Report Coverage

In 2002, Bank of America announced free online bill payment for all new subscribers, and by 2004, free bill pay was the norm at the top US FSIs. Offering an online bill payment solution to retail banking customers will cost the financial services industry approximately $903 million (USD) in 2008. This aggregate amount represents spending on the portion of the service that financial services institutions (FSIs) outsource, such as the online bill payment Internet module, payment processing, customer service, and marketing programs conducted by the third-party service provider. Banks justified the expense of free bill pay based on enhanced customer retention, cross-sell opportunities, reduced call center activity, and higher profitability of online bill payment users. They also expected a reduced cost base from higher volumes of online bill pay due to consumers' increasing adoption and transactions. The anticipated cost savings never materialized, and there is little relief in sight. This TowerGroup Research Note provides insight into the current cost structure of online bill payment and describes one initiative in the industry creating a new "hard-dollar" revenue stream within the online bill payment business to compensate for the expense: fees for expedited payments.

TowerGroup Take-Aways

• Online bill payment initiated through financial services institutions (FSIs) is increasing at a compound annual growth rate (CAGR) of 18% and at this rate will reach 3.87 billion transactions in 2012.
• TowerGroup estimates that by 2010, US FSIs will spend over $1 billion (USD) in aggregate outsourcing portions of online bill payment to third parties that provide the bill payment interface and warehouse, payment processing, and customer service.
• The "soft" revenue associated with online bill pay (users' intrinsic profitability and the FSI's increased opportunities for cross-sell and retention) no longer compensates for the "hard" dollars FSIs must spend to facilitate it.
• TowerGroup estimates that by 2010, payments posted within 24 hours of coming due will generate $40.7 million in revenue for FSIs and offset approximately 4% of that year's online bill pay costs.
• Expediting payments presents many challenges, but fueled by today's economic climate and credit-score focused consumers, shows early signs of becoming a source of sustainable recurring revenue.