I like the part at the very end when Pete talks about being able to pay bills from your credit card.
Noise
from americanbanker -
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A Vision of Utility Inspired CheckFree's Kight
Tuesday, September 11, 2001
By Amanda Fung
CheckFree Corp.'s CEO Peter Kight started what has become known as the leading electronic bill payment provider in the United States two decades ago out of what he calls "positive ignorance."
In 1981, the then-24-year-old California State University dropout was running a group of health clubs, and an insurance executive told him about the automated clearing house.
"I was trying to come up with a better way of selling memberships rather than selling annual lump-sum fees, which wasn't very effective because you essentially had to get customers to rejoin every year," Mr. Kight recalled.
After selling health club memberships on an automatic payment system for nine months, he said, he "realized that this was the business he was looking for."
Mr. Kight started CheckFree in Columbus, Ohio, working out of his grandmother's basement. He didn't have enough money to buy his own computer, so he made a deal with the owner of an apartment management company who had one. To compensate the apartment manager, Mr. Kight applied the automated clearing house, or ACH, program to its apartment complex and put tenants on automatic rent payment.
"When they were done, at 6 p.m., I was allowed to go in and use it until 8 a.m. the next morning," he said. "I paid a programmer at night, and we wrote the ACH program."
The Columbus-based predecessor of Bank One Corp. agreed that if he ran everything and met security requirements it would originate ACH payments and host transactions, Mr. Kight said.
CheckFree, now a well-established company based in Norcross, Ga., reported revenues for its third quarter, ended March 31, of $113.1 million. It has multiyear contracts with 245 of the nation's top billers to supply online billing and payment through about 300 financial services organizations, including major banking companies and brokerage firms.
Last year Bank of America Corp. agreed to a 10-year contract with CheckFree for electronic billing and payment services to its 30 million banking customers.
Mr. Kight recently spoke with American Banker about electronic billing and payment.
What made you think that people would be willing to pay bills online? Did you have some kind of vision?
It's just one of those things that happens with entrepreneurs, what I refer to as "positive ignorance" - you don't know, and you simply believe, without the appropriate amount of background research, something is going to happen.
"Selective positive ignorance" got me into the business of starting down the path of building an ACH file program. By the time I found out how hard it was, it was too late; I was already committed. When I figured out how to make it work I was more convinced that if you could just make this easy to use it would be a boon to any business that wanted to charge any kind of subscription or service to consumers.
How did you become such a fan of electronic payments in a time, the early 1980s, when PCs weren't widely used?
There were two common beliefs at the time. One, consumers liked to write checks because when interviewed they would say they don't want it automatically debited from their accounts. Second, consumers would never allow anyone to charge a very high amount for anything automatically. I didn't believe either one.
One of the advantages of being in the health club industry was I saw people face-to-face when I sold memberships on the automatic payment system. I learned all you had to do was describe how ACH worked in consumer-friendly terms. Through ACH we don't have access to DDAs [demand deposit accounts], we have access to the bank, so consumers were more comfortable with it.
While it was a personally painful process to go door-to-door explaining how automatic rent payments would work, it was tremendously beneficial because I learned how people felt, and [I] thought about the explanation, how to simplify its presentation and how to make it work for consumers.
Why have you decided to befriend banks and financial institutions as opposed to competing against them?
Despite the fact that popular research said consumers disliked banks, what we found is, they may not celebrate banks, but when you test them for trust, banks always rank at the very top. Through the bank brand we found that a lot of banks - in particular Bank of America and [the former] Security Pacific - had small groups internally that were very committed to trying to build [the electronic billing and payment] business themselves, even though they were losing money.
Throughout the years many internal banks had their own understandable political focus on trying to protect proprietary ideas inside the bank. They tried to paint us as the bank enemy, that we and other people were bent on destroying them.
We had been looking for a way to get in to banks and be their supplier. We really had a difficult time trying to get some traction until we bought SSI [Servantis Systems Inc.] in Atlanta five and a half years ago. One of the main reasons why we had to make that acquisition - while it was not an innovative or aggressive company - it had a great reputation with the bank industry because it was by far the biggest provider of ACH technology. It was SSI software that made ACH viable and made it possible for me to start CheckFree. When we acquired them we made the public commitment that we would no longer support our own brand in the consumer marketplace.
How are you encouraging banks to invest more in electronic billing and payment?
We don't encourage banks to spend more. We don't have much impact on their budgets; our approach is focused on two things:
One, showing how profitable this is to banks. The results that have come from the most successful online banks show a stunning increase in retention and profit among people who are not just online bankers but who transact online through the bank. We're working closely with a large group of banks to continue to track information that shows just exactly why people are more retained and what we can do to continue to up-sell them.
Two, we're trying to put more than 100% of our resources into banks to help them to get customers active online. The other thing that is critical is getting electronic bills up and live so they are available for people to see, receive, and try. We've always believed that once we can offer three or four bills we would bring the next wave of mainstream consumers online.
What are some of the disadvantages of electronic billing and payment for consumers and billers?
Disadvantages are, you have to change behavior. One of the first things we learned, if not before leaving home, is to open a checking account, pay bills, and write checks. It's always hard to get people to change, and it takes time to adopt new behavior, especially a new technology. We learn about its availability and possibilities through advertisements, but we learn to switch from friends and family.
That's why hitting 5% penetration in the marketplace means that we will see mainstream much more quickly. If you look at all the research on people who have switched to online electronic billing and payment, virtually no one ever goes back to paper. Our research says, unless it's one of the three D's - death, divorce, or disability - people just never go back.
What are the advantages?
The advantages are, it's more secure than writing on pieces of paper, putting them into an envelope, and handing it off into the paper delivery system. It's substantially faster. There's a small percentage of people who actually go through bank statements and canceled checks and keep the canceled checks and records they're supposed to legally keep for a period of time. That's all done automatically when transactions flow online.
