American Banker concentrates on the actions of the very large banks, and your thoughts in that regard are probably right on the mark. National banks with wide coverage probably save money by offering Internet services, because it allows them to reach otherwise unserviceable customers.

However, the savings only happens if the Internet replaces a more costly channel.

I am from a community bank, and we have built a fairly extensive Web presence for a bank our size. What we have found is that, while our Web activity grows steadily, the costs of our traditional channels have not decreased as fast as we had imagined.

We saw similar results when we added phone banking in the late 1980s. We were receiving, if I remember correctly, about 500 calls per day through our switchboard. We anticipated a 50% drop in switchboard usage once the automated system was in place.

We moved about half of our calls to the automated system, but call volume doubled. We had just as many calls going to our switchboard as we did before we installed the automated system.

Bill payment has proven to be kind of an odd duck. The costs involved are the check handling fee, which the bank incurs, the bill processing fee, which the payee incurs, and the "transmission" fee (postage stamp and envelope), which the bill payer incurs. The cost of processing a check in a bank is already quite low.

In providing a bill payment service to our customers, we are providing them a convenience plus a lower "transmission" fee. The bank's ACH payment may be slightly less expensive, but the fees charged by the bill processing vendors move the postage cost from the consumer to the bank. This more than offsets any bank savings. Furthermore, the vast majority of companies aren't set up to receive electronic payments, so the bill payment vendors end up cutting checks to most payees. The processing for the payee is the same in most cases, because they end up getting a check anyway.

Banks cannot make any money at this unless they charge for it or offset the expense by requiring higher balances. So, if a bank isn't charging for bill payment services, it is probably a loss leader that it is making up somewhere else.

I think that Internet banking will become a more effective savings tool as customers become accustomed to using it instead of traditional bank channels, rather than in addition to them.

There's no free lunch on bill pay. Until it is all electronic, the processing charges will still be high, and these are being absorbed by the banks unless they charge for it in some manner.

Ron Gafron
Senior vice president
and chief technology officer
Glenview State Bank
Glenview, Ill.

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