GonzoBankers, we are at a point where we have begun talking the payments revolution to death. We’ve heard the terrifying predictions about PayPal, MCX, bitcoin, et al at the latest round of conferences (you know, the events where the ’70s one-hit-wonder bands perform while you’re at the buffet and three people dance?). We’ve heard that we all need to prepare for change. We all have processed the sermon that mobile changes everything in payments.
The thing is, it’s time to begin thinking about some specific implications and make plans where we can. One of those areas is bill payment. Here’s the question: will bill payment still be a growing and important part of the payments story or will it be obsolete and declining in five years? One senior (old) Gonzonian’s take on why the answer is the latter.
My reasoning:
1. Bill payment volumes, while sizeable, are nowhere near the volumes we see for checks, debit, ACH, or several other money movement options. There were about 2.7 billion bill payment transactions posted in 2013. Solid, but hardly eye-opening when compared to 18 billion checks, 20 billion ACH transactions, or 40 billion debit transactions.
Bottom line: bill payment is neither so big nor so unique that it is indispensable. And, there are a slew of payment options on the horizon that can likely do the same thing.
2. Bill payment represents the biggest monthly cost on a checking account, by a wide margin (OK, maybe debit processing costs might be more, but that’s offset by revenue). While I would be treading all over non-disclosure agreements if I got specific with costs, ask yourself this: how much do I pay a month for my checking account? Then, how much do I pay in bill payment user and transaction costs per month for those that are enrolled? Bill pay is easily five to 10 times account costs.
3. It is a dime solution in a penny world. Again, let’s get to the math. Banks process or initiate ACH transactions for well under a nickel – and do it all day long. So can bill payment vendors. So can billers. So can PayPal. And it does, all day long. People at Starbucks can pay from their phones for nothing. So, tell me why banks are paying what they’re paying (small clue – lots of nickels) for a bill payment transaction?
Well, there’s flexibility and there’s security and there’s service and there’s the right to dispute et al. In other words, you are paying for support risk mitigation, right? Uh huh. So, I went back and tried to remember the last time I did anything that wasn’t just pay the bill, something that required any sort of service or support from my bank. After thinking about it for a while, I suddenly recalled that it was, um, well, NEVER.
In a weird way, the bill payment vendors caused some of this commoditization. Initially, bill payment was premium priced because of the implied level of service and support (problem resolution, risk mitigation) banks would receive. For the most part, the bill payment process is so smooth that there really aren’t many service issues. That’s good in terms of the experience, but bad for revenue – you can’t charge premium pricing for something banks don’t need all that much. So we commoditize.
Bottom line: it just doesn’t cost as much to move money as you are paying for bill payment. New payment options and better mobile payment technology will make this painfully more obvious in one to three years.
4. Unlike debit, there is no cost recovery opportunity. Somewhere, once, a bank made an expedited payment fee. End of story. There is no opportunity to fee. I asked several people what they would do if bill payment wasn’t free, and they all said they’d just go back to writing checks or go to the biller site and pay with a credit card.
Bottom line: it’s a cost.
5. It has lost the “stickiness” advantage. In the beginning, bill payment did preserve checking account relationships. But let’s fast forward to 2014. What is the sticky product now? It’s mobile, and while mobile bill payment is nice, mobile isn’t sticky because of the bill payment feature. It’s sticky because I can move money lots of different ways and I can perform banking interactions all on one device. Bill presentment/payment is one piece of that, but not the big piece. By the way, it may be a service you’re willing to provide to customers who are otherwise profitable, but you are very likely providing it to many who are not.
So, here was my “prove it” test for myself. For years, I have paid my utilities bill in Flagstaff, Ariz., through bill payment. Last month, I went to the utility company’s Web site and set up auto-pay from checking. It took a couple of minutes and was beyond easy. I set it up so that it’s paid the day after my check is deposited (OK, I get that I gave up the “flexibility” of being able to pick my payment date, but guess what? I always did it the day after I got paid). So, net effect? I don’t sign on and pay. The billing company notifies me of date and amount. I saved my bank several dollars a year. I’m as tied to my checking account as before, if not more, because it is harder to un-do.
What is wrong with this? What doesn’t work here? Nada.
If I were at a bank right now, I’d take my fresh, new business intelligence system and identify all of my customers who use bill pay to make regular payments to utilities, phone companies and the like. Then, I’d start a campaign to get them from bill pay to biller-initiated ACH. Better yet, biller-initiated debit, but that’s a whole other topic. Seems like a winner. Just saying.
Here’s my take: you don’t spend a dime for something if there’s no competitive advantage, no profitable customer retention, no stickiness factor, and no experience differentiator you can’t get for a penny. We are on a five-year decline for bill payment.
So, why might I be wrong? What would make bill payment as prevalent in 2019 as it is now? Well, there are three things that could cause this:
Here’s the point. If something is going to mature and your solutions and cost need to be adjusted, plan for it. Better than wishing you had.
