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Electronic bill presentment and payment— Is it just a click away?

Alexandria Andreeff, Lisa C. Binmoeller, Eve M. Boboch, Oscar Cerda, Sujit Chakravorti, Thomas Ciesielski, and Edward Green

Introduction and summary Today, most consumers still receive their bills This article concerns electronic bill presentment and via mail. With today’s technology, bills may be pre- payment (EBPP) in the business-to-consumer (B2C) sented via the Internet, mobile phone, or personal digi- marketplace and, more specifically, remote bill pay- tal assistant anywhere in the world, allowing for greater ments (as opposed to payments made at the point of convenience to consumers. However, how much, if sale). B2C EBPP applications are plausibly among anything, most consumers are willing to pay for such the most promising innovations to shift U.S. consumer a service remains unclear. Greater convenience, along payments from checks to electronic alternatives. By with value-added services such as better customer ser- EBPP, we mean the electronic bill presentment to the vice, account aggregation, and other incentives may consumer and the electronic initiation of payment by be required to achieve the number of consumers nec- the consumer. Some analysts have suggested that elec- essary for billers to provide EBPP services. tronic delivery of bills will increase the use of electronic In the next section, we explore how most tradition- payments. Our research attempts to answer the fol- al bills are presented and paid. Then, we discuss the lowing two questions: Why aren’t electronically pre- various EBPP models and what enhancements to ex- sented bills always paid electronically? And, if EBPP isting payment choices may be necessary for Internet- does aid in the migration to fully electronic end-to- and e-mail-initiated transactions. Next, we consider end payment, what are the barriers to its adoption? the various payment options available for EBPP; While the U.S. continues to lead the world in tech- and finally, we outline barriers to market adoption nological advancements such as the development and of EBPP services. widespread use of the computer and Internet technol- Traditional bill presentment and payment ogies, Americans still rely on checks to make most payments. The U.S. has higher check usage per capi- Below, we discuss the costs and benefits of the ta than any other industrialized country. Humphrey, traditional bill presentment and payment process. In- Pulley, and Vesala (2000) state that U.S. consumers dustry participants estimate that billers issued between and businesses write around 20 checks per month. This 15 billion and 17 billion consumer bills in 2000. Over is more than 2.8 times the number of checks written 80 percent of these bills were originated by one of four per person in Canada, France, or the UK and at least industry groups: finance, insurance, telecommunica- 20 times more per person than in Germany, Japan, Italy, tions, and utilities. Billers and consumers pay $80 Belgium, the Netherlands, Sweden, or Switzerland. In 1999, U.S. businesses and consumers issued a Alexandria Andreeff is project leader and Lisa C. Binmoeller total of 68 billion checks (BIS, 2001). The proportion is project manager of the Federal Reserve Bank of Chicago’s EBPP Leadership Assignment. Eve M. Boboch, assistant of check usage is highest for remote payments. Of the vice president, and Thomas G. Ciesielski, vice president in 15 billion to 17 billion consumer bills issued every year, the Financial Services Group, are project directors of the over 80 percent are paid by check (Kerr and Litan, EBPP Leadership Assignment. Oscar Cerda is a regulatory associate economist, Sujit Chakravorti is a senior economist, 2000). If EBPP were to capture the whole consumer and Edward Green is senior policy advisor at the Federal market and convert all check payments into electron- Reserve Bank of Chicago. The authors would like to extend ic ones, the number of checks written by consumers a special thank you to Elizabeth Knospe and Ann Spiotto would be reduced by over 40 percent. for their legal assistance.

2 4Q/2001, Economic Perspectives billion annually for bill presentment and payment.1 and costly to billers since it is resource intensive. Tra- Internal operations for bill and payment processing ditional billing also lacks reliability because paper- cost billers $45 billion yearly, with almost two-thirds based billing systems offer no guaranteed delivery ($30 billion) of that going to technology vendors for mechanism. Furthermore, lost bills result in customer hardware and software implementation and support. service problems and late fees for consumers. The remaining $35 billion comprises $10.7 billion for postage; $8 billion for account fees at financial Bill payment institutions; $7.5 billion for insufficient fund fees; The bill payment process involves at least five $5.7 billion for outsource bill/payment processing; main participants: the consumer, the consumer’s finan- $2.2 billion for check clearing fees; and $0.9 billion cial institution, the biller, its financial institution, and for ACH (automated clearing house)/credit card pro- a payment network (see figure 1). The consumer will cessing and settlement fees (Whaling, 2000a). ultimately use funds on deposit at their financial insti- tution to settle the monetary obligation. In the case of Bill presentment check, debit card, or ACH payments, the consumer Traditional consumer bill presentment and pay- will have to deposit the funds into their account before ment is a paper-based process that involves present- initiating payment to the biller.4 The biller’s financial ing the consumer with a paper bill for goods or services institution will present the consumer’s payment obli- previously rendered, which the consumer pays by gation through a payment network that processes check. The bill presentment process involves billing checks, ACH payments, credit cards, or debit cards. operations, such as generating, printing, mailing, and The consumer’s financial institution will send funds delivery of bills to consumers.2 The cost of processing, via the network to the biller’s financial institution if printing, and sending bills can range from $.70 to $1.50 sufficient funds are in the payee’s account (or if the (PayAnyBill, 2000). In other words, billers spend be- payee has a sufficient line of credit). The advantages tween $10.5 billion and $25.5 billion each year to and disadvantages of each network are well known.5 present bills.3 The traditional bill presentment process involves Electronic bill presentment and payment not only the biller generating a periodic report from In contrast to the traditional model, EBPP no its billing systems, but also the subsequent notifica- longer uses the mail system as a delivery mechanism tion of the bill to the consumer for goods or services for bill presentment and payment initiation. Instead, previously rendered. Paper-based billing is an intri- it uses the Internet as a speedier and less expensive cate and time-consuming process that involves printing delivery infrastructure to present bills electronically.6 account statements, stuffing them into envelopes (along With the percentage of U.S. households with Internet with appropriate advertising inserts and other market- access having increased from 26.2 percent to 41.5 per- ing material), and sorting for mailing. Depending upon cent between December 1998 and August 2000 (U.S. the level of automation, the creation and processing Department of Commerce, 2000), Internet access to of bills can take anywhere from one to three days bill presentment and payment options is on the rise. (Doculabs, 1999). In the traditional bill payment world, notification and presentment of a bill occur simulta- Consumer and biller expectations neously when the consumer receives the bill in their Compared with the traditional bill delivery and mailbox. For most bills today, the post office serves payment methods, EBPP seeks to meet or exceed the as a notification and presentment network by deliver- sometimes competing expectations of consumers and ing each statement from each biller individually to billers. each customer. The average bill takes three to five Consumer expectations days to reach the consumer. I Convenience—Consumers do not view the tradi- Most billers have streamlined and improved their tional payment methods as overly burdensome paper-based billing operations as much as possible. and would expect any new bill payment procedure However, the traditional billing process still faces is- to meet or improve on this convenience before sues of convenience, timeliness, cost, and reliability. switching.

