Wachovia Corp., a prominent skeptic of free online bill payment, is reversing course.
The Charlotte company planned to announce today that it is waiving all its fees for online bill pay. It is also set to complete its acquisition of SouthTrust Corp. today, which, along with a recent outsourcing agreement, had a role in the decision.
Bank of America Corp. was one of the first to throw down the free-bill-pay gauntlet, in 2002, arguing that eliminating fees could spur customer adoption.
Numerous banks followed suit, but Wachovia has remained one of the few major banking holdouts to the idea, saying that the fees were needed to offset the processing costs.
Its about-face can be seen as further validation - if anybody still needs it - that banks willing to eat these costs will more than recoup the expense.
Not only can the free service get more customers to sign up for bill pay, this argument goes, but banks have also found that people who use online banking - and especially online bill pay - will buy additional products, become more profitable, and be less likely to leave the bank. As a result, online banking has become a core product rather than a convenience that can generate additional fees from some customers.
Lawrence Baxter, an executive vice president at Wachovia and its chief e-commerce officer, said the acquisition of SouthTrust, of Birmingham, Ala., was a factor in the decision. Retaining those new customers "is an important thrust for us," and free bill-payment could help that cause, he said.
An outsourcing deal with CheckFree Corp. also played a role. Mr. Baxter said that having the Atlanta company handle Wachovia's electronic bill payment and presentment service will slash his company's online bill-pay expenses in half over the next five years.
"We were able to cut the cost basis substantially," he said. "We think we have changed the equation now so that it is much more affordable" for Wachovia to offer free bill payment.
The fee waiver will take effect immediately for Wachovia and SouthTrust customers, Mr. Baxter said. Wachovia plans to kick off an advertising campaign next week to promote the Extra Free Checking service.
(The outsourcing to CheckFree is to begin next year. About 40% of Wachovia's customers - the ones it picked up by merging with First Union Corp. in 2001 - now pay bills through CheckFree, which had been working with First Union. Wachovia will begin shifting its remaining systems to CheckFree software in early 2005. SouthTrust is also a CheckFree customer.)
Until now Wachovia has offered free bill-payment only to customers who held premium deposit accounts. Others would get the service free for three months and then pay $6.95 a month. SouthTrust charges customers who do not use a premium account $5.95 a month.
Aaron McPherson, the research manager for payments at Financial Insights Inc. of Framingham, Mass., said, "The trend, especially among larger institutions is to make it free as a customer relationship play rather than a profit making service."
Larger banks have the ability to deliver larger groups of customers to service providers such as CheckFree, and that helps them negotiate for lower prices, Mr. McPherson said.
Also, more than 40% of major consumer billers - including lenders, card issuers, and telephone companies and other utilities - now offer direct bill payment through their own Web sites.
Beth Robertson, a senior analyst at the TowerGroup market research unit of MasterCard International, said free bill-pay has become the norm among the largest U.S. banks. Seventy-eight percent of the top 50 banks and thrifts offer some form of free bill pay, she said.
The consolidated free-bill-pay offerings of nonbanks such as Yahoo and America Online could be pressuring banks to change their policies, Ms. Robertson said. Wachovia's move, she said, underscores "a growing awareness on the part of consolidators that they need to offer greater value in a variety of ways, including free service."
