new one several times per year. In addition, customers would be protected by daily credit bureau account monitoring (see Online Banking Report #83/84, Credit Report Monitoring & Identity Protection).
3. Full interactive mobile access: While the previous two items are relatively easy to do today, in the United States, the mobile market is just revving up with Cingular's recent announcement to add a banking application to its mobile "desktop." We've seen a live demo using a real bank account, and it's impressive. The partners on the service are Firethorn and Checkfree (see upcoming Online Banking Report #138, due out in late January 2007).

Any premium online banking program should include one or more of these three core, value-added services. Then, additional minor services, such as security alerts, can be layered on to further differentiate premium banking from plain-old banking (POB).

For more information about online banking pricing and premium service offerings, see Online Banking Report #109, Pricing. 

While most banks in the world charge fees for at least some aspect of online banking, the service has been almost entirely fee free in the United States, at least ever since Bank of America rolled out free bill payment in 2002.

At first glance, it seems like a great deal for consumers; however, the lack of direct revenue has hampered investment in the channel and deprived U.S. customers from the more sophisticated services common throughout the world, such as SMS alerts, multi-factor log-in controls, and so on.

We're always on the lookout for fee-based opportunities (see Online Banking Report 122/123 for a laundry list of online fee opportunities), and we are encouraged by eBay's latest innovation, SMS auction alerts with a fee of $0.25 per auction. This is the first time eBay has attempted to charge fees to bidders. The site has offered free email alerts since the beginning.   

Here's how SMS alerts work (see screenshot below):

1. Select "Get SMS alert" (see red circle in screenshot at above, click to enlarge).
2. Select mobile phone provider from drop-down list and enter mobile phone number; currently Cingular, Verizon, Nextel, Alltel, Sprint, and TCRcom participate
3. Check "Watched item ending alert" or "Outbid alert"
4. Click "Continue" which initiates a confirmation message to the user's mobile phone
5. Send a text-message reply from the mobile back to eBay to agree to the charges

SMS-alert users pay $0.25 for each auction entitling them to up to 10 alerts. Each 10 thereafter cost another $0.25. It would be unusual for the number of alerts to exceed 10. After receiving an alert, users can submit a new bid via text message by responding to the text message with their new bid amount. Bidding can be protected with an optional PIN.

Instant messaging alerts work in a similar manner (click on screenshot for closeup):

1. Select "Get IM alert" 
2. Select IM provider; eBay supports the big three: Yahoo, AOL, MSN
3. Check "Watched item-ending alert" or "Outbid alert"

There are no fees for IM alerts. After receiving an IM alert, users can submit a new bid via the provided link.

In addition to SMS-alert links in the main auction listings, successful bidders are also prompted to set up an alert on the bidder's confirmation screen (see below).

What it means for financial institutions
There is no reason why banks cannot charge for triggered alerts. Unlike account access, alerts are a value-added service with no similar "free counterpart" in the offline world. You don't see telecom giants giving away any of their specialized services such as caller-id, custom ringing, call forwarding and so on. Banks should work on developing premium service bundles. For inspiration, take a look at your local phone provider's website (see Qwest screenshot right).

Resources:

• Online Banking Report #109, "Pricing Online Banking Services"
• Online Banking Report #122/123, "2006/2007 Planning Guide"

Baltimore-based Provident Bank <provbank.com> with $4 billion on deposit from 590,000 accounts, is the largest U.S. bank to segment its online banking access into two levels, My Account Online and Premium Internet Banking with Bill Payment.

As the name suggests, the primary difference is bill payment. But also the premium version provides a combined statement whereas the basic version still requires separate logins for
each product. Premium also allows downloading into Quicken/Money (click on inset for an account comparison).

Basic online banking is free; premium is priced at $5.95/month, a popular price point in the days before bill payment became free. The bank encourages trial of the premium service with a generous 6-month fee-free period.

Analysis
It’s a good start, but it would be more effective if the premium version had more benefits such as extra service, more security, longer archives, and so on. The bank also needs to support the product better with website graphics, copywriting, and imagery that reinforces the premium image.

Reference: See OBR 109, for a report on online banking segmentation.

--JB

For years, whenever we needed to show an example of product line segmentation, we've used 1st Source Bank's Premium Online Banking, a $6/mo upgrade for users if its free online banking service.

Our most recent research uncovered several more examples:

American Savings Bank
Free: Online Banking
Free: Online Banking Plus
$5.85/mo: Online Banking Premium

North Shore Bank
Free: Epay
$5.95/mo: All Pay

We'll be covering this subject in great detail as numerous premium online banking programs are launched during the next few years. For more information on multi-level pricing, refer to Online Banking Report #109, published in August 2004.

--JB

Free bill payment. It seems inevitable. With Bank of America and other U.S. mega-banks flogging free bill payment 24/7 , is it possible to still charge a fee and remain competitive?

We believe you can and should charge bill payment fees to at least a portion of your online banking base. But you need to expand the list of features and benefits for the fee-based option to distinguish it from free services offered by other banks.

Eventually, you will likely divide your online banking base into two or more segments. The FREE entry-level service receives the usual laundry list of online banking benefits. The premium level qualifies for an even longer list of benefits, most notably, pay-anyone bill payment. However, premium customers pay monthly fees ranging from $5 to $10 or annual fees in the $50 to $100 range

The key to making this work is to get away from calling the monthly charge a “bill payment fee.” That doesn’t stack up well with BofA and other major banks. Instead, position the premium service as something with MORE VALUE for online-savvy households. Make sure there are easily discernable differences between basic and premium, other than bill payment, for example more extensive archives or more security options. 