Traditional billing does not allow consumers to receive I Time/cost savings—Consumers would expect to their bills anytime and anywhere. Furthermore, errors have costs that are just as low (or even lower) in customers’ addresses (which are common when than their current bill paying costs. customers relocate) may lead to significantly longer I Control over payments—As with the use of checks, delivery times. The process of printing bills, assem- with EBPP consumers would expect to have con- bling bills, and delivering bills is time-consuming trol over the timing and amount of payments.

Federal Reserve Bank of Chicago 3 FIGURE 1 Bill payment

Consumers Billers

Payment network

Consumer's Biller's financial financial institution institution

I Universal payment mechanisms—Because elec- I Reliable delivery mechanism—Billers want a fast tronic payments are replacing the check, consumers and reliable delivery mechanism for both present- would expect to have a wide range of electronic ment and payment.

payment options that meet their specific payment I Ability to up-sell and cross-sell—Billers want to needs or wishes. employ specialized, targeted marketing techniques, I Privacy and security—Consumers must be confi- rather than general paper statement stuffers that dent that any bill payment process will protect may not be suitable for each consumer.

their privacy and funds by securely transferring I Control over customer data—Billers want to pro- billing information and payments. tect and safeguard their most valuable data. I Reliability—Consumers must trust the accuracy of I Broad distribution/reach—Billers require a broad their electronic bills and feel confident that their delivery and payment medium to gain maximum payments will be delivered accurately and on time. customer use. I Dispute resolution—Consumers need reliable and accessible customer service options to resolve any EBPP presentment models questionable transactions. The two primary EBPP models are the biller-di- Biller expectations rect model and the consolidation/aggregation model. There are a number of variations of the consolidation/ I Cost reductions—Billers want a bill creation and payment process that is less costly or, at least, no aggregation model, including e-mail-based EBPP, the more costly than the current paper-based billing use of personal financial management software, screen process. scraping, and scan and pay methods. The notification procedure for both the biller-direct and the consolida- I Dispute resolution mechanism—Billers require an tion/aggregation models involves the biller notifying accessible and cost-efficient dispute resolution the customer of a pending bill, generally via e-mail, and procedure. the customer subsequently logging onto either the bill- er’s or consolidator/aggregator’s website (see figure 2).

4 4Q/2001, Economic Perspectives Biller-direct model the consumer of pending bills in a cost-efficient man- In the biller-direct model, once a consumer has ner. It is estimated that the electronic creation of all enrolled for EBPP services, the biller generates an consumer bills would significantly reduce bill state- electronic version of the consumer’s billing informa- ment production costs. tion. The biller may outsource this responsibility using The model also provides a more reliable, faster a bill service provider (BSP). These BSPs act as agents delivery mechanism for both bill delivery and payment on behalf of the biller and provide such services as receipt, compared with traditional bill presentment electronic bill translation, formatting, data parsing, and, and payment (Kerr and Litan, 2000). Delays and in- at times, hosting the biller’s website. Next, the biller terruptions can have negative effects on the biller’s notifies the consumer of a pending bill, generally via cash flow. The model also has the potential to reduce e-mail, and the consumer is directed to log onto each costs through the use of electronic consumer dispute biller’s website (or to a BSP’s website), where the bill- resolution mechanisms. It is estimated that 70 percent er presents the consumer with an electronic version of calls to telephone-based customer service centers of the billing statement (see figure 3). After viewing concern billing statements (IBM, 2000). Online reso- the online bill, the consumer can initiate payment di- lution could reduce the labor and overhead costs asso- rectly from the website. From the time of enrollment ciated with customer service centers. to the time of initiating payment, there are no other The biller-direct model is also advantageous for parties that come between the biller (or its BSP) and the biller in that it maintains direct contact with the consumer. Thus, the biller (or its BSP) is responsible consumer. Since the biller controls how the bill is vi- for interfacing with the customer to enroll, access sually presented through its website, it can maintain electronic billing information, and make payments. its brand identity. The biller-direct model can also lead Biller-direct advantages to better cross-sell and up-sell opportunities. It attempts For the most part, the biller-direct model exceeds to integrate bill presentment with specialized, target- the biller’s basic expectations. It provides the biller ed marketing techniques, rather than broad-based with an electronic method of creating and notifying advertising that may not apply to all consumers. Since

