Two deals last month by Wells Fargo, one involving electronic bill payment and the other consumer-to-consumer payments, hold clues about trends in online banking. Moves by the San Francisco-based bank, an industry leader in e-banking, are followed closely.
In the first deal, Wells Fargo hired CheckFree, the Atlanta-based e-billing company, to present bills electronically to the bank's three million online customers. In the second, Wells became the payment processor for PayPal, a Mountain View, Calif.-based person-to-person (P2P) payments company that has been acquired by eBay.
The deals, which emanated from opposite sides of Wells Fargo's online organization-CheckFree from the consumer side and PayPal from the business side-provide benchmarks for the evolution of e-banking, experts say.
CheckFree, which has provided online banking and bill pay services to Wells Fargo since 1996, will present e-bills from the more than 250 billers with which it has relationships at the bank's new bill pay platform, as will Wells' other payment providers, including MasterCard RPPS, Metavante and Spectrum.
"CheckFree will be connected to our new bill pay platform, providing e-bills and bill payment services to that platform," said Jim Smith, senior vice president of consumer Internet services at Wells Fargo.
"The platform consolidates bills from CheckFree, Spectrum, and other partners," he said. "It will allow us to route payments, whether it's a presented bill or a pay-anyone transaction."
By preventing Wells from being locked into one bill payment provider, the platform allows a greater number of bills to be presented electronically. "Wells has built an independent layer from the vendors, which is smart," said Avivah Litan, research director at GartnerGroup.
But the CheckFree deal is also a sign that Spectrum, the electronic bill presentment switch co-owned by Wells, JP Morgan Chase and Wachovia, has been "disappointingly slow," said Litan. "A couple of years ago, the thought was you wouldn't need CheckFree, which was why Wells started Spectrum."
That, in turn, reflects the fortunes of the bill consolidator model, in which banks act as the gateway between their online banking customers and utilities, credit card companies, telcos and other major billers. That model, introduced five years ago amid much hoopla, has been thoroughly discredited, Litan said. "There's been a lot of adoption of the biller direct model. The big failure has been the consolidator/aggregator model."
Sixty percent of online consumers prefer viewing e-bills directly at biller Web sites, according to a survey conducted by GartnerGroup in February. By contrast, only 9 percent prefer viewing consolidated bills at their bank. Another 27 percent prefer viewing bills via e-mail.
The preference for the biller direct model is even more pronounced among actual users of e-billing services. Nearly all (93 percent) of consumers who actually view their credit card bills online do so directly at the credit card issuer's Web site, according to the Gartner survey.
The failure of the consolidator model is attributable to several factors, according to Litan-complex user interfaces, enrollment fees, a shortage of e-bills, and the fact that bill presentment is linked to bill payment. Under CheckFree's terms, said Litan, "you have to be a payment customer first before you can get the bills. Consumers like to view bills before they pay bills."
Wells' Smith said the bill consolidator model is still viable. "I still believe the Spectrum model is the right model-that there's one switch that bills and payments are routed through. But we're still in the early stages of bill presentment."
He denied that the CheckFree deal was an admission that Spectrum was failing. "We're delivering a place where customers can view and pay all of their bills. That means multiple partners."
In the PayPal deal, Wells will act as merchant processor for PayPal's online P2P payments, most of which originate from eBay and other auction sites. Wells, which was already processing checking account payments for PayPal, will now process credit card payments as well, said Michelle Banaugh, senior vice president of Internet payments at Wells Fargo.
PayPal is being acquired by eBay, which earlier this year bought out Wells Fargo's stake in Billpoint, another P2P company. eBay has announced it is shutting down Billpoint. "Wells got out of Billpoint right when it started negotiating a deal with PayPal," said Litan. "I think those two events are connected."
The deal allies PayPal with a robust payment processing company, one capable of managing the transactions generated by PayPal's 16 million registered consumers and 3 million businesses. It also gives PayPal the clout it needs to move its services upstream to large online retailers. "Because of Wells' economy of scale, PayPal can go to a merchant like Barnes & Noble and undercut their credit card acquirer's fees," said Litan.
Wells could add PayPal to its growing roster of services for small business customers, whom the bank has targeted for development. Small business owners make up 340,000 of the users of Wells' online business banking services, said Richard Weeks, vice president and product manager at Wells Fargo. Some 60,000 of them use Wells' online bill pay service. PayPal provides another payment option.
"Wells Fargo has a focus on small business Internet services," said Litan. "Now they can offer more convenient payment services via PayPal."
Yet another motivation for the deal is the increasing friction between online payment processors like PayPal and the credit card associations over the practice of aggregating Internet "sub-merchant" accounts.
MasterCard earlier this year stated that it would no longer permit the aggregation of transactions originating from sub-merchants because of the likelihood they would result in chargebacks. Although MasterCard later backed off, the action probably drove PayPal into Wells Fargo's arms.
"The credit card associations are coming down hard, demanding a lot more disclosure on aggregation of risky sub-merchants," said Litan. "PayPal needed Wells to buffer itself from the card associations."
How Consumers Prefer to View E-bills
Biller Direct- 60%