With continued pressure on bank margins, CIOs are scrambling for innovative ways to reduce technology expenses. By now most have exhausted the majority of the cost savings related to staff reductions and put the kibosh on many “unnecessary” I.T. projects. Most have also whipped their core and EFT providers into submission with some lucrative contracts.
So, what’s left?
Bill pay is one area being targeted as penetration continues to increase, driving costs to record highs. Banks have been giving away the service for years, but slow adoption has enabled them to absorb the costs. With a price tag of upwards of $70 per user per year, the increased penetration will eventually force banks to scope out a different model.
Take a look at estimated bill pay volumes and costs based upon today’s pricing over the next five years for an average billion dollar institution. Given the 30% annual increase in bill pay adoption predicted by Forrester, costs will almost triple by 2011:
The fees above are based upon a number of proposals from top tier providers over the last several months and do not include miscellaneous fees such as new user setup, stop pays, research fees, etc., which could add thousands to the numbers. Also, steep minimums can drive costs even higher on a per account basis, especially for smaller institutions.
Bill pay costs as a percentage of total technology spending have increased to over 5% from less than 1% five years ago. Over the same period, core costs have steadily decreased but still account for 25% of tech spending, according to the latest Cornerstone Report. In keeping with bill pay and core spending trends over the last several years, total bill pay costs could come very close to core costs by 2011. The following graph illustrates this potential convergence:
Fortunately, it is doubtful that this convergence will ever take place. The likely scenario is that even though overall bill pay costs will increase, there will be a substantial change in bill pay pricing that will drive down per transaction costs. To date, negotiating with bill pay vendors has been somewhat of an uphill battle. Let’s face it, vendors have been unwilling to change their fee structure and will continue this approach until pressured to alter their model. As costs continue to rise, banks will need to pay close attention and adjust their bill pay model accordingly. During this transition, keep the following in mind:
My first words of advice are to tread lightly and avoid committing to a long term contract. If you can get a 12- or 24-month contract, jump on it; if not, a 36-month term should be the max. When negotiating, your bill pay provider will probably rationalize its steep fees with the labor intensive process of sending paper payments. However, the trend toward electronic settlement, which now accounts for over 75% of all bill pay transactions, gives you plenty of firepower. For example, costs for an electronic transaction may be as little as $.05 versus a labor intensive paper check that could cost over $1. As paper settlement becomes less popular, the costs to vendors are being cut substantially.
Take a look at your current contract and ask your provider to give you a settlement breakout over the last three months. Odds are that your current contract includes a flat per transaction fee, regardless of settlement, and over 70% of your transactions are electronic. Be sure to pressure vendors to break out transaction fees based upon settlement. This could turn out to be a substantial expense savings. Also, make sure you look at the total costs and take advantage in areas like per user fees or monthly minimums.
Bring it In-house
With virtually all banks outsourcing bill pay, vendors clearly have the upper hand. One approach to a solution is to take a hint from the past. A few years back we were paying outrageous fees for outsourced online banking. Those who are still tied to those contracts know what I am talking about. The out of whack costs pushed many institutions to bring it in-house. As the trend toward in-house delivery took off, online banking vendors finally started getting the picture.
Unfortunately, unlike online banking, bringing bill pay in-house is no easy task. Just ask Ralph Marcuccilli, CIO of $1.5 billion STAR Financial Bank in Ft. Wayne, IN, or Wescom, a $3.5 billion credit union in Pasadena, California. Until very recently, only the big boys like Chase, Bank of America and Wells could make the business case. However, as volumes grow, a trend toward in-house bill pay may be just what the doctor ordered to pressure vendors to lower fees.
We are starting to see signs of this trend as banks begin taking over some components in-house. One method that is growing in popularity entails internally processing electronic transactions and handing off only those transactions that involve paper payments. Smart move, as electronic transactions cost a fraction of paper payments. Another model involves internally handling on-us transactions where payments don’t leave the bank and then outsourcing the rest. The on-us transactions are processed via account to account transfers with literally no processing costs. Some institutions are shying away from payment processing altogether but taking over certain customer support functions to save money and provide better service.
Create a Profit Center
OK, making bill pay a profitable product or even self-funding any time soon may be a bit aggressive, but a growing number of banks are offsetting a good portion of their bill pay fees by generating some revenue.
Probably the simplest way to do this is offering expedited payments. In a world that is increasingly “on the go,” the number one reason payments are late is plain disorganization, not cash flow. As a result, studies have shown that most people are willing to pay a minimal fee ($2 – $3) for this service. Unfortunately, the bill pay providers are right there as well with palms wide open charging upwards of $2.00 per expedited payment. Although there is some room for revenue generation, margins are cut due to vendor costs.
Another revenue generating option is to offer debit and credit card payments that boost interchange and possibly even interest income while providing a great alternative for the customer. The challenge in the past has been that the technology enabling this real-time exchange was very costly to implement and relatively nonexistent in the United States. One alternative is a new product Yodlee is offering called DirectPay, which enables real-time debit and credit card payments to be made through the bank’s existing bill pay site, keeping customers glued to the bank. Of course, as with any third party, there are costs involved, but it may be a less expensive option than an internally developed engine.
As the flat yield curve continues to put pressure on margins, banks are looking for new ways to generate revenue and cut expenses. Bill pay is clearly one area of focus to alleviate some of these pressures. With the world becoming more plugged in and bill pay adoption expanding, banks will need to look at alternatives to existing pricing and delivery to remain competitive.
“If everything seems under control, you’re just not going fast enough.”
Does your strategic plan involve the entire organization in implementing technology initiatives?
Have you outlined the steps necessary to help customers accept change? How will you educate them to feel comfortable doing business with you – in person and online?
The IT department can’t do it alone.