SINCE 1994, THE EXCLUSIVE MONTHLY REPORT ON INTERNET BANKING PRODUCTS & MARKETS

Number 86

September 25, 2002

strategies for financial institutions

____________________________

Internet banking

Epayments

Security

Email

Service

Online marketing

Interactive lending

Epayment Vendors

Spotlight on iPay Technologies, LLC ..................... 4

Vendor snapshots.......................... 12

Conference calendar........................ 19

Best of the Web:
    fyiAlerts from CharterOne............ 20

Adding Value to Electronic Payments (part 4)

Outsourcing options grow

he tech sector may be on the decline, but banks have more choices than ever for outsourcing bill payments and funds transfers. Two of the newest entrants, PayCast (ð p. 8-11) and iPay Technologies (ð p. 4-7) provide clever solutions to allow your users to electronically redistribute funds among their own accounts at any financial institution or send money to other individuals. And don’t overlook the payment specialists that have not only survived that past two years but continue to innovate at a surprising pace, especially CashEdge (ð p. 15) which is about to announce a much-needed overnight funds transfer option.

Another new entrant, ATM switches such as First Data’s NYCE
(ð p. 19) and Concord’s Star System (ð p. 16). These ATM giants are in the final stages of enabling real-time transfers between any cardholder. Star System is the most aggressive, mandating that all member financial institutions be able to receive card-based interbank transfers by April 1, 2003. NYCE, which already has the real-time infrastructure is place, expects dozens of implementations by year-end, but isn’t mandating compliance until year-end 2003. Although the systems aren’t interoperable, a Star System cardholder won’t be able to transfer funds in real-time to a NYCE card, third parties such as CertaPay (ð p. 16), CashEdge, and PayCast are developing workarounds that will route outside transactions through the ACH,
so users will be able to transfer funds to anyone in the U.S.

In the first three parts of this series published earlier this year (OBR 81, 82, 83), we made the case for banks to take a creative approach to electronic payments, using the FedEx model of reliability, speed, and tracking to create premium-priced payment options. Two years ago that would have required a multi-million dollar project. Next year, many banks, especially those in the Star and NYCE network, will be able to create these new revenue streams for less than $100,000.

iPay Technologies Delivers Full-Featured ePayments at an Affordable Price

By the end of the year (2002), tiny iPay Technologies with just 30 employees will likely be the only vendor supporting all five major retail epayment needs: pay-anyone bill pay, electronic-only bill pay, small-business bill pay, interbank transfers, and person-to-person payments. If that isn’t enough, they have several other interesting payment products in the works. This company has vision and the ability to develop new technology without incurring massive development costs.

The privately held company is primarily funded by insiders, including CEO Dana Bowers and Chairman Mike Bowers; long-time customers First Interstate Bank (MT) and Arkansas National Bank; and two private investors. To this point they have survived without venture funding and are projecting cash-flow breakeven within six months (Q1 2003).

The company currently has 250 clients, up from 206 at the beginning of year, with a year-end target of 300. Its active subscriber base has grown from 18,600 on Jan. 1 to 32,000 in July. Last Dec. (2001), it processed 64,000 transactions, in July the number was 118,000. Monthly dollar volume has grown from $15 million to $29 million. Fifty percent of payments are electronic; the others are paper checks mailed from Kentucky.

Table 3

Current Products

Currently the company has three products:

·  Pay-anyone Web bill payment: Typical program allowing users to send payments to
any individual or company with a U.S. mailing address.

·  Telephone bill payment: Same as above but with payments originating by telephone. Telephone users can also use the Web to set up payees or make payments and vice versa. The program handles only 3% of the company’s volume, just 3,000 transactions per month.

·  Small business Web bill pay: The company also provides a small business bill-payment program called iPayables, currently used by just 73 business owners. The service features a memo field to add an invoice number that accompanies payment. Users can organize payments into categories and add comments that stay in the history file. The system supports multiple users with different permission levels so a company bookkeeper can schedule transactions, but only the business owner can authorize actual payment.

New Products

The company is nearing the end of an intensive development effort to add three new products. All three are expected to be in production by year-end (2002).

·  Interbank funds transfers (Me2Me): iPay Technologies will be one of the few turnkey providers of consumer ACH originations (see also BankServ, CashEdge, CertaPay, and PayCast). In order to make an ACH deposit or withdrawal, the user must have ownership of both accounts; it cannot be used to make transfers to/from someone else’s account (although it could be used to send money to a college student provided the parent was a cosigner).

·  Email payments, aka person-to-person (P2P): Like PayPal, this feature allows users to send money to anyone in the U.S. with an email address. However, iPay Technologies never takes receipt of the funds. iPay Technologies will also have an added security level requiring recipients to provide additional authentication prior to accessing the funds. The program will work with any U.S. bank account accessible to the ACH system. In contrast, CheckFree’s email payment system requires the sender and recipient to have accounts at participating banks and to participate in the receiving bank’s Web bill-payment service (see OBR 83/84, p. 48).

·  All-electronic bill payment: Targeted to entry-level users, this option allows financial institutions to offer fully electronic bill payment for a low cost. It’s simpler to use, payments take only two to three days, and service quality is high. The downside is that only about 3,500 fully electronic merchants can be paid; just those equipped to handle electronic receipt of payments and accounts receivable information through MasterCard RPPS (p. 18).

