There are reasons that most banks do not run their own electronic billing operations - they are complicated, messy, and hard to make a buck on - but Edward G. McLaughlin, chief executive officer of Paytrust Inc., will hear none of them.
He started Paytrust last year as the electronic equivalent of a centralized mailbox, taking on the burden of paying and presenting bills. Now, as he steps up his pursuit of financial institutions as partners in acquiring customers, he may be facing his biggest challenge yet: persuading banks that tracking hundreds of thousands of bills and their payments is not as unwieldy as it seems.
From the beginning Paytrust's business model has been criticized as too labor intensive. And its monthly fee ($8.95 for the first 25 transactions, and 50 cents per transaction after that) is too high, critics say.
Nonetheless the company has managed to go beyond targeting individuals and has signed up some high-profile financial institutions that want to offer Paytrust's services to their own customers.
OnMoney.com, a subsidiary of Ameritrade Holdings Corp., was the first to go live with Paytrust in January. American Express Co. and GE Capital followed suit in June. The Internet credit card issuer NextCard Inc. is expected to introduce the service this month.
"We think banks have a natural affinity with this type of service because they have always held the checking accounts," Mr. McLaughlin said. "Our goal is to put the bill center where it makes the most sense for the customers."
In going after bank partners, Paytrust is positioning itself against the 800-pound gorilla of the bill payment and presentment industry, CheckFree Corp. of Atlanta, which also seeks partnerships with financial institutions. When Paytrust targeted only individual consumers, its competition consisted of other scanners with pay-anyone models, such as CyberBills and PayMyBills.com.
CheckFree plans to offer a scan-and-pay service similar to Paytrust's but does not have a timetable for its availability, a spokesman said.
Most banks and companies that present bills, including CheckFree, do so only for bills available in an electronic format. Paytrust is one of the few that accepts and scans paper bills so they can be presented on the Web.
The company gets the invoices directly from billers that have been instructed by customers to send the bills to Paytrust. Every month the bills of 30,000 users funnel into its operations center in Princeton, N.J.
If the bills are on paper - about 99% are - they are opened, sorted, scanned, read, and posted on the Internet. Electronic bills can be posted immediately. Customers are notified by e-mail when their bills can be viewed and paid on Paytrust's site or a co-branded site.
People can let Paytrust automatically pay bills up to a certain amount, or they can click on an icon to initiate payment. Payments are confirmed by e-mail.
Dan Springer, chief marketing officer of NextCard, said a main reason it chose Paytrust over competitors was because its management team had a lot of experience. He was also impressed that Paytrust scanned and processed the bills in-house rather than outsourcing them.
"It's a nontrivial process to set up, and if someone is outsourcing it, it greatens the risk," Mr. Springer said. "For us, that would be a double step out."
Mr. Springer said he was well aware of the high cost of such a labor-intensive service. He determined that people would pay for bill management but perhaps not through up-front fees.
"This is an operational process, and if people think it is going to be free, they are wrong," he said.
NextCard worked with Paytrust to develop two pricing models: Customers can get the first three months free, as they do at the Paytrust site, or they can have four bills aggregated through Paytrust free of charge for life. People who choose the latter option and add a fifth bill to the service are automatically charged the monthly fee.
"We are working on the belief that these early adopters will eventually switch all their bills to Paytrust once they are comfortable with it," Mr. Springer said.
Given the concern about the manual labor required to run Paytrust, its operations center is surprisingly calm and controlled. About 100 employees seated in cubicles handle the paper bills once they are tracked through an auditing machine. The employees open, sort, and feed the bills into a scanner, which takes about one second per page to process them.
Two scanners process tens of thousands of bills a day. After scanning, the bills are marked and filed in a room for 90 days in case a customer requests them, then are thrown out.
Paytrust is building another operations center in Sioux Falls, Iowa, and expects to have 500 employees working there within two years.
The real work begins after the bills are scanned.
"We realized early on that scanning was not going to be the problem," said Flint A. Lane, president of Paytrust. "It was reading the information off of the bill that would be the challenge."
To do this, Paytrust developed software to recognize the "bill DNA" - specific markers, such as logos or the placement of the amount due box, that differentiate bills.
"Our important moment was when we realized that there was a way that we could automatically read the information from the bills," said Mr. Lane, the brains behind the system. "It is a lot like fingerprint technology. The computer is basically trying to figure out who this fingerprint belongs to."
Paytrust creates templates for each type of bill it processes. It has about 2,000 templates so far, and a new one is created any time a new bill passes through the system.