-tr
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Interesting points, however your assessment is missing a few points. First, personal finances are built on trust, the warm fuzzy of “someone has my back” consumers perceive this value and take advantage of it. Continuing on this, your example “bill payer site” has be degraded over the years by the numerous private information disclosure that erode this same trust.
Second you missed the value of single site bill pay, consumers value centralizing of bill payment information, consider it part of the personal cash flow if you must.
Finally, I look to the past as experts have called for the demise of numerous banking solutions like, telebank, branches, checks, earnings credit, back counter capture, cashier’s checks…………just to name a few. My point is each new innovation brings about one large challenge TRUST.
Good read, your insight is always on the sticky part of the envelope.
Jon:
Good points all. However, the reality is that biller direct is growing faster than customer initiated, so at least some people are less concerned about the trust issue with the billers.
Agree on the ability to combine all payments information into a centralized place. However, I wonder if there won’t be some solutions for that.
Agree on the over-hype that snotty consultants build on the demise of things – guilty. My bigger point, though, is that this all becomes a lot easier if bill pay pricing commoditizes to where it should.
Terence
As a customer, wouldn’t you feel safer sending payments automatically from your bank’s bill payment service to your utilities, etc.? I feel like most bank customers feel it is more secure to do it this way vs. giving your acct information to another institution. Why offer up that control to someone else? Who knows who is looking at that info, and why offer it to another other set of potential fraudsters “eyes” to see.
You do sign up to allow them access to your account. Billers use it to prove to your bank that they are allowed to debit it.
What happens when they make an error/fraud and debit the wrong amount causing you overdrafts. Will they pay the fees and the interest fees generated by the other billers who were not paid because of the overdraft? If your bank makes the mistake, there is a much better chance of remidiation.
Alex,
I already have my utilities company draw my payment, so I’m OK on the safety issue. I would not do the same with my Visa or MasterCard bill, though – that I might want to dispute, so I’m with you there.
Agree on the dispute, error handling points, but the truth is that I have never had to talk to any of the billers I have set up directly. They never have made a mistake.
I think there will always be a bill pay role, but I don’t think it’s worth 50-100 times the cost of other options. That’s too big a premium to me. I know I sound like a broken record, but I really do think FI’s will be challenged to provide this service free given the costs (and bill pay will really be dead fast if you charge).
Thanks.
Terence
re: “They never have made a mistake”
I’ve had one mistake, and it was a big one by one of the big banks (a client). They double drafted my mortgage! Fortunately, I manage to large enough minimal balance to take the error and give it time to process out without a chain reaction of NSFs. That’s the *only * error, though.
The reason I use bill pay is another reason banks will want to let it die… to save the stamp. If I have to mail a check, I will use bill pay to avoid that ever increasing postage cost. (I get my checks for free, so not worried about those.)
Checks are amazingly resilient and useful in small, trusted networks- church, clubs, recreational athletics, girlscout cookies… long live the check! 😉
Jeb:
Yah, there are still something like 18 billion checks still being written every year. Blows my mind because wife and I account for about 5-10 of them. I was at a store recently and the lady in front of me took out her credit card to pay and the merchant told her there would be a fee to use credit(!). So, she look at her and says “OK”, then takes out her checkbook and begins slowly, slowly writing a check. About halfway through she looks at the clerk and says, “are you happy yet?”. Funny.
I’m with you. And personally, for me, Bill Pay is dead already. I process as many of my household bills through my credit card, because it is simple to initiate, simple to monitor, simple to dispute (if needed) and I get cash back or points. I pay my card monthly, so I am occurring no cost and get a float that works in my favor. I use my banks Bill Pay service only 4 times a year.
Bryan:
That’s my modus operandi, too. The added advantage is that I don’t have to remind myself that my checkbook addition and subtraction skills have disappeared.
Terence
Great points, Terence! I’m fully on your bandwagon. I’ll add some additional fuel to your fire.
Gen X and Gen Y are not doing bank provided bill pay. They are all doing biller direct. The statistics all point to this. And no amount of marketing, promotions and contests is going to change this trend. What Gen X and Gen Y care about is mobile access. They don’t even seem to care if mobile access includes bill pay; they just want mobile access to information and real-time updates to their account information.
So far every bank trade conference I’ve been to in the last 5 years has stated the lack of interest in bill pay for Gen X/Y with great clarity, and often times in the same focus session which is espousing the need for a bank to have a “payments” strategy and how bank provided bill pay is the cornerstone of a bank’s payments solution.
