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BY LAURI GIESEN
Expedited
payments offer a way for procrastinators
to pay more to avoid higher fees or terminated
service. Demand is high, as financial
institutions seek ways to break into
the billers’ business.
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SYNOPSIS | Expedited
payments — payments made the
same or next day — represent
a burgeoning market. Today, that market
is controlled largely by the billing
companies themselves, charging steep
fees. Financial institutions are making
some tentative efforts to establish
a foothold in this market, but offering
a comprehensive product will require
electronic links to the accounts of
the nation’s major billers. One
possibility: Using the existing infrastructure
provided by bank P2P services.
Banks that have given
up on the idea that they’ll ever
get customers to pay for bill payment services
may be in for
a pleasant surprise. New findings show
that consumers will in fact pay for bill
payment in certain circumstances — and
they’ll pay sizable fees for the
convenience.
Several years ago, banks failed to sell
traditional electronic bill payment services
when they charged fees as low as $5 per
month to facilitate payment of every one
of the customer’s bills. Today, they’re
finding customers will pay that much or
more to pay just one bill. The difference:
These customers have to be in a real hurry,
i.e., the bill is due immediately and they
face a hefty penalty if they miss the deadline.
For that reason, expedited
bill payment has become
a potential hot market for banks, enabling
them to earn a fee when consumers’ bills
must be paid immediately, or at least the
next day. This immediacy sets it apart
from traditional electronic bill payment
services, which typically posts payments
between one to five days after the customer
authorizes.
Expedited payments is not yet widely available.
No banks today are offering the full-blown
service, although several are experimenting
with limited offerings that considerably
speed up customer payments. The reason
is most banks today don’t have the
infrastructure in place to be able to get
an immediate electronic payment made to
all the major billers in the U.S., experts
says.
But many banks are looking
at the service and trying to figure out
how they can get into a business that is
currently dominated by the big billers
themselves, such as telephone and credit
card companies, who can typically take
an Automated Clearing House (ACH) payment
from a consumer’s checking account
over the phone. “My impression is
that the big banks, at least, are experimenting
with this and trying to figure out how
to move ahead with expedited payments,” says
Steve Mott, principal of BetterBuyDesign,
a Stamford, Conn.-based consulting firm.
LIMITED BANK EFFORTS
Demand for the product is robust. Because
the consequences of making a late payment
are so severe — potentially leading
to blemished credit ratings — research
from San Carlos, Calif.-based Crone Consulting shows that consumers will pay anywhere
from $1 to $20 per bill to have a critical
bill paid right away, with the fee climbing
as the penalty for late payment rises.
Already, because of the expedited payment
services offered directly by billers, more
than one-third of U.S. households say they
have used an expedited payment service
during the past year and 13% of those say
they have used the service at least once
a month, according to data compiled by
Crone Research. The billers who offer these
services are collecting more than $715
million in annual fee revenue, with that
amount expected to grow to $2 billion by
2007, Crone reports.
Some banks are offering limited versions.
Companies such as Citigroup Inc., for example,
offer P2P (person-to-person) payment services.
Technically, these services aren’t
intended to be used to pay commercial billers;
they were originally set up to enable an
individual using one bank to send money
to someone whose account resides at another
bank. But in certain cases, customers can
use P2P to pay small billers if they’re
not obviously commercial accounts. For
example, a spokesperson for Citigroup says,
a P2P payment might be used to pay a gardener,
but not a utility company.
Then there is the former Bank One Corp.,
now part of J.P. Morgan Chase & Co.,
and its “overnight check service.” For
a fee of $14.99, Bank One guarantees that
it can send a check to anyone, including
billers, by the next day. The promise is
based on the bank’s use of UPS’ overnight
delivery service, which guarantees next-morning
arrival.
Not a true expedited bill payments service,
acknowledges bank spokesperson, Calmetta
Coleman. The overnight check guarantees
only that the check will arrive at the
biller’s office the next day, not
that the biller will post the payment immediately.
