GonzoBankers, we are at a point where we have begun talking the payments revolution to death. We’ve heard the terrifying predictions about PayPal, MCX, bitcoin, et al at the latest round of conferences (you know, the events where the ’70s one-hit-wonder bands perform while you’re at the buffet and three people dance?). We’ve heard that we all need to prepare for change. We all have processed the sermon that mobile changes everything in payments.
The thing is, it’s time to begin thinking about some specific implications and make plans where we can. One of those areas is bill payment. Here’s the question: will bill payment still be a growing and important part of the payments story or will it be obsolete and declining in five years? One senior (old) Gonzonian’s take on why the answer is the latter.
My reasoning:
1. Bill payment volumes, while sizeable, are nowhere near the volumes we see for checks, debit, ACH, or several other money movement options. There were about 2.7 billion bill payment transactions posted in 2013. Solid, but hardly eye-opening when compared to 18 billion checks, 20 billion ACH transactions, or 40 billion debit transactions.
Bottom line: bill payment is neither so big nor so unique that it is indispensable. And, there are a slew of payment options on the horizon that can likely do the same thing.
2. Bill payment represents the biggest monthly cost on a checking account, by a wide margin (OK, maybe debit processing costs might be more, but that’s offset by revenue). While I would be treading all over non-disclosure agreements if I got specific with costs, ask yourself this: how much do I pay a month for my checking account? Then, how much do I pay in bill payment user and transaction costs per month for those that are enrolled? Bill pay is easily five to 10 times account costs.
3. It is a dime solution in a penny world. Again, let’s get to the math. Banks process or initiate ACH transactions for well under a nickel – and do it all day long. So can bill payment vendors. So can billers. So can PayPal. And it does, all day long. People at Starbucks can pay from their phones for nothing. So, tell me why banks are paying what they’re paying (small clue – lots of nickels) for a bill payment transaction?
Well, there’s flexibility and there’s security and there’s service and there’s the right to dispute et al. In other words, you are paying for support risk mitigation, right? Uh huh. So, I went back and tried to remember the last time I did anything that wasn’t just pay the bill, something that required any sort of service or support from my bank. After thinking about it for a while, I suddenly recalled that it was, um, well, NEVER.
In a weird way, the bill payment vendors caused some of this commoditization. Initially, bill payment was premium priced because of the implied level of service and support (problem resolution, risk mitigation) banks would receive. For the most part, the bill payment process is so smooth that there really aren’t many service issues. That’s good in terms of the experience, but bad for revenue – you can’t charge premium pricing for something banks don’t need all that much. So we commoditize.
Bottom line: it just doesn’t cost as much to move money as you are paying for bill payment. New payment options and better mobile payment technology will make this painfully more obvious in one to three years.
4. Unlike debit, there is no cost recovery opportunity. Somewhere, once, a bank made an expedited payment fee. End of story. There is no opportunity to fee. I asked several people what they would do if bill payment wasn’t free, and they all said they’d just go back to writing checks or go to the biller site and pay with a credit card.
Bottom line: it’s a cost.
5. It has lost the “stickiness” advantage. In the beginning, bill payment did preserve checking account relationships. But let’s fast forward to 2014. What is the sticky product now? It’s mobile, and while mobile bill payment is nice, mobile isn’t sticky because of the bill payment feature. It’s sticky because I can move money lots of different ways and I can perform banking interactions all on one device. Bill presentment/payment is one piece of that, but not the big piece. By the way, it may be a service you’re willing to provide to customers who are otherwise profitable, but you are very likely providing it to many who are not.
So, here was my “prove it” test for myself. For years, I have paid my utilities bill in Flagstaff, Ariz., through bill payment. Last month, I went to the utility company’s Web site and set up auto-pay from checking. It took a couple of minutes and was beyond easy. I set it up so that it’s paid the day after my check is deposited (OK, I get that I gave up the “flexibility” of being able to pick my payment date, but guess what? I always did it the day after I got paid). So, net effect? I don’t sign on and pay. The billing company notifies me of date and amount. I saved my bank several dollars a year. I’m as tied to my checking account as before, if not more, because it is harder to un-do.
What is wrong with this? What doesn’t work here? Nada.
If I were at a bank right now, I’d take my fresh, new business intelligence system and identify all of my customers who use bill pay to make regular payments to utilities, phone companies and the like. Then, I’d start a campaign to get them from bill pay to biller-initiated ACH. Better yet, biller-initiated debit, but that’s a whole other topic. Seems like a winner. Just saying.
Here’s my take: you don’t spend a dime for something if there’s no competitive advantage, no profitable customer retention, no stickiness factor, and no experience differentiator you can’t get for a penny. We are on a five-year decline for bill payment.
So, why might I be wrong? What would make bill payment as prevalent in 2019 as it is now? Well, there are three things that could cause this:
- I’m just wrong about consumer behavior and cheaper money movement alternatives being available. Please, now, don’t everybody disagree at the same time. As my dad used to say, “I thought I was wrong once, but I was mistaken.”
- There is a kick-ass price commoditization that gets bill payment costs close enough to alternatives. For that to happen, though, there would likely need to be a 75% reduction in price, something along the lines of the drop in what you first paid for debit and what you pay now.
- Long-term bill payment contracts with minimum fees. Seriously. You’ll be using bill payment as much in five years if you are contractually obligated to pay the same minimum, even if you don’t want to. There are lots of salespeople who will be more than happy to extend bill payment for five years at current prices with your current invoice being the minimum. And, by the way, they’ll be happy to also set that price for any person-to-person (P2P) solutions you want to use just to make life easy. If you were them, you’d be happy to sell this deal as well. The thing is, you’re not them. Enough said.
Here’s the point. If something is going to mature and your solutions and cost need to be adjusted, plan for it. Better than wishing you had.
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