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Bill Payment Trends: Major Shifts in Consumer Behavior Require Comprehensive Planning

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Bill Payment Trends: Major Shifts in Consumer Behavior Require Comprehensive Planning A First Data White Paper Bill Payment Trends: Major Shifts in Consumer Behavior Require Comprehensive Planning There are seismic changes happening in the way people are paying their bills. Companies that create a comprehensive plan to manage through this change have opportunities to reduce costs and drive customer satisfaction. By Kathi Plymouth Vice President, Product Strategy and Innovation and Jody Martin Vice President, Financial Services Marketing © 2009 First Data Corporation. All trademarks, service marks and trade names referenced in this material are the property of their respective owners. Bill Payment Trends A First Data White Paper Introduction For nearly every business, the simple act of collecting payments from consumers is actually quite complex. Organizations want to make it easy and convenient for customers to pay, so they offer multiple choices of payment types and channels. Customers can mail a check, phone in a credit card number, pay in person with cash, directly debit a bank account, and more. However, making it easy for the consumer often makes it more complex—and costly—for the business. To further complicate the situation, there are several major trends that are changing the face of consumer bill payment. For example, a full two-thirds of all bills are expected to be paid electronically by 2012—up 20 percent from 2007—with most of the growth destined for Web and phone applications. This kind of seismic shift in customer behavior will have a significant impact on your company’s payment processing operations, and will necessitate careful planning to properly address. This paper reviews five current and predicted bill payment trends for the next five years and discusses some of the key planning parameters your company should consider to best prepare for and benefit from the changing payment landscape. Questions to consider include: 1. With mail-in payments expected to drop by 2.5 billion items or 25 percent by 2012, how will this impact your in-house processing operation? Can you justify new investments in processing infrastructure? How will you manage the cost per item as volumes shrink? 2. With online payments predicted to equal mail-in payments by 2012, is your electronic payment solution ready? Does your electronic bill payment solution bring the expected lower-cost results or are there unexpected factors that are actually driving up costs and hampering a positive customer experience? 3. Most of the online payment growth is expected to be via credit and debit cards. Is your company able to accept card payments? Are you aware of ways to influence customers’ choices of payment types to minimize costs? 4. Do your bill payment solutions accommodate the unbanked and underbanked population? What can you do to lower the cost of accepting payments from this customer segment? © 2009 First Data Corporation. All rights reserved. firstdata.com page 2 Bill Payment Trends A First Data White Paper 5. Are you actively or passively driving electronic bill presentment behavior? Are you taking advantage of all the levers possible—including the environment, security concerns and convenience? Above all else, does your company have a framework for evaluating all these trends and creating a comprehensive payment strategy? This paper proposes addressing the following three items in a “holistic payments framework”: J Payment channel optimization J Payment type optimization J Management of the payments customer experience Trend #1: Mail-In Payments Are Declining Rapidly The Federal Reserve estimates that the volume of checks paid in the United States peaked around 1995 at 49.5 billion and steadily declined to 30.6 billion in 2006.1 This downward trend is expected to continue. In contrast, there were 62.7 billion electronic payments in 2006, accounting for 67 percent of all non-cash payments—up from a 54 percent share in 2003. The trends for U.S. consumer-to-business (C2B) bill payments are in lock-step with the overall payment trends. According to the financial industry research and consulting firm Aite Group, consumers have heartily embraced the switch from paper to electronic payments. By 2009, electronic payments will overtake all other forms of payments, and by 2012, 64 percent of consumer bill payments will be electronic, up from 49 percent in 2008.2 Figure 1: Electronic payments are poised to overtake non-electronic payments in 2009 18 16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Aite Group 1Federal Reserve Payment Studies, 2001-2007 2Aite Group, “Online Bill Payment: The Elusive Goal of Cost Recouping,” September 2008, p. 5 © 2009 First Data Corporation. All rights reserved. firstdata.com page 3 Bill Payment Trends A First Data White Paper As mail-in payment popularity fades, there are implications for lockbox payment processing As consumer bill payment behaviors change, most