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Payments Evolution Continues

Sorry for the delays between posts. Much has been going on for me. Recently I was working with a client on an assessment for where payments, especially online bill payment offered particularly by financial institutions. I turned part of it into a white and will share that here. Thanks for giving it a read and providing feedback!

The Digital Transformation – The Evolution Continues In Electronic Bill Payment

The digital transformation is changing everything – how we obtain and consume information, how we interact with one another and how we conduct business. The digital transformation has been evolving for several decades and it is easy to lose track of its impact in various parts of our personal lives and business dealings. Its impact is so pervasive that it requires stepping back and focusing to see the particular impact in any one area since pervasive does not equate to uniform. For example, in the area of bill payments the impact of the digital transformation has been profound but is still evolving and hardly complete.

One way to see both the impact and the evolution is to focus on the payments value chain. As a simple framework, think of it as a chain starting with payors (Originators), ending with payees (Receivers) and in the digital realm, passing through and facilitated by intermediaries such as Payment Networks. This payments value chain is changing at each stage. Players in this value chain, particularly financial institutions and payment network firms, will need to understand the current situation, clearly understand the developing changes across the value chain, and make wise choices in order to be relevant, competitive and win as the digital transformation plays out.

The Current Situation

The digital transformation is changing how consumers listen to music, how they shop, how they plan vacations, how they manage their money and how they make payments. As evidence, according to a recent Fiserv consumer research study, Internet Banking (36%) handily tops Branches (25%), ATMs (15%) and all other (24%) interaction channels as the preferred channel for U.S. financial services customers. The widespread adoption of mobile phones is further accelerating change. An emerging factor is the rapid growth in use of Smartphones. In 2010 there were nearly 60 million adults in the U.S. with a Smartphone and by 2014 this is expected to more than double to 129 million according to a recent Javelin Research study. Smartphones are a possible game changing device with their ability to provide an intelligent but easy to use user experience, always-on access and capabilities that facilitate several options for making payments while on the go. Altogether the digital transformation places increasing demands on financial institutions, businesses and their financial technology partners to both meet the expectations of consumers and to take advantage of the possibilities these changes may offer.

As expected these digital channels and devices are transforming payment options and choices. Overall they have driven the move from paper (and offline) models to electronic and online. Over the past two decades bills paid with checks, stamps and envelopes have been replaced by electronic bill payments made directly at biller sites or at consolidated sites such as a financial institution. Cash at the point of sale has been replaced by debit and credit cards and all sorts of pre-paid cards. Cash and checks used to pay friends, relatives and the babysitter is being replaced by electronic person-to-person payments. All of these developments, though, continue to march ahead, going mobile and making them ever more convenient and available on-demand. Correspondingly this further raises the bar on the level of intelligence, service reliability and security required. Clearly the move to electronic payments continues but is hardly complete. A recent study by a payments research and consulting firm estimated that from 2009 to 2014 over 11 billion paper (cash and checks) payments will move to electronic payments. Where those payments will go and who will benefit depends upon choices made by the players in the payments value chain.

Opportunities in the Payments Value Chain

Fleshing out the reference earlier to the payments value chain, a simple, traditional depiction begins with Originators, such as consumers, businesses and governments with an obligation to pay some other party. It also includes Receivers which are the “other party” and can also be consumers, businesses and government. The payments made by Originators are facilitated in some way by a Payment Network which connects the Originators and Receivers, moves information and money to handle settlement, and provides various levels of required security. Specifically in the electronic bill payment arena, value was initially created by giving Originators – largely consumers — more convenient options versus the routine of writing checks, purchasing a stamp and putting an envelope in the mail. The value to Receivers – also called Billers – came mainly from more timely payments, and cost savings due to reduced risk and more efficient processing with electronically received payments. The Payment Networks in the middle have been the drivers of these benefits enjoyed at the ends of the value chain. Through reach and scale they have offered low cost yet fast, reliable and highly secure payment services. The value provided however is limited and as electronic bill payment has emerged into the mainstream it has become commodity-like in growth and margins. 