Pricing

iPay Technologies sells exclusively through resellers such as Open Systems. The cost of iPay Technologies’ services varies as resellers set their own pricing. The company considers itself to be the industry leader in both cost (low) and quality (high). Its straightforward pricing plan allows virtually any size financial institution to offer bill payment at a reasonable price.

In fourth quarter (2002), the company will adopt a three-tiered pricing structure:

Tier 1: Electronic money movement

Includes unlimited payments to any of 3,500 fully electronic merchants. This tier will also include interbank funds transfers (Me2Me) and personal electronic payments (P2P). Because all transactions are electronic end-to-end, it will cost roughly half of the Tier 2, pay-anyone service.

Tier 2: Pay anyone

Includes payment to any U.S. mailing address, priced with a low monthly maintenance fee per user and per-transaction fees. The company does not tack on what it calls “junk fees” for reports, customer service, and so on.

Tier 3: Advanced subscriber module

Includes account controls, bill management, reminders, security preferences, and additional Web site functionality.  

 

 

 ð

Operations

Although we haven’t done the due diligence to verify how the system works over time, based on what the company told us, it appears to be a high-quality service. For example:

·        Research tickets (aka trouble tickets): iPay Technologies currently researches just 1/3 of 1% (0.0033) of all payments; down from 0.0048 at the beginning of the year. According to iPay Technologies, this is a fraction of the industry average of 1%+.

·        One reason for the lower research ratio is that the company proactively resolves problems before the user is negatively impacted. The company tracks all outstanding checks; if a check hasn’t cleared within three weeks, iPay Technologies contacts the customer to determine whether to stop payment and reissue the check.¹

·        Another quality/fraud control: iPay Technologies makes telephone contact with all new payees.

·        Since the program is turnkey, iPay Technologies can have a new installation up and running in as little as two weeks.

·        The bill payment module can operate as a separate function with its own username and password, or with minimal extra development, can be integrated within your online banking program for a single logon.²

·        The company operates it payment program under the URL <billpaysite.com>.

·        The company uses a 100% positive pay model; all payments initiated by 4:00 PM (EST) are sent to the originating financial institution in a debit file (NACHA format); iPay Technologies clients have until noon (EST) the next day to stop payment on any payment that is NSF.

·        Users can request account information via email, including a full list of payees, confirmation of transactions made during each session, and transaction history.

 

Customer Service

The company stands in and handles all customer service on behalf of its clients. Each bank has its own 800-number staffed by iPay Technologies reps. Email and live chat are also handled by the same iPay Technologies reps. iPay Technologies does not currently have any clients handling front-line customer service on their own. iPay Technologies firmly believes that the end processor should handle the customer service in order to minimize errors and delays caused by handing problem tickets back and forth between companies.

·        Standard customer service is 7:30 AM to 5:30 PM Eastern time.

·        A premium option, used by 10% of iPay Technologies’ clients, extends hours to 11:00 PM (Eastern) and adds Web-based live chat.

·        Each client has a unique toll-free number with custom welcome script.

iPay Technologies’ single-pay screen is plain looking but it works.

The interface for recurring payments.

Payment history request.

You can view payment history in Excel format making it easy to cut and paste into other applications.

Analysis

Pros

·        Can get Me2Me, P2P, electronic-only bill payment, pay-anyone bill payment, and a small business version all from the same company

·        Users can easily upgrade through the various options, so banks can set multiple fee levels

·        Dedicated reps handle all service for clients

·        Small company, can speak directly with the CEO or other company founders

·        Simple user interface

·        Email and live chat support

·        Proactive resolution of outstanding checks

·        100% telephone contact with new payees

·        Nearly breakeven, should be profitable in 2003

·        Services resold by core processors and Internet banking vendors; potentially less due diligence if you already have a relationship with the reseller

Cons

·        Small company processes in a month what CheckFree does in an hour (using 40-hour week)

·        Limited financial resources

·        4 years in business (16 months as iPay Technologies)

·        Somewhat outdated look and feel; however, the company promises a face lift in Q1 2003

·        No service guarantees for mishandled payments

If your company can tolerate, or prefers, working with smaller companies, you should add iPay Technologies to your RFP list. Its flexible pricing plans, with very low monthly payments, are designed to appeal to smaller financial institutions just building a critical mass. Currently, 50% of new contracts are conversions.

But this is not just a price story. The company claims to be the quality leader, experiencing a 0.33% trouble-ticket ratio. iPay Technologies uses proactive methods to uncover potential glitches before the customer gets burned.

We’ve been talking to CEO Dana Bowers for several years and have been impressed with her straightforward approach to the business. She has always treated it like a service business, even during the late ‘90s when everyone wanted to be a tech company. But ironically, even though the company positions itself as high touch and not high tech, it will likely become the first payment processor able to provide all three major epayments services under one interface (pay anyone, interbank transfers, and email payments). And we like the fact that you can talk directly to company founders when needed.

If you haven’t yet launched a bill-payment program, by all means you need to talk to Dana and her crew. If you already offer bill payment but are doing a vendor review, add them to your list. Finally, even if your interest is only the interbank transfer and/or email payment module, they deserve a look.              8