July 10, 2012

A bank’s overall success hinges on its ability to recognize and meet the needs of its customers. This is especially evident in how banks are now managing evolving consumer preferences and demand related to customers paying their credit card, mortgage and other loans.

Deciding what payment methods to accept when consumers are paying monthly bills is a complex decision in today’s marketplace. Customers expect consistency of service and convenience regardless of channel: branch, online and mobile. Monthly payments (such as an auto loan) often reflect an institution’s initial link with a new customer and future success at growing that relationship hinges on the customer’s perceived quality of the payment experience. As a result, banks are thinking more strategically about how to balance customer choice with corresponding cost and risk.

The Importance of Customer Choice

Generally, the more choices afforded to customers, the higher their level of satisfaction and the higher their level of electronic payment and presentment adoption. All customers are not the same and they value a variety of different payment choices like how the payment service is accessed, how the payment can be funded and how it is scheduled. Banks offering variety are more likely to satisfy the preferences of the majority of their customers.

An additional consideration with customer choice is to ensure that a payments system can handle the complexities of payments made in the branch, over landline phone, the web and through mobile devices. Historically, banks have operated with disparate systems with multiple posting and reconciliation solutions. Centralizing through a single treasury system simplifies bank processes and reduces frustration levels for customers who place high value on a seamless payment experience across the payment channels they use.

Optimizing Cost

Cost is also among the primary considerations when evaluating a payments system, but cost considerations may often conflict with consumer choice. For instance, customers today show a definitive preference for making payments with their debit cards, which are more expensive for banks to process than ACH payments. While legislation like the Durbin Amendment has changed the economics and closed this gap by making it more affordable for banks to accept debit card payments, the discrepancy still remains. Other cost considerations include channel separation, reflected in the higher price of processing a walk-in payment as opposed to receiving an online payment through the bank’s website.

In response, banks are getting more creative in promoting preferred payment methods (like automatically recurring payments or discontinuation of paper billing) to direct customers toward lower-cost transaction behavior. By bundling consumer preferences with their own, banks can better accommodate customers while simultaneously lowering costs.

Suppressing paper bills delivers significant cost savings – as much as $0.40-$0.50 per bill, according to BlueFlame Consulting. One hurdle banks must overcome to increase paper suppression is transitioning their paper-based auto-debit programs to web-based electronic bill presentment and payment. Legacy paper-based auto-debit programs deliver consistent payments each month, but do not provide the customer a website for managing their account and turning off their paper bill. Banks that transition customers to web-based electronic bill presentment and payment maintain the automatic payments while providing customers the ability to log-in and shut off their paper bill or customize their payment experience in other ways like setting a reminder alert that a bill is ready or a payment is due.

Risk Factors to Consider

Risk is the third factor to consider when deploying an electronic loan payment solution. Risk factors can vary widely from chargeback rates tied to fraud and false positives tied to user error to compliance risks tied to regulations.

Chargeback and unauthorized return rates are generally low in processing loan repayment: their incidence is about that of brick-and-mortar retail transactions and substantially lower than e-commerce retail or other non-face-to-face payments. That said, every returned payment is a bad customer experience and an expensive process for the bank. Chargebacks/unauthorized returns can quickly spike. Simply put, they must be monitored closely via a well-designed process.

False positives (erroneously declining a good payment account) are significant because of the resulting dissatisfaction and the corresponding expense of dealing with them. One way to avoid them can also deliver better customer service: a bank’s system may have the ability to store a funding account number and present it to the customer at the time of the next payment to eliminate the risk of data entry errors. Of course, storing the funding information must have been a customer choice and must be done in accordance with regulatory and industry protections.

For ACH transactions, banks should deploy a solution that submits the highest quality debit request by checking the R/T number, applying ABA system administrative updates and restricting previously processed bad data.

Payment acceptance involves a high level of service interaction between the bank and the customer, making it a great platform for converting new customers to long-term customers of multiple bank products. However, when it comes to payments and customer experience, one size does not fit all. Banks that recognize this are more likely to execute the right strategy to manage the complexity of consumer preference and the myriad of different payment options balanced with cost considerations and risk controls – which will directly benefit their bottom line.

Bill Kinnelly is senior vice president, Product Marketing, of Online Resources Corporation, a provider of online financial services.