| Bank Technology |
Last year utilities, cable companies, and merchants sent more than 16 billion bills to their customers, who paid more than 90% of those bills by mail. Only 6% of them were paid electronically--by telephone, automatic deduction, bank cards, and personal computers. That's about one billion payments. Is that a market? Most bankers seem to think it is, and many think it will grow into the next application that will transform home banking into a household utility.
A study of 185 large banks ($1 billion and more in deposits) by Mentis Corp. found that banks with deposits greater than $4 billion account for 80%-85% of all bank spending on remote banking, with bill-pay applications leading the way. The largest institutions outspend other big banks ($1-$4 billion in deposits) by a ratio of seven to one. And they're planning to pour most of that money into the more sophisticated personal computer-based versions of remote banking. As Figure 1 shows, if those plans are implemented, more than half of all large banks will be offering Internet bill paying by the end of 1997.
Why are these banks so high on the future of remote banking and its star feature, bill paying? Not because their customers are clamoring for it. In the Mentis study, only 4% of the big banks cited customer demand as the most important reason. Nearly half of them cited customer retention and competitive pressures as their compelling reasons.
Some are still underwhelmed
Are the prospects for remote banking really all that good? Mentis estimates that 1.8 million households now use PC-based home banking/bill paying systems via private lines, and virtually none do their banking via the Internet. By 2000, those numbers will grow to 6.5 and 3.0 million, respectively. Jonathon Whaling, who directed the Mentis study, says that banks--especially the biggest ones--have oversold themselves and undersold their customers on the benefits of remote banking/bill paying. He concludes that both banks and billers will have to make larger investments in marketing these services if they want to significantly increase usage rates.
The relatively gloomy Mentis prospectus takes into account the likely effect on remote banking/bill paying of electronic bill presentment, an emerging service that true believers like to call a "killer app," meaning an application that sends demand for a product soaring. After looking at bill presentment from the points of view of both consumers and billers, Mentis is still underwhelmed by the notion of consumers clamoring to pay their bills from Internet Web sites.
Of course, forecasters are wrong sometimes. Other observers, in fact, see great potential from electronic presentment. But more on that later.
CheckFree dominates
Remote banking and bill paying by telephone has been around for nearly two decades--about as long as ATMs. They enjoyed some sporadic success, but never really caught on, in part because the infrastructure was primitive and unreliable.
When personal computer use began to surge in the mid-1980s, CheckFree, Meca, and Intuit saw opportunities for home banking using those devices.
CheckFree, which started out in 1981 with a system that enabled health clubs to automatically collect monthly dues from members' checking accounts, later bet its future on selling the convenience of paying all bills from PCs. If a payee (biller) has previously signed up to automatically receive payments in this way, the transaction goes through electronically. If the payee has not signed up for the service, CheckFree writes a single check for the total amount of all the payments being sent to that biller at that time and appends a list of the accounts and amounts being paid. This procedure is called check and list. Today, some two of every three electronically initiated payments are made by check.
Checkfree's system today serves some 1.28 million consumers (more than 70% of all PC bill payers) through 224 financial institutions, including nine of the top ten banks. All of these numbers have been growing, in the past few years at an accelerating pace.
A little later in the 1980s, personal financial management (PFM) systems--Meca's Managing Your Money, Intuit's Quicken, and Microsoft's Money--integrated CheckFree's bill-pay system into their packages and ever since have promoted it as a star home-banking feature.
Early PFM versions weren't connected to anything. Users keyed in transaction data from their checking, credit card, loan, and investment accounts. Later, PFM software was linked to users' bank accounts via private networks, offering the considerable added convenience of downloading users' bank statements. Bills that are paid from the PC don't have to be keyed in, and users don't have to manually indicate which checks have cleared.
The Internet alternative
Around 1994, the emergence of the Internet provided a new wrinkle to the bill-paying scenario. The Internet made it possible to connect every customer to every bank without going through a proprietary toll-charging central server. (An appealing prospect if you trust the Internet's security, which most users still don't.) The Internet's World Wide Web could spell doom for standalone PFM software packages. That's because, with Web "browser" software built into users' PCs, banks can put the bill-pay software on their own servers; users don't need the packages at all. Moreover, on the Internet users can access their accounts and pay their bills from any Internet-compliant device anywhere in the world. (In standalone packages, the program and account data reside on a specific PC and can only be accessed from there.)
Things begin to move
Last year could be called the infrastructure-building year for electronic bill paying. Many third parties stepped forward to offer specialized products and services. Some of these, including Meca, design customized, bank-branded user interfaces. Others design "middleware" products that link end-user transaction messages to bank mainframe systems.
Microsoft reversed field and centered all its products, including Money, on the Internet. Intuit traded its bill-pay network to CheckFree for 23% of the company's stock and is moving toward Internet offerings of Quicken and an array of financial products.
M&I Data Services provides banking/bill-pay services to more than 225 financial institutions. Of these, more than half offer banking from PCs and nine via the Internet.
Significantly, all providers have committed themselves to work toward a single specification for remote banking, to be completed in 1998.
Last year also saw the formation of Integrion, a for-profit consortium of IBM and 15 big banks which together serve more than half of the country's banking households. Integrion's mission is to provide bank-oriented leadership in building an infrastructure for remote banking. The goal is to have the ability to operate over a wide range of systems and channels--including IBM's and Visa's private networks and the Internet. The key to success will be its Gold standard, a set of open specifications it is developing together with CheckFree, Microsoft, Intuit, and Visa. The consortium will offer its own bill-pay system sometime in 1997.
