Online Bill Pay Makes Strides

Online bill payment has made some significant strides in the past two years. In 2004, Celent estimates that 17.7 billion bill payments were made by consumers in the US.

We believe that the share of consumer bill payments made at a bank Web site should grow from 7 percent in 2004 to 16 percent by 2007, while the share of bill payments made at the biller web site will grow from 7 percent to 13 percent. A stunning 29 percent of consumer bills will be settled over the Internet by 2007, up from 13 percent in 2004.

Having lost some ground to the biller-direct model, the bank-consolidated offering is expected to grow faster than its rivals in the next three years. Intense marketing and increasingly common free online bill payment will help banks pull ahead faster. There is a flip side to this success, however. As more consumers enroll in this service, banks start to worry about the cost of supporting bill payment processing. Although infrastructure cost was not so much of a concern in a fee-based era, it has now become a burning issue. Even if free bill payment is still widely seen as a driver of higher customer profitability and higher balances, banks cannot help but look at their rising processing bill.

The diversity of the payment mechanisms used by consumers to settle their bills is striking. As billers, processors and banks develop new options, the confusion is unlikely to fade. Firms hoping to engage customers in using one solution or another will likely have to market it aggressively if they are to be heard.

The US is now well engaged in an historic shift from paper to electronic instruments in consumer bill payment. The decline of checks' share of total consumer bill payments will accelerate in the coming years. This figure currently stands at 53 percent and should plummet to 29 percent by 2007. Although it is not performing as well as other bank technologies have in the past, bill payment at the bank Web site has been growing rapidly in recent years. It is on track to keep growing at a fast pace in the years to come -- in fact, it is projected to grow at a higher rate than the biller-direct model. However, the success of the bank offering will lead to greater questioning of its paradigm's fundamentals. The cost of processing an online bill payment is still higher than that of processing a check. When online bill pay volumes were marginal and banks were recouping their costs by charging fees, this situation was sustainable. But the arrival of the free online bill pay era means that banks are forced to absorb the costs.

As processing expenses mount, so do banks' appetite for a new paradigm.

Cost is only one of the challenges faced by the consolidator model. To bring online bill payment to the next stage, the industry will likely have to find innovative new ways to handle transactions. Yodlee, a technology vendor known for its aggregation tools, has come up with a solution that potentially could address many of the shortcomings of the current processing paradigm. If it were to prove very effective, it could theoretically disrupt the business of incumbent processors, which totals more than US$600 million.

In the next 12 to 18 months, we believe it is likely that at least one major bank will roll out Yodlee's product. The product will likely not replace the current processing infrastructure, but will instead be used more as a complementary offering. The outcome of these rollouts will be watched closely by industry participants.

In the meantime, we expect incumbent processors to continue focusing on increasing electronic processing rates, keeping error rates low and increasing connectivity with billers to present e-bills. Major processors should also continue lowering their pricing to discourage large banks from switching to in-house processing. The top three processors are also likely to continue hedging their reliance on the consolidator model by expanding into other bill payment services. CheckFree has already made a move in that direction by acquiring a walk-in bill payment company this year, while Metavante and Princeton eCom have been bulking up the services they provide to support the biller-direct model.

Gwenn Bezard is a senior analyst in the banking group at Celent Communications, a worldwide financial services research and advisory firm, www.celent.com.