A defining feature of most home banking strategies has been the outsourcing of bill payments.

With the advent of Internet bill presentment and payment, or IBPP, a growing number of senior banking executives are reevaluating the profitability of their outsourcing decisions, particularly as it relates to offering cash management services to major billers.

A chief financial officer's comparison of costs and revenues in on-line bill paying can be instrumental in profitably realigning strategies for retail home banking and wholesale electronic commerce.

Only a handful of banks do their home banking and bill payment processing in-house. Outsourcing, the more widespread approach, affects a bank's costs and its levels of service. It is essentially a reseller for suppliers of nonbank services and software - and is at someone else's mercy when it comes to costs.

Is it any surprise that nearly all the major third-party bill payment providers have chosen to price their services per account, rather than per transaction? This should be worrisome to CFOs.

The normal, bundled rate charged by nonbank suppliers of bill payment services is about $5 per retail demand deposit account per month, covering up to 20 electronic payments. At that volume, the retail bank's transaction cost is 25 cents per item.

The typical household pays only 12 to 17 bills per month, so the effective unit cost ranges from a barely acceptable 29 cents to a staggering 42 cents. That's much more than what it costs to handle a paper check and considerably more than what a wholesale bank incurs when processing automated clearing house debits.

As a former consultant and banker who conducted profitability analyses on outsourced processing, I found these accounts to be loss leaders at best. The competitiveness of the checking account environment today makes it extremely difficult to recover, through fees or compensating balances, the costs imposed by third-party bill payment providers.

This is not the case with payment services sold to billers by the wholesale side of the bank.

In the case of ACH payments, the bank is the supplier of the services. To put it in the language of the computer industry, the wholesale bank functions as an original equipment manufacturer, or OEM - controlling its own costs, distribution, and, most important, margins-rather than being a value-added reseller.

Fortunately, a market has developed for wholesale banks to exploit their OEM positions.

Internet bill presentment offers a profitable new hope, because it creates a distribution channel for low-cost ACH transactions and their equally low-cost Internet equivalent, electronic checks. By leveraging its available infrastructure, a bank enjoys processing costs that are a fraction of those of bill payment servicers.

To exploit this opportunity, bankers need to study the current market for IBPP services and where best to position their services.

There are six viable IBPP distribution channels available to a biller: its own Web site, electronic mail, browser subscription, shared link, thin concentration, and thick concentration.

These channels can be divided into two broad categories: those controlled by the billers and their wholesale banks, and those controlled by third-party bill payment suppliers or nonbank concentrators.

The following are biller-controlled: the biller's own Web site, where biller-registered customers come to directly view and pay bills); electronic mail; browser subscription, using push technologies; and shared link channels such as America Online's Digital Cities.

Home banking-based, or shared, channels include: thick concentration, in which a biller sends all billing information to a service bureau that presents bills on behalf of many billers; and thin concentration, in which a biller spreads IBPP capabilities among several concentrators or portals.

The last two are controlled by nonbank providers with costs of 42 cents per transaction or more, unless your bank is one of the few that performs its own bill payment processing.

It is in the four biller-controlled channels that IBPP's profitable new hope for banks can be found.

A bank could work both sides of the IBPP street by supporting a mix of biller-direct and home banking-based models. But payment services provided directly to billers by wholesale banks provide far greater returns on investment and opportunities for growth.

When a wholesale bank outsources bill payments, it throws away many opportunities for fostering valuable customer relationships. When a bank outsources home banking and bill payment services, it is doing the same with commercial deposit relationships.

When, in the consumer home banking scenario, the third party that's handling payment processing and settlement for the retail bank is also the entity processing the payments for the biller, it's like robbing Peter to pay Paul. The wholesale bank is sacrificing its profitable, bank-supplied cash management services to pay an outside supplier - typically at a loss.

It doesn't have to be this way. All banks have to do is remember their experiences in deploying other electronic distribution channels.

With automated teller ma-chines, supply created demand and the bank registered its own customers. Then came home banking, which truly took off only when the Internet allowed customers to go straight to their banks' Web sites and avoid third parties when enrolling to view their statements. Finally, there is direct debit, in which payment follows the bill.

Ultimately, each bill payer will decide which of the IBPP channels is most convenient. Banks and their billers need to be prepared to support them all for maximum market coverage.

But the channel a biller selects first to get its foot in the door-and how it uses that channel to enroll customers, present its billing content, and handle payment posting-will dictate its IBPP success and its relationship with its commercial bank.

With this in mind, banks must encourage billers to lead with biller- direct channels, in which billers enroll their own consumers and control their own content and accounts/receivable posting.

The wholesale side of the bank can focus on supporting biller-direct models to woo the huge number of consumers now using direct-debit bill paying services, along with targeting those consumers not interested in traditional home banking services or personal financial manager software.

The retail side, meanwhile, can target traditional home banking customers by supporting the thin and thick concentration models.

Controlling enrollment is the key to maximizing IBPP customer care, revenue, and cost-reduction opportunities, regardless of the chosen channel. Banks must line up behind their billers in a biller-controlled enrollment process that also includes the registration of the desired payment instrument-be it electronic check, direct debit, or credit card- without reliance on third parties.

The marketing advantages of controlling enrollment are considerable. When a consumer is enrolled by the biller, rather than a home banking or third-party payment service, the biller and its bank both have the opportunity to gather information about customer preferences and demographics.

This is invaluable for effective customer service, marketing, on-line sales, and loyalty building. It is also information that is traditionally gleaned but not often shared by third-party home banking suppliers.

But gathering marketing information is just a start. Just as important, biller-controlled enrollments ensure that the wholesale bank will play a role in the settlement process. Regardless of which IBPP channel a consumer selects to view his bill, the bill's "lockbox" will bring the payment back to the biller's wholesale bank.

By embedding payment on the bill before it is rendered at third-party sites, the biller and its bank can avoid many of the cost disadvantages associated with home banking-controlled channels, reduce inbound float, and garner another source of information-packed clicks for the biller.

A biller also benefits by the ability to leverage its combined electronic funds transfer requests with its wholesale bank while optimizing settlement schedules for optimum availability of funds-a major benefit in cash management and customer care.

Embedded payment lets a biller emulate some strategies of the movie industry, which understands how to derive value from content.

A movie draws filmgoers to a theater-and to its snack bar, which is where theater operators make their profits. Similarly, electronically presented bills lure consumers to a biller's Web site, where they can be engaged in one-to-one marketing dialogues.

For IBPP with embedded payment choice, it is the biller-direct channels that best leverage a wholesale bank's strengths.

Because retail banks are merely resellers of home banking, the service is cost-driven. Wholesale banks, as suppliers of cash management services, are revenue-driven. They can make money by serving one big account well, while a retail bank must serve a multitude of customers.

The problem is, there hasn't been a multitude of home banking users.

IBPP can bring many more consumers into the home banking fold. But should retail home banking be the channel through which banks attempt to drive IBPP, and thus serve their major billers? Not if it is going to increase processing costs and move fee income away from the wholesale side.

Clearly, wholesale banking-not just retail banking-must help drive IBPP.

By reconciling its wholesale and retail objectives, a bank can manage a progression that encompasses the biller-controlled e-mail and other channels, one by one. Once they are deployed, the baton can be passed to the retail side.

In the end, both the biller and its bank cover all their bases, while banks realize both their retail and wholesale objectives. Mr. Crone is vice president and general manager of Cybercash Inc., responsible for its PayNow product.

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