underTHEhood: Banking Online Bill Pay Services

Have you ever wondered how your bank's online bill pay service works? Working with a life insurance client on streamlining their payment processing required research into internet bill pay services. So here's the deal:

When you use your bank's website to setup a new payee, you will notice that the website informs you if your payments can be sent within 1-2 business days or 4-5 business days. The reason for this is that in order for your bank to send an electronic (ACH) transaction directly (1-2 business days) to the payee they need to have an existing relationship with that company. Your phone company for instance would need to directly contact Bank of America (for example) and establish an EFT (Electronic Funds Transfer) relationship with them. This would enable BOA to credit the phone company's bank account directly.

According to a recent Forrester study, the number of Generation Y’ers (defined by Forrester as those born from 1976 to 1990) paying bills online will grow by 219% to 20 million in 2010.

What happens, you would ask, if the phone company (or any other payee) does not have a standing EFT relationship with my bank? In fact there are so many banks, large and small, that to have this relationship with all of them becomes very difficult to manage. That is where Internet Payment and Presentment vendors (lets call them IBPPs) fit in. Companies such as Checkfree, Metavante, iPay, Integrated Payment Services are such vendors and they handle any online bill pay transaction for a payee with whom your bank does not have an EFT relationship. IBPPs electronically process the online bill payment transactions in aggregate for your bank and handle the relationship with multiple payees thus acting as a hub for bill payment services. Usually IBPPs take your internet payment transaction and print a paper check with your identifying information and the account number you included with your payment printed on the check. When you select a payee that your bank does not have an EFT arrangement with you will be notified the transaction may take 5-6 business days your payment to be received because that is the time it take the check to be printed, mailed and delivered.

Bill Pay Processing companies fill a void in the market which serves two purposes: smaller banks can outsource their bill pay services and enjoy the economies of scale that these vendors offer in handling large volumes of transactions.

Small payee organizations who see an increasing amount of pre-printed checks coming from their customers should realize that these checks come from the Bill Pay processing vendors (usually the checks have the name of the vendor or other identifying information). The payee has the option of establishing an ACH arrangement with the vendors (usually at no cost) to receive batch electronic transactions and reduce their incoming paper check workload thus significantly reducing the cost of their bill payment operations.


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