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E*Trade Rides Billowing Wave of E-Payments

E*Trade Group is jazzing up its online banking services by offering real-time balances and other features in a bid to attract new accounts and capitalize on the growth in online bill paying.

The Arlington, Va.-based online brokerage and financial services company said customers could now see balances in real-time as well as a seven-day projection of the balance that incorporates pending payments and transfers. They can also now assign categories to various transactions and schedule bill payment in two steps.

The new features arrive at a time when online bill payment is the fastest-growing consumer application on the Web. According to NACHA, the check-clearing consortium known as the Electronic Payments Association, the number of electronic payments will reach or exceed one billion in 2003, double that of 2002, with total dollar volume estimated at $2 billion.

"There are benefits to all the parties involved," said NACHA spokesperson Michael Herd. "To consumers, it's more convenient, and there are cost savings in postage and late fees. At the same time, it's less expensive for billers to process payments, and fewer are returned for insufficient funds."

It costs a merchant or bank anywhere from $1.50 to $1.80 for each bill sent, received, and paid, according to Javelin Strategy & Research, a research firm specializing in payments and financial services. Electronic bills, on the other hand, now cost an average of $0.30 to $0.50.

Technology research firm Gartner says the number of consumers paying bills online nearly doubled in 2002, reaching 25 million by the end of the year, and is growing at almost 35 percent annually

Gartner's financial technology analyst Avivah Litan also noted that online banking customers are the most profitable to banks, are 50 percent more likely to stay, and maintain balances that are 40 percent higher than the offline banking population. The company's research noted that online banking customers also take out loans that are around 40 percent higher, and tend to call the customer service center fewer times.

And that's only half the story. Litan said despite how fast online bill payments are growing with consumers, the B2B sector is growing even faster. "Today, 63 percent of companies engage in electronic payment, and we expect that to be well over 90 percent by 2006," she said.

Gartner's estimates include credit cards, EDI (electronic data interchange) , wire transfers and automated clearinghouse (ACH) transactions. ACH is the most prevalent form of e-payment from business to business, accounting for 39 percent, with wire transfers being the second most popular method.

For businesses, the biggest barrier to offering electronic payments to consumers is technology, according to James Van Dyke, a Javelin analyst.

"There's really complex stuff behind the scenes, and that's been the gating factor," Van Dyke said. B2B payments typically involve lots of adjudication, he said, a back-and-forth process where adjustments are made.

"When you automate B2B payments, you need to automate that adjudication process."

Consumers, on the other hand, have security fears that billers haven't done enough to assuage, said Jim Bruene, editor of the industry newsletter Online Banking Report. "Security is the number one reason people give for not using online payments," Bruene said. "Banks shouldn't forget that most of their customers are new at this." Bruene says that while security for online transactions is good, banks should strengthen customers' perception of security.

The best ways, he said, are to provide feedback in the form of transaction monitors or access alerts, so that the customer would get an e-mail every time a transaction occurred or someone accessed the account online. While few banks do this now, Bruene said most are taking the first step and installing technology to provide access alerts. "Transaction monitoring is in the future," he said, "but eventually it will be part and parcel of every online banking program, letting customers set their own parameters for alerts."

E*Trade's real-time funds transfers for online banking customers may be part of that ideal. First offered in January for brokerage accounts only, the real-time feature is now being extended to online banking customers.

Although Gartner's Litan questioned whether the transfers were actually done in real-time, she called it a distinctive feature in the online banking sector.

"I think E*Trade is the only bank doing that, and it certainly gives them a competitive edge," she said.

Litan said she expected that E*Trade's base of day traders might consider moving their money to E*Trade for banking because of the quick transfers feature. But the offerings also show, Litan added, that E*Trade is "definitely at the top of the list of banks helping consumers get rid of their paper registers."