FIGURE 2 Notification

Consumer A bill Biller A Consumer A Consumer B bill

Consumer C bill From biller A

From biller B

From biller C

Consumer A bill From biller A

Consumer B bill From biller B Biller B E-mail Consumer B Consumer C bill From biller C

From biller A

From biller B

Consumer A bill From biller C Consumer B bill

Biller C Consumer C bill Consumer C

Federal Reserve Bank of Chicago 5 FIGURE 3 Biller-direct presentment

Biller A Consumer A website

Biller B Consumer B website

Biller C website Consumer C

the biller controls the consumer’s demographic data offerings utilizing the biller-direct model use login (captured during the enrollment process) and purchas- IDs, passwords, and encryption technology to provide ing habit data (through billing data), it can more easily sufficient protection for privacy of consumers’ bill target different market segments. records, as well as the actual payments. Biller-direct Finally, since the biller relies on its own (or its providers are relying not only on the 128-bit RC4 en- BSP’s) processing systems, it does not risk third-par- cryption in the consumer’s browser, but also on addi- ty integration problems seen in other EBPP models tional encryption and secure channels for all messages (Doculabs, 1999). In its survey of consumer high- sent between the biller, financial institution, and con- volume billers (over 250,000 bills a month), Gartner sumer. In addition, consumers may be more comfort- Group estimated that by year-end 2000, 74 percent able establishing EBPP arrangements directly with of e-billers would be presenting on their own compa- billers with whom they have existing relationships— ny’s website (Kerr and Litan, 2000). rather than with unknown third parties. Using the From the consumer’s perspective, the biller-di- Internet as a reliable delivery mechanism also results rect model meets many of the basic expectations seen in a reduction of potential late fees due to lost mail or in the traditional mailing system model. Customers misplaced payments.7 expect EBPP costs that are just as low (or even lower) Finally, consumers benefit from the biller-direct than their current bill paying costs. Under the biller- model from a customer service perspective. Consumers direct model, the customer saves on mailing and have the ability to access current or real-time infor- check writing costs when submitting payments. In mation since billers are able to update customer data addition, biller-direct applications are usually offered more frequently. The biller-direct model also allows free of charge. for simpler and faster dispute resolution online versus The majority of consumers perceive the U.S. Post- current telephone contacts. Market research indicates al Service to be a secure, private, and reliable way of that direct billers have a tendency to provide better transporting bills and payment (Whaling, 2000a). EBPP customer service than third parties (Robinson, 2000).

6 4Q/2001, Economic Perspectives Biller-direct disadvantages to implement its own costly infrastructure. Smaller bill- The biggest disadvantage of the biller-direct ap- ers lacking financial resources can still enter the EBPP proach is that consumers must take the initiative to arena quickly. In fact, Gartner Group found that 41 per- visit multiple billers’ websites to view and pay their cent of current consolidation users cited the ability to bills. Even if some billers use the same BSP, it is cur- start e-billing quickly as the top reason for using the rently unlikely that all of a consumer’s billing infor- thick consolidation model (Kerr and Litan, 2000). mation can be received from a single site. This can For consumers, having a third party offer EBPP be time-consuming and potentially confusing if all services may be to their advantage if the third party billers do not use similar processes or interfaces for is able to offer numerous electronic payment options presenting bills and accepting payments, in addition not supported directly by the biller. Depending on the to the multiple usernames and passwords the consum- consolidation site chosen, convenience may be in- er must remember. While this model was acceptable creased by allowing consumers to access their billing to the early adopters, it may be too cumbersome for data at popular Internet sites where they can perform the broader consumer market. other tasks (such as online banking or online shopping). Another disadvantage for consumers utilizing the Financial institutions could potentially garner biller-direct model is that not all billers provide a wide several benefits if they choose to host a bill consoli- range of electronic payment options for each consum- dation site. In contrast to the traditional and biller-di- er’s payment needs. In the traditional model, all con- rect models, with this model banks are no longer forced sumers have access to one universal payment option, into the background performing simple payment pro- the check.8 cessing. Banks’ entry into hosting an EBPP consoli- For billers, the largest disadvantage to imple- dation site could help drive the use of other online menting the biller-direct model is that it is expensive banking services, thus maintaining customer relation- to establish, design, host, and maintain an in-house ships (McPherson, 2001). application (Doculabs, 1999). In a survey of high- Thick consolidation disadvantages volume billers building or buying software for in- Under the thick consolidation model, billers house EBPP, first year expenditures in EBPP programs generally lose branding, marketing, and cross-selling averaged nearly $570,000 (Kerr and Litan, 2000). capabilities as consolidators eliminate direct contact Consolidation/aggregation model between billers and customers. In addition, billers The consolidation model was introduced to address risk losing control over consumer data once it moves consumers’ desire to have one destination to access to the consolidator. and pay their bills while reducing the cost to billers For consumers, unlike providers offering the of implementing EBPP. In this model, the biller sends biller-direct EBPP model, providers of the third-party the customer’s billing information to a third party consolidation/aggregation model typically charge a called a bill consolidator. The consolidator, operating fee of approximately $4–$12 per month. This is prob- on behalf of the biller (or the aggregator operating on lematic given that 59 percent of consumers are not behalf of the consumer) combines data from multiple willing to pay for online bill payment and only 6 per- billers and consolidates the information at a single cent are willing to pay more than $5 (Kerr and Litan, destination. Although some consolidators present bills 2000). In addition, customer service levels may be at their own websites, most support the aggregation reduced as consumers are directed to different con- of bills by consumer service providers (CSPs) such tacts for different problems. as Internet portals, financial institutions, and broker- Thin consolidation age websites (see figure 4). Under the thin consolidation model, the biller Thick consolidation maintains the details of the customer’s billing infor- Two variations of the consolidation model have mation while a summary is forwarded to the consoli- emerged, thick and thin consolidation. Under thick dator. Customers can view a summary of their bills consolidation, the consolidator maintains both the sum- on the consolidator’s site, while those desiring to view mary and details of the customer’s billing information. the details are linked to the original biller’s website. The customer does not need to have one-on-one con- Thin consolidation advantages tact with the original biller to view the full detail of The thin consolidation model allows billers a bills due. greater opportunity to provide online customer ser- Thick consolidation advantages vice, cross market products, and gain greater control In the thick consolidation model, the biller can of their e-billing process, particularly by maintaining offer EBPP services to its customers without having control over consumer data (Kerr, 2000). Furthermore,

