Why Do Consumers Pay Bills Electronically? An Empirical Analysis

Abstract

Although the checkless society has been predicted for decades, checks remain the most frequently used noncash payment method in the U.S., contrary to trends in a number of other countries. Despite the debate over why consumers do or do not adopt new payments technology, little is known about the subject. Given unsuccessful efforts to induce a shift away from checks, some industry observers have even suggested that consumers are irrationally wedded to their checks. As a result, the financial services industry faces significant uncertainty regarding potential investments in electronic bill payment technologies as well as in debit cards, smart cards, stored value, e-cash, check imaging, and check conversion technologies. The goal of this article is to provide some insight into the consumer's decision to use electronic payments technology - What factors influence this decision and what might financial industry leaders do to encourage greater numbers of consumers to make the transition to electronic payments? This article analyzes the extent to which various factors influence consumers' willingness to use electronic bill payment. I review the economic, marketing, consumer decisionmaking, and payments literatures. Then, I analyze a unique 1,300-person survey to evaluate the factors associated with usage of electronic bill payment. I find that several broad factors influence the consumer's preference for electronic bill payment:1) wealth; 2) personal preferences for control, convenience, incentives, personal involvement, and/or privacy; and 3) transaction-specific factors associated with different types of payments. I also find that certain demographic factors are significantly associated with the use of electronic bill payment services. My findings are consistent with new product adoption theories, supporting the idea that some consumer segments are natural first adopters of electronic bill payment services. However, while new product diffusion theories assume that consumers will begin to experiment and adopt innovations as they learn more about the product's features, my analysis suggests that fundamental consumer needs still must be addressed before a broader portion of consumers will adopt electronic bill payment services. As a result, I find that an important portion of consumers do not perceive checks and some electronic bill payment services as substitutes at this time. Some analysts suggest that many consumers are likely to remain reluctant to adopt new payment technologies. However, my analysis suggests that a larger fraction of consumers would adopt these new technologies if important product features such as error resolution, service level guarantees, customer service, the ability to make partial payments, and more convenient sign-up were bundled with electronic bill payment services. My results suggest that the next stage of migration towards electronic bill payment may depend more on firms' willingness to fund the development of these new product features than on overcoming consumer resistance to change. This article also highlights the need for policymakers to better understand the diversity of consumer preferences when considering public policy questions relating to consumer protection.