Out of the Loop?

By Bill Stoneman

As more consumers pay their bills directly on biller Web sites, banks may find their control of this online business slipping away.

Despite all the problems they've had with electronic billing and payment, such as disappointing customer response and elusive profitability, banks at least had confidence they would remain at the center of whatever solution finally emerged. But that confidence has been shaken a bit by recent evidence that activity is shifting to Web sites hosted by credit card companies, utilities and other major billers.

While the actual numbers are subject to debate, recent reports by several research companies suggest the "biller-direct" model of electronic payments is winning out over the "consolidator" model, which likely would be driven by financial institutions. And that spells lost opportunity. "The risk is that banks, except for their own bills, won't have a role in the future of electronic billing," says Avivah Litan, a research director with Gartner Inc.

Although virtually all banks have given up hope of generating income directly from electronic bill payment and presentment, many value it as a customer-retention tool. Consolidating electronic customer bills on a bank Web site helps to bind customers more closely to the institution, since customers are reluctant to switch providers once they've gone to the trouble of setting up electronic accounts and payments. Considering that online billing customers also tend to be among a bank's most profitable, institutions have even more reason to offer the service.

But if biller direct or some other method wins out — and there are several "dark horse" alternatives coalescing out there, such as e-mail billing — banks could end up with no more stake in EBPP than they have now in the paper-based system. That stake revolves around the checking account. Whether customers pay their bills via an electronic or paper channel, the money still comes from the same place.

It's too early to write off the consolidator model, however. Despite gloomy reports from Gartner and Forrester Research Inc., other analysts contend the online bill consolidation model offers customers a convenience that the biller-direct model can't match. If this model prevails, banks would be in a commanding position, since they usually control the link back to the checking account.

And the ability of banks to consolidate customer financial information enhances their position in EBPP. "Banks have the potential to provide a full financial picture to the customer," says Elizabeth Robertson, a research analyst with TowerGroup, a financial services technology research firm based in Needham, Mass. "There's a lot of potential there that makes using a bank site very logical for customers."

Banks still have to capitalize on that potential, though, which means they must do a better job of marketing online bill pay. They also need to make the service more valuable to customers by increasing the number of biller connections available on their Web sites. Customers currently can't pull up more than a handful of bills to review and pay online.

Biller Momentum

Ever since electronic bill pay carved out a place in the market in the mid-90s, conventional wisdom assigned the best prospects to the consolidator model because it offered maximum efficiency for billers and maximum convenience for consumers.

But banks have moved slowly in the face of weak customer demand. Customers, meanwhile, are less than impressed with the limited number of bills actually available on bank Web sites. In the face of slack customer demand, billers have no incentive to rush out and post their statements at consolidator sites. The resulting standoff has left the consolidator model seemingly stalled — and vulnerable.

"Biller-direct is a fairly strong model at this point because there's no strong consolidator model that pulls together all the bills a typical consumer might want," says John M. Perry, chairman and chief executive of Spectrum EBP LLC, a bill presentment company jointly owned by Wells Fargo & Co., J.P. Morgan Chase & Co. and Wachovia Corp.

Among companies seeking to bring billers and consolidators together, Atlanta-based CheckFree Corp. comes closest to offering a comprehensive service. With about 250 billers signed up, it can deliver bills from most of the major telephone companies and many regional utilities. Still, consumers can't retrieve more than three or four bills online in most markets, which dampens their enthusiasm.

Bank of America Corp., a major investor in CheckFree, in 2001 became the first large bank to make a significant commitment to pitching EBPP when it launched a mass-media marketing campaign for its online banking service. Its experience will go some distance toward answering whether consumers really care about this service.

A Bank of America spokesperson declined to comment on results from this campaign. But CheckFree says the bank was able to double the number of bills presented and paid in San Antonio, one of its test markets. Bank of America's initiative is the exception, however. Marketing by most other banks appears weak, and the biller-direct model seems to be gaining traction almost by default.