Federal Reserve Bank of Chicago 7 FIGURE 4 Consolidation/aggregation

Consumer A bill Biller A Consumer A Consumer B bill

Consumer C bill Consumer A views consolidated bills

Consumer A bill Consumer B views Consolidator/ Consumer B bill consolidated bills Biller B aggregator Consumer B Consumer C bill website

Consumer C views consolidated bills

Consumer A bill

Consumer B bill

Biller C Consumer C bill Consumer C

similar to the biller-direct model, the thin consolida- Both of these standards are in their infancy. While OFX tion model provides consumers with the perceived has the widest acceptance, it is a very basic standard security and comfort of knowing that their billing that supports HyperText Markup Language (HTML) information is stored by the biller, an entity with and lacks the depth to support any level of complexi- which they already have an established relationship. ty in a billing statement for consumers.9 Meanwhile, Thin consolidation disadvantages IFX is being aggressively pursued by industry work- While this model may be advantageous for mar- groups and EBPP software providers. Since IFX is keting purposes, billers still lose the marketing chan- Extensible Markup Language (XML) based, it is nel if customers choose not to view the full details of more robust than OFX, with mechanisms for richer their bills. In addition, the biller must bear the cost of payment information and customer transaction track- hosting a website where consumers can view the de- ing functionality (West, 2001). However, given that tails of their bills. Finally, issues with technology, the industry has yet to adopt one standard for data ex- standards, and security increase between the consoli- change, integration issues in the consolidation/aggre- dator’s and the biller’s website, as they must be more gation models persist. closely integrated than in the thick consolidation model. Consolidation preferences Because the consolidation models involve the trans- Larger billers are beginning to show a preference mission of more data and the number of parties in- for the thin consolidation model. In its survey of high- volved increases, the potential for errors also increases volume billers, Gartner Group found that in 1999, 59 if the industry lacks a universal message standard for percent of billers that adopted the consolidation model data exchange. Several groups are currently working used the thick model. In contrast, nearly 63 percent on a universal open standard that would allow billers of billers planning to implement EBPP services in the to present bills to any customer, anywhere, at anytime. future intended to use the thin consolidation model Two industry standards have been introduced by year-end 2000. In fact, 64 percent of billers currently over the last few years, the Open Financial Exchange utilizing the thick model intended to switch to the (OFX) and Interactive Financial Exchange (IFX). thin consolidation model within the next three years.

