The Bill Payment Landscape – 2020 Updates and Future Trends

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Abstract Each year, consumers in the United States pay trillions of dollars’ worth of bills, ranging from housing and car loans to utilities, credit cards and insurance. In 2020, the need to stay socially distant, along with the increasing number of tech-savvy consumers, has amplified the importance of quick, frictionless electronic bill payment options.

While most consumers have a specific plan for paying their monthly bills, almost half say they get anxious and worry about being able to pay them on time. To help reduce some of these concerns, the payment industry has been hard at work for years to create faster and easier ways to make a payment, and these methods are being adopted by Americans, both young and old. Keeping an eye on these ever-changing bill payment options and how consumers use them is increasingly important for billing organizations as they navigate these uncertain times.

New NACHA Rules go into effect in 2021 which will require action by billers that accept ACH bill payments via WEB authorization channels to explicitly include “account validation” as part of the rule definition of a “commercially reasonable fraudulent transaction detection system” and a new requirement to protect deposit account information by rendering it unreadable when it is stored electronically

January 2021

The Bill Payment Landscape – 2020 Updates and Future Trends

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The Evolution of Payments

Where once paying a bill was synonymous with writing a check or standing in line to pay in person, today’s consumers can simply pull up a website or whip out their smartphones. They have more options, more payment channels and more accepted payment methods than ever before.

Today, consumers can choose whether they want to receive account information and reminders by text, email or paper statements. They can pay by credit card, debit card, bank bill pay or check. They can choose one-time or recurring payments. They can pay their bills directly through biller websites, or they can set up a biller in their bank bill pay system. They can simply mail in a payment, or they can call and take care of it over the phone. In many cases, they can choose to make mobile payments through their smartphones, and get actionable alerts that help them pay immediately using credit card or bank information stored inside their phones.

Consumers made roughly 10 billion one-time bill payments in the last year. Of those, about 58 percent – or 5.8 billion bills – were paid online. Comparatively, just 2.3 billion were paid by mail, 1.2 billion were paid in person, and 736 million were paid over the phone.1

Does the rise in adoption of online payment mean that the consumer experience is now, finally, frictionless? If you ask a consumer, the answer is likely, “no.”

A typical consumer has multiple bills to pay through separate interfaces every month. This means they have to set up and keep track of multiple accounts, all with different account numbers and login credentials. They have to either take extra steps to set up a recurring automatic payment schedule, or remember to log in or mail a check when it’s time to pay. They still need to figure out how much they’ll owe and when it’s due, choose a payment option and make sure funds are in place, and estimate how much delay time is needed to process the payment and still meet the deadline. All the while, many consumers have at the back of their minds some worry about the security of the bank account or credit card numbers they have to provide.

Also underlying consumers’ ability to pay their bills on time is an undercurrent of anxiety related to the many health, social and economic challenges faced in 2020. In a recent Aite survey of American consumers, 68 percent said they feel confident that they can pay their bills each month. Yet, just under half of those surveyed (46 percent) noted that they sometimes, rarely or always need a credit card or a loan to pay an unexpected bill. More than half of Americans (53 percent) said that they feel at least somewhat anxious about their outstanding bills, while 48 percent are genuinely worried about whether they can meet their financial obligations.2

The consumer mindset surrounding bill payment, and consumer preferences for interacting with product and service providers, has shaped the payment landscape over the last decade, and will

1 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 2 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 2

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continue to drive innovation in the future. For different reasons, both billers and consumers are moving toward a more frictionless payment experience, and understanding what consumers want and need can help billers and payment processors make the bill payment process more efficient and frictionless for everyone.

Top Trends in Bill Payment

Bill payment trends are largely influenced by consumer sentiment. By customizing bill payment options to suit consumer preferences, billers hope to achieve more timely payment and lower their own cost and risk.

To increase the chances of receiving their slice of their customers’ monetary pie in a timely fashion, billers and financial entities have spent much of the past decade innovating new ways to engage with consumers and meet them where they are with ever more convenient payment options.

