March 30, 2004

Customers who regularly pay bills online are about twice as profitable as other accountholders, according to a benchmarking survey conducted in 2003 by the Boston Consulting Group (BCG). As a result, banks that have figured out how to drive customer adoption of online bill payments have a measurable competitive advantage in financial services, say the research effort's leaders, Carl Rutstein, vice president and director, and Jack Whitt, project leader, both of BCG's Chicago office.

Still, by examining the internal data of 20 of the top U.S. banks, BCG discovered that penetration of online billpay adoption has a long way to go. On average, the banks surveyed counted only 3.6 percent of their customers as active, online bill-payment customers, 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."

Despite the low average, online billpay adoption was in the double-digits at some banks. 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. "They're more similar than they are different."

How, then, to explain the difference in billpay adoption? Although the top performers tended to waive the fee for online banking, these same banks also 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 [treats] the Internet as a silo and considers it a separate product," says Rutstein. "It's typical for those banks who have waived the fee [to have Internet banking] fully integrated at all the other touchpoints with the customer."

The study also revealed that active online billpay customers were twice as profitable as other customers - even after controlling for demographic variables such as age, income and net worth. "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.

And 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," explains Rutstein.

From a strategic standpoint, the organizational ability to convert off-line check-writers to online bill-payers may even have been a factor in recent mergers and acquisitions. But since BCG has been advising some of the banks involved in the recent wave of big-bank mergers, Rutstein couldn't comment about whether a bank's demonstrated ability to convert customers from off-line-to-online makes for a better acquirer. But, he says, "We know the answer really well."

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