Keeping the Faith

by Kenneth Cline

While CheckFree CEO Pete Kight is king of the hill in electronic bill payment, he still needs to translate that advantage into a win for his shareholders.

CheckFree Corp.'s name is synonymous with the electronic billing and payment industry, which is both a good thing and a bad thing for the Atlanta-based company.

It's good because CheckFree handles about half of all the bills paid electronically in the U.S.; no other competitor comes even close to that market share. It's bad because the business itself has yet to reach critical mass. Despite more than a decade of assiduous effort by CheckFree and other vendors, only about 5 million American households actually pay their bills online, even though 12 million currently bank online.

CheckFree chairman and chief executive Pete Kight thus finds himself in the frustrating position of having to continually fend off competitors in an industry that won't grow enough to allow him to develop sufficient economies-of-scale. After two decades of existence, CheckFree has yet to attain consistent profitability. It lost $17 million in the fiscal year ending last June 30 and a further $10 million in the six months ending December 31, 2000.

What will it take for CheckFree to finally break into the clear? Banking Strategies posed that question to Kight during a recent interview. The 45-year-old executive reiterated his belief that consumers will flock to online billing and payment once they come to appreciate its convenience. He says the customer benefits will become more obvious as additional major billers sign up for CheckFree's services. Kight also predicts benefits will accrue from CheckFree's new technology platform, called Genesis, and an ongoing quality improvement campaign.

Meanwhile, Kight has succeeded in driving competitors from the field. Companies that either sold their electronic billing operations to CheckFree or simply abandoned the business include Integrion Financial Network, a bank-led consortium; Visa U.S.A.; BlueGill Technologies; and most prominently, the Microsoft Corp.-led consortium called TransPoint. Kight also signed a pivotal alliance last year with Charlotte-based Bank of America Corp, one of the banking industry's major online players.

But CheckFree isn't home free yet. Consumer adoption rates are unlikely to improve dramatically until banks put some serious marketing muscle behind electronic billing and payment. Banks, however, are still having a hard time justifying the effort financially. And Kight must still contend with Spectrum LLP, a bank consortium led by Chase Manhattan Corp., Wells Fargo & Co. and First Union Corp. that is attempting to develop an alternative to CheckFree's bill presentment system.

Mr. Kight discussed the Spectrum challenge and other CheckFree issues last November, when he appeared as a speaker at BAI's Retail Delivery conference in New Orleans.

Banking Strategies: Since the acquisition of rival TransPoint last year, CheckFree is clearly the dominant player in electronic billing and payment. This industry, however, has not taken off as quickly as many had expected. What's the holdup?

Kight: We need a sense of perspective here. I can definitely tell you that the market is not growing as fast as I would like, but the issues are different now than they were a few years ago.

When we first tackled bill payment, we had to convince banks that they wouldn't be disaggregated — that consumers would want to pay their bills online through a trusted intermediary brand, i.e., the banks. We also had to convince them we were going to support our partners' brands and not try to supersede them with our own.

The situation has changed dramatically over the last two years. We now have good relationships with a majority of the financial services industry. Banks are working more closely with us to offer a better bill payment platform.

But we never believed that bill payment by itself was the end game. We knew that ultimately we would also have to deliver bills electronically — the presentment part — in order to give customers what they really want. On the other hand, we don't believe bill presentment by itself is a business. In fact, we don't actually like the term "bill presentment." Customers don't have bills "presented;" they just get bills and they pay them. It's one process, one cycle. So the business we're in is "electronic billing and payment."

We're working hard to close the loop, with both our financial institution partners and our billing partners. As more bills are presented and paid online, the proposition becomes increasingly compelling for consumers. Bill volume is the key to making it work.

But we have to be patient while we build both sides of this. It's like the early days of the telephone, when companies were going from house to house laying copper wire. A fair number of houses had to be wired before people cared about the telephone. There's not much reason to have a telephone if you don't have anybody to call.

We're in a similar situation. We have to get enough billers shipping statements online so that financial institutions feel justified in erecting platforms that offer electronic billing along with electronic bill payment. It takes resources to do that, and budgets are tight. A certain level of online bill shipment is needed to make the proposition attractive to customers, and until that threshold is reached, providers won't want to make the full investment in the enabling technology. Meanwhile, billers say they don't need to speed up until we get more banks online.

