Evolution of Bill Pay from Fee to Free

As research manager at Callahan & Associates, Denise directs ongoing internal credit union research projects and manages Callahan’s Internet Strategy Consortium. This shared-cost research group conducts quarterly online surveys for the participating credit unions’ members to analyze the effectiveness of their online strategies and explore the potential of new avenues for development. Denise also regularly surveys credit union management teams to provide the industry with fresh data in key area including technological priorities, auto lending and remarketing tactics, retail investment strategies, and call center benchmarking. Denise’s considerable experience includes six years at Opinion Research Corporation (ORC), a leading national research consulting firm in Princeton, New Jersey. She holds a B.S. in Business Administration from

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Denise Senecal ,Research Manager, Callahan & Associates, Inc.
6/21/2004
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Tags: Payment Systems , Financial Performance , Bill Pay , Online , ISC

Bill pay is reportedly one of the most rapidly growing online services, with adoption the number of users growing 230% over the past three years. But even the experts don’t agree on the expected adoption of this fast growing service – with current estimates for 2004 varying widely, ranging from an estimate of 17% from the Tower Group to a high estimate of 36% of households by Dove Consulting. However, by the end of 2004, most concur that approximately 25% of households are expected to use electronic bill pay. Yet, other than the few success stories like Bank of America, many financial institutions are experiencing difficulties in convincing members to sign up for, and use their bill pay service.

The competitive landscape for this service has changed rapidly since it was first introduced. Initially financial institutions believed that this service would be a significant source of fee income, as members would be willing to pay for the convenience of paying their bills online. Yet few companies found this to be the case, experiencing low adoption rates and/or significant rates of consumers signing up and dropping the service.

Now financial institutions are taking a renewed look at their strategies for bill pay. Analysis of the bill pay customer segment has revealed that bill pay customers tend to be a highly profitable customer segment, are more loyal and use a greater number of financial services. A recent Forbes.com/Foresee Results survey of online banking users reveals that online bill payment has a significant impact on adoption, revenues and loyalty. Highly satisfied online banking users were 23% more likely to recommend their financial institution’s site to others and 27% more likely to purchase further services.

More and more financial institutions, including the Bank of America and Wells Fargo, have begun offering this service for free in order to attract this desirable segment. The results so far have been fairly impressive. Credit unions that have dropped their service fees have experienced significant increases in penetration as well. City-County Federal Credit Union (MN, $342M) eliminated their $4.95 fee at the end of May 2003 and reported a 40% increase in their bill pay enrollment.

Here are some questions the credit union needs to answer when deciding whether to offer free bill pay services:

• Do your members expect bill pay to be free?
• Will deeper relationships - greater adoption rates and usage rates - contribute to the bottom line?
• Is your online membership base more profitable than your general membership and do you want to increase retention of this segment?
• Do you want to be a leader or follower in technology and is this congruent with the lifestyle of your membership base?
• What are other financial institutions in your area offering?

It’s clear that the next few years will be critical for credit unions in terms of establishing a presence among your online members. Credit unions that do not focus on increasing awareness and usage of this important service may well be left behind as their online members become used to using other methods and/or switch to other free bill pay services.

More detailed analysis of the benefits of free online bill pay services can be found in the 2004 Credit Union Technology Survey. If you are looking to implement new technologies, change one of your providers, network with other technology savvy credit unions and vendors or just want to be on the cutting edge of technology advances, Callahan’s Technology Survey is your stepping stone to industry.