26
McKinsey on Payments
June 2010
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, generating $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 expand in bill payment. Each market has unique characteristics based on how people pay bills and the nature of the billing institutions. The array of bill pay
markets does, however, fall roughly into four archetypical models. An understanding of these archetypes is indispensible in shaping bill payment strategy.
Christopher McMillen
Kausik Rajgopal
Clarifying bill payment markets
Consumer bill payment refers to the payment
of recurring bills for regularly provided services such as credit cards, phone service (mobile 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 direct 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 thirdparty, 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 developing economies, such as China,
Poland and Argentina.
Each bill payment market exhibits unique
characteristics driven by these differing
channel preferences, as well as the countryspecific 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 organize the numerous bill payment markets into
governing archetypes. We have identified
four such archetypes by quantifying two aspects of each bill payment market: consumers’ channel preferences and providers’
ability to monetize these transactions (Exhibit 1). Patterns emerge among the diverse
bill payment markets when viewed through
Consumer bill payment: Learning from global archetypes
this lens, allowing payment providers to
craft strategies informed by successes in similar markets. Even within an archetype,
however, there are many important marketspecific 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 characteristics of each market differ substantially, the most profitable payment providers
have generated – and monetized – consumer
bill payment traffic through walk-in channels and online urgent channels.
The United States is the world’s largest bill
payment market, both by number of transactions (20 billion annually) and by payments 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
Exhibit 1
The four market
archetypes for
consumer bill
payment
27
is shifting. As U.S. bill payment electronifies, the online channel is stealing share
from both walk-in and mail channels.
In this evolving market, three winning models have emerged. The largest (by share of
transactions) and fastest-growing is the online consolidator model. Retail banks now
dominate this space as consumers increasingly use their online banking interface to
schedule routine bill payments. Consolidators typically charge low transaction prices
($0.10 to $0.15), however. A second successful approach is the biller direct model
for urgent online payments, where consumers 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 transaction prices are much higher ($0.70 to $0.90)
than in the consolidator model, as both consumer and biller typically pay a premium to
ensure timely receipt of funds. The third
successful model in the U.S. market is urgent walk-in. Though in decline as the U.S.
market electronifies, walk-in bill payment
remains a highly profitable model for large
Revenue per transaction
U.S. $
Asia
North America
Europe / Middle East
South America
0.95
0.90
Archetype 1
Attractive developed markets
Archetype 3 Emerging markets
Argentina
Italy
0.45
Colombia
Peru
0.40
Japan
Poland
Brazil
Romania
Chile
0.35
Russia
U.S.
Thailand
0.30
Taiwan
0.25
South Korea
Hong Kong
Singapore
New Zealand
Archetype 4
Nascent markets
Indonesia
Mexico
Philippines
0.20
U.K.
0.15
Spain
Canada
0.10
Archetype 2
Lower-margin
developed markets
China
Vietnam
Australia
India
0.05
Note: Bubble size reflects the number
of bill payment transactions
conducted annually
Source: McKinsey analysis
0
France
Germany
0
10
20
Percent of transactions in cash
30
40
50
60
70
80
90
100
28
McKinsey on Payments
June 2010
agent networks (e.g., Western Union, MoneyGram) that can cover the major population centers, with transaction prices for
urgent payments of $8 to $10 or more.
tory authority, Italy should remain a very
profitable bill payment market.
Italy is the world’s most profitable bill payment market, with an average transaction
price ($0.90 to $1) that dwarfs that of all
other major economies. Two factors have enabled 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 transaction price erosion is anticipated as the Single
Euro Payments Area (SEPA) asserts regula-
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 gaining share. Convenience stores have
emerged as the early winners in this market, 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,1 giving 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 applications.2 Third, 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 population. 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 official (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.
1
2
In 2008, cash was used in 90 percent of transactions in Saudi Arabia, for instance.
