CHARLOTTE, N.C. – Bank of America's move to give away bill pay was music to the ears of many e-com analysts and credit union online gurus who've been saying for years that bill pay is the one truly "sticky" online solution financials have right now. Will credit unions now follow suit? "I'm excited about the B of A move. It's a great thing for our industry, a great thing for members and consumers. I hope we can build some momentum behind this. More and more credit unions that have been on the fence will now say `I've got to get off,' " said Matt Davis, vice president of e-commerce products for U.S. Central. U.S. Central's Corporate Network eCom subsidiary offers its own bill pay product known as MemberStreet. Davis, who worked in the e-com area for a $9 billion bank (UNB Bank) before joining U.S. Central, says he's felt for some time that bill pay users are a financial's most profitable and loyal customers, but he's never had enough proof from a really large user base to prove it. He thinks B of A has done the work for everyone. " Here is a massive financial institution that has the time, data and dollars to do the analysis. We all know they are a bottomline focused financial. They wouldn't do something if it didn't gain them a benefit at the end of the day to justify the cost," said Davis. B of A certainly has the data. At 3.3 million active users, they have the most online banking users of any financial. About a third of those 3.3 million users pay their bills online. Bill pay is not a cheap product to deliver by any means. Credit unions pay about $5 per member to the CheckFree's of the world to do the back-end work of paying their members' bills. But Davis says credit unions have been investing a lot of money in Member Relationship Management (MRM) solutions, and whether those dollars are paying off is unclear. A loyal bill pay member, however, has been shown by research from Forrester, Gartner and other firms to be more profitable than nonbill pay users. Giving the service away for free may be a better investment than a pricey MRM solution, said Davis. According to Susan Landry, VP and research director of Gartner's new GartnerG2 group, many big banks aren't looking at bill pay or presentment to provide a big revenue stream – they want the loyalty. "It's very hard to look at any one product or service attached to the deposit account in isolation. It's in terms of billing services as part of an overall package. Clearly the strategy is not to make a huge revenue stream on bill presentment and bill pay, but it's the investment the consumer makes in the service that locks them in for a longer period of time, increasing loyalty and product use," she said. She said unlike B of A completely waiving bill pay fees, many big banks are using relationship pricing to price the product. So if a customer uses three or more products, for example, they may get bill pay free or at a reduced rate. Some credit unions do that as well. IBM Southeast Employees FCU, Boca Raton, Fla., has bill pay integrated into its "rewards" program, which is a form of risk-based pricing. For example, a member in its CheXpress Level, which has no minimum balance requirement, but the member must maintain an all-electronic relationship, pays $4.00 a month for bill pay, with eight free transactions and then $0.40 for every subsequent bill pay transaction. A member in the CU's Gold Level however pays only $2.00 for bill pay and can do unlimited payments. To be a Gold Level member a minimum of $2,500 combined in all deposit accounts must be maintained, or an average monthly loan balance of $25,000. Members in its Platinum Level pay nothing for bill pay. These members must maintain a $25,000 combined balance of all deposit accounts, or a loan balance greater than $25,000. Pentagon FCU has an interesting bill pay pricing model. It charges members $6.95 a month for the service, yet offers a free option. For members who elect not to receive a dividend on PFCU's share draft account, the service is free. Pentagon FCU President/CEO Frank Pollack said about 10% of its bill pay users choose this free option. PFCU is fast becoming a remote credit union. Approximately 82% of its transactions are done over the Internet or at an ATM. Pollack said bill pay is expensive to offer, and even when it charges $6.95 per member, it's not making money on the service. He said even before B of A's move, the heat has been on for financials to lower the cost of bill pay. "I think there is already pressure to lower it or reduce it, but the business model may change down the road as a result of other technology alternatives," he said. The specific alternative Pollack cited is direct bill presentment from the biller. "It's a better option for consumers because it's painless and free. That model is likely to win out. We're looking at how to play in that direct bill world as a convenience to our members. To allow them to come to one Web site, even though we would make no money. This is an important product." Direct bill presentment is when a customer of a cable company, for example, can go right to that company's Web site to pay their cable bill. Pollack confirmed much of what the research of bill pay users says – Pentagon FCU members who use bill pay are more established members and use a higher number of products than nonbill pay members. One large CU that is offering bill pay for free is the $1.8 billion Pennsylvania State Employees CU, Harrisburg, Pa. It becomes like a broken record hearing how PSECU is doing something technically differently than any other CU, but its latest development in bill pay may be something that will enable more CUs to offer the service for free. At press time, PSECU was still doing bill pay on its own. For the bulk of bills, PSECU sends an FTP file to a laser printing company which prints and mails the check. PSECU has never used a middleman such as CheckFree or Metavante, because of cost. Doing it on its own and through the help of a laser printer, each bill paid costs PSECU about $0.55. About 25,000 PSECU members use bill pay. Here's the innovation. Starting in October PSECU will be able to pay about half of its members' bills electronically through MasterCard's Remote Payment and Presentment Service. PSECU President/CEO Greg Smith said this will drop the bill per member cost to about three or four cents. The reason is because PSECU can use MasterCard's backbone to significantly cut its bill pay processing costs by sending more payments electronically. MasterCard RPPS has about 3,000 vendors that it can electronically make payments to. MasterCard has been building its network since the `80s. PSECU analyzed who its members were paying through bill pay and found that MasterCard RPPS is linked to its top 200 creditors, which represent 60,000 of the 120,000 bills PSECU members pay each month. "When someone is sending payments out on behalf of consumers the big evil is paper. The holy grail is to send out as much electronically as you can. The paper processing results in a lot of errors and mispostings," said Tom Carey, VP of business development for MasterCard RPPS. MasterCard RPPS's error rate for bill pay is a minuscule one-one hundredth of 1%. Carey said a paper-based bill pay inquiry can cost a financial an average of $40, so getting rid of paper helps in more ways than one. To avoid errors, MasterCard RPPS researches creditors. "We find out if the cable company's account numbers are always 12 numbers or if they always start with a three or some other number. We know that and we're going to check all that information before we pass it through," said Carey. CheckFree and other back-end processors are still only at about 60% for electronic payments. For the remaining payments, CheckFree cuts and mails a check on behalf of the consumer. Carey said another advantage of MasterCard RPPS is that the credit union doesn't have to pre-fund any of its members' payments. "We take all payments and we set a net settlement payment off to billers before we collect from the credit unions, so it can maximize its cash flow. The float on funds can make a big difference." PSECU's Smith said if credit unions don't think bill pay is sticky, they need to wake up. "If you can get a member into bill payer, you're really going to have to abuse them to get them to leave. They have a preconceived notion that it's hard to set up. Once you list all the creditors, you don't want to have to do it again," said Smith. [email protected]