March 09, 2004

Customers who regularly pay bills online are about twice as profitable as other accountholders, according to a benchmarking survey conducted last summer by the Boston Consulting Group (BCG). As a result, banks that have figured out how to drive customer adoption have a measurable competitive advantage in financial services.

The research effort was led by Carl Rutstein, vice president and director, and Jack Whitt, project leader, both of the Chicago office.

By examining the internal data of 20 of the top U.S. banks, BCG discovered that penetration of online bill-pay adoption has a long way to go. On average, of the banks that were surveyed, only 3.6 percent of their customers were described as active, online bill-payment customers, which was defined as those who have paid a bill online within 30 days. "The underlying denominator was 'total DDA accounts'--the total addressable pool of people who pay bills through your organization," says Whitt. "That's opposed to what's typically quoted, which is as a percentage of the online banking population."

The adoption rates at some banks, however, were well above average. Indeed, penetration rates ranged from 1 percent to 17.8 percent, even among otherwise comparable financial institutions. "All of these banks have wide ATM networks, wide branch networks, spend a lot of money on brand, have long relationships with their customers, and spend a good deal of money on their Web sites," says Rutstein. "As we look across the Web sites of all these large banks, they're more similar than they are different."

How, then, to explain the differences in bill-pay adoption among these banks? Although the top performers tended to waive the fee for online banking, these same banks also were the ones that best incorporated online banking into other customer channels, such as call centers and branch locations. "It's rare to see a bank that waives the fee, but where the Internet is a silo and it's considered a separate product," says Rutstein. "And it's typical for those banks that have waived the fee [to have Internet banking] fully integrated at all the other touchpoints with the customer."

The study also revealed that active bill-pay customers were twice as profitable as other customers. Even after controlling for demographic variables such as age, income and net worth, the results still pointed toward the boost in profitability of an online bill payment customer. "When you create control groups and you adjust for demographics, indeed, the '2x' lift in profitability occurs after they start becoming 'online-active,' " says Rutstein.

That goes right to the bottom line. "If you're going to have 10 percent of your population, versus 1 percent, using the online channel and being twice as profitable, you will actually see that difference in the efficiency ratio," says Rutstein.

Indeed, from a strategic standpoint, the organizational ability to convert off-line check-writers to online bill-payers may even have been moving the markets. But since BCG has been advising some of the banks involved in the recent wave of big-bank mergers, Rutstein couldn't comment on the extent to which the dynamics of off-line-to-online customer conversion has been a factor. But, he says, "We know the answer really well."

ABOUT THE AUTHOR