Biller-Direct Payments

Biller-direct payment, through secure customer accounts on biller websites, is today’s most popular option for consumer bill payment. At this time, 76 percent of all online bill payments in the United States are made through biller-direct sites. That’s 3 percent more payments than just four years ago, and 14 percent more than in 2010. At the same time, consumer use of online bank bill pay has declined by 16 percent over the last decade.3

Bill Payments by Channel 736 102

1153 4340 1358

2270

Biller's Website Mail Bank's Website In Person Phone Third Party Website

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

3 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 3

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While the online direct-to-biller payment channel is in many ways convenient – and clearly very popular with consumers – it’s still far from frictionless. Requiring customers to click and scroll through multiple pages on a biller’s website, and not offering a quick, one-time pay option on the home page, can cause unnecessary frustration and a poor user experience. This can also lead to additional costs for the biller in the form of increased collection activities and higher call volumes in its call center. While using a multitude of different websites to pay different bills can create some extra effort for the consumer, billers that employ tools that securely remember user ID, passwords, and pay accounts can make things much easier.

Mobile Payment and eWallets

Many billers also offer their customers mobile payment technologies, designed to allow consumers to make payments on the go. Accustomed to continuously increasing capabilities and speeds, consumers expect their mobile bill payment experiences to be instant, accurate, frictionless and actionable. Mobile technology is ideally positioned to fulfill all of these needs, giving consumers real-time account information, an intuitive interface, and the ability to take immediate action to pay a bill, anywhere.

Like a biller website interface, eWallets require the user to “opt in” and to set up an account and account preferences. However, once they do, users can receive actionable push notifications and alerts reminding them of their payment due dates. Making a payment is as simple as clicking “pay now” to access the wallet app that already lives in their phones and make a payment on the spot.

By 2023, 88 percent of the population of North America – 329 million people – will be mobile device users. That’s an increase from 86 percent, or 313 million people, in 2018. Phones are continuously growing faster and better suited to support all types of transactions, too. By 2023, the average mobile connection speed will reach 58.4 Mbps – nearly three times faster than it was in 2018 (21.6 Mbps).4

With identity fraud continuously increasing, and cybercriminals becoming ever more aggressive, use of digital wallets for contactless “invisible payments” is now recommended by security experts to manage in-store and online payments. The technology – used in tools such as Apple Pay, Google Pay or Samsung Pay – encrypts and tokenizes data, rendering it useless to thieves.5 However, while consumer adoption of near-field communications or contactless payments is growing, it’s still being used by only 30.6 percent of consumers in 2020 – up from 27.3 percent in 2018.6

4 Cisco Annual Internet Report (2018–2023) White Paper, https://www.cisco.com/c/en/us/solutions/collateral/executive-perspectives/annual- internet-report/white-paper-c11-741490.html 5 2020 Javelin Strategy & Research, Identity Fraud Study. https://www.javelinstrategy.com/coverage-area/2020-identity-fraud-study-genesis- identity-fraud-crisis 6 Statista, March 2020, https://www.statista.com/statistics/244498/share-of-us-smartphone-users-accessing-proximity-mobile-payments/ 4

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Mobile payment options are especially appealing to Gen Z, the 86 million young adults who comprise the largest generation in the United States today.7 In fact, more than half of the United States population today are millennials or younger.8 Heavy users of mobile tech and social media, 69 percent of Gen Zers use their banking apps on their phones daily or weekly, and most don’t mind sharing online bank account credentials with third parties.9,10

P2P

A growing number of consumers are embracing another app-enabled payment method: person-to-person or peer-to-peer payment, or P2P. Services such as Venmo and Zelle enable electronic payments made directly from one person to another through an intermediary service provider, either through a mobile device or computer interface. These payments are made using several different sources, including debit cards, direct withdrawal from an associated bank account, or stored value in a P2P account. The transactions can be processed by ACH, debit payments or between users’ stored value accounts with a shared P2P provider.

In the United States, about 126 million people are using mobile P2P services in 2020. These services are especially popular when people need to split rent, utilities and dinner tabs; send someone money as a gift, or divvy up travel costs.11 While millennials are driving much of today’s technology toward greater convenience and mobile adaptability, P2P payments have been eagerly adopted not only by younger people, but across all generations.12,13

