Clarifying bill payment markets Consumer bill payment refers to the payment of recurring bills for regularly provided serv- ices such as credit cards, phone service (mo- bile and land line), gas, electric, water and insurance. Consumers pay such bills through three distinct channels, and the share of each channel varies significantly across markets:
• Electronic payment options, such as di- rect debit and credit, have grown quickly and predominate in many developed economies.
• Bill payment by mail, using checks or money orders, is still prevalent in several large economies (e.g., U.S., France), but its use is declining as consumers shift to electronic options.
• Walk-in sites, both biller and third- party, are a frequent channel for urgent
(that is, same-day) payments in many markets and remain the preferred option for routine payments in cash-heavy de- veloping economies, such as China, Poland and Argentina.
Each bill payment market exhibits unique characteristics driven by these differing channel preferences, as well as the country- specific nature of most billers (e.g., utilities, mobile telecom, financial services providers).
For insight into successful market entry and positioning strategies, it is helpful to organ- ize the numerous bill payment markets into governing archetypes. We have identified four such archetypes by quantifying two as- pects of each bill payment market: con- sumers’ channel preferences and providers’
ability to monetize these transactions (Ex- hibit 1). Patterns emerge among the diverse bill payment markets when viewed through Christopher McMillen
Kausik Rajgopal
Consumer bill payment:
Learning from global archetypes
Consumer bill payment is a large and potentially attractive market for payments providers. Globally, consumers pay 75 billion to 100 billion bills annually, gener- ating $25 billion to $30 billion in payments revenue, often at healthy operating margins of more than 25 percent.
However, there is no single solution for providers seeking to make inroads or ex- pand in bill payment. Each market has unique characteristics based on how peo- ple pay bills and the nature of the billing institutions. The array of bill pay markets does, however, fall roughly into four archetypical models. An under- standing of these archetypes is indispensible in shaping bill payment strategy.
this lens, allowing payment providers to craft strategies informed by successes in sim- ilar markets. Even within an archetype, however, there are many important market- specific nuances to consider.
Archetype 1: Attractive developed markets
This first archetype can be seen in a diverse set of developed Western and Asian
economies where bill payment providers have established relatively stable, highly profitable business models. While the char- acteristics of each market differ substan- tially, the most profitable payment providers have generated – and monetized – consumer bill payment traffic through walk-in chan- nels and online urgent channels.
The United States is the world’s largest bill payment market, both by number of trans- actions (20 billion annually) and by pay- ments revenue ($6.4 billion annually). It is also the most diverse, with electronic, mail and walk-in channels each contributing a significant portion of overall revenue. While payments revenues have stayed roughly flat over the past few years, the revenue balance
is shifting. As U.S. bill payment electroni- fies, the online channel is stealing share from both walk-in and mail channels.
In this evolving market, three winning mod- els have emerged. The largest (by share of transactions) and fastest-growing is the on- line consolidator model. Retail banks now dominate this space as consumers increas- ingly use their online banking interface to schedule routine bill payments. Consolida- tors typically charge low transaction prices ($0.10 to $0.15), however. A second suc- cessful approach is the biller direct model for urgent online payments, where con- sumers pay bills at the deadline (or past due) directly on the biller’s Web site. Biller direct accounts for roughly one-quarter of online bill payments in the U.S., but transac- tion prices are much higher ($0.70 to $0.90) than in the consolidator model, as both con- sumer and biller typically pay a premium to ensure timely receipt of funds. The third successful model in the U.S. market is ur- gent walk-in. Though in decline as the U.S.
market electronifies, walk-in bill payment remains a highly profitable model for large
Spain
France
U.K.
Italy
Canada
Romania
0.90
90 0.40
0.95
0.25
Revenue per transaction U.S. $
0.15
Percent of transactions in cash 0.10
0.35
0.05 0.45
80 0.30
0.20
0
Poland
70 60 50 40 30
20 100
10 0
Chile Argentina
Brazil
Mexico Colombia
U.S.
Peru
Germany
Russia
India
Singapore New Zealand
Hong Kong
Australia South Korea
Thailand Taiwan
Vietnam Philippines
Indonesia Japan
China
Asia North America
South America Europe / Middle East
Archetype 2 Lower-margin developed markets Archetype 1
Attractive developed markets
Archetype 3 Emerging markets
Archetype 4 Nascent markets
Note: Bubble size reflects the number of bill payment transactions conducted annually Source: McKinsey analysis
Exhibit 1
The four market
archetypes for
consumer bill
payment
agent networks (e.g., Western Union, Mon- eyGram) that can cover the major popula- tion centers, with transaction prices for urgent payments of $8 to $10 or more.
