EBPP Future Blends Direct and Bank Aggregation Models

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1 Strategic Planning, A. Litan, M. Cruz Research Note 13 January 2004 EBPP Future Blends Direct and Bank Aggregation Models Electronic bill presentment and payment is on the rise. By 2007, 65 million U.S. adults will view their bills online, of which 65 percent will use a blended biller-direct and bank aggregation model (0.7 probability). Core Topic Financial Services: Financial Services Drivers, Strategies, Direction and Vision Key Issue How will changes in technology and processes affect financial services requirements and efficiencies? Strategic Planning Assumptions By 2007, 65 million U.S. adults will view their bills online, of which 65 percent will use a blended biller direct and bank aggregation model (0.7 probability). Since the late 1990s, banks and billers have been trying to lure consumers to their Web sites to view and pay electronic bills (ebills). So far, billers have been overwhelmingly victorious in the battle for consumer eyeballs and have won a significantly greater consumer electronic bill presentment and payment (EBPP) market share than banks have (see Figure 1) Just 7 million adults view their e-bills at their banks, while 28 million view them at biller Web sites, according to a May 2003 Gartner survey of 2400 U.S. adults. Similarly, 18.2 million adults pay their bills at biller Web sites, while just 12.4 million do so at bank Web sites. Thirty-five million U.S. consumers are paying bills online, and that number is expected to increase to 65 million by 2007 (0.8 probability). Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 60 Figure 1 How Consumers View and Pay Their Bills Electronically 57 U.S. Adults in Millions View Pay Net Online Biller Bank Portal Auto Pay Source: Gartner Research (January 2004) However, consumer preferences are the reverse. Only 3.8 million U.S. adults prefer viewing bills at their biller sites; 9.3 million prefer viewing them at a bank aggregation site. Similarly, 9.8 million prefer paying bills at billers' Web sites; nearly double that amount (18.8 million) prefer making payments at bank Web sites (see Figure 2). Banks are notably ahead of billers in terms of consumer EBPP preferences; however, neither bank nor biller Web sites represent the most-preferred consumer interaction channel. is the clear winner when it comes to e-bill delivery, and autopayment dominates e-payment preferences, revealing consumers' desire for the convenience when managing bills. 13 January

3 30 Figure 2 How Consumers Prefer to View and Pay Their Bills Electronically View Pay 26 U.S. Adults in Millions Biller Direct Bank Aggregator Portal Autopay Source: Gartner Research (January 2004) delivery of bills for viewing (which banks or billers can and do offer) is preferred by 12.9 million U.S. adults. Autopay where consumers authorize billers to deduct invoiced amounts automatically from one of their accounts each month is used by 57 million U.S. adults. Autopay is the most-preferred e- payment option among 26 million adults nearly three times as many as those who favor paying bills at bank Web sites, the second-most-popular option. Still, old consumer habits are hard to break, and all electronic channels pale in popularity when compared to paper and the U.S. Postal Service 164 million U.S. adults say they still want to receive their bills through the mail; 116 million say they want to send check payments back through the mail. Neither banks nor billers can afford to sit back and declare victory. They still have an uphill battle in converting paper-bound consumers to electronic channels, where they can reap significant return on investment from converting paper-based transactions to electronic, servicing customers online and cross-selling consumers other goods or services (see "The Big Payoff of Web Billing and Online Customer Service"). Consumers want the convenience of bank e-bill aggregation, e- mail delivery and autopay. However, billers are the ones who can provide consumers with instant enrollment in bill viewing (and therefore instant gratification, which is critical to the Web- 13 January