7 Knoema, US Population by Age and Generation in 2020, April 2020, https://knoema.com/infographics/egyydzc/us-population-by-age-and- generation-in-2020 8 U.S. Census Bureau, National Population by Characteristics: 2010-2019, https://www.census.gov/data/tables/time- series/demo/popest/2010s-national-detail.html 9 Accenture 2017 North America Consumer Payments Pulse Survey. 10 Bank of America, “Trends in Consumer Mobility Report,” Summer 2017. 11 The Payments Review from Trellance, P2P – A Comprehensive Look at Person-to-Person Payments, http://www.thepaymentsreview.com/a- look-at-p2p-payments 12 Early Warning Digital Payments Adoption, July 2018, https://www.zellepay.com/sites/default/files/2019- 04/Zelle%20Digital%20Payments%20Adoption%20Survey%20Report.pdf 13 Make Room Millennials, Zelle® Study Finds Generation X and Boomers Driving Broader Adoption of Person-to-Person (P2P) Payments, March 2019, https://www.zellepay.com/press-releases/make-room-millennials-zelle-study-finds-generation-x-and-boomers-driving-broader 5

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Methods Used to Send/Receive Money 80 75 72 68 69 68 70 60 51 50 40 30 20 10 0 Millennials Gen X Baby Boomers Online or Mobile P2P Cash or Check

Make Room Millennials, Zelle® Study Finds Generation X and Boomers Driving Broader Adoption of Person-to-Person (P2P) Payments, March 2019

The advent of these capabilities opens the door for payment processors and financial institutions to develop the next generation of payment solutions that incorporate these same-day payment channels, giving consumers the instant gratification they have come to expect when interacting with a payment interface.

While PayPal has been a bill payment option for some time, we anticipate that many of these P2P actionable channels will evolve to support P2B. Based on adoption by Gen Z consumers, this may prove to be a viable channel to alert customers of bill data and accept their payments. But any payment technology is only as good as the data that supports it, as moving money wirelessly to pay a bill requires an accurate posting to the proper account.

Credit and Debit Cards

Credit and debit card usage among consumers and businesses to pay bills continues to climb year over year, with credit experiencing a 25 percent increase and debit a 143 percent increase in the last 10 years.14 Many factors contribute to this ongoing rise as a preferred bill payment option, such as rebates and reward points, fewer younger consumers owning a checkbook, and more recently, the economic struggles associated with the global pandemic.

14 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 6

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Percentage of Bill Payments by Credit and Debit Cards 50

0 Credit Card 2010 Credit Card 2020 Debit Card 2010 Debit Card 2020

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

This increased usage may be more convenient or rewarding for the bill payer, but this comes with a cost to the biller/merchant of record in the form of interchange fees from the card organizations. These fees are charged using percentages of the transaction amount that average between 1.3 and 3.4 percent, plus flat assessment charges that typically range from $.05 and $.10 cents.15 Card networks, such as Visa or MasterCard, determine these fees, and they are generally updated twice annually. In addition, there are payment processing fees that are charged by the biller’s chosen payment processor. While these fees may not seem excessive, even a small increase can have a major impact on a high- volume merchant’s bottom line. To offset these charges, more and more companies are implementing surcharging and convenience fees.

In 2020, Visa planned to roll out major changes to their interchange rates, and online transactions were expected to take the brunt of the impact of rising costs. However, to encourage credit card use for certain types of payments, Visa interchange rates were expected to decrease for things like real estate, rent, healthcare, education and certain other expenses. Visa planned to make up the difference through increased fees for card- present and card-not-present transactions.

15 Visa USA Interchange Reimbursement Fees published on April 13, 2019, Mastercard 2019-2020 U.S. Region Interchange Program and Rates, and Wells Fargo Payment Network Qualification Matrix published on Oct. 19, 2019. 7

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Visa’s planned major fee changes were delayed until 2021 due to the global pandemic, though some smaller changes took effect in July 2020.16 MasterCard is reportedly also considering similar fee changes. Because small fee changes can add up to big dollars for entities that accept credit card payments, it’s wise for billers to keep an eye out for announcements from the major credit card companies over the coming months.

Payment System Oversight and Evolution

Between January 2005 and January 2019, more than 11.5 billion records with sensitive information were breached, according to the Privacy Rights Clearinghouse17. While criminal activity is still going strong, despite increasing protections to stop it, a new wave of more targeted cybercrime is forcing the payment industry to innovate new strategies for data security.

The 2019 data compiled by Javelin Strategy & Research in its 2020 Identity Fraud Study indicates that cybercriminals have changed their strategy, targeting smaller numbers of victims, yet going after higher-value targets and causing damage that is harder to prevent or remediate.

