A Road Map for Internet Billing February 1999

Posted: 02/1999

A Road Map for Internet Billing
Part One of Three
By Richard K. Crone

While Internet bill
present and payment (IBPP) promises to streamline and simplify the bill payment process,
there is nothing inherently simple about launching an IBPP program. Part of the challenge
is that there already are at least six electronic distribution channels, or IBPP paths,
from which a biller can choose–each with its own cost structure, and together
representing widely divergent marketing, revenue generation and cost-reduction
opportunities.

Ultimately, each individual bill payer will decide which IBPP channel is most
convenient, and a biller needs to be prepared to support them all eventually for maximum
market coverage. The channel that a biller selects first to get its foot in the door–and
how it subsequently uses that channel initially to enroll customers, control billing
content and handle payment posting–will largely dictate its future IBPP success. As a
result, billers and banks need to take a pragmatic look at the return on investment (ROI)
provided by the various channels to determine the most advantageous IBPP deployment
strategy.

This first of three parts, looks at the revenue opportunities presented by IBPP. Next
month will examine its costs and, in April, an implementation strategy.

How Will History Repeat Itself?

IBPP’s six channels fall into two broad categories. Channels controlled by the biller,
also known as "biller-direct" channels, include the biller’s own website (where
biller-registered customers come to directly view and pay bills), e-mail, browser
subscription (using push technologies) and shared-link (light-concentration) channels such
as Dulles, Va.-based America Online Inc.’s (AOL’s) Digital Cities. Home-banking-based, or
"shared," channels include thick concentration (in which a biller sends all its
billing information to a service bureau that presents bills on behalf of many billers) and
thin concentration (in which a biller spreads its IBPP capabilities among several payment
concentrators or portals). These last two channels are controlled by home-banking service
providers that typically are not banks but wholesale their services to banks. The ROI
profiles are considerably different for biller-controlled vs. home-banking-controlled
channels.

Before comparing ROIs, IBPP’s two major categories must be placed in historical
perspective. The Internet didn’t launch the so-called online revolution, automated teller
machine (ATM) networks did. With ATMs, supply created demand, and as ATMs proliferated,
consumers enrolled with their own banks to use them. Banks didn’t affiliate with other ATM
networks until they had fully deployed their own. Even today, people enroll with their
banks to get an ATM card, not with STAR, PLUS or some other card network.

Home-banking started off with a similar two-party model of banks enrolling their own
customers. But with home-banking, banks quickly turned to intermediating third parties to
run their services for them.

The rise in popularity of the Internet changed everything, however. Banks no longer
need personal financial manager software companies or any other intermediate party to
provide home-banking services. They can go direct to the customer on their own websites,
which is where the growth in home-banking is today, instead of buying shelf space on
someone else’s channel.

Billers, of course, have had some experience with electronic channels as well. With
home-banking, most customers simply look at their electronically presented statements.
There’s still a huge potential for getting them to pay electronically, which is where IBPP
so conveniently closes the loop. Billers’ happiest experiences with electronic payment
have been with direct debit, in which payments are automatically debited from the
customer’s bank account. With direct debit, the biller enrolls the customer with no
intermediation–back to the two-party model–and enjoys the industry’s lowest cost form of
remittance.

All IBPP channels bring together electronic presentation and electronic payment. The
question that needs to be answered is: To what degree and when do billers and their banks
want to involve third-party services in enrolling consumers for IBPP, presenting their
bills and participating in the payment process? An ROI analysis will show which channels
provide the greatest revenue and cost-reduction opportunities in the shortest time. Once
that is determined, we can start to frame an answer.

Calculating Biller ROI, Opportunities

In IBPP, a biller’s ROI is a function of several quantifiable elements, including:
increased revenues, one-time investment costs, recurring transaction costs, check-clearing
float and customer care. There also is an additional element that, while more difficult to
quantify, is of extreme importance: all the benefits that can be derived from increased
brand awareness.

Most recurring bills are for services and products that the average person takes for
granted–water, power, telephones, insurance, mortgages and so on. When people use the
telephone, they rarely think about XYZ Phone Company. It’s only when they review the bill
that they realize how much phone service is being provided and by whom. In defining the
service, the bill becomes the brand. Thus, even as customers measure cost savings and
tally up new revenues, they also must bear in mind the far-reaching marketing implications
of IBPP.

Comparing Revenue Opportunities

For simplicity’s sake, let’s focus our ROI analysis on one IBPP channel from each
category, biller direct and home-banking-based. We’ll zero in on the two channels billers
are most likely to employ initially–direct at the biller’s own website and thick
concentration.

For more than nine months, Reston, Va.-based CyberCash Inc. has been assisting billers
in completing detailed ROI analyses and have packaged, on an aggregated and anonymous
level, the findings of these comparisons below. Each ROI analysis begins with making a few
basic assumptions, including ones about idle fund rates, the cost of borrowing funds and
the number of customers that can be converted to IBPP each month. Obviously, individual
biller’s circumstances vary widely and these assumptions make up a case-study framework
(see "ROI Case Study Assumptions").

We then need to look at the new revenue streams IBPP is capable of generating. New
revenues can come from increased service usage, new service usage and new product sales
via cross-selling and upselling. They also can come from advertising revenues and from
chargeable hotlinks to other companies’ websites.

It’s reasonable to assume that increased service usage and sales of new services will
be higher at a biller’s own website. There the biller has the consumer’s complete
attention and can engage each customer in a personalized electronic dialog–turning on the
cross-selling and upselling charm. Cross-selling is much more difficult in the
concentrator models for the biller, since their content and website are framed within the
context of the concentrator’s own website. Thus, while a thick concentration model might
yield an additional $2 per month for each IBPP customer in increased services, the
biller’s own site could easily double that to $4.

It’s also reasonable to assume that a higher percentage of customers paying at the
biller’s own site will be increasing their service usage, compared to those paying at a
concentrator site. Thus, a monthly revenue projection from usage and cross-sold products
might show an increase of nearly three times (see "Projected New Revenues from
Services/Usage").

New revenues from increased usage and services are just part of the increased revenue
story. The other major potential contributor to an IBPP-enabled biller’s bottom line is
banner-advertising revenue. The emphasis is on potential because, when a biller uses a
thick concentrator, there is no opportunity to display ads. Thus, the biller foregoes the
opportunity to charge other companies wishing to advertise at its site. In fact, as we’ll
see, a biller relying on a thick concentrator model faces the irony of having to pay to
post its own ads next to its own bills. Assuming that the average-cost-per-thousand
"impressions" is $37.20, the expected per-month ad revenues are nearly $7,500
(see Figure 3, "Banner Ad Revenues"). Adding projected banner-advertising
revenues to projected revenues from increased services and usage yields total revenue
increases of nearly $50,000.

Richard K. Crone is vice president and general manager for Reston, Va.-based
CyberCash Inc. in the Oakland, Calif., office. He can be reached at [email protected].