When I first started using banks’ online bill paying feature I figured it was a service they gave me to be competitive. But the bank I just started an account with has really been pushing the service in their advertising emails. Why? Do they actually make money doing this somehow?
They don’t charge me for the service. There’s no per-transaction fee and I generally don’t pay any fees overall, except for specific things like ordering paper checks. When they pay somebody small, like a local veterinarian, they actually mail a paper check, and I get a copy in the statement, and it’s showing the correct billing amount, so there’s no fee charged to vendors. Or at least that’s how it worked a few years back (I haven’t seen this recently). From where comes their profit?
Possibly it is highly automated with a nearly zero cost to them per transaction, and they see it as a preferable alternative to having to process paper checks in the mail, which they weren’t charging for and for reasons of precedent might have a hard time starting to. Is that it?
Most online bill pay is via the ACH system rather than checks (while your veterinarian is paid with a check your electric, telephone, cable, water, insurance bills are paid with ACH).
I think this is mostly a competitive feature–if your bank doesn’t offer online bill pay then you will take your banking business to a competitor–which is also where you will get a mortgage which is profitable for the bank.
I think that’s a huge part of it. Processing all of those incoming checks takes a lot of time and personnel. Even if it is handled from other banks via batch processing, it still takes more time than doing everything electronically. Plus, many banks used to send all those cancelled checks back to the customer. Every step of processing a customer-written paper check takes time and personnel. I think online bill pay is saving them massive overhead by reducing time and personnel costs. Plus, I’m sure it increases their accounting accuracy and makes large audits or fraud investigations, etc. a lot easier.
The bank likes it because it saves them money. The next step is to get you to do all your banking online so that they can close a lot of those expensive branch offices.
Well, it does make sense that it’s a competitive feature, and saves them something. I’m just surprised they try so hard to promote using it after I’ve opened the account.
It’d be a competitive disadvantage for McDonalds to not offer napkins. But they don’t walk around the seating area asking if I’m sure I got enough of them.
Then again, what they’re doing is sending me emails. Telling their software to send this email to customers who don’t use the feature is probably way cheaper than handling more paper mail.
Getting you to sign up for the service makes you reluctant to switch banks. You’ve got all your payees in their system and all your automatic payments set up with them. At this point they really have to do you dirt to get you to switch banks and have to start all over again.
Same with direct deposit. Dealing with getting your direct deposits switched is a pain. Maybe there is an employer out there that lets you switch direct deposit reliably with the push of a button. If your employer is one, consider yourself blessed. But for most people it’s a major hassle.
The fact is that the more convenience services they can get you to sign up for, the more “stuck” you are.
If you send a paper check to a big company, they (or their payment processor) will almost certainly just image the check and destroy the original. They may even just take the information from the bottom of the check and process an ACH transfer. Have you seen someone use a check at a large store lately? The cashier just runs the check through a reader that captures the bottom and returns the check to the customer. This is all done at no cost to your bank.
And if someone walks into a bank and deposits a paper check, the bank almost certainly images it and destroys the original before sending it to the issuing bank.
Circa 2001 or so I worked for a delivery company that had a regular account that was an eye opener for me. All night long, about every two hours, a small prop plane would land at Flightcraft at the Portland airport. It would taxi close to the building and only shut down the prop on the near side, then employees from the delivery company would run out, grab big duffle bags full of paper transaction receipts and checks, run them back to their vans and the plane would take off again for its next round. The duffle bags would go to huge processing centers where they’d be sorted for the various banks and processed. This went on all night long, every night, rain sleet and snow be damned. It was a lucrative run–getting one of those might keep you up all night but it put about $300 in your pocket if you were an owner/operator working on commission.
Now that it’s all done electronically, the banks are saving themselves a mort of money because none of this needs to be done any more.
I think this is the main thing. The money leaves my account as soon as I enter the payment, instead of when a check may clear. That’s Probably about a week in cases where I would otherwise write a check to pay the power company or credit card bill.
But what about when I have the bank send out a paper check to a payee from my account? They even pay the postage. And we have several customers who pay us this way at work every month. There is no fee charged at all (at least, not with my bank).
A lot of banking already is online, what with electronic bill pay, mobile check deposit and person-to-person electronic funds transfers. I still see many branches for all of the major banks but I suspect that there are fewer branches (and fewer tellers) per customer (or per thousand customers) than in earlier decades. Does anyone know if that’s the case?
Definitely not true with my bank. I enter payments weeks ahead of time, I just need to have the money in my account the day of the payment. Nothing leaves my account until the payment is made. Money is debited from my account and shows as payment at the electric company or whomever the same day. If the bill lay is by check, nothing leaves the account until the check clears, exactly as if I had written the check myself.
I certainly find e-payments and mobile banking convenient, but if I were unhappy and wanted to leave my credit union (I don’t) I don’t think the “inconvenience” of setting up e-pay for 10-12 places would stop me. YMMV.
Definitely true with my bank (Wells Fargo). When a billpay is sent, which is usually by paper check to the people I am paying, Wells Fargo debits my account the day after the payment is “sent”, no matter when the check actually clears. They justify this as being because the payment is guaranteed. However, when the check doesn’t arrive, which has happened to me twice recently, you have to go through a process with WF to get your mojney back.
Online bill payment is a competitive necessity. Most financial institutions are using a third-party provider for the bill payment service. Comparatively very few financial institutions do bill payment themselves. The age of charging consumers for bill payment disappeared a long, long time ago when Bank of America stopped charging their customers. That had an affect on the rest of the industry who quickly followed suit to remain competitive and retain their customers. There may be financial institutions still charging for bill payment but is the exception. Because the overwhelming majority of financial institutions are not charging fees for bill payment means it is not a profit center for the bank.
The bank is paying a third-party vendor for the use of their bill payment services. Pricing models vary, from per registered user monthly fees to fees per bill payment transaction to a combination of both. Purely from a pricing perspective, bill payment cost the financial institution money. Many institutions will charge for expedited delivery (i.e. same day bill payment) if they offer this service but the volumes and fees to a consumer do not off-set the overall cost of providing bill payment.
There are a great deal of industry studies on the overall profitability of a digitally engaged payment consumer. Financial institution customers who engage with digitally, and particularly for their payment needs, tend to carry higher balances, have more revenue generating products, etc. and are thus more profitable to the institution. Many banks get the importance of providing a robust set of payment services, from bill payment, P2P, external transfers, online wires, etc. and although many of these services don’t directly create a profit indivdiually they deepen the relationship with the consumer leading to a more profitable relationship. Every digital engagement is an opportunity to provide payments services their customer needs and cross-sell other profitable services to broaden the relationship.
Lastly, financial institutions and bill payment providers are competitive threatened by “biller direct” sites, for example consumers who pay their utility bill at the utility company website instead of through the bank. This disintermediation of the payment relationship is a threat to the financial institution. You also see this in other payment areas such as P2P with providers like Venmo among others engaging consumers for payment transactions outside their financial institution relationship resulting in less profitable relationships for the bank. Again, not profitable directly from the payment service offered by the bank but through the deeper and larger relationship with digitally engaged customers.
MeanJoe - Who in the interests of full disclosure has worked in the payment industry and banking for most of his career including currently for the largest bill payment provider in the business.