After paying bills from his desktop computer for several months through an electronic bill-paying service at Bank of America, Ernest E. Rosemond became irked recently when he noticed that the bank often takes money from his account nearly a week before it arrives in the hands of his creditors.
"Taking the money that early amounts to a kind of a hidden ATM charge," said Rosemond, a development officer at the National Alliance of Black School Educators in Washington. "It's annoying. It's not the money--I lose peanuts in interest--it's the principle. Banks must be earning an enormous amount on the float on customers' money.
"Computer bill paying seems convenient," he said, "but I perceive it to be a cash cow for the banks with no real financial benefit to the customer."
In an age when everything from sneakers to automobiles to bank withdrawals is computerized, the ability of consumers to pay bills in a timely fashion online through electronic checking accounts with their banks is decidedly in the dark ages, severely crimped by the fact that most billers still cannot accept payment electronically, industry executives say. That means that 50 percent to 60 percent of the time that a consumer uses a desktop computer to command a bank to pay a bill, the bank must do what the consumer used to do--write out and mail a paper check.
Before a bank will write a check on a consumer's behalf, it requires having the money in hand to ensure it doesn't get stuck with a bad debt. That means taking it from a customer's account early enough--up to a week, to be exact--to deliver the payment on time. The upshot is that consumers paying bills online not only lose the classic float in banking--the time between when a check is written and when it clears an individual's bank account--but also are giving banks an additional float in the form of free use of their money for up to a week, industry analysts say.
"This is the greatest weakness of this system. It's a significant shortcoming," said Elliott McEntee, president and chief executive of the National Automated Clearing House Association, or NACHA, representing 13,000 financial institutions that use computers to clear financial transactions across the country.
Many industry executives say the convenience of paying online outweighs any concerns about the float in most consumers' minds. The Electronic Banking Association, for example, even touts loss of the float as an advantage, boasting on its World Wide Web site that "electronic payments are processed quickly, in as little as 24 hours to 5 days, (unlike a paper check sent in the mail, which takes an average of 10 days to post)."
"No one will say they don't mind losing money," said Matt Lewis, executive vice president of CheckFree Holdings Corp. in Atlanta, which helped found the EBA. "But the convenience overcomes any other issue. It's so much easier to pay electronically by pointing and clicking. People go online to pay because they are busy. Their time is more important than the 2 percent [interest earned] on the float."
CheckFree handles 80 percent of online bill paying in the United States, acting as the behind-the-scenes company that most banks hire to handle their online bill-paying services. In most cases banks charge for this service, from $6 to $12 a month. A few banks, such as Bank of America and Citigroup, are large enough to run their service in-house, and often without a monthly charge.
But others in the industry say many consumers--how many no one knows for sure--do care about losing control of their money earlier than they need to.
"People do care about the float," McEntee said. "We know from anecdotal evidence that many customers in the process of filling out applications to pay electronically never finish once they learn how early money will leave their account. There's no doubt this is a major impediment."
"The biggest insult is the monthly fee," said Brook Newcomb at Forrester Research, a technology research company in Cambridge, Mass.
For Newcomb and other industry analysts and executives, the current system is akin to a travel agent who sells airline tickets to Europe, only to tell 50 percent to 60 percent of the booked passengers that they'll be taking a slow-going ship instead.
"The consumer sits down and thinks they are conducting a real-time payment exchange, and that may or may not be what's happening behind the scenes," said Richard Oliver, senior vice president at the Federal Reserve Bank in Atlanta, which oversees the nation's paper and electronic payment system for the entire Federal Reserve System.
"It's ridiculous that both ends of the transaction aren't automated," said Jennifer Ellis, spokeswoman for the Direct Deposit and Direct Payment Coalition, which the Fed and NACHA formed 18 months ago to encourage paperless payments. "Other countries are further ahead. We're in the 1960s. People in America are very attached to paper checks."
Why would anyone opt to lose control of their money sooner than necessary, and often pay banks for that privilege? "The answer is that a lot of people aren't," Newcomb said.
While the percentage growth in online bill paying has been dramatic in the past five years--to 400 million payments a year, up from zero a decade ago--the number is a tiny portion of the 15 billion to 20 billion bills paid each year in the United States, according to NACHA.
Computer bill paying is even a small portion of the 1.5 billion bills paid electronically because 1.1 billion of those are pre-authorized debit payments for fixed, monthly bills such as mortgages, health club memberships and insurance payments, said Avivah Litan, of the Gartner Group in Stamford, Conn.
As a result, industry is moving to a new electronic-payment model that combines use of the Internet with the pre-authorized debit system that a small but growing cadre of consumers use. This system would enable companies to send bills and receive payments electronically in real time, and for various bill amounts and at various times, by allowing customers to authorize direct debits from their bank account--all via their desktop computer.
This is the fastest-growing system for online bill paying, but because it's just getting started, no one has reliably measured how many customers use it, analysts say. And it's limited by the number of companies that can accept electronic payments. But a group of new companies has sprouted to give companies the tools to bill and accept payments via the Internet: Transpoint LLC, in Englewood, Colo., a joint venture of First Data Corp., Citicorp and Microsoft Corp., for example, and Princeton Ecom Corp. of Princeton, N.J.
