Electronic billing: The missing link

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More than 20 years after the prediction of a "checkless society," Americans are writing more checks than ever-- approximately 12 per month per house-- hold, according to one recent survey

Customers

say they want the convenience of paying bills online, but they are not yet rushing to adopt this technology. In the chicken-and-egg world of electronic banking, it's not clear whether they haven't been paying bills online because their banks haven't offered these services, or whether banks have been slow to offer electronic bill presentment and payment (EBPP) services because their customers have not demanded it.

This may be changing as customers are deluged with advertisements about online bill payment services. The bad news for the banking industry is that the most aggressive marketers of these services aren't banks-- and now, even the United States Postal Service has gotten into the act.

Many experts believe that the missing element in bringing bill-payers online is electronic bill presentment-that is, online delivery of billing information, so that the billing process is entirely paper-free, and the customer's record is completely electronic. Billers are moving quickly to set up online billing processes, either directly or through online bill publishers. A 1998 study by GartnerGroup and Mentis Corp. found that more than two-thirds of the nation's largest corporate billers (utilities, financial services and telecommunications firms) were actively researching avenues for online bill presentment.

When it works, electronic bill payment and presentment benefits all involved. An IBM study estimated that it costs billers between $1.65 and $2.70 to process each bill; moving to online bill presentment and payment would lower these costs to between 60 cents and a dollar. At the current estimated rate of 17 billion regular bills a year, the potential savings to bitters alone are mind-boggling. The IBM study estimated total savings to the system-billers, customers and banks-at between $19.3 and $46 billion dollars annually.

Community banks, which may be the most logical providers of electronic bill payment and presentment services, must move quickly to meet consumers' expectations in this area or risk losing their traditional position at the center of the consumer payments system.

The Mechanics of EBPP

Electronic bill payment and presentment systems fall into three basic models: biller-- centric, bank-centric and customer-centric.

The biller-centric model was the first to evolve over the Internet, with Cyberbills and Transpoint-MSFDC leading the way, In the biller-centric model, the customer must go to the biller's Web site and enter his or her own account information-not only information about the customer's account with the biller, but also information about the customer's demand deposit account. The biller may then store this information and possibly, depending on its privacy policies, use it for other purposes, such as research or marketing.

The customer may also use the biller's Web site to set up a recurring direct debit. The biller would then notify the customer a few days in advance before debiting his or her demand deposit account. Insurance companies and utilities firms are among the most common businesses that accept electronic payments in this way; many local tax authorities have also set up biller-centric EBPP systems.

The biller-centric model is least convenient for customers and cuts banks largely out of the process. In this model, the customer does all the work and largely cedes control of the transaction to the biller, especially if he or she sets up a recurring debit.

"The biller-centric model violates the two basic principles of choice and control," says electronic banking consultant James R. Wells, "hence the fact that biller-direct is not wildly successful.' Jason Gilbert, general manager of the San Francisco office of Digital Insight, an Internet banking provider to community banks, says that the biller-centric model comes up short because it's not convenient enough for the customer. "The direct model makes sense if you have only one biller," he notes. "It doesn't make sense if you have multiple bills."

The customer-centric model is the one getting the most attention these days, typified by the aggregators. You've heard the ads on the radio, you've seen them on TV-StatusFactory.com, PayMyBills.com, Yodlee.com, Checkfree.com, Quicken.com, Microsoft.com-and now even the U.S. Postal Service, at www.usps.com. (Interestingly, the Postal Service's product uses Checkfree for its processing.)

These aggregators claim to offer the customer what he or she really wants: the ability to receive and pay all bills at a single Web site. In fact, it's not quite as easy as that, and the customer-centric model, as it currently stands, presents some serious concerns for the thoughtful consumer.

The first concern is privacy. To make the most use of a service like PayMyBills.com or Yodlee.com, the customer gives that anonymous Web site his or her entire financial profile: account numbers, account balance information and, in some cases, even a facsimile signature and PINs. The aggregators emphasize security and privacy, but most customers aren't used to providing this information to anyone but their banker, lawyer or accountant.

The second problem is that the bill payment aggregators still use a lot of paper and traditional "snail mail," since, while aggregators such as Checkfree.com and Princeton Ecom do provide electronic bill presentment, many billers are not yet publishing bills online.

PayMyBills.com, a major bill payment aggregator that just merged with Paytrust, is a typical example. If customers want PayMyBills.com to pay bills that are not presented electronically, they must send them the paper bills, or change their billing address so that the bills go directly to PayMyBills.com. PayMyBills.com then scans the bills into the customers' personal "Bill Management Centers," and notifies the customers by e-mail when a new bill arrives. When a customer authorizes a payment, PayMyBills.com either debits the customer's demand deposit account and credits the biller's, or-if the biller does not accept electronic payments-writes a paper check on the customer's account and mails it.

"These sites provide transparency to the customer, but they have obvious problems," says Jason Gilbert; the use of traditional mail and the mix of electronics and paper create multiple opportunities for error. Many billers have security-based objections to sending bills to third parties; Citibank, for example, has refused to send bills to aggregators. Beyond that, billers are unhappy with the electronic aggregators because, in this model, the customer may never actually see a bill. Gilbert notes that bills are often a company's main contact with a customer; with these electronic aggregators, customers "don't see statement stuffers, and billers miss that opportunity," he says.

