Online Payments: Going Beyond Bill Pay
According to digitaltransactions.net, a bill pay user costs a financial institution $60 per year on average in fees to technology providers and processors. Comprehensive data is unavailable but estimates put the average penetration of bill pay at financial institutions at about 10% of checking accounts. Even with such low penetration, the numbers add up quickly.
This then presents a challenge to credit unions: if you can't charge for it, how do you drive profitability - or at least break even - in online services? Researchers have spent a good deal of time trying to answer that question.
Following a 2002 study that showed that online bill pay users were more profitable than non-users, Bank of America changed the rules of the game when it eliminated fees for online bill pay users. Some credit unions did their own independent research and corroborated these results. For example, bill pay users at Wescom Credit Union had an average profitability $400 higher than non-users. Since then, almost all financial institutions have chosen to absorb the costs of offering online bill pay in order to remain competitive; however, not all members have taken notice. A Forrester study found that 12% of previous bill pay users quit using the service because they did not want to pay - even though it was now free!
In 2007, SunTrust engaged Aspen Analytics to conduct a study on the dynamics of e-bill usage. The results were surprising: the researchers concluded that active e-bill payers (more than 3 bills per month) are nearly twice as profitable as the average online customer over a five year period. Therefore, offering e-bills may be one way to identify and create relationships with a profitable member segment. And if your credit union already offers the service, the first hurdle may be better training and education. Many consumers may not even aware that they can both pay and receive bills through their credit union bill pay solution.
Bill Pay's Last Mile
"Online bill pay" does not always mean payment is completed through electronic platforms. In fact, one study estimates that 20-30% of bills paid through a financial institutions' online bill pay service still result in the issuance of a paper check. This last mile may be the hardest to close, according to Kelli Schultz, president of iPay Technologies. The problem is two-fold: millions of small merchants that still cannot accept online payments and consumers who do not trust the technology.
Closing the merchant gap may in some ways be easier than the consumer-confidence gap. The primary inhibitors to merchant acceptance boil down to technology (does the merchant understand how to set up the service) and cost (does the merchant want to pay the fees). The evolution of sites like eBillme, Bill Me Later and Secure Vault Payments may enable more merchants to accept online payments. These sites acts as a middleman between a consumer purchase goods online without a credit or debit card and merchants who want the business but are not enabled to accept payments.
Consumer wariness of online bill pay however may be another beast all together. The latest Forrester research found that 65% of online consumers (a subset of all consumers) do not use online bill payment.
Forrester classified these consumers in three groups:
1. Holdouts: The 71% who claim they will never adopt online bill pay and cling to paper-based payments.
2. Fence-sitters: The 23% who plan to use online bill pay at some point; they just haven't gotten around to it yet.
3. Quitters: The 6% who tried it but stopped; they prefer biller direct sites and other payment options but may be motivated to come back to online bill pay at FIs.
Source: Online Bill Pay 2007: Understanding the Mindset of Holdouts, Fence Sitters and Quitters, by Catherine Graeber, Forrester Research
Changing the behavior of these three groups might pose an insurmountable challenge but that doesn't mean credit union won't succeed in driving adoption of the remaining 35% of online members. And achieving a 35% adoption rate is triple the industry average today.
Online bill pay features will continue to evolve and enable members to better manage their financial lives. Interviews with leading bill pay technology firms indicate a focus on improved feature functionality including more advanced services such as expedited payments, the ability to pay multiple billers from one screen, alerts and notifications and business bill pay functionality. Advanced PFM (personal financial management) tools integrate home banking and bill payment data for a complete picture of a members' financial situation.
In addition, leading-edge credit unions will more actively mine their members' bill pay data to drive higher household adoption of all products and services. This data is already available, but the tools to analyze and make sense of it are slower in coming.
Mobile banking is just the start of a bigger relationship financial institutions are looking for: mobile payments. The idea is that the ubiquitous cell phone will be a cash and card replacement in the future - anywhere cash or cards are currently used are a target for mobile phone payments.
Unlike innovation on the Internet that has historically been heavily driven by American companies, mobile technology is developing faster overseas. Mobile payments are especially prevalent in Asia and some countries in Europe where cell phones are already used for many kinds of transactions.
In the US however, multiple competing stakeholders - including carriers and device manufacturers, financial institutions, payments processors and merchants - have delayed the development and wide-spread adoption of mobile payment technologies. According to Rory Ragsdale, product manager for Paytraxx, the main sticking point is the question of who owns the customer relationship. In online bill payment, that is clearly the financial institution. However, when a mobile phone is involved, network carriers add another stakeholder to claim a piece of the interchange fees.
There are two primary types of mobile payment technologies that are gaining traction in the United States: peer-to-peer (aka person-to-person or P2P) and NCF-enabled.
Mobile peer-to-peer payment options that allow consumers to send money to others for a very low fee are already available in the U.S. This method is viewed as a potential replacement for non-merchant transactions that are done today typically with cash and checks (imagine paying your neighbor's kid to mow the lawn with your cell phone!)
Independent companies are garnering market share in this nascent market. Obopay, launched in 2005, allows users to load or "pre-pay" money into an Obopay account and send to any other mobile device using all three transaction types. The money is transferred instantly and can be "picked up" by both registered Obopay users and non-users. Obopay charges just 10 cents to send money, making the service affordable for even small dollar transactions.
PayPal also offers a mobile option that works similar to Obopay with one big advantage: it leverages the existing online network of 33 million PayPal users (both consumers and merchants). And, like PayPal's online site, the transactions may be tied to other bank accounts and credit or debit cards. It is free for personal use with rates for business accounts ranging from 1.9-2.9% of the transaction.
The second major mobile payment technology aside from P2P is near-field communication (NFC). For payments in the more traditional retail environment, NFC technology is showing the most promise here in the United States. Forecasts from telecommunications consulting firm Ovum predict roughly 70 million NFC enable handsets by 2012 - just 4 years away. Here though, there is a chicken and egg problem: merchants do not want to upgrade their point of sale terminals until enough consumers have adopted the technology; consumers do not see the point in adopting the technology until they have places to use it. Therefore, the potential for adoption is greatest in high-density, high-volume locations. For example, all vendors in the new Washington Nationals' stadium are equipped with NFC terminals to circulate more fans and drive higher volume between innings.
With so many alternatives available to consumers today, the future of online payments is positive - just no one knows who the winners and losers will be. It is clear that consumers are increasingly interested in moving money electronically and prefer to do this with a trusted financial institution. Therefore, those institutions that get out in front and make it easy, reliable and fast to make payments online will be well equipped to win the payments revolution.