8 4Q/2001, Economic Perspectives It was also estimated that 75 percent of high-volume companies can provide customers with all of their billers will use the thin consolidation model by year- bills electronically, regardless of whether the biller end 2002 (Kerr and Litan, 2000). provides its bills electronically. According to Gartner Group, the consolidation One of the limitations of this model is the reli- model’s high fees, lengthy and confusing enrollment, ance of the bill scanner on printing and mailing checks and fragmented customer service have kept enrollment to the biller after the customer has authorized payment. low (Litan, 2000). The challenge inherent in both vari- In fact, it is estimated that over 50 percent of bills ations of the consolidation model is the coordination presented electronically via the total bill consolidation between the different parties involved in the process. method are settled with the biller via check (Glossman Once these issues are resolved, growth of the consol- et al., 2000). In addition, consumers do not receive idation model is expected to increase. As the number bills any faster (in some cases more slowly) and the and type of sites that aggregate multiple bills contin- value of the bill is improved little over the paper ver- ue to grow, use of the consolidation model is expect- sion, since it has no interactive capabilities. For bill- ed to outpace that of the biller-direct model by 2004. ers, direct contact with the customer is lost. In fact, Financial institutions, brokerages, Web portals, and the biller may not even be aware that the customer now the U.S. Postal Service have all added EBPP to has redirected statements to a total bill consolidator. their online offerings (Kerr, 2000). Screen scraping Although industry experts suspect that consum- Screen scrapers are companies that capture cus- ers will ultimately prefer to have all of their bills tomer data from multiple billers’ websites with the presented at one location, the disadvantages of the use of customer supplied IDs and passwords. Once consolidation models (namely, security, customer captured, the data is presented at the screen scraper’s service, high fees, and cumbersome enrollment pro- aggregation website or other CSP aggregation web- cedures) may perpetuate the use of the biller-direct site. Screen scraping companies provide the software model. Given the advantages and disadvantages of used for screen-scraping purposes. each model, it is not surprising that many billers In the past, screen scraping was primarily a uni- currently use both the direct model and variations of lateral procedure initiated by the screen scraper act- the consolidation models. In its 2000 survey of high- ing on behalf of the consumer. A major disadvantage volume billers, Gartner Group indicated that by year- of this model to billers was that they were not involved end 2000, 74 percent of e-billers would be presenting in the process. Billers were unaware that their custom- on their own company’s website, while 73 percent ers’ information had been screen scraped. This raised would have contracted with third-party bill consoli- concerns about security, privacy, and data accuracy, dators (Kerr and Litan, 2000). as well as liability and regulatory issues. With resis- Alternative consolidation/aggregation models tance to screen scraping fading within the past year, Other variations of the consolidation/aggregation there has been a more collaborative approach between model exist. These mainly consist of differences in bill billers and screen scrapers. Major consolidators and delivery or creation methods. Next, we provide a brief major financial institutions have embraced screen- summary of the alternative aggregation EBPP models. scraping technology. Although this approach fulfills a customer’s desire for aggregation, it has yet to be Total bill consolidation seen if screen scraping will adequately address the This is the only model that currently enables issues of liability, security, privacy, and data accuracy customers to view all their bills at a single point via (Gillespie, 2000). the Internet. Total bill consolidation providers require One attempt to decrease the use of screen scrap- customers to redirect their bills to the provider’s data ing in data aggregation is being headed by the Finan- center, which serves as a lockbox operation where cial Services Technology Consortium (FSTC). Its goal bills are scanned and transformed into electronic for- is to test methods of account aggregation, whereby mat (usually in a portable document format or PDF). financial institutions and aggregators work together After bills are converted to electronic format, they to facilitate accurate display of customer data with- are presented at a consumer service provider (CSP) out screen-scraping or without the customer’s surren- (Jeffrey, 2000). der of financial institution access codes to third-party The primary advantage of the total bill consoli- aggregators (Gram, 2001). dation model is that there is no need for standard sys- tems and there are no complicated issues regarding Consumer consolidation model thick versus thin hosting. In addition, scan and pay In the consumer consolidation model, electronic bills are delivered directly to the customer’s desktop.

Federal Reserve Bank of Chicago 9 The biller maintains control of bill details until deliv- data being transmitted, and the authentication of par- ery to the customer is complete. The customer is then ties to the transaction. able to control and store bills and can integrate them Privacy of information is one of the most critical into offline programs, such as personal financial man- issues in an online environment. This is made more dif- agement software. When payments are initiated via a ficult by the fact that EBPP providers may be subject personal financial management software program, the to different rules and requirements protecting consum- payments are facilitated through a consolidator. As a ers’ information, depending on whether the provider result, payments may be made via check, ACH, credit, is a financial or nonfinancial institution. To make mat- or debit card payments. ters more complex, state privacy laws vary greatly in The major advantage of the consumer consolida- terms of the protection provided to consumers.10 tion model is that the consumer is able to work offline. The security of the billing information presented One of its less attractive features is that consumers and the payment instructions received are also of are required to download or purchase special software concern in an online environment. For an EBPP to view bills rather than using a standard browser solution to be effective, it must protect the integrity (Chandler, 1998). of billing data presented and payment instructions E-mail consolidation received through the entire process. Hackers, disgrun- In the e-mail-based billing model, companies en- tled employees, fraudulent billers, or insufficient data able the full detailed billing statement to be sent directly security procedures can threaten the security of the from the biller to the consumer in HTML format. To process. Also, since EBPP is relatively new, there is the consumer, the billing data received resembles a little (if any) legal precedent identifying the responsi- Web page and can contain graphics, advertisements, ble parties in the event that billing or payment data links to the biller’s website, links for immediate bill are compromised. payment, and a link to customer service (Kille, 2001). Due to the electronic nature of EBPP transactions, The major advantage of the e-mail-based model authentication of the parties involved is essential. In is that consumers are comfortable using e-mail. It also a traditional environment, consumers receiving bills allows for personalized electronic exchanges from via the mail generally assume that these bills are legit- biller to consumer (Rini, 2000). As in the biller-direct imate if they follow the biller’s conventional format. model, the biller maintains complete control over the On the payment side, the legal framework is well es- bill delivery process. For the consumer, there is no need tablished to provide parties to a transaction with pro- to download or learn any special software or device. tection from fraud—largely based on paper-based Disadvantages of this mode of bill delivery are signatures. When bills are presented online, the con- that the billing information is not interactive and there sumer has little way of knowing whether the biller is no guarantee that the consumer’s e-mail post office really issued those bills, unless the consumer uses the will properly deliver the e-mail. biller-direct model or has some kind of guarantee of authenticity from the service provider. EBPP payment options Conversely, the identity of the consumer must be The payment mechanisms used by consumers in authenticated to ensure that payment instructions be- the EBPP process are essentially the same as those ing provided are not being initiated fraudulently. In used in a traditional bill payment environment: an online environment, it is unclear what constitutes check, ACH, credit card, and debit card. Consumers “authentication”—particularly from a regulatory often authorize payments online rather than in paper standpoint. Progress is being made in this area, with form. These payments are sometimes fulfilled in an the approval of the Uniform Electronic Transactions electronic fashion; however, many EBPP providers Act (UETA) and its adoption in more than 20 states. still issue payments via check on behalf of the con- The federal Electronic Signatures in Global and Na- sumer. Currently, bill payment service providers pro- tional Commerce Act (the “E-Sign Act”), part of cess an estimated 40 percent of bill payments via which became effective in October 2000, considers check, with less than 60 percent of the remaining bill and promotes electronic signatures as an appropriate payments processed electronically, predominantly means of authenticating identity. Per a March 29, through the ACH (Whaling, 2000b). Regardless of 2001, press release, the Federal Reserve Board of how the payments are ultimately made, payment in- Governors is currently modifying Federal Reserve structions are most often provided online in EBPP Regulation E, which applies to electronic payments, applications—introducing concerns about the privacy to reflect certain provisions of the E-Sign Act. of consumers’ information, the security of payment