And while I do enjoy watching a ’70s era band attempt to rock out while mild-mannered bankers mill about buffet tables, I am getting terribly exhausted at the ongoing repetition of the non-sequitur which comes from our various data processors and technology providers regarding bill pay. Keep in mind that it is in the best interest of the data processors and technology providers to keep telling us that bill pay is the foundation of a payments strategy because it is probably the most profitable service they sell. This dovetails nicely with your points regarding the cost of bill pay in relation to other payment methods.
Jerry:
Great points all. I hadn’t really thought of the Gen X/Y angle. Now I’m thinking you should have written the whole piece.
Terence
Terence,
I’m certainly not qualified to write the whole piece. I’m only a guy in the trenches dealing with the nuts and bolts of bill pay at the institution level. Your cost analysis was an item I hadn’t really given much thought to. *GASP!* I should have. And the cost factor is absolutely compelling. Without having hard numbers in front of me, I would completely agree that our heaviest bill pay users are also our least profitable customers.
When all the chips are down, the only reason we offer bill pay to our customers was to be competitive with other institutions in our market. But my institution’s experience with bill pay seems to fit well inside both the generational statistics regarding bill pay usage and the cost statistics you mention. We aren’t seeing Gen X/Y sign up for bill pay. Simply put, they don’t get it. The heaviest bill pay users are Boomers.
If a group of us Gen X/Yers get into a room together and talk household financial management, the consensus is that bill pay doesn’t really offer anything compelling or useful. The bill pay service providers all like to tout the trust angle and how folks want to use a trusted entity, like their FI, to initiate bill payment transactions. However, Gen X/Y doesn’t seem to have these trust issues. A biller should be trustworthy by virtue of the fact that they are a service provider, lender, or utility. In fact, most household billers are quasi-regulated if not heavily regulated industries, such as utilities, consumer, student, and mortgage lenders and credit card issuers. In the eyes of Gen X/Y, since these entities already have a great deal of information about us as part of the process of them providing us services, why would we not trust them to handle an electronic payment properly?
Likewise Gen X/Y seems to have this “sixth sense” about how systems work. Biller direct makes sense to them because the biller offers some manner to pay through electronic means. And Gen X/Y also detects correctly that the biller does a direct debit from their account (via ACH or Debit, it doesn’t matter) and the transaction is done; all point to point. But again, talk to a bunch of Gen X/Y customers and ask them what they think of the processes to accomplish bank provided bill pay and one of the first things they perceive is that bill pay has a “middle man”. For the largest institutions which have home-grown their bill pay efforts, the middle man is their own computing systems. For the rest of the banking industry it is one of the two or three big bill pay providers. Either way the bill pay “middle man” is very present in their eyes, whereas the other middlemen of the financial industry (ex. VISA/MC, NACHA, The Fed, FCN, etc.) are incredibly transparent.
Their “sixth sense” kicks in because it just doesn’t make sense that you would tell you bank about a bill you need to pay and then the bank would just handle it. Keep in mind that Gen X/Y grew up with various forms of consumer electronics, home computing and that this same generation may not have invented the Internet, but they were the first to capitalize on its capabilities. These skills have led them to be rather critical thinkers about how technology works and therefore are already subconsciously asking critical questions about new interactions with technology… all technology.
I am a late Gen Xer. I also have oversight over my institutions bill pay efforts. I do not use bill pay, nor do I advocate its use. When bill pay blows up in the face of a customer, the issue is almost always related to the paper checks the bill pay system sends because the biller they are trying to pay doesn’t have a relationship with the bill pay “middle man”. Lost and misdirected bill pay laser drafts are the majority of our issues with bill pay. This is where customer counseling comes into play and also where some of our customers learn that the bill pay administrator is not a bill pay user. That usually causes them to pause and think hard about what they have gained by using bill pay.
Terence:
I see your account-profit argument and raise you a relationship-profit one. For my credit union, the presence of a loan, on average, raises member profit 500% versus non-borrowers among my credit-worthy members. [My SPSS is unavailable today, so let’s just assume for argument’s sake, a t test would come out at p < .05] Among credit-worthy checking members, presence of a loan increases profitability by 1000%, yes more than 10 fold. Bill payment, credit worthy, checking members have 50% more loan penetration than credit-worthy checking members without bill payment. Credit card penetration alone sees a lift of 55% in penetration betwixt the twain. On top of that, in addition to their having bill payment, I really want them to use it as bill paying activity sees a 50% increase in profit versus non-use in terms of RELATIONSHIP profit. Granted, the checking product/account profit does not see the same lift with high usage, but the RELATIONSHIP profit rises. So in addition to deploying the attachment marketing theory [however my members want to live, I want to be attached to it], there is a pathway to profitability (via the relationship) from deploying bill pay which is directly contra to your fourth point. I am not concerned about attrition/retention with this argument. I see a phenomenological rise in profit while they are with me when members have bill payment.
Now your last two statements have merit. We should always plan for the end of a particular channel and create scenarios depicting on what that exit should look like.
Thanks for your thoughts,
JPL