Total identity fraud reached $16.9 billion (USD) in 2019, and the type of identity fraud has shifted from counterfeiting credit cards, which has become more difficult due to the EMV chip, to the high-impact identity fraud of checking and savings account takeover. This is one of the hardest types of fraud to identify, thanks to multichannel account access and, alarmingly, attempts to reduce friction in the consumer experience.18

To stay a step ahead of cybercrime, financial institutions, businesses and the payment industry must continuously reevaluate how to prevent and manage identity fraud. Through the years, several regulatory bodies have been created to help mitigate risk, and much of the responsibility for advancements in consumer data security falls on their shoulders.

ACH and Nacha

Operated by the Federal Reserve and The Clearing House, the ACH Network is the backbone of direct deposit and direct payment in the United States, with more than 25,000 participating depository institutions. In 2019, it moved 24.7 billion payments – more than 1 million each day – and $55.8 trillion in 2019.19

Nacha is the oversight organization that creates and enforces the Nacha Operating Rules that keep the ACH Network secure. Nacha consists of 32 direct member financial institutions, along with 11 direct member payments associations, which are in turn

16 Visa USA Interchange Reimbursement Fees, Visa Supplemental Requirements, July 17, 2020, https://usa.visa.com/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf 17 Privacy Rights Clearinghouse, https://www.privacyrights.org/data-breaches 18 2020 Javelin Strategy & Research, Identity Fraud Study. https://www.javelinstrategy.com/coverage-area/2020-identity-fraud-study-genesis- identity-fraud-crisis 19 ACH Volume Value Infographic, February 2020, https://www.nacha.org/system/files/2020-02/2019-ACH-Volume-Value-Infographic- Feb%202020.pdf 8

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composed of diverse groups of financial institutions, including banks, corporations, credit unions, e-commerce companies, and payments technology providers. 20

Underlying the ACH payment system are the Nacha Operating Rules, which define the roles and responsibilities of financial institutions and establish guidelines for each ACH Network participant. The rules are continuously updated over time to enhance ACH performance and the following are several that have either recently been implemented or are scheduled to go into effect over the next two years:

Increasing the Same Day ACH dollar limit. A new rule increases the Same Day ACH per-transaction dollar limit to $100,000. Previously, Same Day transactions were limited to $25,000, which covered about 98 percent of ACH transactions. However, the higher limit enables more business-to-business payments, big-dollar claim payments, and reversals. This new rule took effect March 20, 2020. 21

Reversals and Enforcement. These two new rules will explicitly address improper uses of reversals, and improve enforcement capabilities for egregious violations of the Rules. The Reversals rule will become effective June 30, 2021 and the Enforcement rule will be effective January 1, 2021.22

Differentiating unauthorized return reasons. By allowing the use of a specific return reason code for consumer debits, this new rule provides more specific information when a customer claims an error with an authorized payment. This detail allows originating depository financial institutions (ODFIs) and their originators to react differently to claims of errors, so they can respond to them more appropriately. This new rule became effective April 1, 2020. 23

Supplementing data security requirements. This rule change is designed to enhance quality and improve risk management within the ACH Network by supplementing the existing account information security requirements for large-volume originators and third parties. Specifically, these entities will be required to protect deposit account information by rendering it unreadable when it is stored electronically. This change will be implemented in two phases, beginning June 30, 2021. 24

20 Nacha Direct Member webpage, https://www.nacha.org/content/nacha-direct-member-0 21 Nacha, Increasing the Same Day ACH Dollar Limit, https://www.nacha.org/rules/increasing-same-day-ach-dollar-limit

22 Nacha, Reversals and Enforcement, https://www.nacha.org/rules/reversals-and-enforcement 23 Nacha, Differentiating Unauthorized Return Reasons, https://www.nacha.org/rules/differentiating-unauthorized-return-reasons 24 Nacha, Supplementing Data Security Requirements, https://www.nacha.org/rules/supplementing-data-security-requirements 9

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ACH Contact Registry. This new industry resource will connect financial institutions to address ACH operations, exceptions and risk management. All financial institutions in the ACH Network were required to register contact information for personnel or departments responsible for ACH operations and fraud/risk management between July 1, 2020, and October 30, 2020. 25