Although it appears as though we're just crawling along, there is progress. By the end of 2001, our financial institution partners will be able to electronically deliver half or more of the primary bills received by consumers in the major U.S. metropolitan markets. Once you can offer somebody half or more of their bills online, the proposition becomes compelling. It takes paper off the desk. It brings in a whole new generation of customers.

Many of the country's top 400 billers will be shipping statements online by the end of 2001. And that's going to create a compelling list of bills for us to offer our customers.

Banking Strategies: In terms of the value proposition for electronic billing and payment, who benefits the most, consumers or billers?

Kight: Clearly, the most value accrues to the billers. They want an interactive communication capability with their customers. Electronic billing and payment provides more possibilities than paper media, and at lower cost.

As for the value proposition to the consumer, the only absolute rule I can tell you that I have learned after being in this business for 15 years is that when consumers adopt electronic bill payment, they never, ever, go back. People love it. It's a compelling proposition once people try it.

The difficulty is getting them to try it. The truth is that paying bills with paper checks, stamps and envelopes works. It works fine and people know how to do it. Meanwhile, although financial institutions feel a lot of pressure to offer the product to customers for free, they still have to pay us for it.

Our objective, as I have said repeatedly, is to turn this into an economies-of-scale, efficiency-based business. If we can continue to grow it the way it's growing, bringing more and more people online, the efficiencies will improve and the unit costs will go down. We've got about two years of hard driving to get through yet. But this is going to be a win-win situation.

Banking Strategies: Is there a marketing problem here? Are banks doing enough to promote electronic billing and payment to their customers? Should CheckFree itself spend some marketing dollars?

Kight: Our banking partners don't want us to advertise our brand, so we can't do it. We've made a commitment that our partners' brand names will stay in the foreground.

The challenge for banks is that this isn't something that provides them a direct return. How do you go about getting a multi-million dollar marketing budget at a bank when you can't point to any quantifiable returns? You have to layer in a lot of soft returns.

Wells Fargo, Bank of America and First Union have all come out with some pretty compelling numbers showing how much more profitable an online customer is than an offline customer. And a bill payment customer is dramatically more profitable than a regular online customer.

But still, when you tell your boss how much money you want to spend on marketing electronic billing and payment, and you have to come up with a return on the investment, and then rely on everybody else's profit center to provide that payback — that's complicated. It's difficult for traditional banking organizations to deal with. You have to break the existing budget process to get that done.

We clearly decided to press the issue in our recent agreement with Bank of America. They bought 15% of our company and we acquired their electronic billing and payment operations. In return, they agreed to commit $45 million to marketing the service. But we can't do that very often. The better solution is to show how much more profitable online bill payment customers are and sell that awareness up the line.

There's no easy, short answer. Our experience is that half of the consumers at banks that offer electronic billing and payment don't even know it's available. They literally don't know. If you explain it to them in clear terms, it's surprising how many people will try it. So there's a significant missed opportunity if we don't educate consumers. Banks have to play a major role in that.

The other factor is that we haven't done a good enough job in making the service easy to use. We deserve a lot of blame for the fact that it requires a couple of days and a paper exercise to enroll in an online payment service. We've got to get that fixed. We're working hard with Equifax Inc. and a couple of other suppliers to make online enrollment a lot easier and faster.

Banking Strategies: In the meantime, as the banks are taking a seemingly sluggish approach to this, we've seen a number of nonbanks, for instance Yahoo! and Intuit Inc., offer electronic billing and payment on their Web sites. Are banks facing a competitive threat here, perhaps at risk of losing an important piece of the payments system?

Kight: Given that electronic billing and payment can be offered by anybody that offers online information services, there certainly is the opportunity for customers to defect from banks.

Until the customer gets embedded in some sort of service infrastructure, it's simple to switch. You just have to push a button. The whole electronic brokerage industry developed overnight because it was easy for consumers to sign up and get running. Likewise, the whole person-to-person e-payment business exploded because it was so easy to enroll. Whether it's Yahoo working with someone like us, or a startup company offering a P2P service, these types of things are going to keep coming.