Once the computer recognizes the type of bill it is dealing with, it knows where to get the information it needs to post on the Web. If a bill cannot be read automatically, because it is handwritten or smudged, the machine notifies the staff that the bill does not have a "high confidence level," and an employee double-checks the computer's work.
"Efficiency is not the only thing we focus on," Mr. Lane said. "Accuracy is more important. We have technology, confidence levels, and employees to verify that this is right."
Mr. McLaughlin, 34, and Mr. Lane, 33, had enough technology experience to make the idea of scanning bills seem workable. Both worked at Logic Works Inc., a data warehouse software company (now part of Computer Associates Inc.), where Mr. McLaughlin was head of worldwide marketing and Mr. Lane was head of research and development.
Before that Mr. McLaughlin worked at Industrial Valley Bank (now part of First Union Corp.) in cash management. Mr. Lane, who had done freelance computer programming when he was a sophomore in high school, previously worked at BrownStone, where he helped develop software for clients such as Merrill Lynch & Co.
When Logic Works was bought in 1998 by Platinum Technologies, Mr. McLaughlin and Mr. Lane each knew that he wanted to start a company and recognized how they could complement each other.
"I think we looked at each other and said, 'I need one of those,' " Mr. McLaughlin said.
The deal ultimately came together when they were sharing a taxi to a conference in Chicago and discussed their grievances about paying bills online.
Because of an intensive travel schedule, Mr. McLaughlin was never around to open his bills, let alone pay them, and late fees were swamping him. Mr. Lane had a different problem. He used Quicken to pay his bills online but bristled at having to punch in all his billing information every month.
"For somebody who was classically electronic and always looked for convenience in my life, I could not believe there was not a better way to do my bills," Mr. Lane said.
Mr. McLaughlin added, "When you see such a glaring issue from very different perspectives, you have to ask why."
They researched the market and saw that there were only two solutions available: pay-only, which Mr. Lane was using unsuccessfully, and electronic bill delivery, which Mr. McLaughlin discovered would not help him at all because none of his bills was online.
"We realized that the only person who could settle their bills and do it online was the consumer, and what was missing was the mailbox," Mr. McLaughlin said.
Paytrust encountered its first hurdle in December, when First Union Corp. sued it, charging that the new company was taking customer information off the bank's Web site without consent and storing it in a way that threatened customers' privacy and security.
The lawsuit concerned Paytrust's SmartBalance feature, which uses screen-scraping to combine a customer's bank account information with Paytrust's payment data and automatically balances checkbooks.
First Union dropped the suit in March after the two parties "resolved the situation amicably," Mr. McLaughlin said, declining to elaborate.
Paytrust faces a challenge in educating not only potential bank partners and consumers but also billers. An advantage of Paytrust for billers is that the company can deliver paper bills, electronic bills, or bills distributed with the help of four service providers with which the company has agreements: Derivion, eDocs, billserv.com, and Princeton eCom.
"We tell billers that whatever solution they have decided on, let us know because we have a great retail channel of delivery for you," Mr. Lane said.
Billers have claimed that companies like Paytrust isolate the biller from the customer by disposing of marketing materials and other types of communication.
Mr. McLaughlin said that this is untrue. "Our goal is to be the channel of communication between the biller and the consumer," he said. "If the biller includes notices and messages to consumers, we deliver those to them."
Others see Paytrust as being limited by its high fees and nonbank status.
"I am not sure who their business model appeals to because of the price and trust factors," said Avivah Litan, a research director at GartnerGroup of Stamford, Conn. "It may be appealing to wealthy individuals who travel a lot, but I am not sure about the average American."
Gary R. Craft, an electronic commerce analyst at Deutsche Banc Alex. Brown Inc., said CheckFree needs to get into the scanning business quickly or risk losing prospective customers to Paytrust.
"Paytrust could be a real nightmare for CheckFree," he said. "CheckFree is just sitting there and waiting for the market to develop. They need to get into that business to defend their franchise. Otherwise customers that would have gone to them will migrate to Paytrust."
Mr. McLaughlin said he would welcome CheckFree in the scanning business and would not rule out the notion of licensing his service to the company. "We are a service provider, and anyone that wants to come to us with an arrangement, we would certainly consider."
Matthew D. Fassnacht, senior equity research analyst at J.P. Morgan Securities Inc., said financial institutions may be slow to team up with Paytrust because it involves customers' sending their bills to a third party. Banks will have to feel comfortable enough with the service to be willing to stick their brand on it, he said.
"To the extent that financial institutions' customers want to have bill management capabilities, Paytrust is in a very good position to compete with CheckFree," Mr. Fassnacht said. "But financial institutions will take a while to feel comfortable with it."