Supplementing Fraud Detection Standards for WEB Debits. Currently, ACH originators of WEB debit entries are required to use a “commercially reasonable fraudulent transaction detection system” to screen WEB debits for fraud. This new rule supplements this requirement to make it explicit that “account validation” is required as part of this system. Initially set for implementation on January 1, 2020, this change was delayed and is scheduled to take effect March 19, 2021. 26

Extended operating hours for Same Day ACH. The ACH Network is open to process payments 23 ¼ hours each business day but relies on the Federal Reserve’s National Settlement Service to do so. Currently, that system closes every business day at 5:30 p.m. ET, and on weekends and holidays.27 A two-hour extension to Same Day ACH operating hours is planned for launch March 19, 2021.28,29

As technology evolves and consumer preferences continue to drive the payment industry toward faster payment, the ACH Network, Nacha and the Federal Reserve are taking center stage, providing the backbone on which the future of electronic payments is likely to be built. Widespread adoption of real-time ACH payment, driven by infrastructure and rules changes that will enable immediate money transfer, will usher in a new era of payment convenience for consumers.

The security requirements and validations for these WEB debit entries have already begun to make the ACH network take on similar attributes to the card networks. PCI-like standards, such as requiring companies and billers to secure bank account data at rest and access a real-time authorization before originating a WEB debit, will take effect soon.30 Billers should have these requirements on their payments’ roadmap, especially if they currently manage ACH bill payments in-house. Many biller service providers and ACH originators can meet these requirements with evolved account tokenization, alias account identifiers and real-time bank account validation services.

25 Nacha, ACH Contact Registry, https://www.nacha.org/rules/ach-contact-registry 26 Nacha, Supplementing Fraud Detection Standards for WEB Debits, https://www.nacha.org/rules/supplementing-fraud-detection-standards- web-debits 27 Nacha, Payments Myth Busting, https://www.nacha.org/system/files/2019-10/Payments-Myth-Busting-Hill-Handout.pdf 28 Board of Governors of the Federal Reserve Press Release, December 23, 2019, https://www.federalreserve.gov/newsevents/pressreleases/other20191223a.htm 29 Nacha, Expanding Same Day ACH, https://www.nacha.org/rules/expanding-same-day-ach 30 Nacha Operating Rules, https://www.nacha.org/rules/operating-rules 10

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The PCI DSS and Third-Party Payment Processors

It’s easy to see why maintaining data security with card payment data is critical to doing business. Data breaches can cause extensive damage to a business, both in terms of finances and reputation. The majority of organizations – 65 percent – report being concerned about data breaches, and for good reason.31 Worldwide, the average total cost of a data breach in 2020 is $3.86 million, and it’s even more costly in the United States, where businesses take an average hit of $8.64 million from a breach.32

In 2004, the major credit card brands came together to launch an initiative to protect cardholder data from fraud and theft. The system they established – called the Payment Card Industry Data Security Standard, or PCI DSS, is now the recognized information security standard for every organization involved in transactions with major credit card brands.

Any company that accepts credit card payments from the major card brands, or that processes, stores or transmits credit card data, is required to meet operational and technical PCI DSS security standards. This includes everything from retailers that accept credit card payments, to software and app developers whose products process credit card transactions.33

Every business that stores cardholder data, at any point within the payment process, has to strictly protect that data wherever it resides – from computers to networks to wireless access routers and paper records. If a business offers online payment through a website or app, those shopping carts and payment applications must also meet strict protocols mandated by the PCI DSS.34 However, compliance with the PCI DSS isn’t cheap, as it requires a significant investment in technology, tools and auditing.

Many consumer billers choose to skip the expense and risk associated with handing cardholder data by outsourcing payment processing to a PCI DSS-validated third-party service provider. For the customer, the payment process looks the same – but on the back end, an invisible third-party processor is managing the actual transaction.

Third-party processors generally handle a high volume of transactions, and are better equipped to ensure compliance, support customers with their own compliance efforts, and take on some of the risk and liability involved in a potential data breach. While it doesn’t excuse a biller from PCI DSS compliance, it does make compliance much simpler for the biller by shifting most of the administrative burden to the third-party processor. It also

31 Ovum 2018 Global Payments Insight Survey: Bill Pay Services, https://www.ellucian.com/assets/en/ebook/ebook-ovum-2018-global- payments-insight-survey.pdf 32 IBM, 2020 Cost of a Data Breach Report, https://www.ibm.com/security/data-breach 33 PCI SSC, Maintaining Payment Security, https://www.pcisecuritystandards.org/pci_security/maintaining_payment_security 34 PCI SSC, Why Security Matters, https://www.pcisecuritystandards.org/pci_security/why_security_matters 11

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reduces the biller’s risk associated with data theft, and the financial investment in technology that would be needed to securely store cardholder data.