10 4Q/2001, Economic Perspectives Each of the four primary payment mechanisms perceived negatively by consumers citing a need for used for bill payment has advantages and disadvan- greater control over the timing and amount of their tages in conjunction with electronic bill presentment. bill payments. However, EBPP applications can often To some extent, consumer choice will drive the pop- provide consumers with greater control over their ularity of the payment mechanisms. In many elec- ACH payments. Consumers have the option to pay tronic transactions, though, the way in which the bills through one-time ACH credit transactions initi- payment is made is unknown to the consumer. Ulti- ated through their financial institutions, through one- mately, this means that billers’ and financial institu- time ACH debit payments authorized online (that is, tions’ preferences for one financial instrument over click to pay), or through the more traditional auto- another could have a significant impact on the mech- mated recurring debit transactions (direct debit) au- anism that ultimately dominates EBPP. thorized online or via paper. Though online bill payment applications appear Check to remove some of the barriers to consumer use of The payment component of EBPP is sometimes ACH payments, there are still some obstacles that accomplished via paper check if a biller participating must be overcome. Many billers (particularly small- in an electronic transaction cannot receive electronic and medium-sized organizations) do not initiate or payments. In these cases, the consumer often pro- receive electronic payments. The reasons for this are vides electronic payment instructions to the service uncertain and require further investigation as discussed provider, but the service provider executes the pay- in the “Barriers to EBPP” section of this article. In ment by writing a check to the biller. Consumers are addition, the consumer enrollment and authentication often unaware that a check payment has been made process for ACH payments is not standardized— to the biller because their portion of the transaction is partly due to the fact that the regulatory environment entirely electronic. surrounding ACH debit is still evolving to accommo- Checks provide important benefits in the EBPP date online initiation of payments. This poses chal- process in that they can be used to pay virtually any- lenges for those educating consumers about electronic one—even billers that are unable to receive electronic payments and for EBPP providers wanting to offer payments. However, there is a unique disadvantage ACH as a payment option. Lastly, the consumer pro- for some billers receiving checks in an EBPP environ- tections associated with unauthorized ACH transac- ment. Service providers sometimes consolidate (by tions are not as robust or well known as they are for biller) multiple consumer payments initiated electroni- other payment options, which may be preventing cally in a check-and-list format. A biller receiving a greater usage. check-and-list payment receives a single check pay- ment with a list of the consumers’ payments included Credit card in the lump sum. The biller then must use a manual Credit card payments are another electronic pay- process to reconcile the payments received in its bill- ment option sometimes available to consumers par- ing system, which can be labor-intensive and introduces ticipating in EBPP arrangements. From a biller’s yet another opportunity for error into the reconcilia- perspective, credit card transactions are generally tion of bills. Electronic payment options streamline more costly than other electronic payment alterna- this process, and would seem to be preferable from a tives and are not accepted by all billers, which may biller’s perspective for use in conjunction with EBPP. limit their use in the electronic payments arena. It is From the perspective of payment system effi- important to note, though, that some credit cards now ciency, though, the check-and-list process does reduce feature embedded micro chips that store information the total number of checks that would have to be pro- useful in authenticating the identity of the consumer. cessed if each consumer paid those bills by check. In If these cards can increase the reliability of authenti- addition, the check and list removes authentication cation of the consumers, billers may be more recep- issues between the biller and the EBPP service provid- tive to them due to the reduced risk that a bill payment er; the service provider essentially assumes responsi- transaction will be fraudulent (although it is unclear bility for authenticating the identity of consumers whether fraud related to consumer bill payment is a initiating payments. significant issue for billers). Credit card usage is prevalent among consumers ACH in an online environment. Since EBPP applications ACH is the most common electronic payment are typically available via the Internet, consumers option used for consumer bill payments. In a tradi- may pressure more billers to accept credit card pay- tional environment, ACH transactions are sometimes ments.11 Some billers that allow consumers to pay their

