Consumer bills in the United States are paid by multiple methods (in person, by phone, by mail, online, at kiosks) and by multiple payments methods (cash, check, ACH, cards). Within this complex environment, there has been a competition of sorts between online banking-based bill payment and “biller direct” payments – the later being the industry term for when a consumer goes directly to a biller’s website to pay their bill.
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In a nutshell, online banking-based bill payment has had steady, but relatively slow growth over the past fifteen years or so. Biller direct bill payments only got going about five years ago, but have been growing more rapidly.
Biller Direct Bill Payments
Most biller direct sites accept both card and ACH payments. For many billers, accepting card payments has been a difficult choice, as they then incur merchant discount fees. However, for many, the virtues of having their customers come online to their site (where they can be cross-sold other products and/or handle customer service transactions themselves) has out-weighed the costs.
Card issuers (either credit card or bank debit card issuers) of course are quite happy with the interchange revenue they receive when cards are used for bill payment transactions, and the card networks certainly are also happy to have the increased transaction volume.
Evolution of Billeo
Billeo started as a consumer toolbar provider; giving consumers a simple toolbar which allowed them to navigate to biller direct sites, log in, and keep track of payments. Billeo has expanded their consumer tools to include a password manager, an eWallet, a form filler, and an automatic receipt saver.
To make all of this work, Billeo has ended up with a significant data asset – a robust directory of those billers accepting payments online via card and ACH - and has partnered with several of the major card issuing banks and card networks.
Importance of Card-based Online Bill Payments to Retail Bankers
According to Murali, the most significant development in online bill payment over the past year has been the absolute recognition, on the part of retail bankers, that they have to seriously look at recurring bill payments by card.
Up until recently, this simple concept was challenged by the "siloed" nature of bank organizations. The head of online banking and bill payment, whose products normally do not support card payments, has built a product strategy based on strengthening the customer’s relationship to the bank through the “stickiness” of online banking bill payment. P&L management has concentrated on lowering the cost base through aggressive management of outsourced bill pay processing.
This person’s peer, in charge of the checking account relationship with a customer (and therefore also responsible for debit card transactions) is trying to grow debit card interchange revenue. When the bank’s customer goes to a biller direct site to pay a bill, and uses their debit card, the online banking guy "loses", as the customer is not using the bank’s online site (and therefore not getting “stickier”). But the checking account guy wins: the transaction generates interchange revenue for the bank (rather than generating a bill pay transaction processing cost to the vendor).
In yet a third silo, the credit card issuing guy is hoping that the same bank consumer uses neither the bank online bill payment site nor a debit card at the biller direct site, but instead the bank’s credit card - earning rewards - and thereby generating even more interchange revenue and possibly revolving interest income as well.
Consumer Interest in Card-based Online Bill Payments
Murali thinks that the “noise level” at many banks has increased because of consumer interest in card payments, leading both the checking account guy and the credit card guy to argue strongly for supporting card-based bill payment.
The online banking guy is left in a position of saying “Wait, I’m running a very cost-effective operation. What is the incentive for me to get people to start using their cards”?
Their mutual boss, in the meantime, needs to figure out a way to get all of these guys to develop a common objective to shift transactions to cards, in those cases where this is what the consumer wants. And (this being no surprise to bank-watchers), they need to develop the appropriate MIS to recognize and account for the financial benefits accruing to each area of the bank.
An Alternative Model for Card-based Bill Payment
We talked about a model, currently in the market, in which a consumer, using their bank’s online banking bill pay interface, is given the choice to pay with a card.
Behind the scenes, the customer is logged into biller direct sites and the payment is made by card on their behalf, by a service provider. Murali thinks the concept is appealing, and has a certain common sense to it.
The challenge, in his opinion, is that the bank (and their service provider) are too exposed to risk: not just of fraud, but of general operational problems over which they would have little control. The service sounds “a bit brittle”, in his words, and he worries that the banks might end up with customer service challenges.