Bill Payment Trends, by Generation

More than 55 percent of bill payments fall into four categories: utilities, credit cards, cable/TV/internet, and mobile phone services. Of these, major credit card bills account for the largest share, with more than 1.5 billion bills paid a year, totaling $755 billion.

Of the 15.5 billion bills and $4.6 trillion paid in the last year, about 10 billion, or 65 percent, were one-time payments totaling $3 trillion. Consumers chose to set up the remaining 5.5 billion as recurring payments. The majority of one-time credit card payments are made directly through the billers’ websites, at 51.7 percent, compared to 24.3 percent paid through online bank bill pay. Consumers have widely adopted ACH for recurring credit card payments, handling 78.7 percent of their recurring bills this way.35

Percentage of Bill Payment by Method/Generation 100% 13 23 4 3 43 43 90% 4 8 6 20 12 8 80% 24 22 19 18 70% 18 13 15 60% 24 50% 9 12 20 20 26 40% 30% 50 20% 48 42 44 44 41 10% 0% Older Baby Younger Baby Gen X Older Younger Gen Z Boomers Boomers Millennials Millenials ACH Debit Card Credit Card Check Cash Other

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

These statistics clearly reflect consumers’ movement away from analog payment methods – such as in-person, mail and checks – and toward digital commerce. Still, generational differences persist and are reflected in the payment methods and channels that are preferred by the different Census-defined generational cohorts:

35 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 12

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o Gen Zers (6,199,000 households), born between 1996 and 2002 (ages 18 to 24) o Young millennials (12,102,000 households), born between 1990 and 1995 (ages 25 to 30) o Older millennials (19,670,000 households), born between 1981 and 1989 (ages 31 to 39) o Gen Xers (34,700,000 households), born between 1965 and 1980 (ages 40 to 55) o Younger baby boomers (24,114,000 households), born between 1955 and 1964 (ages 56 to 65) o Older baby boomers and seniors (31,794,000 households), born before 1955 (ages 66 and older)36

The 2020 update to Aite’s survey report, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods37, provides valuable insight into how each of these generations are paying their bills, including methods of payment as well as preferred payment channels, summarized here.

Popular Payment Methods

In the lead – ACH:

• Across generations, ACH is the most popular payment method, accounting for 41 percent to 50 percent of bill payments. • In the last year, ACH payments totaled more than $2.3 trillion, and bill payment volume through ACH exceeded 7 billion.

Percentage of Bill Volume by Payment Method 2010-2020 100%

80%

60%

40%

20%

0% 2010 2020 Check ACH Cards Other

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

36 Aite Group, US Census 37 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 13

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• From 2010 to 2020, the number of bills paid by ACH increased from 36 percent to 45 percent. • Gen Zers pay about 41 percent of their bills with ACH, compared with 44 percent for millennials, 42 percent for Gen Xers, 48 percent for younger baby boomers, and 50 percent for older boomers and seniors.

Credit Cards:

• Each year, U.S. consumers pay 2.6 billion bills using a credit card. • From 2010 to 2020, consumer use of credit cards to pay their bills doubled, to about 17 percent.

Bill Volume by Payment Method 2020 (billions) 8000 7000 6000 5000 4000 3000 2000 1000 0 ACH Credit Card Debit Card Check Cash Other

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

• Gen Zers pay bills by credit about 18 percent of the time, similarly to young millennials who pay 19 percent of their bills with credit cards. • Older millennials pay about 22 percent of their bills with credit cards, compared with 18 percent for Gen Xers, 15 percent for younger baby boomers, and 13 percent for older boomers and seniors.

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Debit Cards:

• Each year, U.S. consumers pay 2.5 billion bills using a debit card. • From 2010 to 2020, consumer use of debit cards for bill payment grew from 11 percent to 16 percent.

