In the U.S. market, the industry standard pricing model has been free online
banking access combined with fee-based bill payment. However, during the
past three years, the fees for bill payment have gradually gone away to the
point where the most major U.S. banks advertise free bill payment, though it
may not apply to all account types or balance levels.
In July, we surveyed the top 50 U.S. banks and found only two that still
charged a monthly fee to all bill payment customers. Nearly half, 22 of 50,
offered bill payment free to everyone. Three banks did not offer bill
payment and the remaining 23 offered it free for certain accounts and/or
balance levels. In total, 45 of the 47 (96%) largest banks with bill payment
offered a free option . For those charging a fee, the average listed price
is $5.63/mo.
Last fall, TowerGroup found 33 of the 50 (66%) largest U.S. banks
providing bill payment free of charge to all or part of their customer base.
Furthermore, Tower found that bill pay penetration increased from 22% of
online banking customers prior to going free, to 38% after the change. This
70% lift was significantly more than what would have been expected without
the price change.
History of Free Bill Payment
Although BofA is largely credited with starting the free bill pay
movement, Citibank was actually the first to go free. In a major branding
campaign in the summer of 1997, the bank hit the streets of Manhattan
touting its no-fee electronic banking message (the fee-free policy also
applied to ATM transactions and other electronic banking transactions).
But until Bank of America’s high-profile move, most major banks held to
a $5 to $7 monthly charge, which not coincidentally covered their monthly
bill to CheckFree. Citibank handled payment processing in-house, which may
have contributed to their willingness to offer it fee-free.
Fees began to crumble in the fall of 2002 when BofA launched a
multi-million dollar television advertising campaign promoting free bill
payment. The campaign proved so popular with viewers that it continues to
this day. At the time, BofA said it was their most-remembered campaign of
all time. In the months and years since, most major U.S. banks have followed
suit. The most recent major to go free was U.S. bank earlier this year (see
Table 1, below).
One notable holdout is Wells Fargo, which last year said that 40%
of its base still paid a monthly fee.1 Assuming 2 million bill
pay accounts, with 750,000 paying monthly fees of $6.95, Wells Fargo is
bringing in more than $5 million per month in bill payment fees. While it
may lose a few customers to its pricing strategy, the $60 mil/yr can be
reinvested into better services, more marketing, or shareholder dividends.
1 American Banker, Wednesday, June 11, 2003
Table 1
Free Bill Pay Timeline
Bank |
Date |
Comments |
Citibank |
1997 |
Part of high-profile strategy to make
all electronic services free-of-charge |
AmSouth |
2001 |
Free-for-life promotion netted more
than 100,000 signups |
Charter One |
2001 |
Became free for all |
BofA |
May 2002 |
Became free for all |
Nat City |
Sep 2002 |
Became free for all |
Fifth Third |
Feb 2003 |
Became free for all |
HSBC |
Sep 2003 |
Became free for all |
Bank One |
Aug 2003 |
Free for all but basic accounts |
US Bank |
Jan 2004 |
Web bill pay free for all consumers, MS
Money/Quicken still $4.95/mo |
WAMU |
May 2004 |
Also offer free to small biz |
Hibernia |
Sep 2003 |
Previously $4.95/mo |
Source: Online Banking Report, 7/04
Table 2
Summary of Consumer Bill Pay Fees at Top 50 U.S. Banks
Source: Online Banking Report, 7/04
(1) Free of monthly fees; in a minority of cases, fees apply for
excess usage and/or account inactivity
(2) Excludes Comerica, whose pricing is not disclosed, and MBNA
which charges by the transaction
(3) Average fixed monthly fee, excludes transaction fees for excess
usage
Table 3
Consumer Bill Pay Fees at US Top-10 Banks
Source: Online Banking Report, 7/04
1In June 2003, Wells Fargo
reported that 40% of its customers received it free-of-charge.
2Wachovia is the other top-10 holdout; it has said that 70% of
customers get it free-of-charge.
Table 4
Consumer and Small Business Bill Pay Fees at Top-50 US Banks
ranked by deposit size, 12/31/03
Source: Online Banking Report, 7/04
Bank of America landing page from Google ad
(8/25/04)
The Bank of America Story
Thanks to an unusual openness, motivated by the strategic importance1
of its free bill payment policy, Bank of America’s internal research
results have been widely circulated in print. To recap, in a 2.5 year study
of bill pay users compared to a control group of similar customers, the bank
found a 30% profit lift (see Table 5 right). Despite conventional wisdom,
little of it came from increased retention: the main driver was increased
balances.
