Banks could miss the mark on the next "killer app" of on-line banking - electronic bill presentment and payments, or EBPP. In part, this may be the result of a misconception: Many bankers continue to view EBPP as an end-game opportunity to acquire additional data for cross-selling. But that will never happen. Pushing EBPP as a cross-selling vehicle delays its widespread adoption, allowing nonbank competitors time to enter and dominate the business.
The point is that there is enough money to be made by simply assuming the role of disinterested bill aggregator. Banks don't have to "mine" the billing data - an activity that may be seen as violating the sacred space between them and their customers. Banks can in effect tell the billers: "Keep your data. We'll content ourselves with operating the back office and 'switch'."
If the banks understand this and move quickly enough to woo billers, then they can create a tidy amount of incremental stock market value. Some institutions are already moving in this direction, but their rate of advance needs to accelerate.
The need for banks to court billers is obvious. While a growing number of consumers want and expect to pay bills electronically, they will not underwrite the system needed to bring this about. Since billers bear the cost of invoice preparation as well as mailing, their savings from being able to publish bills electronically are much more considerable.
Banks have an advantage in catering to biller need. About 15% of all bills and statements sent to consumers in any given year are from banks. If banks can aggregate and present a large portion of these bills and statements electronically or, more probably, outsource the job to a partially or wholly owned third-party electronic bill publisher, they can begin building the scale needed to greatly reduce the cost of EBPP.
In point of fact, the regulators seem to want this to happen. Recently, the Federal Reserve gave its blessing to a scale-building effort by declaring that banks should be allowed to render monthly statements in electronic form.
The banking industry currently renders about 3 billion paper statements and invoices each year (mostly statements). The unit cost of this paper preparation and mailing averages 50 cents. The comparable numbers for utilities and the regional telephone companies are about 15% to 20% higher. By contrast, the electronic cost per unit of both presenting and paying just the banking industry's volume of statements and invoices already amounts to appreciably less than the paper cost.
This means that if banks can consolidate industry statements and invoices for EBPP purposes, they can reduce their own costs. This cost saving, in turn, could initiate a virtuous circle in which scale spawns savings, and savings spawn further scale, until, of course, the cost curve flattens. The banks would be able to bid for the presentment business of other gargantuan billers, such as utilities and regional telephone companies. If they could acquire this volume, the banks could drive the unit cost of bill presentment to an estimated 28 cents, and perhaps even lower. That magnitude of cost saving would be difficult for other nonbank billers to resist, especially if the banks showed that they were serious about not mining customer billing data.
Assuming that the bank-related billing company could earn the traditional 30% margin in the industry, the unit price to billers would approximate 37 to 40 cents. This would suggest a revenue potential of more than $3 billion in presenting the 8 billion statements and bills that are rendered to consumers annually by just the banks, utilities, and regional telephone companies. Capitalizing the resulting after-tax profits at the rate currently assigned to paper billers, we arrive at an entity with a market value comparable to that of a good-sized regional bank - say, about $10 billion. Not bad for a payments business, at least for starters.
To win friends among billers, the bank-related company will have to satisfy not only their needs but also what the billlers perceive to be consumers' needs. At minimum, this would involve offering the following services: adequate support infrastructure, including assuming responsibility for a customer-issue call center; appropriate linkage to the biller's records and accounts receivable system; adequate biller coverage (customers need to see at least five to six different bills per month in order to visit the site often enough); full billing details (consumers won't accept summaries); and appropriate security.
In the longer run, banks have an opportunity to become true partners of the billers they serve, facilitating their entree into full-fledged business-to-business electronic commerce. Exorcising the specter of customer data ownership allows the banks to offer a blend of value-added services, including hyperlinks to biller Web sites for virtual inserts and collections management - with integration to biller legacy systems. In the new Internet age, these innovative services could generate the most substantive bank revenue stream. Mr. Speer is a Washington-based partner of Deloitte Consulting.
