Bridging THE MAZE

By Bill Stoneman

Paying online bills with credit cards could provide a breakthrough for the widespread adoption of e-billing.

Just when it seemed the outlook for electronic bill presentment and payment couldn't get any murkier, another angle is emerging. Card issuers such as Bank One Card Services, MBNA Corp. and American Express Co. are encouraging their customers to view routine household bills at their billers' Web sites and then put the payments on their cards.

So far, the few card issuers pitching this service have done so in a low-key manner, so results are difficult to gauge. But this payment model — call it "card-based, biller direct" — does offer important advantages for all the major constituencies in EBPP, i.e., consumers, banks and billers. If it catches on, small and large card issuers alike will be challenged to reach for a share of the business.

At the very least, the arrival of this model demonstrates how far the other mechanisms for paying bills online have to go to attain critical mass. So far, the two main contestants have been "biller-direct," in which consumers visit individual biller Web sites to view and possibly pay bills, and the "consolidator" model, in which consumers take care of all their bill payment business at one online location, likely a bank's Web site.

Card-based payments could strengthen the biller-direct hand, to the extent that paying bills at a phone company or cable service's Web site becomes easier than it is now. But at least those banks that issue credit cards would stand to benefit from a surge in interchange fees from card-based payments. These fees average between 1% and 2% per transaction. And nearly all banks would benefit if customers used debit cards to pay their online bills.

The upshot is that banks will likely need to support the full range of online payment mechanisms, rather than just a favored one or two. Payment strategists should position their institutions to meet customer needs and preferences, whatever those may be.

Many consumers who view their statements at biller sites today authorize those billers to make an automated clearinghouse draft from their checking account. Credit card payments would be more convenient, and they would also allow customers to retain some float on their funds. Viewed from this angle, card-based biller direct is a form of debt consolidation, although abuse of this method would saddle customers with high interest expenses.

The biggest obstacle to widespread use of this model will actually come from billers, who "aren't eager to pay that interchange fee," says James Van Dyke, president of Javelin Strategy & Research in Pleasanton, Calif. Billers would logically prefer to be paid out of the customer's checking account, since the ACH fee would be much less than the card interchange. The question is whether that resistance would wear down if consumer acceptance of card payments begins to accelerate.

Some view this as inevitable. "Billers want to have the maximum number of customers, so they're going to offer the maximum number of payment options," says Leonard Heckwolf, senior vice president for consumer payment solutions with Bank One Corp., Chicago. Indeed, AT&T Corp. allowed Visa USA to use its name in an advertisement pitching card-based payments in USA Today last March and a Visa executive says other billers will do the same soon.

Payment Standoff

Right now, the EBPP business can be seen as a kind of standoff between the biller-direct and consolidator payment models. Banks, the biggest purveyors of consolidator services, typically acknowledge that biller-direct site traffic is growing faster than theirs, but don't seem particularly worried.

For one thing, the two models don't exactly serve the same purpose. Consumers can delve into billing details at biller sites and seem particularly eager to do so for credit card and long distance telephone bills. But even though they view these bills online, they tend to pay them with a paper check or at a bank's bill payment site. There's also doubt that consumers will want to visit numerous biller sites, particularly if they are entering bank account information at each of them.

"If the average consumer pays between 10 and 15 bills a month," says Neal Wolfson, director of interactive banking for FleetBoston Financial Corp., "there's only so many third-party sites they're going to want to log into to view their bills."

Consolidators, by contrast, offer easy-to-use bill payment, tied directly to the customer's checking account. A further advantage of a bank site, unlike, say, the water company, is that it lets consumers tie their bill payments to other personal financial management software, keeping track of checking account balances, for example.

"Having all the possible bills is not important for a bank," says Alex Brutin, a Paris-based analyst with Celent Communications, a financial services technology research company in Boston. "The important thing is that you tie a customer to your online banking site."