A big disadvantage for billers is, they have to change the way they bill and spend money in advance. There's not much critical mass for a quick return on investment for electronic billing and payment, and they have to show a leap of faith, react to competition, and offer something that a growing percentage of the customer base wants.
On the upside, research shows online billing customers are a lot happier than people on paper checks. By far the biggest advantage: Billers, for the first time, will have the ability to have interactive communication with each of their customers. If you think about the biggest billers - credit card companies, telecommunication-based companies, phone companies, and cable companies - they have no way of communicating with you individually other than bothering you with a phone call during dinner. When the bill goes online we build into that bill the capability to communicate and make individual offers.
Name two of your major competitors.
My two biggest competitors are Deluxe and Harland [John H. Harland Co.] - the whole paper system.
In terms of competitors on the electronic side, Metavante is the most visible because they're working hard right now to build up the ability to compete. But they're struggling to come up with a system that'll work in large volume, and they're committed to trying to get the deal to be a service provider. They haven't made it yet, but I respect their desire and obvious commitment.
What makes CheckFree different?
It's important to understand the term "electronic bill presentment and payment," coined by people who thought there was a business in presenting bills. We don't think there's a business in presenting bills. There's not enough volume. Nobody should sign up for service that just provides bills 'cause then they have to find someplace else to pay bills.
We don't consider companies that are focused on what is called "bill presenting" competitors. We don't see them very much; we don't lose revenue to them; and if you look at companies that try to compete long-term against us, they're trying to get out of the bill presentment business and get into an integrated solution, which we're already in.
What do you think is the key to gaining and retaining consumer confidence, especially during the rise of concern over consumer privacy, fraud, and identity theft via the Internet?
While the media spend a lot of time talking about the latest worm, virus ,or latest concern over privacy, everything we see and the realities of consumer decision-making say that consumers are becoming more confident and comfortable in selectively using online services. There is nothing but a continuously dramatic increase in the use of e-mail and online banking.
When you add in the ability to pay anyone anytime, not just billers, and the ability for all this to be delivered to your e-mail address and automatically tied back to the security of a bank, you don't need to do anything dramatically new or different. You need to continue to have simplicity and functionality.
Name three challenges that you have faced since you started CheckFree in 1981 in regard to mass adoption of electronic billing and payment.
The biggest challenge was having to convert (and build) the standard ACH into a system that I could sell to consumers directly. That was a huge risk and undertaking that I had to do on faith and guts.
The second was convincing the banking industry that this was in their best interest. If they would work with us instead of against us, we could use the Internet, electronic billing and payment, and all the surrounding transaction functionality to return the DDA to the center of the consumer's financial universe, and that's exactly what's happening. As consumers move from looking at things online to transacting online, there's a desire to be safe and secure with their bank's brand of transaction services.
The third challenge is what we're in right now, proving that we can continue to advance all this capability of bringing all the bills and transactions to the market and developing a healthy profit margin.
What has been the trend of electronic billing and payment for the past five years?
The trend has been: The Internet has moved and is being rapidly transformed from a market platform that was designed to provide free information into a marketplace that provides transactions that can create revenue. And we've seen an accompanying increase in consumer interest.
Have you been surprised at all with what has happened so far?
I've been surprised that credit cards have remained the primary way in which people transact; other than online bill payment no other alternatives have sprung up. The credit card system wasn't designed for "card not present" transactions. The industry has always struggled with "card not present" and yet finds itself in the center of the online universe. The card industry struggles in dealing with safety, security, and cost efficiency of "card not present" transactions.
How has, or will, the stagnant economy and recent slump in the technology sector influence the acceptance of electronic billing and payment?
I don't think the economic slowdown is affecting consumers' decisions on this whatsoever. It's less costly to consumers than paying for stamps, checks, and late fees. We see over and over again consumers moving to electronic bill payment because of monetary cost. They don't want to spend as much time; they want better understanding of how much money they have and a better understanding of where money is. All of this is better online than offline.
Unless the economy takes a depression-like downturn, we don't think it's going to affect it at all. It certainly affects the aggressiveness of banks' budget, and that's an issue we deal with.
How does account aggregation affect electronic billing and payment? Do you think it boosts the acceptance of electronic billing and payment?
We think that account aggregation is going to make consumers more interested and feel better about being able to transact from one user interface. We don't have any great insight today on how many people are really actively using it as the central part of their transaction account, but we're very interested in watching it and seeing just exactly how effective it becomes among households. It adds a little bit of complexity to privacy and security, which is a big issue for our bank clients and branded clients, so we're in the middle of making sure we can help improve privacy and safety of aggregated information.
What does the future of electronic billing and payment look like? What are CheckFree's goals?
The goal in the next three to four years is to make good on what we think is the consumer desire to have more than a third of banking households move from paper to electronic. We are continuing to add functionality. We think enabling banks to offer customers e-bills via e-mail is going to be a seminal breakthrough when you look back two years from now on enabling consumers to comfortably try electronic billing and payment with their bank.
Our goal is to stay focused on executing on all of those fronts - quality, integrated functionality, improving consumers' use of systems, and dramatically increasing [the] volume of bills we deliver.
We think the next trend is going to be a successful marrying of transaction capabilities so consumers and merchants can choose.
We will see the flexibility extend to the other side of transactions; consumers will be able to progressively choose to make bill payments and post to credit cards as opposed to always having to pay bills from their DDA. We're going to see dynamic new applications for older traditional electronic payment systems. Anything that makes it easier for consumers to transact online is going to increase consumers' acceptance of what we are. I think you'll see a third of banking households online in less than four years. |