Italy is the world’s most profitable bill pay- ment market, with an average transaction price ($0.90 to $1) that dwarfs that of all other major economies. Two factors have en- abled Italian payment providers to monetize consumer bill payment at this level. First, Italy is cash-heavy for a developed market: 20 percent of households are unbanked and over 40 percent of bills are paid in cash, resulting in the higher transaction prices associated with walk-in services. Second, across both walk-in and electronic channels, the market is dominated by a handful of players (e.g., banks, Italian post office, Lottomatica) that have conditioned consumers to pay for even routine bill payments. While some transac- tion price erosion is anticipated as the Single Euro Payments Area (SEPA) asserts regula-
tory authority, Italy should remain a very profitable bill payment market.
In Japan, the majority of consumer bills are paid through automated direct debit, with the low commissions typical of routine electronic payments. However, consumer use of walk-in bill payment services is gain- ing share. Convenience stores have
emerged as the early winners in this mar- ket, offering the service free of charge to drive consumer foot traffic while charging billers a transaction price of $0.50 to $1 – six to ten times the revenue generated on routine electronic transactions.
Another interesting example in this category is Denmark, where the local direct debit product – Betalingservice – is the standard bill-payment method, but the value-added services offered around simple collection, such as bill aggregation, collections support and commercial enclosure, warrant a rela-
Why the Middle East is leapfrogging in e-payment services
A unique combination of circumstances has positioned Middle Eastern countries for rapid advances in electronic payment systems. First, many of these countries are still heavily dependent on cash,1giving them an opportunity to skip unnecessary and costly steps in payment development, such as check systems and manual transaction forms, and move directly to e-payments. Second, the region’s consumers have been quick to adopt new technologies, such as cell phones and smart phones, and are embracing e-payments and other applica- tions.2Third, the willingness of Middle Eastern countries to attract foreign investment, their pride in competing with developed countries, and the ready availability of funding are spurring the development of new e-payment systems. All this is good news for e-payment providers – both the local and regional banks that dominate the landscape and the international banks, which are typically restricted by regulation to a limited number of branches.
Three market segments
Middle Eastern countries share one more distinctive characteristic that will shape the strategies adopted by e-payment providers. Their markets divide naturally into three major segments: large low-income expatriate populations, high-income expatriates and the local popu- lation. Each group has its own needs.
Low-income expatriates are primarily construction and domestic workers from Southeast Asia with an average income of less than $1,000 per month. Few have local bank accounts, and their use of payment instruments is mainly confined to cross-border remittances though of- ficial (e.g., banks or money exchange houses) and unofficial channels (e.g., the Hawallah market), and pre-paid phone top-ups. In some countries efforts are underway to provide other non-cash services for this group, such as special electronic accounts for low-value salary transfers, direct debit cards in Saudi Arabia and an e-wage system in the United Arab Emirates.
High-income expatriates tend to be regular users of payment applications, frequently for cross-border remittances to their home countries.
People in this group typically come from developed countries with a full range of transaction systems such as ATMs, credit and debit cards, and Internet-based transactions. They typically have bank accounts in their home as well as host country.
1In 2008, cash was used in 90 percent of transactions in Saudi Arabia, for instance.
2The volume of non-cash transactions is growing by 30 percent a year in Saudi Arabia (source: Saudi Arabian Monetary Agency).
tively high price level of $0.80 to $1 per transaction. This direct debit service can op- erate through paper notification, as well as through Internet banking interfaces.
Archetype 2: Lower-margin developed markets
Archetype 1 represents a diverse set of de- veloped bill payment markets united by the common theme of generating – and mone- tizing – consumer traffic through walk-in channels and online urgent channels. Arche- type 2 captures the reverse side of this coin.
This archetype is represented by a homoge- nous set of Western nations where bill pay- ment is dominated by routine electronic transactions. Not surprisingly, transaction prices in these countries are low (typically
$.05 to $0.20), with relatively thin payment provider margins.
