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E-Payments: The Waiting Is the Hardest Part

Long-heralded as the next step in e-commerce, e-payments have failed to live up to the hype. So when will e-payments reach the tipping point?

Technologists heralded that e-mail, PDFs and the Internet would create a paperless office where all data is stored electronically. However, today paper is just as much a part of office life as it was B.E. (before e-mail).

Similarly, the ability to view and pay bills electronically-known as electronic bill presentment and payment (EBPP)-was said to mark an end to the way bills are traditionally paid: with paper checks. So far, however, that too-as with so many lofty predictions made in the late '90s-has failed to live up to the hype.

But recent online payment information from the Herndon, VA-based electronic payments association NACHA (National Automated Clearing House Association) suggests that, overall, online payments are starting to take off (see sidebar, p. 35). In fact, coupled with a reduction in paper-based payments, e-payments are exploding, according to Gwenn Bezard, senior analyst, payments, at Celent Communications (New York). "The use of debit cards is growing at 40 percent a year, while Internet payments are growing at 100 percent a year," he says. "Currently, paper checks are declining at two to three percent a year."

And this trend follows in the insurance industry, too-where monthly premium bills make recurring payments almost a no-brainer for customers (convenience) and insurers (increased customer satisfaction and efficiency).

Booming E-Payment Market

According to Adrienne Chambers, vice president of program development, MasterCard International (New York), the insurance sector is one of the fastest growing when it comes to automatic recurring payments. "Insurance, as a whole, is growing at 40 to 50 percent a year," she says. "Since '98, we have signed up 65 insurance companies for recurring payments," far more than any other market segment that her area covers, including telecom, wireless and utilities. Chambers adds that the number is higher in insurance, since the industry is not as concentrated. "We are seeing especially strong interest in the P&C area, as companies are looking to set up recurring payments through MasterCard," Chambers says.

The marked increase in insurance carriers' interest is not surprising considering that most consumers have many monthly insurance bills. "Almost one-quarter of recurring bills are insurance bills," says Carol Coye Benson, managing partner with Glenbrook Partners, a Menlo Park, CA-based financial services consulting firm. "The market is huge. Basically, every customer has to pay at least one insurance bill a month and most pay more than one." It is for this reason that insurance companies have been some of the first players to venture into electronic payments, she says, citing New York Life and its decades-old Check-O-Matic offering for paying bills through ACH transactions.

Coupled with moving towards e-payments, a growing number of insurance companies are looking to cut paper and mailing costs by offering electronic bill presentment. Coye Benson says that sending a paper bill runs in the $1 to $5 range. By accepting e-payments after the bill has been sent electronically to the customer, carriers reduce processing costs and cut down on delinquent accounts.

But the benefits of e-payments go far beyond cutting costs and increasing efficiency, according to MasterCard's Chambers. "For starters, insurance companies are simply meeting customers' demands when it comes to recurring payments," Chambers says. "Also, customers that use automatic recurring payments pay on-time, so their policies don't lapse, and there are reduced costs in the call center."

Chambers says that MasterCard research also shows that accepting automatic payments electronically increases customer retention, because customers who have recurring payments are less likely to change carriers. Furthermore, there is the possibility of increased sales as customers can just add the additional charges to their credit cards.

Josh Lee, global technical strategist for the insurance industry at Microsoft (Redmond, WA), also sees recurring automatic payments as a way to keep customers. "Paying bills is traditionally a very manual process for customers," Lee says. "Financial institutions that can make the process more automated will have an advantage in reducing attrition."

In the insurance industry, certain areas are seeing a lot of action when it comes to e-billing and e-transactions, according to Jeetu Patel, executive vice president, research, at Doculabs (Chicago). "The first area is obviously premium payments," Patel says. "Almost all of the major insurance companies are offering it now. It is no secret that the so-called 'Generation X-ers' want the ability to make payments online," he says.

Responding to Demand

Although not specifically targeting Gen X-ers, MassMutual Financial Group (Springfield, MA, over $240 billion in assets under management), for instance, is issuing electronically bills to its group life and disability insurance customers and then subsequently accepting e-payments. "Two years ago we put in place a fully functional e-billing environment that replaced the paper mode of billing," says Rick Mourey, assistant vice president, customer service, MassMutual.

With group policies, explains Mourey, a paper bill typically goes back and forth between the carrier and the policyholder's benefit administrator as edits (such as adding or removing employees from a policy) are made. "We realized that sending out an electronic bill is not enough," according to Mourey. "Now benefits administrator users can go in and make changes to a bill online, and they can make a payment automatically through an online payment.

"Our clients that use it love it," Mourey adds. "Once they administer the bills online and send the payment, it is automatic. It is good for the agents, too, since they are not burdened by the changes and they can go out and sell more business."

However, adoption has been slow. "We thought once we put the technology in play, people would come running to adopt it," Mourey says. "There is still some apprehension about the all-electronic environment," he adds, noting that the disparity becomes evident when MassMutual looks at the size of its customers. "The larger companies are more technologically sophisticated and demand this type of functionality, or they won't do business with us.

"The smaller companies are not as comfortable with this," Mourey adds, speculating that at many smaller companies there are small bookkeeping staffs that have been doing business the same way for years.

