Home Banking Bill Paying
There has been substantial progress recently in home banking and bill paying applications. People sometimes ask about the difference between home banking bill payment and the electronic check (eCheck). This white paper will briefly explore the differences between the two approaches to payment.
Home Banking Bill Paying Background
Home banking bill payment began in the 1980’s with some major efforts from various financial institutions. It is viewed by banks as a method to lock in customers, and to increase the share of customer wallet retained by a financial institution. However, home banking bill payment has had limited success. Since it’s introduction, it has grown to about 3+ million regular users today.
As home banking bill paying has evolved over time, an increasing number of institutions have offered it to their customers. In actual practice however, the vast majority of these financial institutions do not process the transactions themselves, rather they outsource the transaction fulfillment process to one of a very few providers, the most notable of which is Checkfree. NACHA estimates that the top five companies process approximately 75% of home banking bill payment transactions.
The way home bill paying works today, the consumer gives a payment instruction to their institution or to the bill payment provider directly. This payment instruction is then converted, or fulfilled, into a payment of one of a variety of forms, including ACH, paper checks, or unsigned demand drafts. In actuality, the payment instruction is often converted into two transactions, the removal of funds from the customer’s account (disbursement), and the payment to the payee. Most disbursements happen electronically.
While home banking bill paying is very convenient from a customer viewpoint, and appears to be an electronic payment, as noted above, it is often not completely electronic. In fact, the majority of home banking bill payment requests are fulfilled by the bill payment provider actually printing and mailing a paper check (sometimes a demand draft) to the payee receiving the check. This situation is improving rapidly, however, and the goal is to reach 50% electronic payments in the next year. The systems allow for a very limited amount of information to accompany the payment, and as a result, the payee frequently has a difficult time matching the payment with a given bill. These paper transactions must be treated as exception items which delays posting to the customer’s account. Some payees have reported processing costs for these payment increases in excess of $ 1 per payment.
One result of this process is that the bill payment service is itself very expensive to offer, making it unprofitable for many institutions. Typically, this service costs the financial institution offering it between 30 and 50 cents per transaction. For consumers who buy the service directly, the cost is typically around $ 10/month for up to 20 transactions.
Comparing echecks and home banking bill paying
While the on screen presentation of an eCheck may look the same to a consumer as home banking bill paying, echecks differ substantially from the process described above.
First: echecks may be exchanged directly between parties, eliminating the need for an intermediary. eChecks can, like paper checks, also support intermediaries, enabling the home banking bill paying providers to use echecks themselves to improve their own efficiency. This will allow the bill payment providers to adopt echecks and offer an additional all-electronic payment solution, one which can deliver payment and remittance information to billers over the Internet.
Second: echecks provide a very information rich environment, and can carry substantial information directly with the payment. While they will initially be exceptions for payees, echecks should be very easy to integrate into the existing process for paper checks which come with remittances. Payees should be able to process these at much lower costs than paper checks without remittances.
Third: echecks are designed from the ground up to fit within the existing banking/ check processing infrastructure. It should therefore be possible for many banks to offer this capability directly, without relying on an outsourcer for processing. Of course, should the bank find outsourcing a more attractive business proposition, then they may offer echecks through that option. In either event, while each bank will establish their own pricing, we expect that eCheck pricing and costs will be similar to paper check costs, which are lower than those of home banking bill paying.
Fourth: echecks reduce risk to the payment system. Since traditional bill payment services sometimes fulfill payments through unsigned demand drafts, they create additional risk to the payments system. eChecks do not support an unsigned option, and can only be used with the knowledge of the account holding institution.
Fifth: while home banking bill paying is primarily targeted at the consumer, we expect echecks to initially serve the business marketplace. This customer segment has somewhat different concerns, and is often making payments in high dollar amounts.
As with paper checks, echecks and home banking bill paying gracefully coexist. In particular, since home banking bill payment providers can include echecks into their back end payment fulfillment process, they can leverage the same approach to improve their ratio of electronic payments, and to improve the lives of the companies they currently are paying through paper checks.