Though online bill payment is quickly taking root, few people realize that most of these electronic transactions are eventually transformed into paper checks cut by the bank or its vendor and couriered to the payee.
Internet banking may be more convenient for the customer, but these paper checks are a headache for the payment processing sites. This is hardly the most efficient way to submit payments, and it is becoming a much bigger problem now that consumers are flocking to the Web to pay their monthly bills and banks are fueling the trend by promoting the services heavily.
The heart of the matter is the limited number of billers who can accept payments electronically; less than half of home banking payments are sent to billers in electronic format. The rest are turned into paper checks, which arrive without payment coupons at bank lockboxes. They must be processed by hand, which is expensive and time-consuming - as well as a recurring source of data entry errors.
Worse still, sometimes the checks simply get lost in the mail.
"It's a nightmare," said Mark Havlik, a team manager with Wachovia Corp.'s global electronic payments group.
A further complication: Some checks generated by Internet banking arrive at the lockbox as individual checks paying a single bill, but others are far more complex. Some arrive as a single check that is meant to cover payments from many customers to a single biller, along with a corresponding list of customers and their account numbers. This is called a check-and-list.
"We have to inspect every check by hand, and determine whether it has all the information we need," said Cindy Murray, the executive vice president and head of banking operations for ABN Amro in Chicago. That is a major concern for the bill payment industry, she said. "It is not cost-effective for us to process these checks."
Sometimes the e-billing checks arrive without the information necessary to process them. Even when they do have it, the data - such as the customer's account number and biller's address - must be keyed in by hand. "You make a lot of errors," Ms. Murray said.
Incomplete information creates more problems. "The quality of what you get on every check-and-list may vary," Mr. Havlik said. "You may not have enough information on the list, or it may not have the right information. It's prone to problems." And if the consumer's account number or some other vital piece of information is mistyped, the payment may be delayed or even credited to the wrong account.
"Our costs are three times higher than processing normal payments that come in with a coupon," Ms. Murray said. "We have to charge the billers more in order to pass the costs on."
One study shows home banking has a cumulative annual growth rate of 25% in the United States, and executives involved in processing bill payments say they are seeing the evidence.
"We are getting a lot more of these checks in all of our retail lockbox operations," Ms. Murray said. Out of roughly five million remittances per month, she said, the bank is receiving 200,000 to 300,000 of these checks, up sharply from 100,000 a year ago.
The problems are not limited to banks and billers, but also affect consumers. Even though most home banking programs warn customers to make payments several days in advance of the due date, many people are not aware that the transactions, which began on their computers in digital format, eventually become paper checks.
"The consumers think that everything goes through the system electronically," said Mr. Havlik. "That's what I would think if I wasn't in the business."
Even savvy consumers can get burned. One of them was Janet Blackwell Jones, a consulting manager for Unisys Corp.'s North American payments practice in Charlotte. She tells the story of the time last winter when she returned home from a weekend trip to discover that her water had been shut off. She knew she had paid the bill on time, but the water company said her account was overdue.
Moreover, when the utility asked for a copy of the canceled check, she couldn't produce it - she had paid online with a recurring debit, and that turned out to be the cause of the problem.
"I live in a small town in North Carolina," Ms. Jones said. "These places are just not set up to receive any kind of electronic payments."
As a banking industry veteran, she understands the value of online payment methods, but as a consumer who was forced to eat the cost of a night in a local hotel until her water service was restored, she also sees a growing problem in the online bill payment system.
Richard Crone, the vice president for financial services at the Boston market research firm Dove Consulting, said that about 60% of all home banking payments end up as paper checks, and the fact that there are so many glitches involved in this process threatens the vitality of online bill pay. "Late payments are the No. 1 source of customer complaints with home banking," he said. "This is such a big problem."
Mr. Crone compares this process to the days before optical scanners could sort checks automatically. "This is taking the billing industry back 50 years." He said one lockbox company has found the manual sorting and data input process so onerous that it has outsourced the data entry for these coupon-less checks to Mexico, where the labor costs are far lower.
The obvious solution is to get more billers ready to receive electronic payments, and Ed McLaughlin, a vice president for electronic payment and presentment at Metavante Corp., is trying to do exactly that. The electronic bill payment service provider has set up electronic payment links with more than 2,700 billers and sees signing up new billers as a constant process.
"We do it every day," he said. "Our goal is not to create more paper but to eliminate paper" from the billing stream.
He said Metavante, a unit of the Milwaukee banking company Marshall & Ilsley Corp., processes as many as nine million home banking bills every month, and 60% to 70% of those are paid electronically. The remainder, which could total well over three million items, go out as paper checks.
Mr. McLaughlin noted that most of those checks are sent not to lockbox sites but to very small billers, such as rent payments or monthly parking bills.
But Metavante is still mailing a very large number of checks to lockbox sites. Many of these smaller billers are unlikely to jump on the e-billing bandwagon, either because they don't generate enough volume to justify the effort, or they simply have not moved into the Internet era. As a result, lockbox operators will have to continue processing these checks by hand. "This is an unavoidable part of the business," Mr. McLaughlin said.
