IMGCAP(1)]
This story appears in the November 2008 issue of Cards&Payments.
As any pawnbroker can attest, an economic downturn for one line of business can provide revenue opportunities for another. That is the glass-half-full assertion of those who say more financial institutions should offer fee-based, last-minute bill-payment options to their customers and do a better job of marketing the service.
Generally dubbed expedited, same-day or next-day bill payments for automated clearinghouse payments or "real-time" payments by users of electronic funds transfer networks, the methods all serve to move funds more quickly from bank accounts to billers, or at least get payments posted more quickly on consumers' billing accounts.
When U.S. consumers pay fees to banks for speedier processing of their bill payments to avoid more-expensive late fees or credit-report blemishes, banks split the revenue with third-party processors. Such processors, including Clairmail Inc., Metavante Corp. and Fiserv Inc.'s CheckFree, are offering a growing variety of expedited-payment options for financial institutions to offer their customers.
Consumers willing to pay fees for last-minute payments do so because of convenience in good times, and financial hardship in bad times.
"The slower the economic recovery, the more likely the motivation for consumers to use expedited payments will shift from convenience more toward necessity–actually utilizing expedited payments as a form of financial management," writes Bruce Cundiff, director of payments research and consulting for Javelin Strategy & Research Inc., in a report released in September. "Fewer consumers will use expedited payments under a necessity scenario than a convenience one, but those who do need the service are more willing to pay higher service fees to avoid higher late charges."
If the economy improves, consumers made aware of their options for expediting bill payments directly from their bank accounts will be more willing to pay fees, and higher fees, for the convenience of occasionally paying bills at the last minute, Cundiff says.
Economic crisis or not, financial institutions will miss out on $5 billion in fee income over the next five years unless they get more consumers into the habit of paying last-minute bills through their banks instead of directly to billers, Cundiff asserts. He forecasts the average fee for expedited payments to reach $10 per payment in 2009, $13 in 2010 and as much as $16 in 2011 through 2013.
In 2007, some 34 million U.S. households used expedited payments at least once (
But a lot of those expedited payments go directly to billers instead of being initiated by banks.
Marketing Options
In online surveys of 2,350 randomly selected consumers in March and 3,367 consumers in August, nearly one-third of consumers told Javelin they had made some type of expedited payment within the past year. But 74% of respondents said they paid expedited bills directly to billers, while only 25% paid them through their banks or credit unions. (One percent paid bills using other means, mostly through services that enable consumers to pay bills through third-party Web sites.)
An increase in consumers' use of online banking and mobile-banking tools could help financial institutions market expedited bill-payment options to depositors through online banking Web-site postings, e-mail messages and mobile-phone alerts that bills are due, notes Cundiff. "A lot of the lack of consumer usage of these types of services through financial institutions is due to lack of awareness that the options exist," Cundiff says. "Consumers inherently trust the timeliness of direct communication with the biller, thinking 'the only way I'm not going to get my cable turned off is to go to the biller.'"
But another report, also released in September, cautions financial institutions not to bank on expedited-payment fees to cover an increasing percentage of their costs of offering online bill-payment services. By 2012, expedited bill payments will help financial institutions recoup only 3% to 5% of their costs of offering slower–but free to consumers–online bill payments, U.S.-based consultancy Aite Group LLC predicts in that report.
Financial institutions pay third-party processors an average of 44 cents per online bill payment, according to Gwenn Bézard, the report's author and Aite research director.
Bézard agrees with Cundiff that protracted economic problems could have contradictory effects on consumer use of expedited payments. "People who are using expedited payments today out of convenience may start to budget more carefully and tighten their reliance on expedited bill payments," he says.
One reason for lack of customer adoption today is that fee-based expedited payments still are fairly new to online banking.
U.S.-based processor Metavante began offering an expedited bill-payment service to its financial-institution customers about 16 months ago.
When a consumer starts to initiate a bill payment through his online banking site, Metavante's bill-payment processing application checks the cut-off times for payment acceptance by billers with whom it has electronic connections. The consumers' online-banking site generates a message informing the consumer how soon his biller will post a payment.
