online bill payment: a path to doubling profits - bcg bill payment: a path to doubling profits....

Opportunities for Action in Financial Services

Online Bill Payment: A Path to Doubling Profits

Online Bill Payment: A Path to Doubling Profits

For many banks, the online channel is an ongoingsource of perplexity. Although banks have made hugeinvestments in developing and running the channel,their hopes of using it to cut costs and attract new customers have never been realized. A fundamentalproblem is that many institutions think of their onlinebank as an expense—not as the potential profit driverthat a few leading banks have accurately perceived itto be, much to their advantage.

In an article The Boston Consulting Group publishedtwo years ago, we emphasized the importance of get-ting online customers more active on bank Websites—not just getting them enrolled—and of effec-tively integrating the online channel with bankbranches and call centers.1 The importance of theseinitiatives for increasing share of wallet and improvingretention among existing customers—top prioritiesfor most banking executives—was recently reinforcedby a detailed BCG benchmarking survey involving 20of the largest U.S. banks.

Today, some U.S. banks are turning to the onlinechannel to strengthen their payments business, usingthe “flow” of transactions to increase their “stock” ofdeposits and loans. A core product in this effort isonline billpay, which allows customers to pay their per-sonal expenses electronically through a bank’s Web

1. See “Activate and Integrate: Optimizing the Value of OnlineBanking,” BCG Opportunities for Action, January 2002. The articleis available on www.bcg.com.

Online Banking 11/13/03 9:48 AM

site. The transaction is then fulfilled by an automatedclearing-house payment or by a check cut throughthe bank’s back office (a function that is typically out-sourced). In a market in which the vast majority ofconsumer payments are still made using paper, onlinebillpay offers customers a fast, easy alternative to writ-ing and mailing physical checks.

What is striking, however, is that although the prod-uct is generating significant buzz, only a small minori-ty of financial institutions are realizing online bill-pay’s full potential. A large portion of efficiency-ratiogaps among banks can be explained by whether thebanks are in the top or bottom quartile in billpaypenetration—a difference worth several billion dol-lars in market capitalization for a top-ten bank in theUnited States. Although the banks in our benchmark-ing survey had similar technology, brand recognition,and size, penetration rates differed by a factor of tenfrom the highest to the lowest quartile. Moreover, oursurvey revealed that active billpay customers are twiceas profitable as offline customers and that activeonline customers who do not use billpay are still one-third more profitable than offline customers.2 Thesebenefits typically take about three years to realizefrom the point of activation.

Where does this increased profitability come from?The drivers—including increased spreads fromdeposit and loan products, higher fee income, andenhanced retention—relate predominantly to rev-enue rather than cost. To the surprise of many, these

2. Active billpay customers are those who pay a bill online at leastonce per month. Active online customers are those who use theirbank’s Web site for other purposes, such as moving funds amongaccounts, at least once per month.


benefits are not the result of demographics or selec-tion bias but of changing customer behavior prompt-ed by the deeper relationships that online bankingand online billpay help create. The core truth is thatcustomers who bank and pay bills online—even afteradjusting for age, income, and income-producingassets—are far more profitable than offline cus-tomers. (See Exhibit 1.) And the benefits evolvequickly. BCG research (involving event-study method-ology with demographically adjusted control groups)that compared the profitability of individual customersbefore and after just one year of online-banking andonline-billpay activation showed increases of 20 and 40percentage points, respectively. (See Exhibit 2.)

Banks that work to deepen billpay penetration—andthat take a proactive, holistic approach to onlinebanking in general—will be best positioned to seizean advantage over their rivals in the increasingly com-petitive U.S. banking environment. An initial step inthat process is to understand how online billpay fitsinto the overall payments landscape.

The Power of Payments

Payments businesses comprise many of retail bank-ing’s most profitable, high-transaction services, suchas checking accounts, credit cards, debit cards, andlockbox accounts. In large institutions, payments areoften responsible for 40 percent of total revenues and33 percent of profits. But payments can be difficult tomanage since their economics cut across banks’ tradi-tional silos and are often buried within various prod-ucts and processes. Today a few leading banks arelearning how to rigorously measure and track profitsthat originate from payments. As a result, they aregaining highly useful information for increasing trans-


0

1.0

1.0

<35

35–55

>55

3

<40

40–75

>75

3

Age

<75

75–400

>400

3 = 27

x x

Comparative Profitability by Channel

Demographic Segments

Average profita-bility of online household by segment (index)

Income($thousands/year)

Net worth($thousands)

Active online customers more profitable than offline

Average profitability of offline household by segment (index)

Offline customers more profitable than online

SOURCES: BCG research and analysis.

NOTE: Each dot represents a demographic segment (for example, lessthan 35 years old, making less than $40,000 annually, and worth morethan $400,000).

Exhibit 1. Even After Adjusting for Demographics,Online and Billpay Customers Are More ProfitableThan Offline Customers


action volume and fee income.3 Such initiatives areespecially important in markets that are undergoingmajor shifts in payment vehicles, such as the UnitedStates.

