It was not that long ago that bill payment was widely viewed as an optimal way to attract new checking account customers and as the reason why they stayed. Banks were flocking to the then-new service, and they used "free" as the magic word to sign up new bill-pay users.
What a difference a few years make.
Today the high costs for banks of delivering the service, combined with limited resulting revenue and competition from alternative providers, is leading some institutions to question whether bill pay is an ultimate solution after all. The current cost structure is unsustainable. It is time for a frank conversation between banks and bill-pay vendors on a path forward.
Bill pay has become a mature product, adoption of the service has slowed and features have become fairly standard across solution providers. As a result, the ability to differentiate a product is very difficult.
Banks have a great deal of experience managing products that have matured into the mainstream, and the inevitable migration always forces a conversation about the same thing—cost of delivery. So now, the vendor price for delivering bill pay is under fire.
Bill payment remains, by a fairly substantial margin, the most expensive part of a bank's checking account costs other than debit processing. Often, the price is higher than monthly per-account fees, statement charges and fraud losses (other than debit-related fraud) combined.
And while debit processing costs are higher than bill pay, the price for providing debit service is offset by significant revenue. By contrast, very few banks have been able to generate bill-payment fee income of any sort.
According to our client data, 75-80% of checking account customers are active Internet banking and/or mobile banking users (customers who have logged in in the last 30 days). However, a high-performing institution will only see active bill-payment use among 15-20% of those same customers.
Our numbers show that another 10-20% may have enrolled in bill pay but are not active users. A key reason for low adoption is that high delivery costs temper banks' excitement over selling this service and recommending it to customers.
While it's clear that bill pay is a sticky service for some checking customers, many banks are now asking themselves whether these same customers are profitable. To the extent that they are, banks have a reason to keep shouldering the bill-pay costs. To the extent that they aren't, banks have a hard pricing decision to make.
There is little evidence that charging for bill pay will create fee income, as opposed to eliminating usage. Other nonbank providers of alternative payment solutions, such as person-to-person payments, have tried charging a fee, but they are hampered by low adoption. This demonstrates that bill pay is not a strong latent source of future revenue.
Meanwhile, a number of new payments vendors are creating money movement solutions that are far less costly than bill payment, which only further raises the question why bill payment costs for banks are so high.
Yet it can also be argued that bill payment offers security and benefits that these new solutions cannot yet match – the classic value-versus-pricing argument. Now the question that needs to be asked is whether the cost is worth the benefit.
Bottom line? Unquestionably, there will be a place for free bill payment with profitable customers who want to use the feature. For everybody else, it will become a strategy of driving bill-payment costs down to make the solution viable in the long run. It is time for banks and vendors to develop that strategy.
Vendors need to understand that the service is too expensive. Banks and credit unions need the unit costs and minimum fees to be much lower. But banks and credit unions need to understand that lower bill-payment prices will mean lower revenue for vendors, who will want to have a chance to recoup that revenue by offering another product or service. Financial institutions should give them a shot to do more to help both parties' bottom line.
That is a more sustainable path forward.
Terence Roche is a principal at Cornerstone Advisors in Scottsdale, Ariz. He can be reached at firstname.lastname@example.org.