Normally, we don’t pay much attention to studies correlating bill payment
with higher profits. It’s a function of the early adopter demographics and
will gradually diminish as bill payment becomes a mainstream service.
However, Bank of America’s results deserve a second look because they used a
control group of similar non-bill payment customers to compare profit lift.
We have serious doubts that you will be able to recreate these results
within your own customer base. Here’s why:
- What really caused the profit lift? Was it the bill payment in
isolation, or was it the entire online banking experience at BofA’s
award-winning site.
· Did households in the control group already have one foot out the
door? Perhaps the control group didn’t adopt bill payment at Bank of America
because they were already in the process of moving their balances to another
financial institution. If so, the control group was predestined to have
lower profits no matter what factor was evaluated.
· Was the control group really that similar? Although, they may have
been in the same demographic segment, it seems to us that a household using
bill pay in 2001 was fundamentally different in their financial behavior
than one that didn’t use bill pay.
· Would the same profit lift be seen with any new product geared to
affluent customers, e.g., a new diamond credit card? In other words, it may
not be that bill pay causes balances to grow; it’s merely that those
with growing balances tend to sign up for new upscale services regardless of
what they are.
· Finally, even if you take the results at face value, does BofA’s
experience with early adopters during the past three years have any
correlation with what you might expect with mainstream users during 2005 to
2008?
1 Besides the free publicity, the bank has an ulterior motive
for promoting free bill payment across the entire industry. The bank
took a 16% interest (10 million shares) in CheckFree in Q2 2000; the
deal was valued at $400 million at the time.
Table 5
Bank of America Results
index of profitability with 100 = to
profits prior to the household using electronic bill payment
Initial customer profitability |
100 |
|
|
|
|
+ deepened relationships (+27) |
127 |
|
|
|
|
+ increased retention (+3) |
130 |
|
|
|
+ reduction in servicing cost (+1) |
131 |
|
|
|
– cost of bill pay service (-9) |
122 |
|
|
|
|
|
|
|
Source: Bank of America, increase in customer profitability during a
31-month period ending in 2002, results of an analysis of 300,000
customers comparing profits from bill payment users vs. the profits of a
control group of similar households not using bill pay
Results from Online Resources
Online Resources, a major bill payment processor with more than 500
financial institution clients, found that bill pay penetration was 40% for free
vs. 28% for those with monthly fees of $5 or less
(see Table 6 below).
Table 6
Online Resources results
Aug 2003
|
Monthly Fee |
|
|
Free |
<$5 |
>$5 |
Lift |
% of ORCC client’s charging this fee1 |
33% |
36% |
31% |
n/a |
Online banking adoption2 |
18% |
14% |
13% |
30% |
% Bill pay conversion2 |
40% |
28% |
20% |
60% |
Bill pay adoption2 |
7.2% |
4.0% |
2.5% |
120% |
Source: Online Resources, 7/04
(1) January 2004 data
(2) June 2004 data
That’s a 30% lift in conversion of online banking users to bill pay; and an
even more impressive 120% lift in total bill payment adoption across the bank’s
checking account base. However, it’s been achieved at a hefty cost. Not only are
the banks giving up the $5 to $6 monthly free from their existing bill pay
customers, they’re paying several dollars per month for a whole new group of
customers.
It’s also difficult to ascertain how much of the increase in online banking
adoption was accounted for by the free bill pay offer. Since the first to offer
free bill pay tended to be more aggressive in their overall marketing of online
banking, some of the lift is from better overall marketing, regardless of the
price.
Results from Compete Inc.
Ecommerce researcher Compete Inc., which has a financial services
practice run by Stephen Franco, a high-profile analyst at US Bancorp Piper
Jaffray during the height of the bank technology boom. He found that banks
offering free bill payment had a higher share of their customer’s electronic
bill payments. At major banks that charge for bill pay, 18% of their customers
used biller-direct payments. In comparison, those offering it free-of-charge had
a third fewer customers (13%) using biller direct services (see Table 7 below).
Table 7
Bank Bill Pay vs. Biller Direct
Feb 2004
|
|
Penetration of: |
Segment |
Number |
Bill pay base |
Online banking base |
Bank online |
28.7 mil |
n/a |
100% |
Any pay online |
11.3 mil |
100% |
39% |
Bank only |
5.7 mil |
|
20% |
Billers only |
4.6 mil |
|
16% |
Both |
1.0 mil |
|
3% |
Source: Compete, Inc. 5/04
LowerMyBills landing page from Google ad (8/25/04)