Nor are the aggregators free, although consumers don't seem to mind paying for this service (something that may bewilder bankers). If the average household pays 12 bills a month, that's $3.96 a month in first-- class postage. Most billers provide their own return envelopes, but if the customer provides his or her own, at a generous estimate of 10 cents per envelope, that's another $1.20. Most banks offer customers free checking in exchange for direct deposit or maintaining a minimum balance; even a per-check fee, however, is unlikely to exceed 20 cents a check, so call that another $2.40. Thus, a customer who pays bills the old-fashioned way has maximum out-of-- pocket expenses of about $7.60 a month.

After an introductory six months' free service, the US. Postal Service will charge consumers $6 a month to pay bills electronically, for up to 20 transactions; transactions beyond that will cost 40 cents apiece. (Thus, the Postal Service will actually take in more revenue from an average household using its electronic payment service than from one that uses first-class mail.) PayMyBills.com charges customers $8.95 a month, and Checkfree charges $9.95 a month.

But, as we all know, customers are willing to pay-and even sacrifice-for convenience. "Choice, control, convenience and cost are the primary drivers," says electronic banking consultant Wells. "For people who are time-starved and convenience-- hungry, they're willing to give up some confidentiality in exchange," and they don't mind paying for service if they perceive that they are receiving value in return.

These aggregator sites, says Wells, "should scare the bejeebers out of the banks," because they violate "the fundamental premise that customers shouldn't be giving out their confidential information to third parties." The answer, says Wells, is 11 that the banks should become the aggregators, so that customers can keep their PINs at their banks.'

Moving to a Bank-Centric Model

In fact, one of the aggregators-Checkfree-- is 16 percent owned by Bank of America, and has a 10-year contract to handle electronic bill payment and presentment for the bank. And banks are moving, with the help of outside service providers and interbank alliances such as Spectrum, Digital Insight and Metavante (formerly M&I Data Services), banks are beginning to offer comprehensive electronic bill presentment and payment services of their own.

"Customers clearly have an expectation that their financial institution should be the one to provide these services," says Digital Insight's Gilbert. A 1999 study by Gantz Wiley found that paying bills ranked third among the Internet banking services customers said they would be likely to use, if offered by their own financial institution. Studies by Jupiter Communications and the GartnerGroup have also found that customers who make financial transactions online would prefer to receive and pay bills through their financial institutions, rather than through an Internet portal or aggregator.

Many banks have been offering electronic bill payment services for years, not necessarily through the Internet. Gardiner Savings Institution, a $400-million thrift in Gardiner, Maine, has offered electronic bill payment through a stand-alone, non-- Internet-based computer banking system for the past three years. Jim Fairfield, Gardiner's savings' manager of electronic banking, says that 375 customers use it monthly, and more customers join all the time.

Gardiner Savings' computer banking program, GSI electronic banking, is a customized version of a program created by Regency Systems. The bank provides it free to customers. Through the program, customers can check balances, transfer funds, pay bills and keep their financial records. The bank plans to create a Web site that will offer these services, but will continue to offer the stand-alone program for customers who prefer not to transmit financial information over the Internet.

To pay bills electronically using Gardiner Savings' online system, customers must enter their own billing account information, and then send the bank payment requests via modem. The bank then makes the payments, either electronically or by paper check; Fairfield estimates that between 55 percent and 60 percent of payments are electronic. Some of Gardiner Savings' own business clients accept payments electronically, so the bank can benefit from "on-us" electronic payments. Rather than charge a monthly fee, Gardiner Savings charges customers 20 cents per transaction for electronic bill payment.

Gardiner Savings' program is typical of the early bank-centric electronic bill payment programs. These programs first appeared in the 1980s; the reason they never took off, Wells says, is that they offer only half of the equation.

"The primary disconnect is that if consumers get billed with paper, the overwhelming majority pay them with paper checks," Wells says. "If banks want to reduce paper, they have to present bills electronically to get consumers to pay bills electronically. Consumers don't want incomplete solutions."

Last year, The Chase Manhattan Corp., First Union Corp. and Wells Fargo Corp. joined to form Spectrum, an online switch designed to facilitate electronic bill presentment and payment. Spectrum's mission is "to provide a secure, open and interoperable infrastructure to electronically link consumer and biller service providers;" it has announced its intention to put an interactive financial exchange switch (IFX) in place by the year's end.

Spectrum's membership is open to any financial institution. With its three founders, its participants currently include 26 of the nation's largest banks-including BB&T, Hibernia, M&I Marshall & Ilsley, Summit Bancorp and Wachovia Corp. A recent alliance with Metavante will allow Spectrum participants to pay any company or individual electronically, regardless of whether the recipients have electronic connections.