Federal Reserve Bank of Chicago 11 bills via credit card are now charging a special fee for or at a fee lower than current costs associated with their use. It is not clear whether billers are charging check payments. Gartner Group reported that a ma- this fee to cover the increased cost of the transaction, jority of consumers, 59 percent, say they do not to discourage widespread use of credit cards for bill want to pay anything for account and bill payment payment, or due to other reasons. If this becomes a aggregation services, and 51 percent feel other pay- common, accepted practice, more billers may be en- ment types, including checks, cash, and debit cards, couraged to accept credit cards for bill payments. are easier to use (Kerr and Litan, 2000). A cumbersome set-up process and long lead time Debit card for electronic payments may also need to be addressed Debit card transactions are also sometimes used for to entice further usage. Consumers often have to wait the payment of electronically presented bills. Offline one billing cycle to set up credit card, debit card, or debit cards are most commonly used because these ACH payments for their bills. Some consumers may transactions can be processed offline through the credit also experience a three- to five-day delay between the card networks. Online debit transactions have not been time their account is debited and the merchant is paid. used on a widespread basis, which may be because Consumers may not change existing bill payment there is no standard industry model for authenticating habits until they perceive a strong value proposition consumers’ identities and for connecting with the ATM with EBPP. One approach may be to price paper pre- networks to obtain the instant verification of funds sentment and payment more directly so as to encour- availability that is needed to process online debits. age consumers to utilize electronic alternatives. An Online debit card transactions are currently be- alternative potential solution may be to attract con- ing piloted on the Internet. One such pilot, launched sumers to adopt electronic payments through finan- in February 2001 by BillMatrix Corporation in con- cial incentives. junction with Star Systems, Inc., allows consumers to pay their utility bills using a debit card. In addition, Incentives for financial institutions NACHA, the Electronic Payments Association, spon- EBPP could result in lost revenue for financial sored a pilot which concluded in March 2001 of con- institutions operating retail lockboxes (the service of sumer debit card use on the Internet; the NACHA pilot financial institutions processing remittance informa- combined use of the debit card with a digital signa- tion from a post office box and depositing them di- ture for authentication purposes. The success of both rectly into an account) and check-processing operations. of these pilots remains to be seen, but interested par- Some institutions struggle with the inherent conflict ties are working to ensure that the debit card plays a of reducing check revenue when promoting electron- role in Internet-based payment transactions. ic payment usage. Furthermore, current pricing poli- cies for electronic and check payments may discourage Barriers to EBPP the use of electronic payment alternatives. In the introduction to this article, we asked the However, pressure from EBPP providers has re- question: What barriers are preventing widespread sulted in financial institutions entering the market- adoption of electronic presentment and payment? place either directly with more user friendly and less Initial research has uncovered a number of barriers: costly EBPP options or by partnering with consolida- 1. Lack of incentives for participants, tors. In addition, service providers are targeting finan- cial institutions by offering network switches that utilize 2. Lack of standards for enrollment and data exchange, open architecture for settlement of EBPP transactions. 3. Concerns over security and privacy of financial information, and Incentives for billers 4. Legal issues surrounding industry regulations, lia- The initial costs associated with implementation bility, dispute resolution, and consumer protections. of e-billing programs for high-volume billers are es- timated to average $570,000 (Kerr and Litan, 2000). Lack of incentives for consumers High implementation costs and the need to operate EBPP services need to save consumers money multiple, complex, billing systems concurrently have and time compared with traditional bill payment. Con- likely discouraged biller adoption. The lack of stan- sumers appear reluctant to use EBPP until more of dards and the uncertainty surrounding future EBPP their bills are available electronically. Checks are per- solutions introduce additional disincentives for billers ceived to be free and relatively easy to use. Industry considering participation. analysts agree that consumer adoption would grow While 32 percent of all large volume billers more rapidly if EBPP services were offered for free (greater than 250,000 bills a month) (Kerr and Litan,

