Instant payments could alleviate bill pay pain points
Consumers pay eight bills a month on average. That might seem like a lot, but rent, utilities, student and other loans, streaming subscriptions and the occasional doctor’s office visit do add up. If payments are recurring, consumers often have the choice to pay them automatically through either their bank or with a biller directly by scheduling a payment in advance. If payments are one-off, automated solutions are not always convenient. Instant payments can address this need and serve as a convenient way to pay one-off bills in both singular and reoccurring instances.
This article sheds light on common problems around bill pay — in particular one-off bill payments. It then discusses how instant payments could solve these pain points, and unpacks how billers and financial institutions could benefit from this solution.
One-off payments: An unrecognized pain point
Consumers generally pay their bills in one of two ways. The first way is an automatic recurring bill payment, which means the consumer authorizes the biller or their financial institution to complete a reoccurring payment (which can be a fixed or variable amount) on a consistent schedule. The consumer can authorize the payment through various methods such as debit card, credit card, or directly from their financial institution’s account, for example by ACH or check1. Once scheduled, the biller pulls the funds via the chosen payment type indefinitely.2
The second form is one-off bill payments, which involves a consumer manually completing a reoccurring or singular payment each time it’s due. For instance, a consumer might have a monthly utility bill, but they may choose to manually complete the payment each month rather than scheduling it to automatically occur. Or they may have a singular medical bill that cannot be automated. These bills introduce some pain points for both billers and consumers (discussed more below).
Some might assume that automatic recurring bill payments are more popular given their simplicity, but that’s a misconception. Consumers actually use one-off payments in two-thirds of their bill pay transactions.3 While this might happen for a variety of reasons, one reason for some consumers is uncertainty of funds in the account and the need for flexibility to control the timing of their payments.
Regardless of the reason, one-off bill payments can be inefficient for consumers and billers alike. Consumers must take the time to either write and mail a check, log into a biller’s portal or pay from their financial institution’s site to complete a payment. If they forget to do this, or don’t allow enough time for the payment to reach the biller by the deadline, the payment will be late and subject to penalties. And even when the payment is timely, the consumer may have forgotten to include the correct remittance details, potentially leaving the biller to have to manually look up account information to reconcile the payment, a costly process that could lead to the payment being posted incorrectly. If an automatic recurring bill payment gets rejected, moreover, the consumer may need to manually resubmit the payment as a one-off bill payment.
Instant payments could alleviate pain points
Instant payments have the potential to transform the one-off bill payment space along with rejected automatic bill payments4. Not only do instant payments allow a customer to transfer funds from their financial institution’s account to their biller’s account within seconds, but the truly transformative factor is a supplementary feature of instant payments called a request for payment (RFP). As the name implies, RFP enables a person or organization (including a biller) to send a request to a customer to complete an instant payment, along with embedded relevant information such as bill details and required remittance data. This feature facilitates the automated processing of the payment.
The potent combination of instant payments and RFP could allow for a more streamlined one-off bill payment experience. For example, the biller could send an RFP to their customer’s financial institution, and the financial institution could then present it to the customer via text message linking to the customer’s mobile banking app. Once the customer is ready to pay the bill, they could click the link, review the bill details attached in the RFP, and easily complete the payment by clicking a confirmation button.
Below are ways that this process could solve certain one-off bill payment inefficiencies for consumers:
- Reduce paper bills: Almost half of consumers prefer to receive only digital bills, but less than one-fourth of bills are delivered digitally.5 In some cases, billers continue to send paper statements because their customers are using payment options like checks that require a physical remittance document to be returned with the payment. However, by sending a bill via RFP and offering instant payments as a payment option to their customers, billers may be able to convert some check payments and cut down on the need for physical billing statements.
- Increase on-time payments: With one-off bill payments, consumers risk missing a payment due date — either because they don’t remember to pay it until the due date (which may be too late for certain payment options), or they need to wait until they have the funds to pay it. With instant payments, consumers can complete the payment without penalty even on the due date, and the funds are transferred immediately, ensuring that the transaction is successfully processed on time.
- Immediate notifications: Consumers want to see when a transaction has posted, or when the funds have transferred out of their account. Specifically, many view notifications of posted payments as highly important. With an instant payment, consumers will be able to receive real-time confirmation that a payment was successful.
Benefits for billers
Because consumers most often pay their bills on a one-off basis, a large majority of businesses that issue bills stand to benefit from RFP-enabled instant payments like loan, utility, and rent bills, as well as medical, charity and tax bills, to name a few. These benefits include:
- Fewer delinquent bills: With a streamlined experience, billers eliminate frictions that can prevent consumers from paying bills on time, such as delays in delivery of paper statements. As a result, billers could reduce the number of late fees and customer dissatisfaction.
- Reduced exception handling costs: Instant payments are irrevocable, which means the transfer cannot be reversed once the payment is complete. With this certainty, billers may see fewer returned payment exceptions and reduced costs associated with collecting them.
- Streamlined accounting processes and fewer errors: When payments do not have the correct remittance information included, the accounts receivable department may need to manually confirm the information. With RFP functionality, the biller can ensure that all relevant remittance data is included and the correct customer account is credited.
Benefits for financial institutions
Financial institutions are billers, too, and can take advantage of the benefits noted above for their credit card and other billing operations. But they can also benefit by offering services to their biller customers that take advantage of instant payments functionality:
- Leverage an opportunity for value-added bill pay services: When financial institutions integrate value-add services like invoice and remittance details into the payment flow, they offer a compelling solution that helps billers automate more of their payment processing.
- Create distinguishing innovations: Financial institutions have the opportunity to build upon RFP functionality to deepen relationships with consumer and business customers who are increasingly demanding advanced digital banking services and new payment options. For instance, they may leverage capabilities within their digital channels to support auto-authorization capabilities for certain RFPs. Billers could use this functionality to automate more of their one-off payment activity.
- Consumers can automate the payment of recurring bills, but in most cases, they instead handle them on a one-off basis. However, consumers and billers can experience inefficiencies from one-off bill payments.
- Instant payments have the potential to transform how one-off bill payments occur through RFP capability. With RFP, a biller can send a customer a request to complete an instant payment while embedding relevant information such as bill details and required remittance data.
- With RFP, billers can increase the number of on-time bill payments, reduce errors and costs associated with exception handling, and use remittance data to streamline their accounting processes.
- Financial institutions can benefit from RFP both as billers and as service providers to their biller customers by offering innovative solutions built on this RFP capability and thereby deepening their relationships with their customers.
Visit the instant payments education page on frbservices.org to continue learning more about the benefits of instant payments and their potential uses.
1When a consumer uses an online billpay service to automate recurring payments to a biller that isn’t in the service’s biller account directory, the service often must issue a check to that business in lieu of an ACH payment.
2The consumer has the ability to deactivate the automatic payment, of course; in addition, changes in the consumer’s payment method (such as a credit card expiring) will end the recurring payment.
3Aite Group. “How Americans Pay Their Bills,” September 2020.
4For the remainder of this article, pain points of one-off bill payments also include rejected automatic bill payments.
5ACI Worldwide. “Billing and Payment Trends and Behaviors,” 2020; page 10