What is the bill pay industry?
Bill payments are ubiquitous. Every adult and every business pays bills of some kind. However, the bill pay industry is often overlooked by the banking industry, even by those in the payments field. Nearly four trillion dollars in bill pay transactions are conducted annually in the U.S. Why doesn't this massive market get due attention or investment?
The short answer is that financial institutions do not make money outright on bill payment services. Money changes hands during bill payments without incurring fees or accruing interest. In fact, bill payment management and technology loses money for financial institutions. Despite the universal necessity for bill payment services, many financial institutions do not heavily promote this service offering. Nevertheless, a substantial market for bill payment exists, embedded in the woodwork of every industry.
Bills are older than capitalism itself. Historians source ancient invoices back thousands of years to the earliest written records of any kind. Bill payments have come a long way since then, of course. The bill payment market evolved alongside the rest of the payments industry. New technology may ease or streamline parts of the bill pay cycle, but the sheer number of different possible permutations for bill payment complicates the infrastructure.
Key industry players
The bill payment ecosystem consists of bill payers (or consumers), billers, and financial institutions. Bill payers are the persons or companies making payments. Billers are the persons or companies requesting payment. Financial institutions, in the context of bill payment, have historically mediated bill payment transactions.
For years, the bill pay process was uniform and relatively straightforward: billers sent invoices to consumers; consumers initiated payment through their bank; banks transferred money to billers, completing the transaction. The only available payment methods were through financial institutions via credit card, debit card, check, or direct debit; if bill payers had cash on hand, maybe they could pay the biller directly.
In the 1990s, banks introduced bill payment services online and by phone, sometimes charging a processing fee for the convenience. Some financial institutions then used fee-free eBills as a competitive differentiator. Over the last decade or so, billers began circumventing FIs by offering direct bill payment options through the internet and mobile apps.
The digital transformation in the payments industry spurred a new breed of bill pay providers to enter the market, offering solutions to both FIs and billers by providing fast and seamless experiences for bill payers. Financial institution bill pay solutions, once monolithic, have been disintermediated. Now, upstart fintechs compete with each other and with established players such as Fiserv and FI to become premier bill pay providers.
Payment options: pros and cons
Consumers want the capability to choose the most convenient option for their bill payments, and catering to bill payer needs is one of the strongest ways for financial institutions to compete in the industry. However, the expansion of new payment methods, channels, and statements makes for a complex bill payment ecosystem.
Different billers might accept payment from any combination of channels, including online, mobile, or in-person; via fintech, bill pay aggregator, or bank transfer. Billers also deal with a vast amount of payment methods, including debit, credit, digital wallet, ACH, real-time payments, cryptocurrency, and even the surprisingly endurant methods of cash and check. Consumers also might make recurring and automatic payments or pay on a case-by-case basis. Each element of bill payment collection introduces new layers and involves its own operational, reconcilement, and compliance requirements.
Connecting directly with payers gives billers more control and faster payments, but managing bill pay operations can be difficult for all parties. Payers need to log into multiple biller sites and provide information to each biller, which introduces risk. The lack of a unified solution also means users have a disjointed view of their expenses. As for billers, they have to expend time and energy to their payment collection operations, which includes negotiating the acceptance of different payment types and working out clear and actionable messaging for their users. Meanwhile, if financial institutions want to keep skin in the game, they must offer a bill payment experience that rivals direct billing.
The importance of bill pay trends
Mercator research states: "Despite not being profitable on a stand-alone basis, bill pay is the key to building a long-term relationship with users. It also provides rich data that can be enhanced to offer relevant and timely alerts as well as contribute to individualized financial advice and product recommendations."
The bill payment industry is not going away. It will be worth it in the long run to invest in the right bill pay solution. There are several bill pay providers that offer market solutions for financial institutions, direct-to-consumer billing, biller-direct services, and white-label billing.
This article provides an overview of the bill pay industry. For deeper insight into the nuances of key concepts, the complex realities of the market, recommended features for a modern bill pay experience, and comparisons of specific bill pay solution providers, see Mercator Advisory Group's recent report, U.S. Vendor Comparison of Consumer Bill Pay Providers: Laying the Foundation for Future Intelligent Use of Payment Data.