Bill Payment: Putting Banks Back in Control
BY JARRET HELMS, TIM MILLS & TOM WELANDER
What can restore banks as central players in retail bill payment? Customers paying their bills via bank-owned Web sites using credit and debit cards.
The prevailing migration path for consumer bill payments comes at a significant opportunity cost to banks. Billers are gaining more control of consumer payment choices through their online and direct-debit offerings and this control results in more ACH payments. In turn, bank lockbox revenues are dwindling in exchange for relatively little upside in new ACH origination business. Yet recent research shows consumers who try bank provided online bill payment like the offering. Consumers are also increasingly paying their bills with credit and debit cards. Combining these two offers banks a way to regain ground while also creating a substantial revenue stream from even a relatively small amount of card bill payment.
Financial institutions have been losing their foothold in the consumer bill payments arena as check bill payment volumes decline. What can reverse the tide?
One answer appears to be: encouraging consumers to pay with debit and credit cards on bank Web sites. By leveraging the recent growth in debit card usage by offering customers the ability to pay bills with cards, banks can reposition themselves as central players in the bill payments space while simultaneously creating a potentially larger revenue stream than was ever enjoyed in the days of paper.
From Check to ACH
The need for such tactics is increasingly apparent. A recent Global Concepts study suggests that retail remittance check volumes could decline by 40%, or roughly between 2 billion and 2.5 billion items, between 2006 and 2010. Based upon current trends, 75% of those checks will migrate to the Automated Clearing House (ACH).
One might rightly ask, so what? Banks have long been divesting from the retail lockbox business. From the paying banks point-of-view, an ACH payment is not so bad — its cheap to process and bounces just like a check.
Looking deeper, however, this trend comes with a significant opportunity cost for financial institutions. A large percentage of consumers migrating to the ACH do so through either the direct-debit or biller-direct channel, placing billers firmly in the drivers seat in terms of steering consumer behavior. The migration will also strongly favor a few large ACH originators, leaving most financial institutions out in the cold when it comes to the small upside from a growing ACH origination market.
Instead of billers gaining more control of the payments portal, financial institutions would prefer consumers to use bank electronic bill payment (EBP), i.e., paying through the banks Web site. The advantages of EBP include increased customer retention and the ability to cross-sell consumers while they use the service.
Banks would also like consumers to make more bill payments via credit or debit card. Presently, card bill payments account for only 2% of bill payment dollars, but that meager amount is worth just as much in interchange revenue (about $1.2 billion) as the fees from the entire ACH origination business. With new technology solutions by large players like Checkfree Corp. and Metavante Corp., it is now possible for consumers to use credit or debit cards to pay bills through banks EBP.
But will consumers want to pay their bills with cards? While 75% of migrating check bill payments may end up as ACH transactions, 25%, or about 500 million payments, will migrate to cards between now and 2010, according to Global Concepts 2006 Payments Map Study.
And what about the future of EBP? Consumers who currently use EBP prefer it to other payment channels by a wide margin, indicating a solid acceptance. New research shows that refocusing and reemphasizing promotional messages for EBP might enable banks to reach new segments of consumers not aware of the channels payment benefits.
What Do Consumers Want Anyway?
Global Concepts 2006 Bill Pay Drivers study of 2,500 consumers discovered two distinct groups of bill payers: traditionalists and electronic payers. The traditionalist group is comprised of households that pay the majority of their bills (81%) via check. Traditionalists comprise 54% of all bill payers, so their reliance on checks makes them a sustaining force behind check-based bill payment.
Included within the traditionalist group is a large cross section of American consumers. There is a higher-than-average concentration of retirees, but three-fourths of the group is a combination of families, married couples and singles from all economic backgrounds. Despite the reliance on checks, these are not necessarily technology shy people. In fact, 65% of traditionalists have Internet access.
Nevertheless, traditionalists continue to pay the majority of their bills by mailing checks. The primary reasons they prefer checks are 1) a desire to remain safe from identity theft or hidden bill payment fees and 2) a desire for control over their money. When asked to rate different payment instruments on their effectiveness at being both safe and offering control, only checks and walk-in payments score well on both counts among traditionalists (see chart entitled, “The Safety/Control Tradeoff”).
The electronic cluster accounts for 39% of American households. While also diverse, white-collar families are disproportionately represented in this group. Whereas desire for security or control are most important to their traditionalist counterparts, electronic cluster members primarily want options that are quick and enable them to use a single avenue to pay all of their bills. Concerns about security and hidden fees have less effect on their choice of bill payment method.