Even CheckFree has expanded into the Internet model.
The advantage of the Internet system, company officials say, is clear. When a bank makes a payment for a customer under the current online system, whether its an electronic check or a paper check, the bank has to re-create all the billing information that is contained on the upper portion of the paper bill customers receive in the mail and detach and return with the check they write.
These payment stubs have much more information than just a customer's account number, industry executives say, and the job of re-creating that information on behalf of an online bill payer--and keeping it up-to-date--is enormous and costly.
But if a bill is sent to a customer on the Internet from the company itself, the company automatically includes an up-to-date electronic pay stub with it that is automatically returned with a customer's payment authorization. That reduces delays in figuring out to whom a payment should be credited, industry executives say.
Lewis Levin of Transpoint says there are several ways this new model could work.
A customer could be notified by e-mail or regular mail that a bill is waiting at a Web site, or he could be told it's his responsibility to check a specific Web site each month.
Once a customer goes to a Web site, he could authorize a payment in one of two ways. The amount billed would be debited to his account automatically unless he objected to it within a certain time period. Or a customer might be required to actively say "yes" each month to authorize the debit.
These Web sites will be run by creditors themselves or on behalf of creditors by companies such as CheckFree and others. Ultimately, the aim would be to have a Web site where consumers could go to see all their bills in one place.
The Internet model's big advantage for consumers is that money moves out of a customer's account and into a biller's on the day the money is due, not a second sooner, making bill paying "real-time" the way that debit-card payments and automatic payroll deposits are. It eliminates part of the float consumers enjoy from paper checks, but speedier paper-check processing is fast eliminating that anyway, bank industry officials say.
For billers, the Internet's big advantages are that the costs of sending and receiving payment on a bill electronically is about half the 60 cents to 80 cents it costs to send and process the return via the U.S. mail, industry executives say. And the biller can include advertisements that consumers might ignore but can't throw away, as they now can with inserts included in paper billings.
Despite these advantages, the day when a consumer can truly pay all bills and other debts through his bank electronically with no delays is years away, industry executives say.
The pre-authorized debit system has been around for more than a decade, but its growth is slow. Some studies show many consumers won't pay electronically until they can pay all their bills that way and in one place. Companies haven't pushed the debit system as much as they could.
Potomac Electric Power Co., for example, which provides electricity for the District and much of Montgomery and Prince George's counties, has had a preauthorized debit system for 13 years, said company spokesman Bob Dobkin. Today, of Pepco's 670,000 customers, 29,200 use it, up from 28,773 in 1998 and 21,142 in 1995. The company started an online pay option in March, which 1,500 households now use, in which customers continue to get a bill in the mail but can go online to authorize a debit.
Rosemond, the development officer, says he has now soured on online banking and is going to explore direct debit payments.
But until systems like these become the norm, banks will struggle to improve the current system. "So far the industry hasn't had a great story to tell," said Jane Wallace, manager of electronic bill payments at Bank of America, based in Charlotte, the nation's largest bank when measured by retail deposits.
She said the bank works hard to get creditors to accept payments electronically. Today 71 percent of the bills it handles for online payers are transmitted electronically, about 10 to 20 percentage points above the industry average. And when a creditor and payer both have an account at the bank, money is taken from a customer's account only a day or two before it is due, she says.
She also says the float the company makes is minimal. "The benefits on that float disappear by the cost of handling the number of phone calls coming in asking about the payment, whether it has been received or where it is," she said.
Despite some disadvantages, demand for online banking is growing, Wallace and other bankers say, with about 4 million people today paying electronically in the United States, up from nothing five or six years ago.
That's thanks to customers such as Stuart Goldman, an accountant in Columbia, who pooh-poohs concerns about the float. "You probably aren't losing money once you consider that checking accounts typically pay only 1 percent to 2 percent interest these days," he said. "After tax, and with the money you save on stamps, it's worth it.
"There's a cost paid in life for convenience," he said. He concedes, though, that if interest rates on checking accounts went up, he would reevaluate his choice.
Jere McGonegle of Springfield says he doesn't worry about the float. "Once I pay a bill I subtract it from my account, and as far as I'm concerned it's gone." But there are some pitfalls, he says, such as the time he forgot a decimal point and paid the phone company "a couple of thousand dollars."
Beyond the float, tough issues about privacy and security remain to be resolved before most people will accept electronic bill paying, cautions the Fed's Oliver.
Last year, for example, the Fed did a study to find out why only 50 percent of the country's employees have paychecks deposited directly into their bank accounts. It found that those who hadn't signed up were motivated not by convenience but by "issues of security, privacy and problem resolution."
"The people who had accepted it were concerned about convenience, not privacy and security," he said.
"For the consumer to say that this was an experience that was so good that I'm going to change my long-standing behavior requires something more than convenience. They have to feel secure, private and that the cost situation is attractive," he said.
"This all gets into the psychology of why people do what they do," said Robert Tetenbaum, executive vice president of First Manhattan Consulting Group.
And of course, marketers will always have to grapple with people like Robert Mitchell, an economist in the District, who simply likes the old-fashioned technology of pen and paper. "I can write a check whenever I want, and the mail works very well," he said. "It's very convenient."