Lingering concerns about security maybe be an obstacle, as well. New York-based eMarketer states in a report that 70 percent of US consumers say they are discouraged from using a credit card to shop online due to concerns over security, but that only 1.5 percent of complaints about online fraud in the US involved credit/debit card fraud, according to statistics from the Internet Fraud Complaints Center (

Marketing E-Payments

"While electronic payments for both recurring and one-time transactions are bound to increase steadily, today's slow-growth market is marked by habit and fear-the habits of paying bills online and the fear that financial and personal data will be compromised online," according to Dr. Noah Elkin, senior analyst, eMarketer.

The slow adoption that MassMutual faced is common when it comes to EBPP. "Most companies underestimate how long it will take for the market to adopt and change to electronic payments," according to Patel from Doculabs. "Once an insurance company rolls out the technology, it has to follow up with a huge marketing campaign to promote the capability. Without exception, the marketing is always under budgeted or not budgeted at all."

One area where e-payments may reach the tipping point-before the "scary" world of Internet-based payments does-is in healthcare with flexible spending accounts (FSA). Currently many health insurers are rolling out benefit cards for customers with FSAs.

Humana Inc., headquartered in Louisville, with $4.3 billion in assets, recently launched a combined benefit/ID and benefit spending card pilot for its 13,000 employees. The pre-paid benefits MasterCard is linked to the employees' FSA.

The HumanaAccess MasterCard, issued by BANKFIRST (Sioux Falls, SD) and powered by Avon, CT-based Evolution Benefits' Benny Card, allows members to access funds they set aside in a FSA or HRA (health reimbursement account) by swiping their card at the provider's office or pharmacy. Through the card, funds are deducted directly from the member's account, eliminating the need for members to pay cash at the point-of-service and to complete forms and wait for a reimbursement check. "Every employee that elected to enroll in a flexible spending account received a stored-value ID card," says Beth Bierbower, vice president of product innovation at Humana. "It works like a debit or credit card. When you go to the pharmacy or to the doctor, you use the card to pay. It deducts automatically from the FSA."

Leveraging the Level of Comfort

The use of stored-value cards, which look and operate almost identically to a regular credit card, should make mass adoption by consumers easier. "You use the card like a credit card," Bierbower says. "Everybody knows how to swipe a credit card, and the consumer is very familiar with that type of transaction."

Stored-value cardholders can use the card at any eligible healthcare provider. "Each healthcare provider has a merchant code" that is recognized by Humana's systems, Bierbower explains. "So an employee can't go into a Gap or a gas station to use the card, because the system checks the merchant ID."

Bierbower attributes the ease of use and familiarity of the stored-value card to the rapid increase in FSA enrollment at Humana. "After we rolled out the stored-value cards in Humana, we saw a 25 percent increase in FSA enrollment," according to Bierbower. "This is important for both the employer and the employee. It lowers taxes for the employer and for the employee."

Finally, Doculabs' Patel says he is seeing some activity in two other surprising areas-claims and agency commissions, although most companies are just beginning to dabble in the offerings. "E-payments are also active in the claims area when it comes to recurring payments," such as long-term disability payments or certain health products, such as flexible spending accounts. "It is not that the insurance companies want to pay their claims earlier. They are just shaving some of the processing time off of the claims cycle and reducing some of the costs."

One reason insurance companies may be slower to adopt e-payments for claims and other outbound payments may be traditional practices. "Some will say e-payments for claims at insurance companies will impact the bottom line and that some float will be lost by not issuing a paper check," says Troy White, a director at FREEDOM, a unit of Fi-serv (Brookfield, WI). "In premium collections, e-payments makes sense because the insurance company is getting the money quicker. But if it is also offered for claims, it is a double-edged sword," as the payments will go out faster.


From Stamp to Send

By Eileen Colkin Cuneo, InformationWeek

It's becoming increasingly common to pay bills electronically, according to a new report from electronic payments association NACHA (Herndon, VA), a nonprofit group representing more than 12,000 financial institutions. According to the report, online bill payments may exceed $200 billion this year if the trend keeps moving in the direction it did in the first quarter.

The report says that in the first three months of the year, more than $48 billion in payments were made using the Automated Clearing House Network, the central online payment system for e-payments.

That's already half the total of all online payments made in 2002, signifying an aggressive growth rate. That growth is expected to continue as more and more consumers and businesses begin to engage in online bill presentment and payment, the report says.

NACHA develops the operating rules and business practices for the Automated Clearing House Network, and for electronic payments in areas including Internet commerce, electronic bill and invoice presentment, and e-checks.

- EDITOR'S NOTE: This article originally appeared on, a sister property of Insurance & Technology and part of the InformationWeek Media Network.


Consumers' Auto-Payment Habits Vary

According to research from New York-based MasterCard International, consumers pay bills automatically in a variety of ways, including through debit cards, credit cards and ACH transactions directly from a bank account.

- 67 percent of consumers pay bills automatically.

- 37 percent pay automatically with credit cards.

- 27 percent pay automatically with debit cards.

- 50 percent pay insurance bills automatically (through various types of payments).

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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