12 4Q/2001, Economic Perspectives 2000) are presenting electronically, adoption rates Standards for data exchange drop considerably for small to medium-sized billers The lack of universal message standards for data for both electronic presentment and payment. How- exchange continues to hamper growth in EBPP. Sev- ever, adoption by the largest billers may generate the eral standards have been introduced over the last few critical mass required to convince consumers of the years, including OFX and IFX. Industry adoption has benefits of EBPP because, as noted earlier, the larg- been slow, and participants continue to use different est billers generate 80 percent of bills. formats for the exchange of presentment data, hin- However, the adoption of EBPP has not neces- dering interoperability between various provider and sarily led to end-to-end electronic payments. Virtual- biller systems. ly all consumer bills are paid electronically when they are presented electronically and the consumer Security and privacy concerns has initiated payment online (click and pay). A ma- Consumers are concerned about the security and jority of these payments are completed via the privacy of the financial information required for the ACH.12 However, consumer-initiated online recur- EBPP process. Gartner Group surveyed consumers ring bill payments that are not presented electronical- and determined that of Internet users who do not pay ly (primarily the pay-anyone model) are often bills online, 52 percent are concerned about privacy completed via check. Additional research is needed and 48 percent are concerned about security and to investigate if online-initiated check payments are fraud (Barto, 2001). driven by the billers’ inability to accept electronic Some security and privacy concerns regarding payments or if other barriers are also contributing to electronic data transfer for bill presentment include the use of paper payments in EBPP. data confidentiality and integrity, billing statement issuer authentication, and nonrepudiation of state- Incentives for third-party service providers ments (Whaling, 2000a). Specifically, the issues in- The dominance of several providers, lack of clude the protection of the data that is transferred open systems, and lack of universally accepted stan- between biller, service provider, and consumer from dards may serve as deterrents to new entrants. While being read or modified; verification that the billing larger providers may have the financial resources to statement received by the consumer was sent from develop solutions for multiple standards, the lack of the biller or service provider; and proof of the exact standards may limit smaller providers’ capabilities. It contents of the billing statements. is also unclear if third-party pricing policies for elec- tronic and check payments discourage the use of Legal issues electronic methods. When the EBPP provider is a financial organiza- tion, this raises a number of legal and regulatory con- Lack of standards for enrollment siderations that might not be relevant to a typical The multitude of models, payment options, and commercial provider. The question of which state’s providers require consumers to use various cumber- or country’s laws control an Internet relationship is some, inconsistent enrollment methods to establish still developing (Spiotto and Mantel, 2000). States EBPP services. The method of enrollment may vary have adopted different consumer protection laws, depending on the biller and/or the model. The frag- which may be applicable to EBPP services. mented enrollment process has historically been a Consumers may be exposed to differing protec- major barrier for the traditional ACH direct payment tion rights and liabilities. The dispute resolution pro- product. In the direct payment enrollment process, cess may vary depending on the players, models, and the onus is typically on the consumer to contact each payment options. The current legal and regulatory biller to enroll, change, or cancel automatic deduc- environment is still primarily designed for a paper tions. This same type of problem is apparent in the environment. initial EBPP enrollment process, where the burden is again on the consumer to search for billers offering Conclusion EBPP services. The pay-anyone model tries to allevi- In recent years, commercial use of the Internet ate this burden by allowing consumers to initiate has changed the way consumers and billers interact. payments online to anyone regardless of how the bill Traditionally, consumers received paper billing state- is received. While this model begins to address some ments for products or services rendered; most con- of the barriers to EBPP, it also appears to introduce sumers then forwarded a check to the biller via mail paper payments into the process. to pay the amount due. As an information delivery channel, the Internet has provided a new alternative

Federal Reserve Bank of Chicago 13 for billers and consumers to complete these transac- to use EBPP and/or electronic payments instead of tions. Today, some billers are leveraging the Internet traditional presentment and payment methods. An- to facilitate EBPP, in which billing statements are de- other inhibiting factor is the lack of standards in sev- livered to consumers and consumers provide bill pay- eral areas of the industry: The enrollment process is ment instructions via e-mail or on the Internet. inconsistent among service providers, and there are In this article, we addressed two important ques- no universally accepted standards for the presentment tions: What barriers are preventing widespread adop- of bills, thus hindering greater interoperability in the tion of EBPP?, and Will the electronic delivery of industry. As with other Internet-based applications, bills increase the use of electronic payments? Indus- security and privacy concerns may be slowing the try analysts have heralded EBPP as the “killer appli- adoption of EBPP, as are uncertainties and obstacles cation” enabled by the Internet, and some have claimed in the legal and regulatory environment. that electronic presentment of bills will be the key It is unclear whether increased EBPP usage will driver leading to the electronic payment of bills. How- truly drive the use of electronic payments among con- ever, we find that in spite of extremely optimistic pre- sumers—and if so, what their electronic payment dictions of growth for EBPP, actual use of EBPP is method of choice will be. This article identifies the estimated at less than 1 percent of consumers’ electroni- key barriers to EBPP and suggests some areas in which cally paid bills (Kerr and Litan, 2000). Furthermore, incentives could be provided to encourage greater upon closer look at the industry, we find that checks use of EBPP and electronic payments. Some, but not are still predominately used to pay consumer bills— all, of these areas represent potential opportunities including bills that are presented electronically. for both the private and public sector in facilitating We have uncovered several barriers to greater use the migration from traditional paper-based payments of EBPP and electronic payments. The most critical to electronic payments. barrier is that key parties have insufficient incentives

NOTES

1Admittedly, this cost estimate overstates the real resource cost 7Industry participants hope that the Internet will prove reliable; of bill payment, because some of the cost represents transfers however, there are some reliability concerns relating to e-mail de- among various participants and third-party providers. livery and website hosting.

2These operations may be done internally by the biller or outsourced 8A consumer does not necessarily need a single electronic pay- to third parties. ment option, but rather various payment options with flexibility to meet their needs and wishes. 3This assumes 15 billion bills at $.70 and 17 billion bills at $1.50. The wide range in cost may reflect differences in unit cost for 9As of mid-2000, OFX had achieved broader industry support large and small billers and differences in the way the cost esti- with the release of OFX 2.0, an XML compliant version. mates were made. 10It can be argued that a provider of bills to customers in several 4The consumer may have access to overdraft facilities that would states must satisfy the privacy expectations in each state, and the allow them to make payment without having funds in their trans- various requirements might conflict. actions account. 11This is in part because all four of the major credit card networks 5For further information regarding the advantages and disadvan- limit consumer liability for unauthorized use to zero if proper tages of each payment mechanism, see Chakravorti, 1997; processing rules are followed. Chakravorti and Shah, 2001; Federal Reserve Board, 1996; Federal Reserve System, 1997; Flatraaker and Robinson, 1995; 12Consumers may also choose to only view electronically pre- Humphrey and Berger, 1990; Humphrey, Kim, and Vale, 1998; sented bills and write checks rather than initiate online payments. and Wells, 1996. These types of transactions are not currently tracked and are therefore not included in this discussion. 6Cost comparison is done at the margin and does not include tran- sition costs.

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16 4Q/2001, Economic Perspectives