Relative to potential value, the consumers who have adopted electronic bill payment have received a disproportionate benefit; saving substantial time, money and increasing their security. Despite this, still less than 50% of online banking users – those showing a clear interest in dealing with their bank electronically – use their financial institution’s online bill payment service. Over 60% of the electronic bills that could be presented to those who use online bill payment go unsubscribed and are never viewed each month.

The Billers have yet to receive, at least in significant proportion, a number of potential benefits such as richer and more standard information flows and as just noted with the lagging adoption of bill presentment, the elimination of paper from billing side of the payment cycle. The value potential, however, is real and substantial. A study done for a very large cable company identified over $100 million in annual savings from the application of intelligence available from the mining of bill payment data (e.g., understanding payment channel and type choices and precisely guiding subscribers’ choices), and an equally sizable amount of savings from elimination of monthly paper bills.

Financial institutions, which have been the allies of the Payment Networks have arguably benefited more so than the Billers but have also borne most of the cost of providing the service. Compounding the challenge, the benefits the Financial Institutions enjoy are indirect and soft since bill payment is typically provided for free and generates no direct revenue.

While the Biller benefits are lacking and the Financial Institutions find the benefits to be soft, the value to consumers is on a new, upward trend – driven largely by developments such as those described earlier with the widespread adoption of Smartphones. In turn these enhanced services are likely to further raise the costs of the Billers and the Financial Institutions and their Payment Network allies as they scramble to keep up with consumer demands, making the precise ROI even more elusive.

Winning Strategies

Returning then to the depiction of the payments value chain as a three part process, consumer and billers at the two ends and the payment network and financial institutions in the middle, going forward the opportunity for new value creation calls for a focus away from the middle and outward toward the two ends where emerging and unmet needs clearly exist. For consumers as the Originators there are still unmet needs in making basic electronic bill payment compelling for mainstream households. While a majority of households now pay at least one bill online at either the Biller or through their financial institution it remains a minority that have made the commitment to paying most or all of their bills this way. As mentioned earlier, a far larger number of electronic bills could be presented to online customers which would eliminate paper and further enhance security (with reduced identity theft).

The winners in the race to capture these potential consumer users and their transactions will recognize that existing choices must be expanded both in terms of where online bills can be received and paid, particularly on Smartphone devices and generally everything mobile, and choices about how the payment is made such as expanding to include as many payment options as possible and moving to even faster payment speeds. There are information-based opportunities as well, with examples including enhanced financial management tools and alerts, which can help consumers better manage and increase control over their household cash flow. The stepped up value proposition may in turn provide a firmer foundation for charging a fee for online bill payment and creating a more intense electronic relationship. A relationship which offers richer data that can be tapped for deeper insights financial institutions can leverage to improve cross-sell and enhance customer profitability.

On the Biller side, unlocking latent consumer demand for electronic bills is a clear opportunity. In addition, Billers today face a complex array of payment streams coming to them which are neither uniform in their quality nor the quantity and value of the information that accompanies them. Billing and accounts receivable systems while obscure are the life blood of consumer oriented companies such as energy and telecom, cable, insurance and financial services and any improvements made by payment networks that reduce errors and speed revenue collection cycles will be eagerly received. The winners will recognize this opportunity and work to streamline their information flows to Billers and provide easier ways to integrate and facilitate straight-through processing. They will also enrich the data that is transmitted including pre-processed analytics that Billers can act upon directly or integrate into their own data analytics engines and customer marketing systems for use in up-sell and cross-sell, risk and fraud management, and improving customer loyalty.

Together these types of improvements offer the promise of a more widely adopted and active value chain where richer payment and information flows move more quickly, nearing real time. In turn, latent and highly valuable demand at the ends of the payment value chain can be unlocked and monetized by those that compete in the race to provide the winning value proposition.

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