Though large banks are starting to show signs of slowing growth in their bill payment services, two vendors that serve smaller banks are saying the online bill payment space is rife with opportunity.
Both Digital Insight Corp. and Online Resources Corp. reported solid gains in their bill-pay operations last week, and they took pains to explain how their business differs from that of the market leader, CheckFree Corp., which said last week that its bill-pay volume growth is slowing.
CheckFree counts many of the biggest banking companies as its customers. It said that some of them have cut down their efforts to promote bill-pay; analysts said this is a sign that the bill-pay business at large banks is approaching maturity.
But small and midsize banks are a different story. “Our clients are much earlier in the adoption cycle than are the big banks,” said Jeff Stiefler, the chairman, president, and chief executive of Digital Insight in Calabasas, Calif. His company “serves middle-market institutions, not large banks, and we have no customer concentration.”
Digital Insight reported that about 24.8% of the people who use online banking services offered by its financial company clients also use its bill-pay service. By contrast, Bank of America Corp., one of the biggest names in online banking and a longtime CheckFree customer, said this month that half its online banking customers use its bill-pay service.
CheckFree, an Atlanta company, said it has become subject to cyclical trends that it has only recently started to track; analysts said these trends are not new but are becoming harder to offset with revenue from new volume because CheckFree’s volume is already so massive.
Mr. Stiefler said his company does not have this problem because it usually charges its clients by the number of users, not per transaction. As a result, “we’re much less subject to things like cyclicality.”
It also tends to be conservative in its growth estimates, he said. But since just 24.8% of its online banking end users pay bills online — or just 4.6% of its clients’ customer base — the growth potential is huge, he said. Digital Insight lacks its own bill payment technology but resells services from CheckFree and Metavante Corp., a unit of Marshall & Ilsley Corp. in Milwaukee; it does not report its own transaction volume.
CheckFree reported bill-pay volume through its bank customers had risen 4% in the third calendar quarter (its first fiscal quarter) from the preceding period; in the same quarter last year, its growth rate was 11%.
Online Resources in Chantilly, Va., competes head-to-head with CheckFree, and its July purchase of Princeton eCom Corp. put it neck-and-neck with Metavante for the No. 2 position in the bill-payment market. It reported 199% volume growth in the third quarter, mainly due to the Princeton acquisition. In the second quarter its growth was just 2.2%, but Online Resources reported 12% and 7% growth in the two previous quarters.
Beth Robertson, a senior analyst at MasterCard International’s TowerGroup Inc. research unit in Needham, Mass., said that vendors serving larger and smaller institutions face different types of hurdles.
Large banks have offered online bill payment for a longer time, have been more aggressive in marketing, and are more likely to update their online bill payment software to offer the latest features, she said; they have now acquired all the easy-to-win bill-pay customers.
Small banks, conversely, have been slower to offer, promote, and update online bill payment services because of the cost, she said; plenty of easy bill-pay converts remain within their customer bases.
Still, even if adoption rates at some banks are slowing now, they are likely to promote other bill-pay features soon that may generate fee revenue. CheckFree and Online Resources have both been outspoken about their ability to offer faster payments in the next year.
“The providers are now focused on value-added services,” Ms. Robertson said, and since banks can charge fees for services like expedited payments, they may be motivated to breathe new life into their marketing, she said.
John Kraft, an analyst at the investment firm D.A. Davidson & Co. in Great Falls, Mont., said that, despite their different target markets, the vendors face “the same trends in the same industry.”
However, “the smaller banks that Digital Insight targets tend to be slower to waive the fee” they charge for online bill payment, he said. B of A has not charged consumers for the service since 2002. “That’s probably the biggest difference,” he said.
Mr. Kraft said he is not convinced that CheckFree’s business has slowed significantly, despite investors’ focus on those numbers last week. Based on what he knows of Bank of America, Mr. Kraft said, a rough guess for CheckFree’s penetration, for bill payment use among its clients’ total customers, is 20%.
“If you think that there’s going to be a slowing at some point” for bill payment adoption, he said, “Digital Insights’ is going to be a long way away,” but there is still opportunity for CheckFree as well.