Hard numbers on the EBPP market are difficult to come by. But even bankers and bank-oriented vendors concede that consumers are retrieving bills directly from biller sites at least as often as from consolidator sites. "There's no doubt that there is a great deal of momentum in the biller-direct model," says Terry O'Hanlon, executive vice president for marketing with CheckFree.

Forrester estimates that 4.5 million households received or paid bills at financial institution Web sites last year, just barely edging out the 4.47 million households that used biller sites. But Forrester, which is based in Cambridge, Mass., goes on to predict that biller sites will capture 80% of the EBPP industry's growth over the next five years, unless financial institutions boost their efforts.

Gartner, counting consumers who view bills but don't necessarily pay bills online, estimates the biller-direct model has 10 times the market penetration of the consolidator model within the key telecommunication, utility, insurance and lending sectors.

Other Alternatives

To be sure, the entire picture is murky at this point. The Forrester and Gartner estimates, for example, are subject to dispute and interpretation.

Octavio Marenzi, managing director of Celent Communications in Boston, says the number of people who actually use biller direct regularly is probably considerably smaller than the number of people who enroll in the service, experiment once or twice and then don't return. CheckFree's O'Hanlon believes many people sign up at multiple biller sites, which produces significant duplication in the numbers.

Consolidator advocates also doubt that biller direct will have much staying power with consumers. For one thing, consumers will likely tire of jumping from one Web site to another to pay their bills. "Our research indicates that consumers will go to the most convenient location to pay their bills," says Kevin Watters, head of the consumer Internet group at Bank One Corp. in Chicago.

Like most bank Internet executives, Watters sees little chance that biller direct will prove more convenient for consumers than the consolidator model in the long run. And then there's the security issue. "Are people going to entrust their financial data to a non-financial institution?" asks Michael Dobbins, senior vice president for direct banking with Charter One Financial Inc. in Cleveland.

Given the consolidator model's innate advantages, bankers may be justified in their expressions of confidence. But others worry that banks will continue failing to make much headway unless they improve their marketing efforts. For example, CheckFree's O'Hanlon says too few branch employees are adept at explaining how the EBPP service works and what it can do for customers.

Furthermore, neither biller direct nor today's consolidator model are assured of survival, given the other potential alternatives now in various stages of development. These include e-mailed bills, where billers e-mail their statements directly to customers. A link in the message then brings the customer to the biller's site, where payments can be authorized.

Though this might still require consumers to obtain several passwords, it would effectively make the customer's e-mail inbox the point of consolidation, thereby resembling traditional billing through the U.S. Postal Service. Whether it would overcome consumer concerns about providing personal financial data to multiple billers is not clear.

There's also some discussion about account aggregation technology becoming the focal point of consolidation. Richard K. Crone, vice president with Boston-based Dove Consulting Inc., says aggregation vendors such as Yodlee Inc. can become the intermediary between billers and customers, a role currently assumed by CheckFree and Spectrum.

Under this system, consumers would sign up to pay bills at their biller sites, and then aggregate those billing accounts at their bank site. "When you double click on that bill through account aggregation, it will take you straight back to that biller to pay," says Crone, who asserts that transaction costs, whether borne by financial institutions or the consumer, would be lower than with today's bill consolidator services.

And then there's MasterCard's Remote Payment and Presentment Service, which like Spectrum is offering to switch bills between companies that work closely with billers and companies that serve consumers. In MasterCard's favor, according to Forrester analyst Catherine Graeber, are well-established relationships with thousands of billers and financial institutions. Graeber, in fact, predicts MasterCard RPPS will eventually overtake CheckFree and Spectrum to become the dominant player in the consolidator world.

So what's a bank manager to do? The EBPP business remains in a state of flux, and this makes it difficult for financial institutions to place a big bet on one particular service model. But to the extent that banks accept the argument that bill payment enhances customer retention, they shouldn't cede the race for leadership to the biller-direct model any time soon.

Mr. Stoneman is a freelance writer based in Albany, N.Y.

Copyright © 2003 by Banking Strategies, published by BAI.

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