Germany’s market is representative. The population is almost universally banked (98
percent), and billers are highly consolidated with the top six issuing nearly one-third of all consumer bills. Germany’s large billers have used these market characteristics to their advantage, aggressively enrolling sub- scribers in automated monthly bill payments from their bank accounts. As a result, direct debit holds an 80 percent share of all trans- actions, and bill payment transaction prices average only €0.10 ($0.12).
A similar story plays out in the other devel- oped markets of Western Europe and in Canada and Australia. Driven by a varying mix of economic, cultural and regulatory factors, these highly banked populations rely heavily on direct debit for bill pay- ment. Routine electronic transactions at very low revenue have thus come to char- acterize this archetype.
Archetype 3: Emerging markets
The final two archetypes exist outside of the
The local population is adopting mobile and smart phones in large numbers as they participate in the rapid development of their countries.
Their payment needs are similar to those of high-income expatriates except for remittances.
A regional scan
On the individual country level, clear differences emerge in the steps providers are taking to develop innovative payment instruments.
In the United Arab Emirates the dominant applications are smart cards and contactless payment methods (such as payment cards for the newly built Dubai Metro and other transport systems) and mobile payments for settling parking fees on the spot. In addition, the national ID smart cards launched by the government in 2009 provide a basis for future identification and payment applications for a multitude of e- services including government payments.
In Saudi Arabia there has been rapid adoption of electronic bill payment and presentment through the SADAD payment platform, with around 70 million transactions in 2009, representing more than 30 percent of all non-cash payments. This puts the country ahead of the curve in introducing electronic bill payment, a new technology even in developed economies. However, the country lags behind in other areas, such as point-of-sale e-payment transactions (an average customer completes only about nine per year), and credit cards (which accounted for only 6 percent of all card transactions in 2008).
Across the region as a whole, rapid developments in the payments industry are fuelling the appetite for further innovation. Commercial banks are introducing cutting-edge, mobile-enabled remittance solutions. Retailers and mobile service providers are exploring partnerships with banks to reduce churn and enhance value for customers. Government bodies are becoming increasingly aware of the benefits of e- payments for financial systems and are taking bold steps to support or even spearhead these developments, building e-invoicing platforms and refining regulation to encourage new modes of payment.
Payments players that embrace these changes are likely to emerge as winners, not only building customer loyalty, but also reducing their cost of funding despite the expected increase in interest rates.
Mehmet Darendeli is principal, and Michael Glück is a consultant, both in the Dubai office.
developed markets in the remaining cash- heavy economies and are distinguished by their relative stage of development.
The first, emerging markets, comprises sev- eral Eastern European, Middle Eastern and Latin American markets. Bill payment is still evolving in this archetype. The average household already pays five to eight bills per month. However, electronification is in its early stages, and walk-in cash channels will hold significant share for the foreseeable fu- ture with attractive transaction prices. Over the long term, some markets in this arche- type may have the opportunity to
“leapfrog” to new payments technologies, depending on the actions of incumbents, new entrants and government bodies (see sidebar, “Why the Middle East is leapfrog- ging in e-payment services”).
Russia is the largest of the emerging bill payment markets, with over 4 billion trans- actions annually. Walk-in channels comprise 80 percent of bill payment volume and are marred by inefficiency. As in many Eastern European markets, banks and post offices administer roughly two-thirds of Russia’s walk-in volume, typically forcing consumers to wait in long lines and complete cumber- some paperwork for each transaction. As the market liberalizes, this inefficiency is spurring innovation from new entrants. Cy- berPlat has taken a leading position in the fast-growing mobile top-up market by building a distribution network of over 200,000 locations, including ATMs, point- of-sale terminals, self-service kiosks and on- line/mobile payment sites. Start-up firms Avtokard and OSMP/QIWI have made a similar push to improve the consumer walk- in bill payment experience.
Brazil, like Russia, is a large emerging bill payment market with approximately 4 bil- lion annual transactions conducted prima- rily through walk-in channels. However, unlike Russia, Brazil boasts one of the most sophisticated walk-in payment networks due to its bank-led Boleto Bancario system.
Under this model, many billers actually out- source the issuing of bills (boletos) for a fee
to the banks, which have established a uni- versal exchange system allowing consumers to pay any boleto at any Brazilian bank.