Digital Insight, a major provider of Internet banking technology support to community banks, acquired Mew Network Consolidator in April, which allows banks to collect electronic data from multiple billers, so that customers can receive their bills through banks' Internet sites as well as pay them. The Consolidator allows a bank access to any electronic bill publisher that uses the Open Financial Exchange (OFX). Wells Fargo is currently conducting an internal pilot of this program; Chase has also purchased it and is integrating it into its own system. To date, Digital Insight's Consolidator is the only bill consolidation program that has received certification from the Spectrum network.

Traditional Roles, New Tools

Facilitating payments is one of banks' traditional key roles; advances in electronic bill payment and presentment technology will make it possible for community banks to maintain this role in an online world. EBPP services will also be crucial for community banks that want to position themselves as their customers' trusted financial managers and advisors.

Figuring out how to charge for electronic bill payment and presentment services may be a public relations and marketing challenge similar to that of the automated teller machines. Customers don't mind paying third-party aggregators for online bill services, but may resent having to pay their bank for the same service, especially if the customer perceives that the bank is saving money by moving to EBPP as well. (While EBPP can reduce banks' per-transaction costs by 5 to 10 cents a bill, Jason Gilbert notes that the investment in technology may be considerable.) Banks must identify the value they add to the EBPP process and highlight it for their customers.

"The Post Office has no insight as to what the balance of my account is," says Gilbert. "They can't catch overdrafts. Aggregators can't tell me what my available balance is ... bill management is the key service."

The important questions are, says Wells, "Once the consumer has centralized everything [through an aggregator or a bank's EBPP system], what does this intermediary help him or her to do? How will the aggregator help the customer keep information secure and manage other financial decisions? Banks have an opportunity to be a trusted third party to help consumers manage their finances through the Internet."

Gilbert and Wells both believe that the industry is close to a critical mass of online bill availability that will draw customers to electronic bill payment. "There was a hesitation in the market as to how well [EBPP] would be accepted," Gilbert notes, but the multitude of nonbank providers may have done banks a service by getting customers used to the idea.

"People say consumers aren't clamoring for this," Wells comments. "Well, there was nobody clamoring for ATMs, either."

info

www.cyberbills.com

www.transpoint.com

www. digitalinsight. com

www.Status Factory.com

www.PayMyBills.com

www.Yodlee.com

www.Checkfree.com

www.Quicken.com

www. Microsoft.com

www.usps.com

www. princetonecom.com

www.paytrust.com

www. bankofamerica.com

www.spectrum.com

www. metavante.com

www.gantzwiley.com

www.jupitercommunications.com

www.gartnergroup.com

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Leveling the Playing Field: Electronic Aggregators and Regulation E

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While community banks may have many intangible competitive advantages over the online bill aggregators such as

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Yodlee.com, the aggregators currently have a tangible advantage: It is not clear that these aggregators are subject to the disclosure and liability requirements of Regulation E.

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Regulation E implements the Electronic Funds Transfer Act (EFTA), which requires that financial institutions disclose the terms and conditions of EFT services; requires periodic documentation of transfers through statements and receipts at EFT terminals; sets procedures for resolving errors; and limits consumer liability for unauthorized transfers, thus transferring that liability to the financial institution involved.

In June, the Federal Reserve Board asked for comment on revisions to its official staff commentary on Regulation E that reflect advances in consumer banking technology and the emergence of online aggregation and "screen scraping" services. The Fed asked for comment on whether and how nonbank aggregators should be subject to the requirements of EFTA and Regulation E.

The Fed asked whether nonbank aggregators fall within

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Regulation E's definition of "financial institution," which identifies financial institutions as those that maintain a customer's account or issue an "access device" for the account. A nonbank aggregator that issues a separate access code or password in order for a customer to transfer funds or make payments seems to fall squarely within the definition of "financial institution," and should therefore be subject to Regulation E. Several aggregators avoid this, however, by having the customer use his or her own bank PIN instead of a separately-issued access code.

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Complicating the issue-and putting the banks at a further competitive disadvantage-is the fact that a financial institution is often completely unaware that a customer is using one of these aggregators. Thus, if fraud occurs in connection to one of these nonbank bill payment sites, the customer's bank may find itself liable for losses although it was unaware of the transaction. Because of this possibility, customers' use of nonbank aggregators may expose banks to fraud and reputation risks over which they have no control.

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In its Aug. 31 comment letter, America's Community Bankers told the Federal Reserve Board that "financial services aggregators ... meet the definition [of financial institutions pursuant to Regulation E," and should therefore be subject to Reg E's consumer protection requirements, as well as to the agency's rules and guidance on privacy and security. Charlotte Bahin, ACB's director of regulatory affairs and senior regulatory counsel, wrote, "An aggregator receiving the information necessary to access the consumer's accounts indirectly holds the account ... aggregators who have access to information from a consumer about his or her accounts must bear the responsibility of having this information just as if the aggregator were a financial institution with a physical office."

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The Federal Reserve is expected to issue its staff commentary revisions by the end of the year. It's worth noting, however, that the Electronic Funds Transfer Act is now 22 years old. Its drafters never envisioned the kinds of transactions that are now subject to EFTA requirements. Clarifying its application in this new environment may ultimately demand a legislative update.