Banks Can Slice Transaction Costs
Newkirk, Kristine M., Independent Banker
EDITOR'S NOTE: The "Marketing Matters" column on page 60 discusses this issue from a different perspective.
Touted as a convenient, efficient and less costly alternative to paper checks, direct payment is on the rise. Direct payment is a service through which consumers pay bills or other recurring payments via the Automated Clearing House (ACH) Network, a nationwide electronic payment and collection system.
Direct payment differs from electronic bill payment in that the latter requires consumers to instruct their financial institution to pay each bill individually as the bill comes due, whereas direct payment occurs automatically. Once the customer provides written authorization for direct payment to the billing company, payment is electronically debited on a predetermined date from the customer's bank and credited to the billing company's bank. An account statement, normally distributed monthly, will show that those payments have been made.
Although traditionally used for insurance premium payments, fixed and variable bills can be paid with direct payment for all types of recurring charges, such as loan payments, utility bills, subscriptions, charitable contributions and membership dues. When the bill amount varies period to period, such as a utility bill, the consumer generally receives a billing statement 10 days before the payment is due. A day or two before the payment is forwarded, the company, through its financial institution, originates an ACH debit from the consumer's financial institution to be settled on the payment due date.
This service provides consumers with significant time and cost savings. Since direct payment occurs electronically, consumers need not spend personal time paying bills; postage costs are eliminated. Payments are made on time, and since authorization can be cancelled at the customer's discretion, consumers maintain full control of their financial affairs.
Companies that originate direct payment also benefit. Firms using direct payment can eliminate bill preparation and postage expenses, as well as subsequent check processing procedures. Delinquencies are reduced and late billing procedures are eliminated. Cash flow may also be improved. Direct payment can eliminate the expense and handling of coupon books or paper drafts.
ROLE OF COMMUNITY BANKS
Potential cost savings, increased cross-selling opportunities and enhanced client relations (with both retail and commercial customers) are several reasons that community banks find direct payment appealing. Banks that offer direct payment today are essentially adopting a long-term strategy, in the sense that by further strengthening banking's role in electronic commerce, they are positioning themselves to attract tomorrow's customers.
Financial institutions of all sizes realize significant cost savings when they process ACH debits compared with checks. Payment Systems, Inc. of Tampa, Florida, found that in January 1994, when comparing the transaction cost of processing ACH debits to checks, smaller financial institutions (under $1 billion in assets) had savings of 50 percent, while large institutions (more than $1 billion in assets) had savings of 41 percent. …