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Compete, Inc. Finds Banks Offering Free Bill Pay Are Less Exposed to Biller Direct Sites

Analysis of Online Bankers' Account Management Preferences and Behavior Yields New Insights

BOSTON, MA – April 14, 2004 -- Approximately one in six online bankers now pays bills exclusively at biller direct sites instead of a retail bank, according to new analysis from Compete, Inc. Aggressive marketing by biller direct sites during the past year has retail banks scrambling to increase penetration of payment services before their customers begin paying bills online somewhere else. Many banks have waived bill pay fees as a strategy to acquire and retain bill payers. Compete has found that bank customers were approximately 30% less likely to use biller direct sites if their banks waived bill pay fees.

"Banks face an uphill battle compared with the built-in advantages of biller direct sites," said Stephen Franco, Managing Director of Compete's Retail Banking Practice. "They have introduced free bill pay as a way to offset these advantages and increase adoption of online bill payment," added Franco. "We've found that banks who offer bill payment services at no charge are able to capture a larger share of their customers' bill payment activities at the expense of biller direct sites."

Bill Payment is Binary:
Banks Must Acquire Bill Payers Before They Go to Biller Direct Sites

(Online bankers at top retail banks)

In the new study, Compete analyzed the bill payment preferences and activities of online bankers. The analysis quantified the impact of their behavior on the bill payment penetration of about 20 retail banks and six biller direct groups — cable/satellite providers; credit card companies; wireless providers; mortgage servicing institutions; landline phone companies; and student loan providers — between July 2003 and February 2004.

Compete's findings included:

• Online bankers who pay bills online at their bank sites still outnumber those paying bills at biller direct sites, 5.7 million and 4.6 million, respectively. But biller direct sites have been successful at making inroads with banks' online bankers. Aggressive biller strategies to deepen relationships with customers through incentive programs and heavy promotions have paid off, particularly those of credit card companies. Compete found that half of the consumers that preferred to pay bills at biller direct sites used credit card company services. Importantly, these consumers represent lost opportunities for banks: a scant 3% of consumers elect to pay bills at both bank and biller direct sites.
   
• Free bill pay resonates with online bankers and is an effective strategy to increase bill pay penetration. Banks offering free bill pay services boosted penetration rates into their online banking customer bases to 20 – 40%, two-to-four times the rates of banks that charge for bill pay. US Bank launched free bill pay in December 2003 and substantially increased its penetration rate from 12% to 20% in just three months. In contrast, banks that don't waive bill pay fees are putting their customers at risk. Compete found that free online banking and bill pay was a compelling reason to switch banks for 50% of online bankers.
   
• Banks offering free bill pay services have less exposure to biller direct sites. In aggregate, Compete found that 16% of all online bankers paid bills exclusively at biller direct sites in February. Banks charging customers for bill pay services were found to be at a competitive disadvantage relative to peers; 18% of these banks’ customers preferred to pay bills at biller direct sites versus 13% for banks who waived bill pay fees.

"Banks are investing significant resources to attract and retain active bill payers who are a loyal and profitable customer segment. With 17 million online bankers not yet paying bills online, there is still tremendous untapped opportunity. Banks that go free will have a competitive advantage not only among peers but also versus biller direct sites," said Franco.