A Road Map for Internet Billing

Posted: 03/1999

A Road Map for Internet Billing
Part Two of Three

By Richard K. Crone

While Internet bill
present and payment (IBPP) promises to streamline and simplify the bill payment process,
there is nothing inherently simple about launching an IBPP program. Part of the challenge
is that there already are at least six electronic distribution channels, or IBPP paths,
from which a biller can choose–each with its own cost structure, and together
representing widely divergent marketing, revenue-generation, and cost-reduction

Ultimately, each individual bill payer will decide which IBPP channel is most
convenient, and a biller needs to be prepared to eventually support them all for maximum
market coverage. The channel that a biller selects first to get its foot in the door–and
how it subsequently uses that channel to initially enroll customers, control billing
content and handle payment posting–largely will dictate its future IBPP success. As a
result, billers and banks need to take a pragmatic look at the return on investment (ROI)
provided by the various channels to determine the most advantageous IBPP deployment

In last month’s article, we began by looking at the revenue opportunities of IBPP. This
month, we’ll look at the costs. In April, we’ll discuss an implementation strategy.

Comparing Costs

One-time initial costs are fairly simple to compare. They include all of the one-time
costs for building a total integrated IBPP capability. The principal functional components
are known as the four Ps of IBPP: presentment, permission, payment and posting. The lion’s
share of these startup costs go toward systems components, implementation, converting
print files to hypertext markup language (HTML) and the like. Costs are fairly equal among
the channels, except that homebanking-controlled models require that billers bend to their
systems and protocols, which adds extra costs (see Figure 1, "Total One-Time IBPP

Figure 1

Total One-Time IBPP Costs

One-Time Initial Costs Paper-Based Billing Thick Concentration Biller’s Website
Systems components
(including OFX compliance)
$ – $200,000 $100,000
Systems implementation
(including OFX compliance)
$ – $400,000 $100,000
Obtain connection
and authorization
$ – $25,000 $25,000
Data security $ – $25,000 $25,000
Staff training $ – $10,000 $10,000
Data conversion–print file to HTML $ – $100,000 $100,000
Miscellaneous $ – $50,000 $50,000
Total One-Tme Costs $ – $810,000 $410,000

Another cost that has to be factored in is banner advertising. Again, billers utilizing
thick concentration are faced with having to pay for their ads, thus turning a potential
ongoing revenue stream into a debit (see Figure 2, "Banner Advertising Costs").

Figure 2

Banner Advertising Costs

Banner Ad Costs (per month) Paper-Based Billing Thick Concentration Biller’s Website
Average cost per thousand   $37.20  
Projected number of impressions per month (year-one average)   200,400  
Subtotal Banner Ad Costs   $7,455  

Another cost area is outbound and inbound production. Outbound production costs are
naturally much lower at a biller’s own website where the biller is neither stuffing
envelopes nor paying a third-party concentrator for posting privileges (see Figure 3,
"IBPP Outbound Production Costs").

Figure 3

IBPP Outbound Production Costs

Outbound Production Costs-IBPP Paper-Based Billing Thick Concentration Biller’s Website
Outbound production costs per item $0.75 $0.32 $0.02
Number of monthly IBPP statements (year-one average) 50,100 51,000 51,000
Subtotal IBPP Outbound Production per Month $37,575 $16,032 $1,002

Meanwhile, a biller will continue incurring regular outbound production costs on its
non-IBPP paper-based statements (see Figure 4, "Regular Outbound Production
Costs"). By putting these together, and then adjusting for late and cut-off notices,
we can determine the total monthly product costs (see Figure 5, "Total Monthly
Outbound Production Costs").

Figure 4

Regular Outbound Production Costs

Outbound Production Costs-Regular Paper-Based Billing Thick Concentration Biller’s Website
Total number regular outbound production cost per item $0.75 $0.75 $0.75
Number of monthly statements (year-one average) 4,949,900 4,949,900 4,949,900
Subtotal Regular Outbound Production Costs $3,712,425 $3,712,425 $3,712,425

Figure 5

Total Monthly Outbound Production Costs

Outbound Production Costs per Month Paper-Based Billing Thick Concentration Biller’s Website
IBPP outbound production costs $37,575 $16,032 $1,002
Regular outbound production costs $3,712,425 $3,712,425 $3,712,425
Subtotal Outbound Production Costs $3,750,000 $3,728,457 $3,713,427
Late and cut-off notices per item $5.00 $5.00 $5.00
Percent of IBPP customers receiving notices (on base of 50,100) 1% 1%
Percent of regular customers receiving notices (on base of 4,949,900) 3%
Subtotal Late and Cut-Off Notices $750,000 $744,990 $744,900
Total Outbound Production Costs per Month $4,500,000 $4,473,447 $4,458,417

We can assume that inbound production costs roughly will mirror the outbound costs, but
without having to adjust for late and cut-off notices (see Figure 6, "Total Monthly
Inbound Production Costs").