This model has become further entrenched as the major banks sign up retail networks (e.g., lottery kiosks, post offices, supermar- kets) as correspondent locations, extending the geographic reach of their walk-in net- works. The Boleto Bancario system now processes 40 percent of Brazilian bill pay- ment transactions, rendering market entry by non-banks quite difficult.
Archetype 4: Nascent markets The final archetype is represented by a number of developing economies, primarily located in Asia, for which bill payment is in a much earlier stage of evolution. The average household pays relatively few bills per month (two to four). Thus, consumer preferences are still forming, and the end- state across electronic, mail and walk-in channels is unclear. (In fact, markets such as Vietnam and Algeria have a fourth chan- nel: door-to-door collections.) Transaction prices are low given the relative economic underdevelopment of these markets, but growth rates are tantalizing.
China is the largest of these nascent bill pay- ment markets, with an estimated 9 billion transactions annually at relatively low prices ($0.10 to $0.20). Traditionally, most con- sumers have used the walk-in cash services provided by banks, the postal service and the billers themselves, while a sizeable minority have utilized electronic debit for bill pay- ment. However, new online payment services could significantly shift consumer behavior as the market matures. Early leaders such as Alipay and Tenpay have built transaction scale by integrating tightly with online mar- ketplaces (e.g., B2B exchanges, auction sites) and are now expanding their services into adjacent fields such as consumer bill pay- ment. Time will tell whether Chinese con- sumers gravitate toward these online third-party solutions or continue to prefer more traditional bill payment channels.
India is another bill payment market in its early stages. A majority of consumers use
walk-in cash channels today, with greater em- phasis in India on biller service centers and less on banks due to the highly unbanked na- ture of the population. Banks have, however, staked out early leadership in the small but high-growth online bill payment space. New third-party consolidators are challenging the incumbents, both walk-in and online, with a focus on improving the customer bill pay- ment experience. For example, Easy Bill has launched India’s first chain of one-stop pay- ment collection centers, while Bill Desk offers a centralized hub for electronic bill present- ment and payment. As in China, the Indian bill payment market is just entering its forma- tive years, and winning business models will be in flux for some time.
Using the Archteypes
Bill payment providers – or those seeking to gain a foothold in this market – should use the archetype framework to assess the scope, geographic focus and long-term de- fensibility of their market entry and posi- tioning strategies.
As an example, new market entrants – par- ticularly within the electronic channel – are best served by focusing on emerging and nascent markets, where consumer behaviors are shifting and incumbents are not yet en- trenched. Of the two, nascent markets pro- vide greater potential long-term growth and a tantalizing opportunity to influence con- sumer behavior.
A scan of the bill payment archetypes pro- vides important lessons for incumbents on what has – and has not – worked in de- fending and monetizing existing positions.
For example, consumers and billers have consistently proved willing to pay a pre- mium for online urgent and walk-in pay- ment services versus routine e-payment services. For incumbents in markets that are still in flux, this strongly suggests where the value is likely to accrue long- term. Also, notable successes in building barriers to entry (e.g., Brazil’s boleto sys- tem) illustrate tactics incumbents can use to their advantage.
Strategic questions for global bill payment providers
Armed with a clear understanding of these archetypes (as well as the nuances of each individual market), payment providers with global bill pay aspirations should begin by answering the following set of questions:
• What assets and capabilities give us a sus- tainable competitive advantage in the bill payment market? How does this assess- ment vary among electronic, mail and walk-in channels?
• Are we well positioned to compete at scale with a high-volume, low-price model? Or are we better suited to target specific coun- tries, verticals or niche payment types with high transaction prices?
• Can we transfer certain aspects of our bill payment model from one country to oth- ers? Or must our entry strategy be highly tailored towards each individual market?
• In which situations will regulatory con- straints, market realities (e.g., presence of established competitors, novel consumer preferences) or our own timeline favor a buy versus build approach?
• To what extent should emerging payment types (e.g., mobile) play a role in our global bill payment strategy, and will this role vary substantially across markets?
• What value-added services to both collec- tors and consumers can justify increased pricing in each individual market?
* * *
Each bill payment market is unique, and there are limits to the inferences one can draw from any simplifying construct. How- ever, the archetype framework can be a powerful tool for plotting strategic options in this attractive business.
Christopher McMillen is a consultant in the New York office, and Kausik Rajgopal is a principal in the San Francisco office.