The volume of non-cash transactions is growing by 30 percent a year in Saudi Arabia (source: Saudi Arabian Monetary Agency).
Consumer bill payment: Learning from global archetypes
tively high price level of $0.80 to $1 per
transaction. This direct debit service can operate through paper notification, as well as
through Internet banking interfaces.
Archetype 2: Lower-margin developed
markets
Archetype 1 represents a diverse set of developed bill payment markets united by the
common theme of generating – and monetizing – consumer traffic through walk-in
channels and online urgent channels. Archetype 2 captures the reverse side of this coin.
This archetype is represented by a homogenous set of Western nations where bill payment 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
29
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 subscribers in automated monthly bill payments
from their bank accounts. As a result, direct
debit holds an 80 percent share of all transactions, and bill payment transaction prices
average only € 0.10 ($0.12).
A similar story plays out in the other developed 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 payment. Routine electronic transactions at
very low revenue have thus come to characterize 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 eservices 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 epayments 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.
30
McKinsey on Payments
June 2010
developed markets in the remaining cashheavy economies and are distinguished by
their relative stage of development.
to the banks, which have established a universal 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, supermarkets) as correspondent locations, extending
the geographic reach of their walk-in networks. The Boleto Bancario system now
processes 40 percent of Brazilian bill payment transactions, rendering market entry
by non-banks quite difficult.
The first, emerging markets, comprises several 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 future with attractive transaction prices. Over
the long term, some markets in this archetype 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 leapfrogging in e-payment services”).
Russia is the largest of the emerging bill
payment markets, with over 4 billion transactions 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 cumbersome paperwork for each transaction. As
the market liberalizes, this inefficiency is
spurring innovation from new entrants. CyberPlat 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, pointof-sale terminals, self-service kiosks and online/mobile payment sites. Start-up firms
Avtokard and OSMP/QIWI have made a
similar push to improve the consumer walkin bill payment experience.
Brazil, like Russia, is a large emerging bill
payment market with approximately 4 billion annual transactions conducted primarily 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 outsource the issuing of bills (boletos) for a fee
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 endstate across electronic, mail and walk-in
channels is unclear. (In fact, markets such
as Vietnam and Algeria have a fourth channel: 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 payment markets, with an estimated 9 billion
transactions annually at relatively low prices
($0.10 to $0.20). Traditionally, most consumers 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 payment. 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 marketplaces (e.g., B2B exchanges, auction sites)
and are now expanding their services into
adjacent fields such as consumer bill payment. Time will tell whether Chinese consumers 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
Consumer bill payment: Learning from global archetypes
walk-in cash channels today, with greater emphasis in India on biller service centers and
less on banks due to the highly unbanked nature 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 payment experience. For example, Easy Bill has
launched India’s first chain of one-stop payment collection centers, while Bill Desk offers
a centralized hub for electronic bill presentment and payment. As in China, the Indian
bill payment market is just entering its formative 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 defensibility of their market entry and positioning strategies.
As an example, new market entrants – particularly within the electronic channel – are
best served by focusing on emerging and
nascent markets, where consumer behaviors
are shifting and incumbents are not yet entrenched. Of the two, nascent markets provide greater potential long-term growth and
a tantalizing opportunity to influence consumer behavior.
A scan of the bill payment archetypes provides important lessons for incumbents on
what has – and has not – worked in defending and monetizing existing positions.
For example, consumers and billers have
consistently proved willing to pay a premium for online urgent and walk-in payment 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 longterm. Also, notable successes in building
barriers to entry (e.g., Brazil’s boleto system) illustrate tactics incumbents can use
to their advantage.
31
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 sustainable competitive advantage in the bill
payment market? How does this assessment 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 countries, verticals or niche payment types with
high transaction prices?
• Can we transfer certain aspects of our bill
payment model from one country to others? Or must our entry strategy be highly
tailored towards each individual market?
• In which situations will regulatory constraints, 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 collectors 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. However, 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.