in-house retail lockbox operations are experiencing declining check volumes and rising costs per item. This comes at a time when many in-house payment systems are in need of replacement or upgrades, as they have been in operation since implementation at the turn of the century in preparation for Y2K. Thus, many billers have reached a “tipping point” where it’s time to ask the tough questions: J Due to declining volumes, has the cost model of doing in-house paper remittances changed to where there is no advantage to your organization to keep the process in-house? J Are you doing yourselves a disservice by processing paper remittances in-house, perhaps by missing out on advances in technology that improve payment processing or customer service? J If you are already outsourcing, how “future proofed” is your provider in terms of technology and scale? And, given the current economic environment, is your provider bank-agnostic? Answering these questions might tell you it is time to revisit the economics of your current remittance processing model. For example, in recent years, many high-profile banks have outsourced their lockbox operations. Due to decreasing payment volumes, increased credit pressure and the recent upheaval in the banking industry, many banks have found that outsourced lockbox operations are a better strategic fit for their businesses. With continued economic pressures and increased industry consolidation, it is anticipated that many more banks will be looking at the outsourcing trend in the near future. Like banks, corporate billers face many of the same issues. For example, the costs of facilities, system maintenance and support, and labor are increasing, further driving up the per item cost. Enhanced functionality is another key component of the outsourcing value proposition that should be carefully considered. In particular, check truncation and ACH (Automated Clearing House) growth are adding new complexities for remittance processors and billers. As it relates to check electronification of paper payments, your organization needs to assess its current solution. Is your billing system able to take advantage of technological gains that have occurred in recent years, such as the ability to generate Check 21 Image Cash Letters (ICL) and Accounts Receivable Conversion (ARC) files? If not, system upgrades could be needed, but they might not make economic sense. With declining items to process, is it wise to invest more money in an infrastructure that is already underutilized and possibly nearing the end of its life cycle? Trend #2: Biller Direct Is Becoming the Preferred Payment Method As mentioned earlier, many consumers are putting away their checkbooks and embracing electronic payment methods. Increasingly, these electronic payments are going directly to the biller, mostly through biller web sites or via interactive voice response (IVR) systems (a payment model known as “biller direct”). Aite Group predicts that the biller directs’ share of consumer bill payments will be 31 percent by 2012, and billing consolidators’ share of the payments will be about half that at a 15 percent share.3 (See Figure 2.) 3Aite Group, “Online Bill Payment: The Elusive Goal of Cost Recouping,” September 2008, p. 7 © 2009 First Data Corporation. All rights reserved. firstdata.com page 4 Bill Payment Trends A First Data White Paper Figure 2: The growth in biller directU.S. Consumerpayments Bill Payment is outpacing Mix (%) all other forms of consumer payments 100% 5% 5% 5% 5% 5% 5% 4% 4% 4% 2% 2% 2% 2% 2% Source: Aite Group 4% 4% 5% 5% 90% 14% 14% 14% 14% 14% 14% 14% 14% 14% 80% 6% 7% 9% 10% 10% 11% 12% Walk-In 70% 13% 15% 10% 13% Automated 16% 60% 18% Cards 21% 24% Direct Debit 26% 50% 28% 31% Consolidator 40% Biller Direct 63% 30% 59% Mail 53% 51% 47% 43% 20% 39% 36% 32% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Aite Group And it’s not just Web-based payments on the rise. Tower Group estimates that phone-initiated bill payment volume will double over a five-year period to reach over 300 million transactions by 2010. In surveys, consumers cite numerous reasons for their preference for direct payment methods, including faster posting of payment, certainty of payment and convenience. Biller direct gives consumers greater control over when a payment is made as well as confirmation that it has been completed. Consumers’ rapid adoption of biller direct payments has been no fluke. Many billers have consciously hastened this transition. For example, paper invoices often prominently display Web addresses and phone numbers where consumers can pay bills. Direct-mail campaigns encourage people to save time, avoid late fees and enjoy other conveniences by paying online or over the phone. As a result, consumers have heeded the advice, putting their checkbooks, pens and stamps in the drawer and heading to the computer or phone instead. The Yin and the Yang of Biller Direct For the biller, of course, a vast increase in direct payments has its own set of implications—some of which are good, and others that create new challenges.
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