Consumer Behavior and Motivation
Murali sees consumers doing a lot of bill payment transactions at biller sites, of course. It was interesting that he commented that the trend has really been driven by credit card companies – that these bills are the highest number of bills paid online at websites. (Ironically, of course, these bills are paid entirely by ACH rather than by card!) He commented that the credit card companies are making it very, very convenient for consumers to pay online – including at the last minute.
Online Bill Payment vs. Online Purchasing
Murali also commented that “there isn’t that much difference between online bill payment and online purchasing” – something that we at Glenbrook have been thinking about for quite some time.
After all, buying a sweater at Macy’s store at the mall and writing a check to your telephone company are pretty different experiences; and for the payment industry (at least in the past), entirely different market segments.
But for a consumer, going online to Macy’s.com to buy that sweater, and online to T-Mobile.com to pay their bill, are very similar experiences.
Murali thinks that the “password wallet” the consumer uses to log into T-Mobile is closely related to the “payment wallet” the consumer will use to purchase goods online.
(Note: the term “wallet”, as used here, is Glenbrook’s, not Billeo’s. It is a "tricky" word to use in the payments industry, since there were numerous doomed e-wallet initiatives in early Internet days. But some of us think, to paraphrase Arlo Guthrie, that “we’ll wait till it comes around again - this time with four part harmony and feeling!”)
Consumer Behavior and Segmentation
We talked about a segmentation of bills – and bill pay behaviors – by the complexity of the bill.
Murali expects that for variable, complex bills (such as your telecom or credit card bills) consumers are likely to continue to prefer a biller direct model.
For simpler bills – perhaps mortgage payments or water utility bills – he expects preauthorized, recurring bill payment to be a favored mode – whether by ACH or card.
He commented that banks, generally speaking, are not able to show a customer today all the payments, across payment methods, that the customer has made to a given vendor. For example, if I have a checking account and credit card from the same bank, and I have made payments to t-Mobile by credit card, online banking, ACH preauthorized debits and check over a six month period, I can’t, today, get a consolidated view from my bank of how much I paid to t-Mobile over this period.
(Some banks let you see this, through “PFM lite” features, if you classify each payment – way too much work!) Although it is easy enough to understand the “why” of this (silos, again), it seems to me to be failing to meet a fairly obvious customer need.
Murali was pretty outspoken on the current trend towards enabling “expedited payments”, with an additional charge to the consumer from biller, bank or both.
Again, the irony in this situation is that while the underlying bill payment infrastructure is increasingly able to deliver all payments relatively rapidly, consumers are increasingly being charged extra for these “expedited” payments.
In Murali’s view, this is something like the airlines deciding they are going to charge for checked baggage: not a cost related function at all, but simply a “because we can” fee. Undoubtedly consumers value having payments made quickly – but Murali points out that this is a classic example of the “arbitrage of information”. He suspects that many consumers simply don’t know that immediate payment is available, free of charge, at many biller websites.
Mobile Payments and Mobile Bill Payment
We spoke about mobile payments and the potential for mobile bill payment. He thinks that the U.S. market is still pretty far away from seeing this materialize in a big way – although he did observe that in India, it has taken off very rapidly, and that people there had shown that they were very comfortable getting information on their phone and using the phone to pay. We agreed that it would be interesting to watch if the online banking vs. biller direct “war” would port directly to mobile – or if one or the other model would have an inherent advantage in that environment.
The Billeo Perspective
As far as Billeo is concerned, Murali says that business is good and their “story has been consistent”. Financial institutions are finding the consumer toolbar to be an interesting capability to offer their customers. Consumers are finding both the biller direct toolbar and the shopping “wallet” to be convenient.
Billeo believes very strongly that wallets, for bill pay or shopping, will have to be open: meaning that consumers can load any payment device, from any provider, into the wallet (just like we do with physical wallets). A bank (or other payment provider) may sponsor a wallet, but if they try to limit it to their own cards or payment mechanism, it won’t work for the consumer.
Online bill pay is a fascinating market to track – both because it is so large and because the options offered consumers are so varied. Billeo is one of the companies in this space that we will continue to watch!
Note: Glenbrook's Scott Loftesness is an advisor to Billeo.