Electronic Bill Payment and Presentment: The Options for Banks Are Becoming Clear
Ouren, John, Singer, Marc, Stephenson, John, Weinberg, Allen L., The McKinsey Quarterly
The options for banks are becoming clear
After several years of growing investment in online banking, banks are now faced with an important decision: what to do about electronic bill payment and presentment (EBPP) - and when. EBPP enables consumers and businesses to receive, review, and pay their bills electronically, offering advantages of both cost and speed over the way most bills are paid today. By taking paper out of the billing process, EBPP could save billers, customers, and other constituents in the United States over $2 billion annually by 2002.
For banks, EBPP represents something of a threat, in that it could lead to customer attrition and erode several revenue streams: the float associated with paper check processing, cash management fees, and other revenues associated with traditional payment processing. These revenues could be partly protected if banks were to provide - and shape - EBPP.
But EBPP also has an important strategic dimension as it promises to become an integral part of a bank's overall online banking service. EBPP can add value to the core checking account by making transactions more efficient and enabling customers to consolidate their financial information more easily. Moreover, online interactions can be used to create a more intimate relationship with the customer and promote and deliver other online products and services. If banks fail to embrace EBPP, they could be preempted by brokerage firms, financial management software providers, and others seeking to strengthen their position in the online financial services market. In addition, if these players control EBPP, they are likely to divert payments from the traditional bank networks, thus affecting wholesale revenue streams.
Currently, banks are the trusted center of bill payment for most consumers. They are likely to be able to extend this relationship on line because they are in the best position to consolidate EBPP across multiple billers. In addition, they have a head start, already possessing a three million strong electronic banking customer base that is expected to grow to between 10 and 12 million over the next four years.
However, we believe that it is only the biggest US banks that need worry about adopting EBPP quickly and shaping the models that deliver it. The rest can afford to be fast followers.
The current total of relevant payments in the United States - and thus the potential US market for EBPP - is 27 billion recurring billing transactions per year, a figure that is growing by about 1 percent a year [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. This 1998 total includes the 15 billion consumer-to-business transactions that are recurring, such as monthly telephone bills, and the 12 billion business-to-business transactions that take place in the United States each year.
Billers benefit most from EBPP because it slashes the cost of interacting with the customer. It reduces paper handling and postage, cuts down accounts receivable because of its faster bill payment cycle, lowers expenses related to payment errors, and results in more efficient credit risk management. On an average bill of $100, billers are likely to save as much as $1.90 per transaction in total [ILLUSTRATION FOR EXHIBIT 2 OMITTED].
If EBPP penetration reaches 7 percent of recurring transactions by 2002, biller savings will amount to $2.2 billion annually. Moreover, billers are likely to reap indirect benefits from their enhanced ability to interact with customers. A cable television provider, for example, could offer customers the opportunity to sign up for additional premium channels when they pay their cable bill.
Payees, both consumers and businesses, can derive some direct economic benefit (such as savings on postage and envelopes) from EBPP, but most are likely to find it simply very convenient. They can pay bills electronically in the same "batch processing" way they do today, but at the same time take full advantage of the possibilities of the Internet to consolidate their bills and access their account. …