Coleman adds, however, that a random sampling
of billers by the bank indicates that most
say they will post the check the day they
receive it.
Consultant Mott notes that customers could
gain many of the benefits of the Bank One
program by simply paying UPS or another
delivery service for overnight delivery
of a check themselves. The one advantage
of the Bank One offering is that customers
don’t have to drive to the office
of an express delivery service to drop
off the check; instead, they can go online
and authorize payment.
Although the bank has not released any
current usage numbers, Coleman says the
program has been “well received” and
noted that the bank received 200 requests
the first day with only minimal advertising
and that number “has grown substantially
since.”
Another effort to get banks into expedited
payments has been initiated by Fort Knox
National Co., an Elizabethtown, Ky.-based
provider of electronic payment services.
Fort Knox says it currently works with
700 billers in the U.S. to provide them
with expedited payment capabilities. To
increase its market share with billers
even further, Fort Knox hopes to work jointly
with a number of banks to co-brand and
then co-market these services to the banks’ commercial
customers.
“We’ve been approached by a number
of banks that have commercial clients that
want to offer expedited payments as an
option to their commercial customers,” says
Paul Flanigan, Fort Knox’s chief
marketing officer.
And Fort Knox may not be the only company
taking this kind of approach. In late
July, Fiserv Inc., a major data processor
for
banks, announced it was acquiring BillMatrix
Corp. BillMatrix already provides expedited
bill payment services to 120 billers.
The combination of Fiserv’s vast banking
relationships and BillMatrix’s biller
technology should get more billers into
the expedited payments arena, says Richard
Crone, founder of Crone Consulting.
Fiserv executives alluded to that possibility
during the announcement of the acquisition.
Pat Foy, president of Fiserv Bank Serving
and Electronic Payments Group, said Fiserv
was seeing strong demand from its financial
institution client base for electronic
bill pay solutions. “Financial institutions
can use BillMatrix’s services for
their own expedited payment needs and to
resell the company’s services to
their corporate customers,” Foy said
in the published statement.
Consultant Mott says working with a technology
and service company such as Fort Knox
or Fiserv is a viable option to many
small
and mid-size banks that want to offer
expedited payments to their commercial
customers,
but don’t have the internal technology
to do so by themselves. However, he believes
most large banks will develop their own
systems rather than work with a third party. THE POSSIBILITIES
The limited efforts by banks so far
suggest the range of possibilities
open to banks
in the expedited payments arena. Mott
and Crone say there are basically three
roles banks could play:
- Offer
expedited payments through their
own billing services,
such as the payment
of bank-issued credit cards,
mortgages, car loans and any other
consumer
lending product where remittances
are sent out;
- Assist
their commercial banking customers
to develop
expedited payment options.
The banks could share in the
revenue collected on expedited payments
as
well as provide a valuable service
to their
corporate banking customers;
- Offer full-blown retail products, where
expedited payments are integrated into
banks’ existing bill payment
services. Customers would pay an
extra fee if they
needed payments made the same-day
or next-day.
Banks appear to
be the furthest along in the first category
of activities. According
to Crone Consulting research, banks represent
more than 25% of all remittances in the
U.S. and when it comes to existing biller-direct
expedited payment services, they’ve
already taken a lead. Of the expedited
payments made last year, financial services
accounted for about 62% — with 42%
of the payments going to pay credit card
bills, 12% to mortgages and 8.3% to pay
car loans. The remainder of payments was
to various utility, phone service, Internet
service and insurance companies.
Since banks already have made strong
progress in developing internal expedited
payment
services, the next logical step for many
is to extend their in-house capabilities
to their commercial customers. While many
large utility companies and other big billers
have their own systems in place, many smaller
companies do not have that capability in-house
and would welcome assistance from the banks
that provide them with lockbox and check
clearing services, says Crone. The Fort
Knox and Fiserv efforts can be seen as
steps in this direction.