But bill presentment, the other P in EBPP, does represent a serious weakness in the consolidator model. FleetBoston, for example, the seventh-largest banking company in the U.S., lets its credit card customers view their bills online but still does not present third-party bills to its online banking customers. The basic problem, Wolfson says, is that too few billers have signed up with any of the companies that would route bills to banks and other consolidators to make the service meaningful for consumers.

Even Wells Fargo & Co. in San Francisco, which prides itself on being a technology leader, is only now coming close to offering third-party bills to its online banking customers. Wells began presenting statements from 260 billers last spring, says Jim Smith, senior vice president of consumer Internet services. Typical Wells Fargo customers will probably be able to find bills from three or four companies, which Smith says should be enough to draw interest.

The holdup has been the same for many years. Credit card issuers, who probably control the most valuable online bills, want customers coming directly to their sites. Other billers seem reluctant to sign up with intermediaries such as CheckFree Corp. or Milwaukee-based Metavante Corp., Marshall & Ilsley Corp.'s technology services arm, owing in part to uncertainty that their bills will reach many customers. Most banks, as a result, are either offering bill presentment rather quietly or, like FleetBoston, waiting until the companies consolidating billers make more progress.

Breakthrough Model?

Card-based payments offer hope of breaking this logjam in EBPP. One of the big advantages of this model is that it provides benefits for consumers, billers and financial institutions alike.

The potential benefit for consumers is ease of use. Making payments at biller sites typically requires entering bank account and transit numbers in order to set up an ACH draft. That's not so difficult, but few consumers carry checks with them all the time, as they do their credit and debit cards, and thus lack ready access to those numbers.

The issue is more complicated for billers. Subtracting up to 2% in interchange fees from gross revenue is a steep price for many of them, particularly considering that ACH fees run as low as 0.1%. In return, however, billers can get faster access to funds from customers, more certainty that they'll be paid and lower attrition in such businesses as cable TV and auto insurance — especially if the consumer arranges for the payment to be made automatically on a recurring basis. Best of all, perhaps, credit and debit card payments move billers a step closer to saving money by discontinuing some of their traditional mailings.

"When consumers come to enroll for online account management," says Richard Crone, a consultant with Boston-based Dove Consulting, "the goal of the biller is to get them to enroll also for payment. Billers cannot reach their ultimate goal of eliminating paper without getting the consumer to register for electronic payment."

Though promotion of card-based, biller-direct payment has been pretty modest thus far, it will soon become more aggressive, says Armen Khachadourian, senior vice president for new market development with San Francisco-based Visa USA. Visa paid for a front-page ad in the March 17 edition of USA Today that declared: "Pay your phone bill automatically with your Visa card at www.att.com/visa9." It appeared between logos of the giant card association and AT&T, still the largest long-distance provider.

The interchange fee could make some billers slower to embrace card-based payments than card issuers and consumers. But AT&T believes the benefits of enrolling customers in online billing accounts are worth the cost of doing so with card payments. The company saves money when it stops mailing paper bills, says Karen Snyder, director of online marketing for the phone company's consumer division in Morristown, N.J. And it saves money when consumers find information they want online, rather than by calling customer service representatives.

The opportunity for financial institutions in card-based payments at biller sites also appears strong, despite the diversion of customers from the consolidator model. Charging household bills can add to card transaction volume, boosting interchange fees and possibly outstanding balances, a lesson already learned by gas stations and supermarkets. It's little wonder then that Bank One Card Services, MBNA, Visa USA and American Express all provide links to scores of billers at their respective Web sites, making it easy for consumers to find billers that accept card payments.

Finally, although the credit card business is highly concentrated among a handful of very large issuers, just about every bank has an opportunity to cash in on online payments for household bills through debit cards. Visa's Khachadourian estimates that about 40% of some $40 billion in card-based payments last year for recurring household bills was made with debit cards. This is significant because most banks issue debit cards, since there are no major barriers to entering that business, unlike with credit cards. On the other hand, not all banks issue signature-based debit cards, and PIN-based debit cards cannot be used for Internet-based payments.

All in all, card-based biller direct may turn out to be a model banks embrace rather than fear.

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

Copyright © 2003 by Banking Strategies, published by BAI.

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