If you are going to give up $60/yr in fee income, make sure you let visitors know. HSBC has two banners on its Personal Internet Banking page.

If you do find it necessary to match the big banks with a free pay-anyone offering, we recommend the Wells Fargo approach. Dole out free bill payment judiciously, as an incentive to encourage customers to increase balances, adopt e-statements, or add an overdraft line of credit. 

-- Jim Bruene, Editor & Founder
jim@netbanker.com

Many financial institutions use a quasi-breakeven model for bill pay, charging $4-6 per month to cover outsourced payment processing costs. It’s a good strategy, provided your competitors do the same. Don’t count on it. We expect the “street price” of bill payment to rapidly approach zero as aggressive non-banks enter the fold.

Fee-Based Programs

Service fees for “plain vanilla” consumer programs top out at about $6/month. But, a value-added service offering may be able to command higher fees, especially from small businesses and individuals with more complicated finances. You can also sell optional ancillary services integrated with bill payment (see OBR 11/97 ).

1.

Flat Monthly Fees

Description: It’s not particularly difficult to justify a small monthly fee, like $3 per month or less. In the U.S., consumers save $0.33 in postage for each bill paid electronically. Research shows that the mean number of bills paid by computer/modem-owning households was 11.3 (OBR 10/96 ). If all are paid electronically, that’s an easy $3.73/month in postage savings. But, 37% of those surveyed paid fewer than nine bills per month. Their postage savings would be $2.97 per month or less.

Bank Goals: Cover costs; provide all-you-can eat service to encourage usage.

2.

Transaction Fees Only

Description: Use the ATM pricing model and charge for bill payments by the transaction. This approach is not widely used, primarily because many bill pay service providers charge a significant flat monthly fee per registered user, regardless of bill payment volume.

Bank Goals: Cover variable costs; encourage trial; compares favorably with known postage costs.

3.

Monthly Fee Plus
Transaction Charges

Description: A common approach, a monthly fee that covers a set number of payments each month, with a transaction charge for “excess” transactions.

Typically, the monthly fee cover the first 15 to 25 payments. Thereafter, each additional payment costs $0.40 to $0.50 each. Since 88% of PC/modem owners pay 16 of fewer bills per month (OBR 10/96 ), most consumers pay just the monthly fee, never incurring transaction fees. But business users end up paying a variable fee based on usage.

Another variation on this theme, which we’ve only seen a few times, is to charge a very low monthly fee that covers just a handful of payments. For example, $2/month for the first five transaction, then $0.50 each thereafter. This approach would satisfy casual users paying 2-3 bills, while charging heavy users a fee commensurate with the value.

Bank Goals: Cover costs; encourage light users; charge heavy users.

4.

Dollar Volume-Based Fees

Description: Although not used by anyone at this time, another possible approach is to base bill pay fees on the total dollar value of the payments rather than the number. The theory here is that those paying higher dollar amounts would be less price sensitive. For example:

We think this approach would make sense to users, especially when combined with payment guarantees and/or payment insurance programs (e.g., monthly payments guaranteed in the event of death or disability).

Bank Goals: Match bill pay fees more closely with value received, e.g. higher fees for higher levels of household income/expense.

5.

Annual Fees

Description: Instead of a pesky monthly fees assessed 12 times per year, an annual bill payment membership fee might be more palatable; especially if combined with value-added services such as e-mail confirmations and bill payment credit lines (OBR 11/97 ).

Bank Goals: Cover fixed costs while reducing the number of times fees are assessed.

7.

Premium Pricing for Small Businesses

Description: Take a cue from the phone companies, differentiate your business bill pay
with several value-added features, such as integrated email messaging, and then charge 3 to 4 times the consumer price. As we discussed in our Sep. ‘98 Small Business issue, business users might pay as much as $250/month for Virtual Bookkeeping services (OBR 9/98,).

Bank Goals: Profitable fee revenue; new business generation; incremental loan outstandings; cross sales.

Bundling Strategies

7.

Bundled with Loans

Description: Pay-anyone bill payment with bundled bill payment overdraft line of credit and/or credit card.

Example Pricing:

• $15 to $50 annual fee for a bill payment and credit line bundle covering the first 15 payments per month
• $0.50 charge per payment after the first 15 each month
• 16.9% APR on bill payments charged to the credit line, with a three day interest-free grace period

8.

Bundled with Online Checking

Description: Pay-anyone bill payment bundled with special “online” checking accounts that have monthly fees or balance requirements higher than they would without the bill pay feature.

Other Strategies

9.

Free, Free, Free

Description: To use the latest Web terminology, become a free “portal” to users’ bills. Then layer transactive services on top of basic bill payment, such as email payment alerts and confirmations, user-defined reminders, checking account balance alerts,
e-mail confirmations of high-dollar DDA transactions, and so on.

Bank Goals: New customer acquisition; increase Web traffic; PR; build positive brand image online.

10.

Compensating Balances

Description: Many banks routinely waive monthly checking account service charges if the customer maintains a given balance level. Since customers are conditioned to this pricing for checking, it may make sense to follow the same strategy with bill payment. Wells Fargo and numerous major banks use this approach.

Bank Goals: Cover costs either through fees or higher balance levels; can be positioned as a “free” service provided minimum balance is maintained.