In late October, Bank of America Corp. ratcheted up the debate over whether to charge for online bill payment: It said that in the six months since it had ceased charging fees, it had increased the number of customers using online bill payment to 1.5 million from one million, and upped the number of online banking subscribers to 4.35 million from 3.1 million.
The next day, Online Resources Corp. issued a report showing customers were much more likely to adopt online banking and bill payment if it were free. The study also concluded that the higher the fee, the lower the adoption rate.
Differences over charging for online bill pay - and, if so, how much - are as old as the service itself, and many senior bankers are still on the fence about it. Despite the pressure to get rid of the fees, there are good reasons to apply them, bankers say. Electronic bill payment is a convenient service, and it potentially saves customers money on stamps. It makes sense, these bankers reason, that customers should pay for that value.
On the flip side, bankers agree that though online adoption rates have steadily risen, they could be much higher. Plus, it has been shown over and over that online customers tend to be the most profitable and loyal ones.
Despite a growing body of evidence that banks gain customer loyalty and reduce service costs by offering free Internet bill payment, most banks still do charge for the service. Some are reevaluating their fee structures, but others say they have no plans to make changes.
At the TD Bank subsidiary of Toronto-Dominion Bank, bill-pay charges are tied up in overall account charges, making them difficult to unwind. The bank is satisfied with the way things are set up, and "We are not planning to change any of our core pricing," said Jeff van Duynhoven, associate vice president of Internet banking.
The bank's cheapest checking account plan carries a fee of $3.95 (which can be waived with minimum balances), and includes 10 free self-service transactions, such as writing a check, paying a bill, using an ATM, using the voice-response unit, or using a debit card. After the first 10, such transactions are 50 cents each.
Many banks are reluctant to share their thoughts on how they justify online bill payment fees. Detroit-based Comerica Inc., which charges $6.95 a month unless customers meet certain requirements, and U.S. Bancorp of Minneapolis, which charges $4.95 a month to certain customers, declined requests to speak about their pricing strategies.
J. Randolph Bryan, the senior vice president for delivery channel management at Hibernia Corp., which charges certain customers $4.95 a month after a three-month free trial period, said the issue needs to be studied further. The New Orleans company is evaluating the effect of bill-pay usage on customer attrition, he said.
Mr. Bryan discussed Bank of America's decision to drop fees - a move that was widely watched in the industry, that was based on an extensive customer profitability study, and that B of A said has succeeded so far in getting a lot of customers to enroll in bill pay. The Charlotte company's profitability study lasted 31 months and found that online customers had deposit balances 38% higher and asset balances 45% higher than other customers.
Mr. Bryan said that B of A has another compelling reason to offer free online bill pay: In April 2000 it awarded CheckFree Corp. a 10-year contract in exchange for a 16% stake in the Atlanta company. Under the deal, B of A can earn up to 10 million CheckFree warrants for meeting certain milestones; to earn them all, B of A must have more than 10 million customers using CheckFree's services, and must be delivering more than 10 million bills a month.
"The dynamics of that relationship make it easy to make that [free] offer," Mr. Bryan said.
National City Corp. is a rare example of a banking company that dropped its bill-pay fees in the wake of Bank of America's move. The Cleveland company began making bill pay free in September in response to customers who said the fees were preventing them for signing up for the service. It said it hopes to double its bill-pay user base by late next year.
Some bankers in favor of charging bill-pay fees use the ATM model as an example of how the momentum around charging fees can change. Teller machine transactions started out free, but once the card associations lifted certain restrictions, banks started tacking on various charges. The general population, already hooked on the convenience of ATMs, did not put up much resistance to the fees once they arrived.
But some bankers say the movement toward no-fee bill pay is only going to get bigger. "That trend is not going to stop," said Robert Foregger, the chief operating officer and a co-founder of Everbank, an Internet-only outfit that offers free bill pay. "Once you have customers doing online bill pay, you've really taken the next leap in the relationship," he said. "Those transaction relationships are really valuable," he said. (Everbank is a division of Wilmington Savings Fund Society FSB in St. Louis, the primary thrift subsidiary of WSFS Financial Corp.)
Online Resources, a McLean, Va.-based provider of online banking and bill pay, did a study of its client banks that have been offering online services for more than a year, and found that offering them free resulted in adoption rates of 18% for banking and 5.4% for bill pay. When a fee is added to bill pay, the online banking adoption rate drops to 9% and the bill-pay adoption rate drops to 2.1%, the company said.
When the fee for banking and bill payment is bundled, adoption rates are the lowest - 5% for banking and 2% for bill pay. But in this instance, the number of online banking customers who "convert," or adopt bill pay as well, is the highest - 41% versus 31% when there are no fees at all and 24% when there are bill-pay fees only.
The study also found there is no difference in conversion rates if bill payment is offered for $2.95, $3.95, or $4.95. With these charges, the conversion rate drops only 10% to 28% compared with when the service is offered for free. But when bill payment charges are $5.95 or above, the conversion rate drops by 35% to only 20% compared with the no-fee pricing.
Online Resources also found that free trial periods are virtually useless unless they are conducted for at least 90 days.
