In the decade since deregulation, utilities have had to balance two competing
necessities — improving customer service and lowering costs. Automatic
bill payment is one of the rare initiatives that can meet both of these needs
simultaneously.

Automatic bill payment is a mechanism that allows customers to use a payment
card to automatically pay for their monthly recurring bills, such as telephone
and cable bills, insurance premiums, property rental fees, and utility bills.

The overall recurring bill payment market continues to rise — it already
represents a staggering $777 billion in annual consumer payments. For consumers,
the convenience of paying monthly bills automatically is very attractive. Consumers
are looking for a convenient alternative to writing multiple checks for their
many recurring bills. In fact, a national survey found that one-third of all
U.S. consumers want the option of using a payment card to pay recurring bills
automatically.¹

Research by Visa®, the world’s largest payment system, has found that 51 percent
of credit and debit cardholders cite the convenience of not writing and mailing
multiple checks individually as a reason for establishing automatic bill payment
with merchants. The growth in consumer demand is apparent at Visa, where the
association expects to surpass $32 billion in sales volume attributed to automatic
bill payments during 2001, a sharp rise from $4 billion in 1995.

Consumer convenience is not the only force behind the rise of automatic bill
payment. For merchants, the benefits are compelling, helping to make card-based
bill payment one of the preferred payment options across multiple merchant categories.
All have experienced improved customer retention, more efficient billing and
fewer billing errors. In fact, one major insurance company offers its policy
holders a five percent discount on their monthly insurance premium if they use
a payment card.

Figure 1 – Why Service Providers Accept Payment Cards

How Card-Based Bill Payment Benefits Business

By accepting payment cards, businesses gain in multiple ways:

• Better cash flow, lower expenses — Payment cards help improve cash
flow by giving customers more flexibility in how they pay their bills. Automatic
bill payments charged to a payment card ensure on-time receipt of payment, and
lower billing and collection costs.

• Increased revenues — Card acceptance can increase sales by attracting
new customers and offering existing customers more buying power.

• Guaranteed payment — Authorized card transactions are paid promptly
by a financial institution, which then assumes the risk of nonpayment.

• Improved availability of funds — Payment card transactions are typically
credited to accounts faster than checks, and funds are available almost immediately.
Compared to check payments, merchants benefit from better cash flow and a substantial
reduction in accounts receivable.

• Lower handling costs — Transaction costs can be lowered by accepting
payment cards. Check transactions can generate many costs that automatic bill
payment doesn’t, including remittance processing, lockbox fees, insufficient
funds charges, and collection agency fees.

• Resources of a global payment system — Payment card systems are
able to provide the experience and support that merchants need to make automatic
bill payment an essential component of doing business.

Case Study in The Utilities Industry

The City of Austin’s Municipal Utilities

The City of Austin officials see automatic bill payment as a key competitive
advantage in the age of electric utility deregulation. With more than 315,000
customers in the Greater Austin area, the city’s municipal electric utility
has a prized customer base to protect. Officials consider the value added by
card acceptance to be a competitive feature in winning new accounts and retaining
customers.
Since 1895, when the City of Austin Electric Utility Department threw the switch
that first brought electric light to the city, the utility has been recognized
nationally for excellence in customer service, a tradition that extends today
to all of the city’s services where bill payment is concerned. In 1994, when
its customers requested the use of payment cards, the city responded. Today,
thousands of customers use automatic bill payment to pay their monthly utility
bill and thousands more use their card for one-time payments.
Austin residents now enjoy the convenience of bankcard payments for a range
of services, including electricity, water, construction permits, and court assessments
— a service provided at no additional charge.

Automatic bill payment has also helped streamline internal operations. The utility
has been able to reduce costs by eliminating its expensive walk-in customer
service centers. Instead of multiple walk-in facilities, the utility now operates
a single telephone customer service center. City of Austin officials point to
card acceptance as a very useful tool to prepare their business for the competitive
pressure of a deregulated electric utility environment.

Faster Payments

Merchants that accept automatic bill payment point to the reduction in payment
cycle as the primary benefit. Bankcards have the shortest payment cycle among
other forms of payments, according to a 2000 survey conducted by Visa.²
For example:
• The payment cycle for bankcards is only seven days.
• Automated clearing house deposits take nine days to process.
• Checks require nearly 19 days to process.

Companies participating in the survey also reported that:
• Card payments were 50 percent faster than personal checks.
• Card payments saved about 10 cents per transaction — mostly on float
— thanks to shorter payment cycles.
• Compared to a year ago, churn is down 20 percent for credit card payments.

Merchants Gain Peace of Mind Through Improved Technology

Merchants that accept card-based payments in their businesses already know
how this convenient payment method helps improve their bottom line by increasing
sales and lowering costs. However, they may also have experienced increased
deposit declines, higher charge back and decline rates when customers neglect
to notify them when their account information has changed.
But new technology is overcoming many of these problems. Visa’s Account Updater,
for example, acts as a clearinghouse mechanism that electronically exchanges
current account information between card-issuing banks, merchants and bill processors
in a secure environment. Acting as an automated safety net, Visa’s Account Updater
helps minimize declined card transactions and chargebacks that result from incorrect
card account data on file. At the same time, it makes payment more convenient
for customers, because service is not interrupted due to declined transactions.

Moving Mainstream

Payment card companies have committed significant resources to make automatic
bill payment a priority and are currently working with merchants to meet their
needs. The business case for the utilities industry strongly supports automatic
bill payment because card associations can help influence — and ultimately
change — consumer behavior. Consumers put their trust in card brands, such
as Visa, because they provide a seal of approval for using payment cards to
make transactions quicker and more efficient.
The campaign to take automatic bill payment mainstream is similar to the campaign
that card associations conducted in the mid-1990s to take debit cards mainstream
— a campaign that’s taken Visa’s debit card sales volume from $21 billion
in 1995 to more than $159 billion today, based on 2000 statistics.

Because businesses gain a competitive advantage and consumers increasingly prefer
this option, the business case for automatic bill payment is strong.

Footnotes

1 Market Facts, Inc.
2 Visa Merchant Bank Card Acceptance Survey,
2000.