Users Proliferate, But Banks Face a Cost Squeeze in Online Bill Pay

More people than ever are paying bills electronically, but banks have few ways of making money from that trend, according to separate research reports out this week. The latest consumer survey from bill-pay technology provider CheckFree, a unit of bank processor Fiserv Inc., estimates that 63.1 million Internet-using households pay at least one bill online in an average month, up from 61 million in CheckFree's 2007 survey. These households represent about 75% of online Americans and collectively paid 934 million bills in a typical month. Harris Interactive conducted CheckFree's 2008 Consumer Banking and Bill Payment Survey, the eighth since 2002, by polling 3,031 U.S. consumers who use the Internet, were at least 21 years old, and were at least partly responsible for household bill payments. For the second year in a row, consumers who go online paid more bills at bank and biller-direct Web sites than they did by any other method, the survey found. Online bill payments made at both financial-institution and biller-direct Web sites rose to 42% of the total volume of household bill payments made each month (21% for each method), up from 39% in the 2007 survey. Checks accounted for 31% of payments in this year's survey. In 2002, only 14% of Internet users reported paying bills online. CheckFree says its latest online survey has a margin of error of plus or minus two percentage points and considers its results representative of the nation's 85.1 million Internet-connected households. For financial institutions, however, the missing ingredient in online bill pay is profit, according to a revenue and cost analysis by Needham, Mass.-based research firm TowerGroup Inc., an independent unit of MasterCard Inc. TowerGroup estimates that U.S. banks and credit unions will spend just over $900 million this year in aggregate outsourcing portions of online bill payment to third parties such as CheckFree, Online Resources Corp., Metavante Corp., and others that provide the payment interface and warehouse, processing, and customer service. That number is expected to climb to $1 billion by 2010. But what TowerGroup research director Jennifer Roth calls the “soft” revenue associated with online bill pay?users' intrinsic profitability and the financial institutions' greater opportunities for cross-selling and customer retention?no longer compensates for the “hard” dollars they must spend to facilitate what has become an almost universally free service. One reason for that is that banks have ramped up bill-pay usage to such an extent that they've already hit all the volume-based price breaks the providers are willing to give. “You're not going to get any more discounts,” Roth tells Digital Transactions News. She also says banks incur increased customer-service costs when they roll out bill pay. Although Citibank introduced free online bill pay as far back as 1997, banks' monthly charges for bill pay largely stuck until 2002, when Bank of America Corp. rolled out a free service and rivals rushed to follow. Now expedited payments, which offer same-day or even real-time posting, offer one of the few remaining opportunities for bill-pay revenue generation, according to Roth. She notes that fees for expedited credit card payments generally range for $12 to $15, a bargain compared with issuers' late fees of $25 to $40. Utilities generally charge $3.95 to $6.95 for same-day posting to avoid a shut-off, about the same amount that bill-pay providers will charge for an expedited payment to such companies. TowerGroup forecasts U.S. expedited payments to increase at a compound annual growth rate of 38% through 2012, reaching 19.4 million transactions and corresponding revenue of $101.6 million. “This will offset about 8% of projected online bill-payment costs across all U.S. financial institutions,” Roth's report says. Besides expedited payments, credit card-funded payments are an upcoming source of bill-pay revenues for financial institutions, according to Roth. That's because if a consumer goes to his bank's online site and charges a payment to a card issued by that institution, the bank will earn interchange revenue (Digital Transactions News, Aug. 26).