The check's in the Net

By Troy Wolverton Staff Writer, CNET News.com May 30, 2002, 4:00 a.m. PT Internet consumers can get instant messaging, watch on-demand video and trade stocks as the market moves, but most still can't pay their bills in real time. Although a growing number of customers are using online banking for basic services, far fewer are turning to the Net for bill payment. Part of the problem is that banks can take days to process electronic payments, offering little advantage over sending checks by regular mail, while often charging fees for the service. Wells Fargo, for instance, recommends that customers pay bills online three to six days before they are due and charges $6.95 per month for the service unless a minimum balance of $5,000 is maintained at all times. Bank of America warns customers that most online payments will take two days to be processed and that some will take up to five days. "The problem you are seeing--and it's a broader problem in financial services, not just limited to banking--is that the true connectivity beneath the hood isn't all that connected," said John Patterson, chief executive of Business Logic, a financial software company. "You've got a high-tech coating over a legacy environment." Customers may be even more frustrated to learn that the technology to make instantaneous transfers has been available for years. Such payments have long been made over ATM networks and through electronic fund transfers. But instead of transferring money instantaneously, banks send online payments to large clearinghouses that process transactions in batches. This system is far less expensive for banks than real-time transfers, costing only a few cents per batch. Industry analysts describe the situation as a classic supply-and-demand stalemate: Consumers are waiting for better bill-payment services before signing up, and banks are waiting for clear market demand before building them. "Until people demand real-time payments, banks will use the cheapest system around," said Avivah Litan, an analyst at Gartner who covers online banking. Some 34.2 million U.S. adults banked online last year, according to a recent Gartner study. Although the percentages vary at each institution, about 30 percent of checking-account customers at large banks such as Wells Fargo are using the Internet to check balances and transfer funds among their accounts. About 17.6 million customers--roughly half the number of those using basic Internet banking services--paid their bills online last year. In addition to higher fees and concerns over lag times, many consumers resist paying bills online because they still don't trust the Internet to provide for those transactions. "Early predictions of electronic bill presentment and payment as a killer application have faded," Forrester Research said in a recent report. "Firms now believe the industry is years away from a critical mass of billers and consumers." Gartner analyst Avivah Litan says while bank payment sites seem the logical place to pay your bills, so far, it isn't working out that way. The reason: Banks just aren't trying hard enough. see commentary Until then, customers may find their payments arriving late when they were expecting immediate money transfers online. Clearinghouses typically process a payment on the day after it is made, and it usually takes another 24 hours for a payee to process the payment and credit an account. And that is often the most optimistic scenario, occurring only if a biller accepts electronic payments in the first place. Many billers still can't process such payments, forcing banks or their online partners to send paper checks. "It's easy to get one party wired: the end user," said Jim Bruene, editor of the Online Banking Report, an industry newsletter. "To get billers such as the AT&Ts able to receive money electronically was, and is, a huge challenge." CheckFree is the nation's largest online payment company, providing the technology for the U.S. Postal Service, Yahoo, Bank of America and many other large financial institutions. Despite pushing electronic bill payment since the 1980s, about one-third of bill payments made through CheckFree end up being sent by check. Online banking: Risky business?Lee Curtis, investigator, Kroll Associates Rival company Metavante, which provides online banking services to customers such as Chase and Wells Fargo, says that about 45 percent to 50 percent of online payments made through its system go out as paper checks. "We would love to do all of them electronically," said Hans Myklebust, Metavante's vice president of electronic payment and presentment. "It's not a matter of technology. Billers have to be set up to allow consumers to send them transactions. And their volume has to warrant it." Payment processors such as Metavante and CheckFree also face the law of diminishing returns. Special report Cracking the nest egg Hackers find fortunesin online bank accounts In many cases, businesses that account for the majority of consumer bills have already signed up with such companies to receive electronic payments. What's left are the thousands of smaller businesses--such as plumbers, carpenters and gardeners--that send out relatively few bills and have little incentive to accept online payments. Online banks and payment companies allow customers to pay these bills online, but the billers will actually receive a paper check. "There are lots of disparate billers," Myklebust said. "We'll never get enough mass for all of those billers to go electronic." Internet payment systems e-Money Guide Making a clear case for online digital check imaging Bank Technology News If eBay swallows PayPal, customers may suffer IDG MSN makes online bill payment push E-commerce Times Can PayPal frenzy continue? CNN/Money EarthLink, Paytrust launch Web billpay service CRMDaily.com E-payment: Not living up to its billing ZDNet PayPal needs a friend Business 2.0 Editors: Mike Yamamoto, Lara Wright, Dina GachmanDesign: Pam DoreProduction: Mike Markovich