E-Payment Competition Heats Up

More than 60 million Americans now pay their bills online, compared to 20 million in 2001. Online bill payment has become the fastest growing online banking application.

During the first quarter of 2003, NACHA estimates that more than $48 billion in online bill payments were made in which the Automated Clearing House (ACH) Network was the payment system used. That figure is half of the amount of $96 billion for all of 2002.

At the current growth rate, the amount would exceed $200 billion for all of 2003. In contrast, a recent survey estimated online sales figures of $76 billion for 2002 and $96 billion for 2003.

In this arena, banks not only compete with other banks, but also with billers.

"The race is definitely on for control of consumer relationships with their billing and payments," said Avivah Litan, vice president and research director of payments systems at GartnerGroup. "Banks are very proactive now in offering bill payment services. In some cases they're paying consumers to sign up for it instead of charging."

For many banks, that means eating the cost they pay for processing transactions. However, Litan said it's worth it to them because customers who use bill payment are twice as likely to stay with them as well as keep balances that are 40 to 50 percent higher. In fact, of all Americans earning $75,000 or more per year, only about 15 percent are paying bills online, leaving a large untapped market of high-value customers.

Those customers create a huge opportunity for cross-sell. According to Gartner figures, 43 percent of billers with a bill payment strategy expect to increase the amount of revenue per customer by 7.5 percent from their Internet billing program. "That's why things have gotten so aggressive now," said Litan.

Because banks are also billers, they have an opportunity to generate even more savings. Gartner projects an average company that sends out 2 million bills per month can save more than $26 million per year by billing and servicing customers online. "Many large banks and credit card issuers have 20 million customers, so you can multiply the savings by ten," said Litan.

The biller-direct model is still dominant, however. Of consumers who view bills online, almost 80 percent do so at the biller Web site, versus 10 percent at their bank site. With customers primarily going to credit card issuers and telecommunication providers to view and pay bills, some financial institutions have shifted to a more proactive mode.

"They see that the market is slipping away from them," said Litan. "That's why you've got banks like Chase and Bank of America paying consumers to use their service. They don't want to lose that interface and that revenue."

Unfortunately, only the largest banks can justify offering free bill payment and giving incentives to customers who sign up. "Not all banks can afford to do that, so the rich get richer and the poor get poorer," said Litan. "You're going to see more consolidation in the banking market, and a lot of it may be driven by these electronic applications. That's something banks really have to pay attention to."

Banks like Wells Fargo and Bank of America have poured vast resources into beefing up their Web sites in order to make it easier for consumers to manage bills. Litan advises other banks to follow suit if they want consumers to use their computer instead of their checkbooks.

ONLINE BILL PAYMENT

1st quarter 2003

$48 billion

All of 2002

$96 billion

Source: NACHA