Percentage Gross Dollar Value by Payment Method 2010-20 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2020 Check ACH Cards Other

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

• Gen Z and younger millennials are more likely to pay their bills with a debit card, which they do 26 percent and 24 percent of the time, respectively. • For younger baby boomers, a debit card is used for 12 percent of bills, vs. 9 percent for older boomers and seniors.

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Checks:

• Checks are used to pay almost $779 billion in bills annually in the United States. • In 2010, about 37 percent of bills were paid by check. In 2020, that number is down to 15 percent. • Although fewer people are paying bills by check these days, U.S. consumers still write more than 2.3 billion checks annually to cover their bills.

Gross Dollar Volume by Payment Method 2020 (billions) 2500

2000

1500

1000

500

0 ACH Check Debit Card Credit Card Cash Other

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

• Gen Zers use checks for about 8 percent of their bills, compared with 6 percent for young millennials, 8 percent for older millennials, and 12 percent for Gen Xers. • Baby boomers pay about 20 percent of their bills with checks, while seniors use checks for about 24 percent of their bill payments.

Cash:

• In the last year, about $133 billion in bill payments were made using cash, compared with $1.2 trillion in card-based payments (credit, debit and prepaid cards). • While cash is one of the least popular forms of payment, it accounts for 4 percent of bill payments made by Gen Zers, young millennials and Gen Xers. • Older millennials make 3 percent of their bill payments with cash, compared with 2 percent for younger baby boomers and 1 percent for older boomers and seniors.

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Payment Channels

In the lead – Direct-to-Biller Online Payments:

• Direct-to-biller payments are the most popular payment channel across all generations of consumers, and are on the rise. • About $1.2 trillion of one-time bill payments were processed in this way in the last year.

Bill Payment Site Use by Generation

100% 1 1 2 2 3 4 90% 28 25 19 20 21 17 80% 70% 60% 50% 40% 71 74 79 78 76 79 30% 20% 10% 0% Older Baby Younger Baby Gen X Older Younger Gen Z Boomers Boomers Millennials Millenials Biller Website Bank Website Third-party Website

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

• Older millennials are most likely to pay bills directly through billers’ websites, accounting for 53 percent of all one-time payments made. For older boomers and seniors, the figure is 34 percent.38 • For recurring payments, the use of biller websites is fairly consistent across all age groups, ranging from 50 percent of recurring bills paid for Gen Z to 57 percent paid by younger baby boomers. • Gen Z and Gen X pay 79 percent of their online bills directly through billers’ websites, compared to 71 percent for older boomers and seniors.39

38 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 39 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 17

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USPS Mail Payments:

• About $717 billion in annual one-time bill payments were sent by mail in the last year. • With the exception of Gen Z, which pays about 17 percent of their one-time bill payments by mail, the younger the person, the less likely they are to send payment by mail.

Percentage of One-time Bills by Channel/Generation

Gen Z Young Millenials Older Millennials Gen X Young Baby Boomers Older Baby Boomers

0% 20% 40% 60% 80% 100% Biller Website Mail In Person Bank Website Phone Third-Party

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

• About 31 percent of older boomers and seniors still send payment through the mail. • For young millennials, just 12 percent of one-time payments are sent with help from the Postal Service. • All generational groups are less likely to use mail to make recurring payments, though again, Gen Z is in the lead with 13 percent of recurring payments sent by mail. • All other generational cohorts have similar rates of paying recurring bills by mail, ranging from 8 percent to 10 percent of recurring bills paid through this channel.

Bank Bill Pay:

• About $443 billion of last year’s one-time bill payments were processed through bank bill pay. • Fewer of today’s consumers are paying their bills through bank bill pay than they were 10 years ago. In 2010, this payment method accounted for 38 percent of bills paid. • Today, just 22 percent of bills are paid using bank bill pay.40 A primary reason for this decline in usage is the multi-day delay between making a payment in the bank portal

40 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 18

A Clearwater Payments White Paper - January 2021

and when it is posted to the biller account. This delay can cause headaches for the consumer in the form of interrupted utility service, cancelled insurance policies and late fees. Entities such as Nacha and The Fed are working to make real-time ACH payments a reality in the near future.