"If the biller says, 'My cut-off time is 5 p.m.,' our files will reflect that," says Jeff Lewis, president of Metavante's e-payment solutions division.
Online-Banking Ties
Consumers can opt to continue with the payment as a standard ACH payment that may take a day or two to post to their biller's account. Or the consumer can opt for an expedited payment, in which the bank will speed the payment posting, usually for an extra fee.
Like most financial institution bill-payment services, Metavante's first step when a consumer initiates an expedited bill payment from an online-banking site is to send an electronic file listing payments that are being processed to a biller with which it has ongoing relationship.
Because the biller knows funds are on the way from a trusted source, the biller can post a credit to the consumer's account right away. Metavante then uses the ACH network to settle batches of transactions overnight between consumers' originating bank accounts and the receiving banks of their billers.
Lewis would not disclose the fees Metavante charges financial institutions for its services but says "from a [consumer] fee perspective, it will range anywhere from $4.95 to $25."
The $25 fee usually is for an overnight check service, in which Metavante does not have an ongoing agreement and an electronic connection with the payee. In those cases, the consumers' financial institution prints a check that Metavante sends to the biller via FedEx. The consumer receives a FedEx confirmation number via his online-banking site, Lewis adds.
"Those are typically high-value types of payments, such as a house closing," Lewis says.
Metavante is piloting another fast-payment option in which consumers pay billers with credit but through their online-banking site, Lewis adds.
More consumers would pay fees to expedite payments through their online-banking sites if their banks offered the service next to other bill-payment options and made clear to customers its existence and how it works, Cundiff says.
For example, in his report Cundiff notes that Silver State Schools Credit Union in Nevada displays a bill payment on its online-banking site and offers a free next-day payment option or a same-day payment for $6.95.
Silver State did not return calls seeking comment, but Online Resources Corp., the U.S.-based processor that enables the bill-payment options, says it began offering the service in April.
The free and paid options settle payments as ACH transactions or on the processor's proprietary network. "We liken it to the FedEx or Amazon model, if you order your books and want to get them a little faster," says Sheila Narayan, Online Resources vice president and general manager of banking payments services.
Financial-institution customers are expediting only 1% to 3% of online-banking payments through the service, but Narayan expects the rate to increase as consumers become familiar with the service. "This product is perfect for the economic times we're in," Narayan says. "But I think this is a product that will stay as the economy improves."
Bill-payment pioneer Western Union Co. also plays a part in expediting online-banking bill payments. Western Union and online-banking processor Yodlee Inc. announced a partnership in October 2007 to link financial institutions' online bill-payment services directly to Western Union's 6,000 billers worldwide, 4,000 of which are in the U.S.
Banks Decide Fees
The result, Yodlee BillPay PayItAll service, includes standard or expedited payment capabilities for online-banking users. When consumers opt for same-day or next-day bill payments, Western Union processes them over its proprietary payment network. Consumers do not see Western Union's, or Yodlee's, logos as they initiate payments. That way, consumers associate their bank's brand with the faster payment, not a third party's brand.
Banks decide what fees consumers pay for speedier bill payments, says David Shapiro, Western Union senior vice president of marketing. He would not disclose how much the service costs financial institutions or which banks have been using the service for the past year, saying the service is still "in the early stages."
But, Shapiro adds, Western Union has built its business on consumers' willingness to pay fees for faster funds delivery, and he does not see any indication that will change. "The alternative is having late fees assessed by the biller, which can be more costly," he says.
One factor that might promote the bank-expedited bill-payment model is the increasing prevalence and functionality of mobile phones. Though not widely used for payments or mobile banking yet, the mobile devices now are equally as ubiquitous as consumer access to broadband Internet service, according to Javelin.
Javelin reported in September that 84% of U.S. consumers reported using broadband Internet services, and 83% said they use mobile phones. With consumers taking mobile phones everywhere with them, many are coming to value services such as mobile alerts tied to their bank accounts and ability to conduct banking from text and Web applications on mobile phones, Cundiff says.