Remote banking is still in its infancy, but already analysts seem to be agreeing that its future is tied to the future of bill paying. Yet while the numbers of bill-pay users and their banks continue to rise, it's not exactly a land rush. The total number of remote users (9.5 million) that Mentis projects for 2000 is less than the number of people who had bought Quicken PFM software by 1996. Hardly the ingredients for a "killer app."
What will make this change? For a start, the payment system as a whole could save by going from paper to electronic media. In the case of bill paying, total system costs could be cut by two thirds! That's a rough approximation, of course. But the potential savings are so massive that they could become drivers of change.
Present bill-pay systems are far from all-electronic. From 40%-60% of all consumer payments are handled manually. Billers now spend $0.80 to $1.35 to send and process bills. That cost, says CheckFree, could be cut by at least 30%, and possibly 50% with all-electronic payment. Every provider in the payment chain can claim a share of those savings.
Presentment to the rescue?
Is there a magic wand that will transform this lackluster present into a glittering paperless future? Yes, say the true believers. It goes by the prosaic name of bill presentment.
The vision is anything but prosaic: an electronic flow of information from biller to consumer and directly into the biller's accounts-receivable system, with stops at both parties' banks.
Here's how it might work. The telephone company converts its standard paper bill into a Web format and posts it on its Web site (requiring a PIN to access it). It sends an e-mail message to the consumer that the new bill is out and how much it is, and sends a message to the consumer's bank. When the consumer wants to pay, she goes to her bank's Web site and clicks on the bill-pay icon. This takes her to an array of icons representing all her regular billers. She clicks on the telco's icon and enters her PIN. The bill's summary page appears. She clicks on "Pay Now" and the deed is done. Or she clicks on the "Long Distance Calls" page to look at the itemized list. If she is an independent contractor, and wants to keep track of her business calls so she can rebill them, she clicks again and invokes a program that analyzes the calls and saves the data for the invoices she will send out. She notes a message advising her how she could have saved $37.50 under an alternative pricing plan. She may also notice the electronic "bill-stuffers" along the edge of the screen. If she's interested in, say, a cruise to the Bahamas, she clicks on that icon to see more.
This scenario is a composite of several bill-presentation services announced by CheckFree and Princeton Telecomm. As we went to press, it looked as though the Princeton team would be first to field an operational all-electronic service.
Some of the features in the composite scenario won't appear in the early versions, and not all parties agree on the logistics of presentation.
The biller's view
Providing end-to-end bill presentment and payment service involves a lot more than just signing up billers, the biggest of which handle a million or more payments every month. All high-volume billers--telephone companies, utilities, cable companies, and retailers--process incoming bills through lockboxes, which are often managed by third parties. Over the years, lockbox managers have honed their equipment and procedures to cut their costs to the minimum. That involves extracting names, account numbers, and amounts from the remittance advices that consumers send in with their checks. So they aren't much interested in upsetting these operations in order to handle a relatively few payments in different formats. The "check and list" payments they get from bill-pay services are much worse. If any item on the list is wrong, the whole list becomes an exception item and the check can't be processed until the errors are found.
Princeton Telecom, a 12-year-old firm and leading bill-presentment handler based in Princeton, N.J., recently extended its els Electronic Lockbox Service to include a pay-by-phone option along with direct electronic debits. Now the firm has teamed up with providers of related Internet services to offer the country's first all-electronic bill presentment and payment service over the Internet. The new service was scheduled to be available in mid-April to some 400,000 customers of Elizabethtown Gas, City Gas Company of Florida, and NUI Energy along the eastern seaboard.
Princeton had previously announced a pilot program with PSE&G, the largest public utility in New Jersey.
Suffolk County National Bank, a $900 million-asset institution based in Riverhead, N.Y., was set to become the country's first bank to offer bill presentment at its Web site. However, executives were still finalizing legal documents and declined to furnish details when this magazine went to press.
CheckFree has announced E-Bill, a bill-presentation service which it is currently demonstrating at its Web site. The company has partnered with nine companies in five different industries to provide the new service, an early version of which is now available. CheckFree will also offer the CyberCash Electronic Wallet for bill payment.
All this activity strongly indicates that electronic bill presentation and payment is for real and may in fact be set for takeoff. A study by BlueGill Technologies, Ann Arbor, Mich., which specializes in converting print documents, such as statements for utilities, into a Web format, sees Internet billings going from zero in 1996 to 215 million per month in 2000 (see Figure 2).
Bankers are waiting and seeing
From the banking side, most of the major players agree that bill presentment is going to be big, although they don't agree on how big or when.
Bank of America spokesman Jeff Hershberger says that his bank is "interested, and looking at opportunities,-- but has nothing it wants to talk about now. He points to the need for a whole new set of industry standards for bill presentment--a comprehensive set that would include smart cards, biller logistics, and computing platforms at various levels.
Visa's e-Pay bill-payment service will incorporate a presentment feature in a pilot now planned for early '98. Spokesman Gregg Jones stresses that Visa's solution will include qualification of providers and dispute resolution.
David Fortney, Integrion's manager of product development, agrees that "bill presentment will be important--a win-win situation for all parties." But the consortium has no timeframe for bill presentment beyond "maybe in 1998.-- Fortney says that the key will be developing a "robust-- system that is scalable to millions of transactions and works for any bank and all billers. He says that such a system calls for new data-interchange standards for the required graphics, Web linkages, and e-mail. BJ
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