Figure 6

Total Monthly Inbound Production Costs

Inbound Production Costs per Month Paper-Based Billing Thick Concentration Biller’s Website
IBPP inbound production costs $37,575 $16,032 $1,002
Regular inbound production costs $3,712,425 $3,712,425 $3,712,425
Subtotal Inbound Production Costs $3,750,000 $3,728,457 $3,713,427

Going with the Float

The last major elements our ROI analysis needs to take into account are inbound and
outbound float and the costs of customer care. Float benefits are fairly easy to pinpoint.
Using the assumed 5.5 percent rate of return on idle funds and an IBPP float value of
$4,008,000 (calculated by multiplying the year-one average IBPP statement base by the
average monthly bill), we can expect nearly half-a-million dollars per month in float
value (see Figure 7, "Total Monthly Float Value Cost").

Figure 7

Total Monthly Float Value Cost

Outbound/Inbound Float Paper-Based Billing Thick Concentration Biller’s Website
Idle funds rate of return 5.5% 5.5% 5.5%
Value of IBPP float $4,008,000 $4,008,000 $4,008,000
Number of monthly IBPP statement (year-one average) 50,100 50,100 50,100
Number of days float outbound 4 3.5 2
Number of days float inbound 4 3.5 2
Subtotal IBPP Outbound/Inbound Float $4,899 4,286 2,449
Value of regular float $395,992,000 $395,992,000 $395,992,000
Number of days float outbound & inbound 8 8 8
Subtotal regular float $483,990 $483,990 $483,990
Total Float Value Cost per Month $488,889 $488,277 $486,440

Finally we come to the costs of customer care. The Internet is an extraordinarily
effective, self-service (i.e., low-cost) customer care medium, as many companies already
are proving at their websites. The vast majority of customer care incidents relate to
billing, and a biller with IBPP capabilities at its own site clearly has an advantage in
being able to resolve at least some of these incidents before they escalate into a more
costly phone call. In contrast, by inserting a third-party into the equation,
homebanking-based models, such as thick concentration, actually can raise the number of
incidents while making no provisions to resolve any of them online (see Figure 8,
"Monthly Customer Care Costs").

Figure 8

Monthly Customer Care Costs

Customer Care Costs Paper-Based Billing Thick Concentration Biller’s Website
Customer care incidents per month as percent of total base 2% 2.05% 2%
Total number of customer care incidents per month 100,000 102,500 100,000
Percent of incidents related to billing 80% 80% 80%
Percent of incidents resolved online 0% 0% 10%
Average fully burdened cost per customer care incident $15 $15 $15
Total Customer Care Cost per Month $1,200,000 1,230,000 1,080,000

And the Winner Is?

Now let’s put it all together and project out over five years the incremental revenues,
costs and cost savings that the thick concentration model and the
direct-at-the-biller’s-own-website model provide over today’s paper-based model (see
Figure 9, "Five-Year Cost-Benefits of IBPP").

Figure 9

Five-Year Cost-Benefit of IBPP

Revenues and Costs–Five Years Thick Concentration Biller’s Website
Incremental Revenues $6,012,000 $26,284,464
Advertising cost $2,236,464
Outbound production $(7,965,900) $(12,474.900)
Inbound production $(6,462,900) $(10,971,900)
Outbound/inbound float $(183,700) $(734,800)
Customer care $1,800,000 $(7,200,000)
Total Costs and (Cost Savings) $(10,576,036) $(31,381,600)
Five-Year Net Total (Incremental Cost) Incremental Benefit $16,588,036 $57,666,064
Incremental one-time initial costs $810,000 $410,000

Although we did not run the numbers in this analysis for other IBPP models, such as
shared link or thin concentrator, their numbers fall between these two extremes. In
addition to winning in terms of incremental benefits, the
direct-at-the-biller’s-own-website model wins in terms of payback per month on the
one-time costs–about 17 months compared to thick concentration’s 310 months. It also wins
in terms of payback in initial investment in numbers of yearly customers, and in payback
of initial investment in number of yearly customers as a percentage of total customers.

In short, when the numbers are objectively evaluated, the biller-controlled channels
such as direct-at-the-biller’s-own-website offer the greatest revenue and cost reduction
opportunities in the shortest possible time. This points to a deployment strategy of first
implementing the biller-controlled channels, and making the distribution of bills through
other IBPP channels a "consumer-defined option." See part three of this series
in the April issue of PHONE+ to see how this plays out for billers and their banks.

Richard K. Crone is vice president and general manager for CyberCash Inc., Oakland,
Calif. He can be reached at

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