4 experience), and rich, full-feature functionality, such as showing unbilled daily balances, and providing timely customer service and dispute resolution. Billers and banks need to work together so that banks provide consumers with bill lists and basic e-billing functions (such as viewing monthly statements and initiating payments), while enabling billers to interact with consumers to provide customer service and offer relevant promotions and cross-sales. Vendors Yodlee recently introduced this type of blended model with its Bill Manager offering and has reportedly signed a major bank customer, with a few more in the pipeline. CheckFree is coming closer to this blended model with its new WebPay v.4.0, but still does not enable consumers to jump over to biller Web sites from within a bank site's windows. CheckFree's WebPay 4.0 and Yodlee's Bill Manager both support instant consumer enrollment at biller Web sites; Yodlee also supports payments at biller sites. CheckFree supports the biller direct model through its hosted services and I-Solutions software, and also supports a hybrid model (Scout) now available at CheckFree.com, which helps consumers find their e-bills. Through its bank interface, CheckFree intentionally gives banks more control over the user experience and gives billers the ability to communicate with the bank-centric functionality through programmatic application programming interfaces. Like CheckFree, Metavante, another provider of bank e-bill aggregation, does not enable consumers to link over to biller Web sites from the bank site's windows. In theory, the decentralized Yodlee Bill Manager model comes closest to satisfying biller, bank and consumer requirements, but there are undoubtedly tradeoffs in performance and reliability when system control is decentralized. Bank Programs In the meantime, consumer preferences have markedly shifted since 2002, when surveyed online consumers said they would rather view e-bills at biller Web sites directly (see "Billers Still Offer Consumers More Convenience Than Banks"). Consumers cited free service as the main reason for this preference. Attitudes started changing in 2003, when more banks began offering consumers free EBPP services and even encouraged consumer adoption by offering sweepstake programs and gifts. For example, in addition to offering free bill payment service, the nation's largest banks including Bank of America, Citibank and Chase offered cash or other rewards ranging from $150 (Chase) to entries into weekly drawings for free cruises 13 January

5 (Citibank). Banks are motivated to offer lucrative awards because consumers who pay bills at their online banking sites are less costly to service and more profitable. Bank of America, which had 2.8 million online bill payers in October 2003, and Wells Fargo, which had approximately half that number of adopters in 2Q03, released statistics on how profitable these consumers were to their banks. On average, the banks found that online bill payment customers retain 30 percent higher balances in their demand deposit accounts, take out 20 percent greater loan amounts, buy 7 percent to 10 percent more bank products and make 30 percent fewer calls to bank call centers. Citibank has stated similar numbers. Online bill payment is more-readily adopted by consumers in the highest income brackets those earning more than $75,000 a year and among the most-educated college graduates. Nearly 24 percent of U.S. adults earning or more than $75,000 a year pay their bills online; only 9 percent of those earning less than $25,000 do the same; approximately 18 percent of those earning between $25,000 and $75,000 pay bills online. Similarly, 26 percent of college graduates pay bills online compared to 19 percent of high school graduates and 9 percent of adults who never graduated high school. Many U.S. banks particularly the largest ones have already eliminated, or are seriously considering eliminating, their bill payment fees, and are improving their user-interfaces. Their tactics are working; consumer adoption is on the rise. Thirty-five million U.S. consumers are paying bills online, and number is expected to increase to 65 million by 2007 (0.8 probability). The first figure is across the board at a combination of bank and biller Web sites. So far, the largest successes have been in the telecommunication and credit card billing sectors, which have driven much of the current e-billing adoption at these billers' Web sites. These billers will typically be reluctant to support the bank e-bill aggregation model, where billers lose control over direct interaction with their customers (see Figure 3). Therefore, banks will have to work closely with EBPP service providers and billers to provide the kind of e-bill delivery model that consumers are looking for, and which satisfies major successful e-billers. 13 January

6 Figure 3 E-Bill Adoption by Billing Sector Adults Viewing E-Bills (millions) Adults Paying Online (millions) Credit Card Telephone Loans Utilities Insurance Other Source: Gartner Research (January 2004) Action Recommendations Billers should prepare for the shift in consumer preferences to e-bill aggregation by working with vendors that provide e- bill distribution through banks. Telco companies and credit card issuers should ensure that when they distribute e-bills through bank partners, they still are able to bring consumers back to their own Web sites, where they can service them more effectively, as well as engage in cross-sale and marketing activities. Other billers, such as utilities and insurers, don't need to concern themselves as much with this capability because their bills are more static, and consumers will be less-interested in going to their Web sites from within the bank EBPP platform. Banks should follow the lead of their successful peers by dropping fees for online bill presentment and payment, so that they can attract and retain the most-profitable customers. Banks should work with EBPP service providers that offer a blended biller-direct/bank aggregation model. This will be the most-attractive model for most of their consumers and will drive the most adoption. 13 January

7 Bottom Line: The days of pure biller-direct or bank-aggregation electronic bill presentment and payment models are nearing their end. By 2007, 65 million U.S. adults will view their bills online, of which 65 percent will use a blended biller-direct and bank aggregation model (0.7 probability). Banks and billers need to work together, albeit through third-party providers, such as Yodlee, CheckFree and Metavante, to provide consumers with model that give them the best of both worlds. Such a blended model is the only one that provides a win-win value proposition to banks and billers alike, and is the one that best satisfies consumer requirements for convenience and rich functionality. 13 January