Moreover, the movement toward electronic paymentsthat has gained momentum globally over the past tenyears is expected to continue. (Electronic paymentsfor personal expenses are already the norm in manymarkets, such as Western Europe.) Our research andproprietary models suggest that the volume of global

Annual house-hold profita-bility(index)

25

50

75

100

125

150

Offline

100

Active online

101

Active billpay

103

+2102

+20121

+40 143

Baseprofita-bility

12 months

later

Pre- online

activation

12 months

later

Pre- billpay

activation

12 months

later

SOURCES: BCG research and analysis.

NOTE: Results are based on an event study using customer and transac-tion data over 30 months showing 12 months of actual net income aftercapital charge (NIACC) before and after activation.

Exhibit 2. Profitability Rises Sharply Within One Year of Online Activation

3. For a comprehensive discussion of current payments issues, see“Making Payments Pay: Organizing for Success,” BCG Opportunitiesfor Action, September 2003. The article is available on www.bcg.com.


electronic transactions will grow by roughly 9 percentannually through 2010, while physical check volumewill shrink by more than 1 percent per year. In theUnited States, where the number of paper paymentsis much higher than that of electronic payments, weexpect paper check volume to fall by more than 3percent per year (with back-office paper-item process-ing falling more than twice as fast by 2005 as the shar-ing of check images grows). Given this trend, onlinebillpay’s strategic importance for banks should onlyincrease.

Until now, U.S. banks have achieved only modest suc-cess in getting customers to become active Web siteusers and adopt online billpay. For the institutions inour survey, the median level of households enrolledin online banking—those with a registered passwordor PIN—was only about one-third. Less than two-thirds of those enrollees actually used the site month-ly, and only one-sixth of that active group used billpaymonthly. (See Exhibit 3.) The median penetration ofactive billpay for all checking-account customers wasunder 4 percent. (See Exhibit 4.)

However, based on the experience of institutions thatare achieving the most success with online billpay,there are specific and proven steps that banks cantake to improve their performance.

Four Steps to Making Billpay Pay

Customers who use online billpay typically visit theirbank’s Web site three times per month. The banktherefore assumes a deeper presence in their lives.And interacting with a Web site is a far different expe-rience than simply writing out a check and mailing itto the local dry cleaners. While customers are online,


10

20

30

40

50

60

70

80

10

20

30

40

50

60

70

80

10

20

30

40

50

60

70

80

Median=34

Median=56

Median=16

Enrolled online-banking customers as a percentage of retail

demand-deposit account holders

Active online-banking customers as a percentage of

those enrolled online

Active billpay users as a percentage of active

online-banking customers

Each bar represents a bank in BCG’s survey

SOURCES: BCG survey and analysis.

NOTE: Not all respondents provided all the requested data.

Exhibit 3. There Is a Wide Range of Online Success Across Banks

they see their up-to-date account balances and areexposed to other products and services the bank isoffering. These frequent interactions help build asense of partnership and “doing things together” thatmost banks are trying to engender with their cus-tomers. Our study suggests there are four initiativesthat can help billpay reach its potential for your bank.

Understand the economics. In an era when manyhouseholds seek financial services from a variety ofsources, it has been clearly shown that online-billpaycustomers and active Web-site users tend to consoli-date share with their primary provider. Data show thatbanks are thus more likely to sell such customers loan

products like mortgages and revolving-credit accountsand to receive increased fees from customer transac-tions with both credit and debit cards. Today, about75 percent of large banks still charge for online bill-pay, but most waive the fee for about 40 percent ofenrollees. A holistic view of the economics clearly supports waiving the fee, or eliminating it altogether,in order to generate customer usage. Only a modestincrease in billpay penetration—typically less than 1percent of customers with demand-deposit accounts—offsets the lost fee revenues. Some banks are startingto understand this, and we expect that within 12months less than 50 percent of banks in the UnitedStates will be charging for billpay.


0 5 10 15 20

17.8

11.9

10.6

8.5

7.1

6.8

5.6

5.1

4.5

3.6

3.2

3.0

2.6

2.3

2.3

2.2

1.9

1.5

1.0

Median=3.6

Active billpay users as a percentage of total retail households

Each bar represents a bank in BCG’s survey

SOURCES: BCG survey and analysis.

NOTE: Not all respondent banks provided all the requested data.

Exhibit 4. Active Billpay Penetration Is Extremely Low Among U.S. Banks

But the range of performance is wide

Online Banking 11/13/03 9:48 AM Page 10

Create the business case. Increasing billpay penetra-tion to top-quartile performance can be worth morethan $1 billion in market capitalization for a largefinancial institution. Take an organization with 3 mil-lion retail-customer households, each generating$400 in annual profit for the bank. Households thatactively use online billpay will, on average, doubletheir profit contribution within three years. There-fore, increasing penetration from 2 percent to 8 per-cent would add 180,000 households, each generatingan additional $400 annually for a total of $72 millionin additional profits. The typical large bank in theUnited States, with a price-to-earnings ratio of 15,would gain more than $1 billion in market value byeffectively leveraging the power of the online chan-nel. (The bank in this example moved from the thirdto the second quartile.) So when the economics areviewed holistically, the channel presents a significantopportunity to increase shareholder value.

