The “fee vs. free” controversy

Jim Bruene

August 2004

: OBR 109



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In the report we look at the widespread practice of offering of online bill payment free of charge (see p. 4 for prices at top 50 U.S. banks). You can read the report for our detailed conclusions, but suffice it to say, we are not wild about this trend. Online banking and bill payment provides significant value. And without a tangible revenue stream, it’s difficult to make the appropriate investments in the channel. We think bank customers will actually be better off in the long run if they shoulder at least a portion of the extra costs of a robust online banking service.
Free bill payment is particularly vexing. Here’s a service that runs circles around the paper equivalent. Users can save time, save money (postage, late fees, and check printing fees), can improve bill tracking and budgeting, and make their financial life easier. And, if the electronic payment doesn’t post at the biller on time, the bank and/or processor will go to bat for them to resolve the problem. Try doing that with a paper check that’s “”lost in the mail.””
So why do banks insist on providing this beneficial and costly service free of charge? They are doing it for the “”relationship”” value. No doubt users love getting something for nothing. And we won’t dispute the correlation between bill pay users and higher household profitability. But so what. You can correlate higher profits with any service designed for a well-heeled audience.
The bigger question is this: Is free bill payment, costing $50 to $100 per customer per year, the best way to gain more loans and deposits from your best customers? It may be, but there may also be less expensive ways to achieve similar results, such as lifetime transaction archives or more account security options (see p. 13 for more ideas).
It’s a tough call.
Other Subjects
• Recent reports of online fraud losses are highly inflated



pricing, marketing, product management, retail banking, bill payment, electronic payments, premium online banking