Consumer-to-Business (Recurring): Checkfree

4.1 How It Works

The first, known as The CheckFree e-Bill Service, allows payments to be made to any one of 260 subscriber companies comprised of utilities, financial service organizations, and insurance and telecommunications companies. Each of these companies is a client of CheckFree and pays CheckFree a fee. In exchange, their customers are able to receive and pay their bills online. This in turn reduces costs for the billing companies. Customers must first establish an account with CheckFree at the CheckFree website. The account establishment process is fairly straightforward. The first step is to complete the website registration form. This requires that the user’s name, address, and e-mail address be entered. Next, a menu containing the list of billing companies is displayed and customers are asked to choose their billers from among the list. In the final step, account information with regard to each billing company is obtained. At this point, the user also establishes a login with a user ID and password.

With an established account, customers are given access to personalized web sites at www.MyCheckFree.com. From this site, customers are able to view, pay and track bills. E-mails are sent on a monthly basis to remind customers of upcoming bills that require payment. Bills can be scheduled to be paid in advance and can be scheduled up to two days prior to their payment deadline due to a two day transaction time. Customers can either choose to pay using a check or money market account, or by credit card where accepted by the biller. Prior bills are stored for up to six months on the CheckFree servers for customers to access.

This service is offered free to consumers. Receiving companies pick up the tab with the cost being more than offset by the savings garnered by them from not having to process bank checks.

The Online Payment Service is an expanded version of the CheckFree e-Bill Service. Rather than limiting potential payments to the 260 subscribing companies, payments can be made to anybody, anywhere. As an example, one might use the Online Payment Service to send money to children in colleges or to neighbors. However, the Online Payment Service is not offered directly through the CheckFree Corporation itself. Instead, the service is offered through any one of 657+ service providers, whose ranks include Bank of America, Yahoo and the U.S. Postal Service [17].

The account establishment processes with the service providers are similar. The customer must enter his/her personal information. Following that, the customer must set up a list of payees as well as a payment schedule. However, for payees who are not subscribers to the CheckFree service, electronic payments are not possible. Instead, a paper check is printed and physically mailed to the intended recipient using the information and payment amount submitted to service provider.

This service, on the other hand, costs customers anywhere from 0 to 15 dollars a month for a set number of transactions. Additional transactions cost more. The justification for these costs can be found in the fact that to the businesses that are not subscribers to CheckFree, paper checks would need to be sent anyway. The customer would therefore be required to pay for envelopes as well as stamps.

4.2 Underlying Technology

Payments to subscribers are made through ACH transactions and credit card transactions. These are detailed in section 2. Additionally, as mentioned, payments to non-subscribing companies are made through mailed paper bank checks.

4.3 Advantages and Disadvantages

The cost is the driving force behind C2B online payment technology. It has been estimated that the cost to the private sector of processing such payments through the use of bank checks is roughly $1.25. At the same time, electronic alternatives have been estimated to save companies roughly 50% of this cost [8]. Thus, on a cost-per-transaction basis, electronic payments are clearly preferable.

However, while the cost-per-transaction diminishes, there is a significant upfront cost for bill payees. “It is estimated that a biller has to incur an upfront fixed cost ranging between $150,000 and $1 million to develop [electronic bill payment and presentment] capabilities; the average cost is approximately $400,000 (McVey and Brown 2000a). Because the ensuing benefits per bill are relatively low, a biller needs to issue a significant number of bills to recover its fixed investment.” [8]

This highlights the chicken-and-egg problem that exists in the C2B market. Bill payees are reluctant to cover the upfront costs unless there is a guarantee that the initial investment will be recovered through per transaction savings. This keeps bill payees from adopting the technology. On the other hand, customers are also unwilling to spend the upfront time commitment required to research and establish a C2B account before there is a guarantee that the initial investment of time will be recovered through future savings of time and money.

The paper check printing and mailing approach that CheckFree offers is a potential successful, yet backward, solution to this problem. By offering such a service, more customers are likely to join thus enticing more bill payees to join as well. Although this might be beneficial in the long term, in the short term it goes against everything that the C2B market stands for and is extremely expensive for all parties involved.

4.4 Commercial Success Thus Far/Future Prospects

Despite the apparent advantages offered by such services, they have had little commercial success thus far. In 2001, it is estimated that less than 1% of such bills (albeit with both businesses and consumer as the payer) were presented and paid online [8].

At the same time, CheckFree, the leading player in the industry, has managed to survive through the recent tech bust with increasing revenues each quarter and decreasing losses; it is now close to the break-even point. It possesses a respectable valuation of $2.5 billion and its shares are trading at $28 per share. The market clearly has faith in the company and judging by its improving performance, it is on the right path.

A valid comparison might be to that of the general electronic transaction market. “Even in 2000, only 37 percent of noncash retail payments were completed electronically; the remaining 63 percent were made by check. Since the share of electronic payments was 14 percent in 1979, it took electronic instruments twenty years to gain 23 percent of the market.” [8]

With that in mind, CheckFree’s, and by extension the C2B market’s, performance is nothing to worry too seriously about. The required infrastructure will take time to build but in the end, the potential efficiencies will ensure more widespread adoption.

4.5 Similar Products

The C2B technology has failed to attract the necessary customer base and thus has not fared well in recent years. The major, direct competitor to CheckFree was www.TransPoint.com, but it has since gone out of business. That leaves Paypal which is beginning to roll out services that conceivably could put it in competition with CheckFree.

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