Going beyond the biller-direct option,
many experts believe the real challenge
for banks is to develop systems that enable
them to offer expedited payments as a standard
retail product. These efforts seem to be
in the early stages, however. “I’d
be surprised to see any substantial offerings
from banks yet this year,” says Gwenn
Bezard, research director for New York-based
Aite Group. “I’m not sure anyone
has figured out yet how to make this happen,
but they are working on it.”
Today, most electronic payments paid
by banks take one to two days to
post, experts
say. About one-fifth of bills paid through
banks’ online bill payment services
aren’t even paid electronically at
all, according to data from the top bill
payment processors such as CheckFree Corp.,
Metavante Corp. and Online Resources Corp.
That’s because neither the bank paying
the bill nor the electronic payments companies
used by that bank has a direct link into
the biller’s accounts. In these cases,
the bank or a service hired by the bank
must cut a check and mail it to the biller.
These payments often take up to five days
to post.
To make expedited payments work, banks
need to make sure they or their service
providers have all the necessary links
to get a payment to a biller immediately.
Crone says many banks are working with
CheckFree, Metavante, and Online Resources
to get the links in place. All three companies
have been actively working during the past
decade to increase the number of billers
that have direct links to their operations
so that an electronic payment can be made.
For example, Matt Lewis, executive
vice president of CheckFree., says
his company
today can make same-day payment on 75%
of the bills for which it provides electronic
processing services. Most banks don’t
advertise that fact, he says, because they
do not want to risk angering customers
whose bills can’t be paid that quickly. “Most
banks present the slowest time they have
in order to avoid customer satisfaction
problems from those customers who cannot
get their bills paid any faster,” Lewis
says.
Lewis says that nearly all the major
financial service and utility companies
already have
the electronic links in place to CheckFree
to get immediate payment. The remainder
are primarily small companies — lawn
services or attorney’s offices — that
generally do not charge high late fees
or threaten to cut off service. These companies
would not get a lot of emergency payments,
he adds.
Additionally, CheckFree is increasing
the number of billers to which
it can make
same-day payments, Lewis says. He notes
that the growing number of bills being
paid electronically is making it easier
for small and mid-size companies to justify
installing links to CheckFree to get
faster payment. THE NEXT STEP
But rather than wait for CheckFree
and the other bill payment
companies to get
all the billers onboard, consultant Mott
believes banks need to assume a leadership
role. Since many of the big banks already
have direct links in place to send P2P
payments between consumer accounts, he
suggests banks need to expand these electronic
links to get funds into billers’ accounts.
If nothing else, the top 10 or
20 banks could build links
to each other so that
retail customers of each bank would be
able to send electronic payments immediately
to the commercial customers of all the
other participating banks, Mott says.
Once that infrastructure is in
place, the next challenge will
be to figure out how
much to charge consumers for the service.
Bezard says most research he’s seen
shows that $5 to $10 per bill appears to
be an amount that most consumers will pay.
That might seem like a bargain compared
to the alternative. On a credit card bill,
for example, most card issuers charge at
least $25 for a late payment. And customers
who planned on paying off the balance then
have to pay an interest charge on the total
amount due. Utility companies typically
don’t charge as much on a payment
that is received a few days late, but they
can charge hefty fees if they have to cut
off service. Consumers may be glad to pay
$10 if it means not only keeping the service
running, but avoiding the higher fee to
turn it back on.
Research from Crone Consulting
found that 63% of consumers
who used an expedited
payment service from a biller did so because
they wanted to avoid late fees while 51.7%
wanted to prevent their credit rating from
being harmed and 24.3% were attempting
to avoid service disruption.
Crone’s research supports a fee range
of $5 to $10. It found that 27.3% of consumers
who made an expedited payment paid between
$5 to $10 while 16.4% paid under $5 and
18% paid more than $10. The remainder did
not pay a fee. Crone, however, argues that
many banks will implement a multi-step
fee process, similar to one already offered
by some mortgage companies, where consumers
who are making a next-day payment will
be charged less than those making the same-day
payment. Questions
or comments about this article? Post
them at the Banking
Strategies blog.
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