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Transforming the Bill Paying Habits of Check Writers

By Paul McAdam, Senior Vice President, Strategic Thought Leadership

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This month’s article extends last month’s conversation about how to shift hard-core paper check writers to electronic alternatives for in-person purchases. This month, I’m discussing consumers’ bill paying habits and ways of migrating consumers from paper to electronic payments for bill pay. Information in the article is derived from an FIS survey of 3,205 U.S. consumers. A full report on the research results can be found at http://www.fisglobal.com/Insightspapers/index.htm.

Even though it’s been more than 15 years from the initial launches of Internet banking and bill payment, the majority of consumers are still writing checks to pay either a recurring or occasional bill. Consumer behavior in banking and payments tends to change gradually, and barriers to paying bills online persist.

Paper Checks – The Most Common Bill Payment Method

Fifty-two percent of consumers reported writing at least one paper check within the past 30 days to pay either an occasional or a recurring bill (Figure 1). No other payment method was used by more than 30 percent of consumers, even though 47 percent of consumers pay bills online through their financial institutions’ sites, their billers’ sites or a combination of both. And, in some instances, other electronic bill payment methods highlighted in Figure 1, such as pre-authorized ACH, are initially set up by consumers online. But the fact that the ritual of paying bills using paper checks continues suggests that obstacles remain to the migration from paper to electronic bill payment.

Five Payment Type Segments

Last month’s article introduced a segmentation scheme for payments, which divided consumers into five groups based on the payment types they most typically use for in-person purchases. (See Figure 2 in last month’s article. http:// www.fisglobal.com/CheckWriters/index.htm.) Not surprisingly, the five segments’ payment preferences for in-person purchases carry over to their bill payment behaviors (Figure 2).

  • Paper Check Writers represent 11 percent of the adult consumer market but generate 29 percent of checks used by consumers for bill payments. Members of this segment tend to be older, and their incomes are at the lower middle end of the spectrum. Of the 12 bills on average they pay each month, nearly eight of them are paid with a paper check.

  • Cash Users compose 27 percent of the market. On average, they use more paper checks than cash to pay bills, although cash is the second most popular payment vehicle for them. They account for 23 percent of all checks used for bill payments. Cash Users are concentrated in Gen X and Boomer segments and generally have low incomes. They are the segment least likely to be banked.

  • Debit Carders account for 34 percent of the market and 24 percent of paper check bill payments. Debit cards, closely followed by online bill pay at their financial institution’s site, are their preferred bill payment methods. Their demographics are similar to those of Cash Users.

  • Innovators (high usage of mobile and contactless payment methods for in-person payments) represent only 2 percent of the market and 1 percent of paper bill payments. Credit cards are their preferred bill payment method. They are young and relatively well off.

  • Credit Carders – concentrated in the Boomer segment and the most affluent group – account for 26 percent of the adult population and 23 percent of paper checks written to pay bills. Bill payment via credit card edges out paper check payments as the most popular payment method for this group.

Paper checks are much more entrenched in bill payment than in point-of-sale (POS) payments, and their usage is less concentrated in one segment (i.e., Paper Check Writers). When asked how they think their paper check usage will change year to year, the vast majority of consumers believe it will be static. Only 5 percent of consumers predict a meaningful decline in check writing for bill payment compared with 15 percent that predict a decline in check usage for in-person payments. For all of these reasons, we believe that paper check usage for bill payment will decline at a slower pace than usage at POS terminals – in the absence of major intervention.

Occasional Bills/Charitable Contributions vs. Recurring Bills

Consumers often pay occasional bills or make charitable contributions with different payment methods than they use for paying recurring bills. On average, consumers pay 3.2 occasional bills/charitable contributions and 7.0 recurring bills per month. Utility bills, followed by mortgage or rent, insurance and credit card bills are the most common types of recurring bills paid with paper checks.

Looking at the distribution of payment methods used for occasional bills/charitable contributions vs. recurring bills, we see that paper checks represent 38 percent of occasional bill payments but only 28 percent of recurring bill payments (Figure 3). It’s not surprising that online bill pay, particularly from the financial institution’s site, is more popular for paying recurring bills than occasional ones. It’s logical that consumers would find it a hassle to set up the financial institution accounts for paying occasional bills or making charitable contributions.

We also note a meaningful difference in the percentage of bills paid by credit card between occasional bills/charitable contributions and recurring bills. Seventeen percent of occasional bills are paid by credit card vs. 10 percent of recurring bills. Some consumers, no doubt, are charging occasional bills/charitable contributions to credit cards, collecting points/rewards and then paying their credit card bills online. Other consumers, however, are loath to use cards to pay their monthly bills as evidenced by the 11 percent of consumers paying recurring bill payers with checks who say they use checks because they don’t want to charge their bills.

In fact, there are numerous reasons why paper checks are more entrenched in bill pay than in POS payments. And, the reasons don’t change much in magnitude between occasional bills/charitable contributions and recurring bills. The key reason cited for paying bills by paper checks (by about 20 percent of people paying bills by check and by 28 percent of the Paper Check Writers segment) is ease of keeping track of spending. That’s the same top reason people say they use paper checks for in-person payments. Many consumers remain “married” to their check registers and carbons.

Numerous other reasons for continuing to pay bills by check are often cited, which add to the variety of factors that must be addressed to accelerate migration from checks (Figure 4). Nearly one-fifth admit that habits are hard to break. Another sizable group puts the onus on the biller by stating the biller prefers paper checks, doesn’t accept credit/debit card payments and/or doesn’t have a Web site that enables online payment. Float, often cited by financial services executives as a rationale for continued check usage, was a reason mentioned by a modest percentage of people paying bills by check – only about one in ten.

Bill Pay Intervention

Last month, I discussed how to speed up migration of paper checks used for in-person purchases through a “carrot and stick” intervention to overcome consumer inertia. The same types of incentives and disincentives generally apply to bill pay. However, an important difference between payments for in-person purchases and bill payments is the role played by the payee in either supporting or preventing migration. Clearly, credit and debit card acceptance by retailers has been pivotal in supporting migration away from paper checks at POS terminals, and the advent of easy-to-use payment acceptance tools such as PayPal, Square and other electronic person-to-person (P2P) payment systems will accelerate the growth of electronic in-person payments to small businesses and individuals. To obtain the same rate of growth in electronic bill pay, incentives will need to be provided to both payers and small billers to overcome key obstacles.

  • For bill payers:
    • – Create online tools and mobile and tablet apps to track spending that are better than check registers
    • – Transform bill payment platforms into portals for electronic payment in order to encourage consumers to consolidate and conduct electronic payments from one source
    • – Assist and incentivize customers in setting up online bill payment
    • – Promote points/rewards for paying bills with cards
  • For smaller billers:

    • – Offer solutions to enable online and card payments

At FIS, we’re always working on innovations to enable clients to grow their bases of active electronic bill payment adopters. We’re addressing the issue of integrating electronic bill payment with other types of electronic payments by creating an FIS money movement portal. Our bills and payments portal will include options to pay bills, make expedited payments, pay people, transfer money to another financial institution and move money internationally. The initial service of this expanded money movement suite is the ability to pay people electronically. The P2P build-out is in progress for piloting later this year.

As always, feel free to e-mail me with your questions. I also welcome feedback on results your organization has achieved in migrating consumers away from checks.