Consumers can set up online-banking preferences to send alerts to their mobile phones in addition to, or instead of, their e-mail accounts.
"I call it my alarm clock for my bills," says Reetika Grewal, director of product marketing at Clairmail Inc. "I'm one of those people who's famous for getting my bills in the mail or online and putting them off until I'm at my computer."
'Snooze Alarm' Test
Clairmail offers a mobile bill-payment service it markets as Mobile Lockbox to financial institutions and billers, which, in turn, markets the service to their customers as Green Payments because they do not require paper bills or checks. A key function of the service is what Clairmail calls "actionable alerts," meaning mobile-phone users whose banks offer the service may respond to alerts with commands to pay bills or just ignore them for the moment.
Clairmail is testing a new "snooze alarm" for those alerts. The service, being piloted with an undisclosed financial institution, will send mobile-banking and bill-payment users an initial alert about 20 days before a bill's due date, Grewal says. If the customer opts not to pay the bill, the service sends another notice a week or two later. This second time, the service offers slightly faster processing of the bill for a convenience fee of 25 cents to 50 cents, as set by the financial institution.
If a customer opts to wait longer, he receives a final payment alert shortly before the bill is due, with the option of paying a convenience fee, usually between $5 and $10, as set by the financial institution, to expedite payment of the bill.
During the pilot, Clairmail only is testing the service on ACH rails, but it hopes eventually to expand the service to debit and credit card payments, Grewal says.
Grewal would not disclose exact fees Clairmail charges banks, but she says Bezard's estimate of 44 cents per online transaction is about right. Mobile bill-payment transactions, she says, cost banks about 5 cents each, cheaper than check-processing costs.
Clairmail is not the only payment processor focusing on adding standard and expedited bill-payment functions to mobile banking. Fiserv, the U.S.-based owner of online bill-payment pioneer CheckFree Corp., in September announced Fiserv Mobile Money, a partnership with Mobile Commerce Ltd., a New Zealand-based mobile-banking services provider. "It's the first time we're delivering to U.S. consumers a single platform to offer up a text-banking browser from the phone application as well as online banking," says Calvin Grimes, Fiserv Mobile Money product manager. "We have the ability to enroll those consumers via Web, via phone and via walk-in."
Consumers in New Zealand and Australia pay most recurring bills with electronic debits from their bank accounts, says Serge Van Dam, a Mobile Commerce vice president working with Grimes on the Fiserv Mobile Money project. But for those who want to pay bills electronically within minutes instead of a day or two, Mobile Commerce enables Telecom New Zealand customers to pay bills for their landline phone, mobile phone and Internet service using an electronic funds transfer and point-of-sale network owned and managed by New Zealand banks, Van Dam says.
Van Dam sees an even bigger opportunity for billers and banks around the world to offer bill-payment options through mobile phones to underbanked consumers. "The people who are not online bankers today are the people who have the most cash-flow problems," he says.
Not to be left out, Metavante's Monitise in October rolled out a mobile-banking service with nearly the same functionality as Metavante's online-banking and bill-payment service, and the processor expected to add expedited-payments functionality to the mobile service in November, according to Lewis. Though banking customers cannot yet add payees via mobile phones, Metavante hopes eventually to add that option, he says.
Marketing of both mobile and online banking and bill payments under the aegis of environmental responsibility has helped increase consumer awareness and adoption of electronic banking and bill-payment options, sources agree. But many say financial institutions should do more to make online-banking users know their fee-based bill-payment options when they need them.
"Financial institutions traditionally don't do a good job of marketing bill payments, but we're seeing them change how they go about it," Lewis says.
The move to mobile banking gives financial institutions an opportunity to increase the visibility of bill payments in general, including expedited payments.
With so many new options for expediting payments through online-banking sites, consumer awareness is sure to increase, as will adoption and fee income for financial institutions. CP
