A growing number of banks are moving some electronic bill payment operations in-house.

The number making the move is still small, but it indicates a turn in the way most banks have approached the complex bill payment business. More than 350 have outsourced it to Checkfree Corp.; others have signed on with providers such as Princeton Telecom and the former Travelers Express operation now owned by M&I Data Services.

The few banks that have begun executing at least some bill payments in- house are seeking a wide range of benefits, such as more control over payment data and processing alternatives, lower costs, and closer relationships with customers.

"This brings us leverage and flexibility in the future," said Paal Kaperdal, vice president of on-line banking at BB&T Corp., Winston-Salem, N.C.

By the end of this quarter, BB&T expects to send payments generated by its on-line banking customers through software it is installing from Intelidata Technologies Corp. Other vendors that offer such software include Corillian Corp. and Edify Corp.

Such software takes advantage of a curiosity of outsourced bill payment processing. Frequently, banks route payments intended for their large corporate clients, and even for themselves, to outside providers.

"Globally, institutions issue 40% to 50% of all bills," said Richard J. Bell, senior analyst at Tower Group. Banks, he said, issue monthly bills for credit card, mortgage, and car loans, and "some portion of the payments that banks receive will be payable to them."

With the proper software, banks can process these "on-us" payments. They can then route more difficult payments, such as those intended for noncustomers, to outside providers.

"Most banks doing in-house processing today are not trying to be full providers," said Timothy Ruhe, vice president of marketing at Herndon, Va.- based Intelidata. The company has four banks, including Bank One and First Union, using its bill payment warehouse software. "They're trying to get control of that on-us portion."

The economic benefit of doing so is compelling. Banks pay processors from 20 cents to $1 for each bill payment, Mr. Bell said. The cost rises as paper checks are generated to render payments. Banks could pay as little as half a cent for a fully electronic on-us payment.

"Institutions can do a lot to change the economics" of bill payment, Mr. Bell said.

Even more important than the economics, bankers say, are the control and flexibility they can gain with in-house processing.

"Being able to strip out on-us payments is a nice benefit," said Paul Ayres, vice president and manager of on-line services at KeyCorp, which installed the Intelidata software in 1995. "We're principally interested in controlling the customer experience."

Mr. Ayres called the in-house capability "absolutely critical" to KeyCorp's ability to make real-time updates of accounts, including bill payments, available through any delivery channel.

Real-time updates have become a central theme of KeyCorp's consumer marketing. The bank has run campaigns on-line and in print in Cleveland, Denver, and Seattle touting the "instant access" and up-to-date information it offers, regardless of whether consumers bank through automated tellers, by telephone, on-line, or in branches.

As the keeper of all data related to bill payments, KeyCorp is the contact point for customer service and problem resolution.

"Our remittance processor, Checkfree, acting on our instruction, investigates any biller issues. They never talk to our customers," Mr. Ayres said.

Banks can use the bill-payment information in their data bases to cross- sell other products, said William A. Soward, vice president of business development at Edify in Santa Clara, Calif.

Over time, he added, banks could "differentiate themselves on the payment side." Customers, for example, could instruct banks to deduct payments from different accounts, such as debit cards, investments, or credit cards.

Two of Edify's 100 customers, $1 billion-asset Busey Bank of Illinois, and the Internet-based Net.Bank, are piloting the company's bill payment software.

Three of Corillian's eight customers-Hibernia Bank, M&T Bank, and SunTrust Bank-are signed on to pilot the Beaverton, Ore.-based company's bill payment software.

Mr. Soward said bill presentment companies are requiring banks to route the associated payments through their processing systems. As bill presentment increases, banks must manage an increasing number of back-end payment relationships, he said.

"The job of the payment warehouse is also to manage all these instructions according to the back-end requirements. Banks are in a position to control payment processing decisions and negotiate the best deals."

Mr. Kaperdal of BB&T said, "We feel it's important to have all our payers and payments set up so we determine the appropriate routing."

Payments that BB&T does not handle internally will go through Princeton Telecom, though the bank may switch later to the Visa ePay system depending on volumes, Mr. Kaperdal said, adding, "We want to decide what payments go where."

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