Integrate the online channel with the rest of the bank.Surveys show that customer retention and effectivecross-selling hold the top spots on many senior-man-agement agendas. Online billpay, with its capacity todrive both improved retention and share consolida-tion, is an excellent vehicle for pursuing both of theseinitiatives.

For example, debit card usage in the United States isstill fairly modest. Roughly 70 percent of demand-deposit accounts at the banks we surveyed have adebit card. And just 60 percent of those accounts (42percent of the total) actually use the card for non-ATM purchases. But active billpay customers are 35percent more likely to use their debit cards for non-ATM purchases, which generate higher transactionfees for the bank because they are typically displacingcash or a paper check. The economics still hold if the debit card purchase is displacing a credit card,


because even a top bank typically has card penetra-tion of only one-fifth of its checking-account cus-tomers. Increasing debit card usage is a goal for mostretail banks, and an integrated online channel canhave a direct and positive influence.

Create quick wins. Banks are sitting on a wealth ofcustomer information regarding direct withdrawals,check-writing activity, and cash-spending habits. Foronline-billpay customers, banks also have electronicpayee information. Institutions can leverage thesedata to create targeted, customer-specific offers. Bybuilding on the deposit-account relationship, bankscan also create products that cannot be easily replicat-ed by nonbank competitors.

For example, the checking/credit card combinedaccount—in which the card is really a charge carduntil the account falls below zero—is a powerful cus-tomer proposition that monoline credit-card compa-nies cannot offer because they simply don’t havechecking accounts. Since the checking account is thekey product and typically generates the most profit(in total dollar terms) for retail banks, institutionsshould look for ways to strengthen it and use it togain share of wallet in related products. Increasingonline-billpay penetration should be part of thisprocess.

Seizing the Advantage

There can, of course, be difficulties to overcome withonline billpay. For example, internal frictions withinthe bank can develop around the waiving of fees,which causes the bank’s Internet group to lose directrevenue. The problem is that benefits from increasedbillpay penetration aren’t typically measurable using


day-to-day metrics, and all departments rightfully wantcredit for their performances. One potential solutionis to create a “shadow” profit-and-loss statement forthe Internet group in order to give it due credit fornew online and billpay customers. Moreover, whilewaiving fees has been shown to make good economicsense and increase penetration, it is also critical tobreak out of the silo mentality and think about cus-tomers in a holistic manner. Banks that genuinelyintegrate their online offerings with the rest of theinstitution—and that stimulate cross-channel commu-nication and cooperation—will gain the most. (SeeExhibit 5.)

In the end, the winners will be those that succeed atteaching customers how much online billpay has to

Typical

Rare

Yes No Yes No

Waived fee1 Integrated cross-channel efforts2

Average active- billpay penetration(index)

SOURCES: Company interviews; company Web sites; BCG survey data;BCG analysis.1Includes those banks with a stated fee but very liberal policies for waiv-ing the fee.2Based on BCG’s assessment of key criteria for integration.

Exhibit 5. A Holistic View of the Online ChannelDrives the Best Results

Most banks integrate the online offering across channels before deciding whether to waive the fee


offer and at proactively signing them up for the pro-gram. Among the tools that banks in the UnitedStates can use to integrate online banking and billpayinto retail functions, and to achieve increased pene-tration are

• customer incentives for billpay usage, such as aone-time cash bonus, the waiving of other bankingfees, sweepstakes, and other promotions

• incentives for tellers and customer service repre-sentatives, such as cash compensation and contestsat branches and call centers, to activate new cus-tomers

• promotions in all channels (such as branch lob-bies, ATM screens, Web home pages, CSR greetingscripts, and statement stuffers)

• in-branch workstations with support to walk cus-tomers through transactions; plasma screens withdemos that people can watch as they wait in line

• simplified enrollment, with a one-step sign-upprocess; the enabling of all online customers forbillpay; the offering of billpay as an option in bun-dled-product suites

• a “free” lead offer (the goal being to encouragetrial and adoption)

• the identification of billpay customers in all inter-nal systems in order to help break the silo men-tality

• innovation and incremental improvements in func-tionality; follow-up and assistance for customerswho start but then abandon the process


Online billpay is a lever that can be used in myriadways. It can improve your knowledge of how cus-tomers think and behave. More important, it will help customers get to know you—and what you haveto offer—better, which will lead to improved cross-selling, higher profits, and enhanced retention. In afinancial services landscape where so many productshave limited potential and so many banks are strug-gling with their Internet channels, billpay may repre-sent one of the last great online opportunities.

Carl RutsteinJack Whitt

Carl Rutstein is a vice president and director in the Chicagooffice of The Boston Consulting Group and head of thefirm’s North American Payments practice. Jack Whitt is aproject leader in BCG’s Chicago office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2003. All rights reserved.


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online bill payment: a path to doubling profits - bcg bill payment: a path to doubling profits....

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