But once you get past the initial hype, this is a service business. While the Internet changes a lot of things, it doesn't change the fundamental laws of business. You have to provide great service. You have to be there when the customer needs you 'round the clock. And more than anything else, when you are dealing with people's finances, you have to have zero defects.

The Internet industry isn't ready for that. The financial services industry, on the other hand, lives service quality. Banks and well-established financial service brands with quality credibility have the first opportunity, second opportunity and third opportunity to be the preferred online supplier. Only on the fourth opportunity will those customers go someplace else. We think the financial services industry is going to win.

Banking Strategies: Pete, although you've tried to work with the banking industry — and CheckFree has many bank clients — some institutions have joined together in consortiums such as Integrion, and now Spectrum, to compete against you. How do you deal with that?

Kight: Well, it's an interesting situation. I don't have any business books showing me how to work against a competitor when the competitor is also my client. It's an interesting dynamic. One of the things we've had to do is provide great service to everybody, every one of our clients.

When we're up against a consortium made up of some of our own clients, we don't have the opportunity to compete as aggressively as we did against TransPoint or Visa...

Banking Strategies: So your hands are tied a bit?

Kight: They're somewhat tied. One of the biggest problems in competing in the Internet online or digitally-delivered services arena is that it has become acceptable to fight with what the industry calls "vaporware." Companies announce products well ahead of the time that anything actually is produced. They talk about all the wonderful things that their black box is going to do.

The question then becomes how to respond. Whether you're going up against a consortium or somebody else, it's difficult to compete with someone until they actually get into the market. Until then, you're competing against what they say and what they hope, and the customer perceptions that go along with that.

Fortunately for us, consortiums always seem to have difficulty working efficiently. We think it's going to be difficult in this case as well. Consortiums typically try to stitch together lots of different operating systems. We, on the other hand, already possess an integrated end-to-end processing system in our new Genesis platform. We're hoping we can demonstrate that this integrated service platform provides a better path than disparate switches and services, and do so before the banks lose too much time and momentum.

We've competed against a lot of powerful entities over the years — from Intuit and Visa, to American Express Co., EDS, Microsoft, First Data Corp., and a lot of small companies. But our overriding priority is trying to advance the market as fast as we can. As the market leader, we advance as the market advances, which means competitors not yet in the market will fall even farther behind.

Banking Strategies: Clearly you've seen many competitors come and go, but CheckFree is still standing...

Kight: I have a lot of scars to show for it, but we're still standing.

We now have 50% of this business. People aren't going to celebrate someone who controls more than 50% of the market because they fear monopolies. But I've always talked openly about the fact that I don't believe electronic billing and payment is going to be run by 10 different companies. It's an economies-of-scale, efficiency-based business. There's no way billers are going to link to 10 different systems. And there's no way our costs can go down unless we generate higher volume and capture economies-of-scale.

I also believe this is a zero-defect business. Consumers expect to hit a button and, with the same assurance that they can pick up a phone and hear a dial tone, they expect the transaction to take place safely and securely, every time. So, beginning in 1997, we embarked on an 18-month process of building a whole new processing platform, which we call Genesis.

But nobody has ever done enough research to answer the question, "What constitutes sufficient quality?" We always said our quality was a lot better than everybody else's, but we couldn't measure it. So I talked to my team about the idea of achieving "dial tone" quality. Nobody was overly enthusiastic about it because we didn't really know how to get there. After all, some of CheckFree's service quality is dependent upon linkages with the banks and the manner in which billers settle payments.

Even so, we decided to make a public commitment to establish dial tone-level quality as a fundamental goal to which everybody's compensation would be tied. In a service business, that level turns out to be exactly 4.6 sigma, which is the statistical equivalent of 99.9% accuracy.

CEOs are notorious for making those kinds of commitments for their teams even when it's unclear how they will be achieved. But we did it. We hit 4.7 sigma toward the end of the process, but honest to goodness, in the last week of the last quarter, one out of a dozen of our servers went down for just 30 minutes. That took us down to 4.55 sigma and we all missed our bonuses. But 4.55 sigma is still dramatically higher than the 3.8 we started with, and we've been hitting 4.6 sigma ever since. It's a big deal.

Mr. Cline is senior editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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