Percentage of Recurring Bills by Channel/Generation

Gen Z Young Millenials Older Millennials Gen X Young Baby Boomers Older Baby Boomers

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Biller Website Phone Bank Website Mail Third-Party

Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update

• For Gen Z, bank website payments are used for just 17 percent of online bills paid, compared with 28 percent for older boomers and seniors. For Gen Z, 8 percent of all one- time payments are made through bank websites. • For baby boomers and seniors, bank bill pay represents 17 percent of one-time payments – the highest of all the generational groups – but only 13 percent of their recurring payments. • The generation most likely to use bank websites for recurring payments is young millennials, who pay 19 percent of their recurring bills this way. Gen Z is the least likely to use bank bill pay for recurring payments, representing just 12 percent of their overall recurring bill payments.

In-Person Payments:

• Approximately $395 billion in one-time bill payments were made at a physical location last year. • In-person payments accounted for about 12 percent of one-time bill volume in 2020. • Gen Zers, young millennials and Gen Xers are the most likely to pay a one-time bill at a physical location about 15 percent of the time, with older millennials and baby boomers only using this channel at a 10 percent usage rate.

A Clearwater Payments White Paper - January 2021

Phone/Voice Payments:

• For recurring bills, payment by phone is the second most-popular choice behind payment through a biller’s website. • Older baby boomers and seniors are most likely to pay their recurring bills by phone, taking care of 27 percent of their payments this way, followed by young millennials, who pay 19 percent of their recurring bills by phone. • Other generational segments pay between 12 percent and 15 percent of their recurring bills by phone. • For one-time bill payment, Gen Zers take the lead, with 12 percent of bills paid by phone. • All other generational groups have similar rates of one-time payments, with between 6 percent and 8 percent of bills paid by phone.

Third-Party Websites:

• The least popular of all the payment channels is payment through third-party websites, such as QuickBooks, MyCheckFree.com and Mint.com. • Third-party websites accounted for about 2 percent of online bill volume in 2020. • The age group that is most likely to pay bills through third-party websites is Gen Z, but their usage rate is just 4 percent of their bills paid online.

Bill Payment in the Age of COVID-19

With the global pandemic making its mark worldwide, the United States is seeing reduced consumer and business confidence. COVID-19 has caused high unemployment rates and closures of entire business sectors, and there’s no end currently in sight and no reliable predictions for when the economy might take a positive turn.

At the time of this writing – October 2020 – the United States is seeing falling unemployment rates and rising employment levels, but both remain far below their pre-COVID levels. However, this may change given the dire predictions of increasing case numbers, hospitalizations and deaths during the winter, and a widely available vaccine still many months away.

Private consumption growth has slowed, and household disposable income has declined, forcing some consumers to make difficult choices when it comes to spending money.41 Consumers are feeling this pain in more ways than one: 56 percent say they are finding it more difficult to keep up with their financial obligations, thanks to pandemic-related job loss or reduction in income. At the same time, 53 percent of people in the U.S. say their expenses have increased as a result of COVID-19.42

41 Brookings Institute, October 2020 update to TIGER: COVID-19 remains an impediment to the global recovery, https://www.brookings.edu/research/october-2020-update-to-tiger-covid-19-remains-an-impediment-to-the-global-recovery/ 42 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 20

A Clearwater Payments White Paper - January 2021

About half of consumers still say that they would find a way to pay all of their bills. But, when something has to give, the financial obligations that consumers are most likely to let go of are charitable donations, student loans, and TV and internet services. The bills that they are most likely to find a way to pay are those that keep a roof over their heads: mortgage and utilities.43

While consumers are facing these challenges, billers would be wise to take these stressors into account, along with generational preferences for bill payment methods and channels.

Many banks have updated their policies to help consumers through these tough times. Similarly, billers should also think about creative billing, collections and payment strategies to reduce the flood of last-minute phone calls from worried customers and help them meet their financial obligations. Friendly, supportive customer service goes a long way toward securing payment, and working out a plan that works for each customer – such as accepting credit card payments, taking partial payment or working out a payment plan – is a better option than not getting payment at all and moving into collections.

By making it easier and safer for people to pay their bills – paperless bills, online payment options and digital wallets reduce the need for risking their health to make an in-person payment, for example – billers can ease consumers’ stress levels, increase the chances of timely payment, and create a positive customer relationship.

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Clearwater Payments 12377 Merit Drive Suite 1530 Dallas, TX 75251 800.784.5320 [email protected] www.clearwaterpayments.com

43 Aite, How Americans Pay Their Bills: Sizing Bill Pay Channels and Methods, 2020 Update 21