Despite their preferences for a quick and comprehensive bill-pay method, consumers in the electronic cluster still pay roughly one-third of their bills by mail or walk-in, methods that rate poorly for speed. This is probably because these users still have bills that they can only pay via check. Because so many consumers in the electronic cluster still write checks, they lack the ability to pay all bills using a single, preferably electronic, method.
Give them what they want: EBP?
As a payments channel, EBP actually stands alone in offering both of these groups of consumers what they value most. Traditionalists should appreciate the fact that EBP is relatively secure and provides control over their money while electronic users benefit from a single, quick payment channel.
Despite these strong points, only 13% of American households use EBP at all. Traditionalists fear that EBP wont provide them the security, freedom from fees and control they desire. Ironically, banks must maintain robust online security standards, requiring a great deal more sophistication from identity thieves than rummaging through a mailbox or trash can for documents. EBP also allows consumers to initiate bill payments when they choose, preserving the financial control that traditionalists value. Why haven't traditionalist consumers adopted EBP?
Part of the problem may be the choice of performance attributes banks have promoted with regard to EBP. Banks that want to convert traditionalists should primarily emphasize that EBP is safe, free and provides control by allowing consumers to time their payments. However, a quick examination of ten large financial institutions Web sites reveals that banks overwhelmingly emphasize speed and convenience of electronic bill payment, factors that please existing users but are largely irrelevant to the target audience of traditionalists.
Banks also need to continue reinforcing the value of EBP to convert new electronic users. Speed of payment is essential to the electronic group, but its not enough. Other payment channels also provide quick transactions. Direct debit, for example, enables recurring payments to occur without human intervention at all.
What EBP offers that competing electronic methods do not is a single channel to pay all bills. Some institutions do emphasize that EBP is one tool for all bills on their Web sites and additional marketing efforts that emphasize this message will likely yield results among consumers already using other electronic bill payment channels.
Can EBP really catch on with new users? Current trends suggest so. Even without a correctly tailored message, EBP still enjoyed a 10% adoption rate between 2005 and 2006. Consumers are changing their check writing habits, which is clearly evident in the projected decrease of over two billion remittance checks by 2010. Fewer checks means consumers are likely trying new payment channels or at least using electronic payments more often. This period of exploration and transition by the consumer creates the perfect opportunity for financial institutions to change consumer perceptions about EBP by presenting the payment channel in a new light.
The Dynamic Duo
Greater penetration of bank EBP among bill payers re-establishes the financial institution as an important player in the bill payment space in that whoever controls the payment portal also has more control over consumer choice of a payment instrument.
Right now, even bank EBP generates mostly ACH transactions, which offer no additional profit for banks over biller-direct models. Although EBP offers benefits such as consumer retention, the 2006 Global Concepts Bill Pay Drivers study shows that current EBP users actually add very little to the banks bottom line. They keep lower checking and savings balances than average, presumably sweeping account balances into higher yielding accounts. They also create fewer non-sufficient funds/overdraft fees than average. If current EBP users were encouraged to pay bills with their debit cards instead of creating an ACH-type transaction, however, the amount of revenue they would generate is substantial.
Previously this option did not exist. But now, using a new crop of online bill payment modules, banks have the ability to seamlessly offer debit and credit card payments through their EBP dashboard. Although some biller-direct sites also offer card payment options that generate revenue for banks, there are advantages to bringing the consumer to the banks Web site instead.
First, consumers may be more likely to use their banks debit card while on their banks Web site than they would at a biller site. Second, EBP provides the opportunity for banks to increase their interaction with consumers, creating more opportunity to offer information about other services.
Even a small increase in debit or credit card usage could have a significant impact on industry revenues. Consider the following scenario: Consumers will make roughly 15.5 billion bill payments in 2010. Hypothetically, if 100% of those transactions were ACH items, at two cents per transaction, those bill payments would represent $311 million in revenue to ACH originators. At present interchange levels, those same payments would be worth $89 billion in industry revenues.
Of course, card transactions will probably not reach anything approaching 100% usage. Consumers wont always choose to pay with cards and billers are unlikely to welcome the high cost of accepting a card payment. But if banks are able to steer just 5% of bill payments to cards at even 70 basis points — a lower rate to encourage billers acceptance — they will still generate $2.6 billion in interchange revenues. That is a revenue stream more than twice the size of todays entire ACH origination business.
EBP, coupled with banks other efforts in debit reward programs, could be a powerful tool for banks to drive increasing card usage for bill payment. And as the numbers show, a little card usage goes a long way.
Mr. Helms, Mr. Mills, and Mr. Welander are payments experts at Atlanta-based Global Concepts Inc., a wholly owned subsidiary of McKinsey & Company.