Weighing the Options

Banks measure the viability of using outsourcing to control electronic bill-pay costs.

California Federal Bank recently moved its online banking service from Online Resources, its Web banking provider since 1996, back in house. The reason: control.

"We want to do many of the same things they're doing. We just want it within our control," said Pamela White, first vice president of the Internet management group at Cal Fed.

Yet at the same time, Cal Fed chose to continue using Online Resources for electronic bill pay and presentment (EBPP). The reason: cost containment.

Rather than absorb the expenses associated with high-volume EBPP services, many institutions have chosen to outsource. "EBPP is perfect to outsource," said Jeanne Capachin, an analyst at Meridien Research. "It really minimizes the upfront expense for a service that's only going to appeal to a small percentage of clients."

The need to keep costs down is causing banks to reevaluate which services they outsource and which ones they retain in-house, said Matthew Lawlor, chairman and CEO of Online Resources. "If you're an institution looking to buy your own software, whether you have someone host it or not, you're not paying just one upfront cost-you're going to be paying right along the way as the technology changes."

Online Resources works with 525 banks, about a third of which use only the bill-pay feature. That's a good alternative, according to Meridien's Capachin. "The consumers that have been looking for an EBPP solution don't mind if it's standalone. They view it as a separate activity."

But consumers do mind having to endure multiple sign-ons to access online banking services. "As banks redesign their Web banking and increase the usability of their services, it's going to become more important to have a single sign-on," Capachin noted.

Banks are moving toward meshing online banking and EBPP services as a single service, observed Terrie O'Hanlon, executive vice president of marketing at CheckFree. "Consumers may be confused that they have to enroll again for bill pay, since many view this as a part of online banking." By offering a single logon and enrolling a customer in both services from the beginning, banks can focus on educating consumers-either by e-mail or on the bank site-about the benefits of receiving and paying bills."

At Cal Fed, some 65 percent to 70 percent of bill payments go out electronically-a good reason not to switch EBPP providers. Faced with the drudgery of reinitializing their biller relationships, customers might decide to go elsewhere.

Under Cal Fed's new arrangement, customers will initiate bill payments with Cal Fed, and then be handed off to Online Resources,

allowing Cal Fed to continue to take advantage of the merchant database that Online Resources maintains.

A second outsourcer, which Cal Fed declined to identify, will manage the EBPP application and hosting arrangement, but will build the system so that it can be moved in-house later on. "We wanted to make sure we selected a system that allows us that flexibility," White said.

But by moving the rest of its Internet offerings in-house, Cal Fed risks losing a very tightly integrated Internet banking channel, said Online Resources' Lawlor, noting that banks that use only part of Online Resources' services forego CRM and up-sell opportunities that the vendor offers when it handles the entire online package.

"We're more than a bill-payer," Lawlor said. "We have a front-end, a call center, a consumer marketing program where we use eCRM and a database, and Cal Fed is not going to enjoy that."

For banks using Online Resources' entire package, 30 percent of customers who call in with questions about online banking enroll in bill payment, thanks to tight integration between the call center, the bill payment engine, and the front-end banking and the CRM systems.

EBPP is by far the most active part of an online banking relationship, said Jim Moran, co-founder and executive vice president at edocs, a provider of online account management and EBPP solutions. It transforms static documents like bank statements into an interactive dialogue between the bank and the customer.

"The critical customer communication-the statement, the mortgage document, the trade confirm-becomes the springboard for creating the cross-selling and upselling opportunity," said Moran. "It is from this interactive view of a customer's bill that the bank cross-sells or up-sells a new service, based on the relationship you already have."

To smooth the transition from a static to a dynamic mode of interaction, banks are allowing consumers to test the online experience with simple transactions like retrieving statements. "As the comfort level of the customer increases, they are willing to try transactions that are more complex," said Jane Wallace, executive vice president, consumer and payment solutions at Princeton eCom. "That's why financial institutions have been very successful in keeping their customer base satisfied with electronic billing."