Through deregulation, federal and state government reforms, and rising competition,
utilities are faced with tough challenges. There is increasing pressure to reduce
costs and increase operating efficiencies, while at the same time, providing
the high level of service that consumers are demanding. Accepting MasterCard
cards for recurring payments can be an important component in helping you achieve
both your financial and customer service goals, by helping your company reduce
costs, receive payment faster, reduce losses from processing problems, and offer
additional payment options to your customers.

More than 79 percent of U.S. households carry a bankcard (such as a MasterCard)
for the convenience, the flexibility, or to earn rewards benefits. And today,
these cardholders are looking for more opportunities to use their cards. As
a result, many service-oriented industries, including utilities companies, are
accepting payment cards, offering their customers an attractive payment alternative
to cash and checks.

Combine this convenience with improved customer service and reduced operating
costs, and its no wonder card acceptance is becoming an integral part of many
utility companies’ strategic plans.

For 30 years, MasterCard has been a premier payment system in America. Now
you can take advantage of all we have to offer, including materials and programs
designed specifically for utilities service providers interested in (1) accepting
payment cards for the payment of utility goods and services and (2) participating
in recurring payments programs.

Imagine the ability to streamline your billing process and build customer loyalty!
“Recurring Payments by MasterCard” can help you do this.

Recurring Payments: A Payment Mode

This white paper focuses only on recurring payments by MasterCard. In the dictionary,
the word recurring is described as an adjective meaning “to happen or come up
again repeatedly.” In the collections world, a recurring payment describes an
arrangement whereby a customer agrees to allow a company to bill against a specific
account, for mutually agreed-upon payment amounts (that can be fixed or variable)at
specified time intervals. It is yet another way — or mode — that a
customer can pay for goods or services on a growing list that includes in person,
by mail, by phone, kiosk, and Internet.

The payment methods that can be used for recurring payments include credit
card, debit card, charge card, private label card and debits against deposit
accounts. A monthly, quarterly, bi-annual, or annual Automated Clearing House
(ACH) debit against an existing deposit account is an example of a recurring
payment. Recurring payments typically occur monthly or quarterly and can be
a fixed or a variable amount.

An Increasingly Popular Way to Pay

Recurring payments by credit and debit card have been around for more than
25 years. Some service providers recognized both the merchant and consumer benefits
of this payment mode shortly after the credit card began to boom in popularity
in the early 1970s. Service providers wanted to make the payment process easier
for consumers. Some retailers wanted to give their customers the opportunity
to divide one purchase into installment payments of a fixed amount.

A 1996 study by the National Consumers League and the Opinion Research Corporation
found that 20 percent of its survey respondents who have a credit card have
“given permission to a company to make regular, monthly, or yearly charges against
a credit card.”

Many service providers can offer their customers the recurring payment option,
but several industry categories stand out as the most likely to provide it:

• Utilities
• Telecommunications
• Cable
• Insurance
• Internet Service Providers
• Charities
• Security Services and Protective Agencies
• Retail/Catalog
• Memberships
• Subscriptions
• Professional Services
• Home Services (Cleaning, Lawn Care, Pools)
• Child Care

These industries account for over $1 trillion in consumer payments each year
in the U.S. and about $820 billion in recurring charges. Though some of the
industries have built their entire collection effort around recurring transactions
by payment card (satellite television, Internet services), in most cases the
penetration of card payments as a percentage of all payment methods (checks,
cash, ACH, etc.) is less than two percent. Many industry observers believe that
promoting recurring payments by payment card is a way to encourage card acceptance
in these highly under-penetrated merchant categories.

Consumer Demand

Consumers Want the Recurring Payments Option

In focus groups of consumers conducted in mid-1996, MasterCard learned that
consumers would like to have the option to pay on a recurring basis by using
credit and debit cards. Focus group participants universally reported feelings
of drudgery and anxiety when discussing the process of paying monthly bills.
“Doing the dishes is more fun,” said one participant. These consumers believe
that recurring payments will result in fewer checks written, reduced anxiety
by not having to spend as much time “watching money being drained from my account,”
and the potential to earn rewards feature (such as frequent flyer and automobile
rebate programs).

Those focus group participants who favored the concept suggested the benefits
of recurring payments by card versus traditional ACH debits to be 1/the option
to revolve payments and 2/support from issuing banks in resolving billing disputes
with the service provider. There is some indication that the ability to execute
recurring payments by card could impact the consumer’s choice of card brand,
loyalty to a card issuer, and loyalty to specific service providers. “If I had
a bunch of those recurring charges on a card, I wouldn’t want to go through
the hassle of putting those charges on a different card,” one participant said.
“I’d be pretty much likely to keep that card unless I really had a problem with
it,” another said.

Certain consumers highlighted issues with recurring payments by payment card.
For example, some consumers cited a perceived lack of control with any recurring
payment (by ACH or card). Some customers would like to receive written or electronic
confirmation of successful recurring transactions. The National Consumers League
study found that 15 percent of credit cardholders that have used the recurring
payments option “had difficulty terminating these charges.” Of these, 31 percent
said it took “several months to stop the charges.” MasterCard saw nearly identical
results in a similar study. Some customers would not be comfortable with large
ticket transactions (e.g. mortgage payments) in the recurring mode. Focus group
participants indicated that promotional offers (e.g. discounts or additional
frequency awards) would stimulate recurring payment trial and ongoing volume.

Quantitative Study Underscores

Consumer Perspective

In late 2000, MasterCard conducted quantitative consumer research to better
understand consumers’ payment methods for recurring charges, including consumer
attitudes, current behavior, decision criterion and concerns. A very large percentage
of U.S. households receive recurring bills (usually monthly) for various services
(see Figure 1) including utilities, insurance, cable, and telephone service.

Cable/Satellite TV
Mortgage/Home/Student Loans
Auto Loans/Lease
Internet/Online Services
Figure 1 – Common types of recurring bills

Although check writing continues to be the dominant method of paying recurring
bills in many industries, consumers are rapidly moving toward other payment
alternatives. Sixty-nine percent of consumers today are involved with automatic
bill payments, with thirty-seven percent linking their automatic deductions
to a credit card. Another important finding was credit card recurring payment
(CCRP) users average 3.7 automatic recurring payments of which more than half
are CCRPs (2.1) The most prevalent alternatives to credit cards are automatic
paycheck and checking account deductions.

Our research proved that consumers have a high level of awareness surrounding
the credit card recurring payment option, however awareness differ by industry
(see Figure 2).

70%-84% Awareness 60%-68% Awareness Under 60% Awareness
Utilities Education Expenses Charitable Donations
Magazines/Newspapers Ongoing Health Care Public Transportation
Insurance Health Clubs  
Internet/On-line Services Auto Loans/Lease  
Cable/Satellite TV Mortgage/Home/Student Loans  
Telephone Real Estate Taxes  
Figure 2 Credit card recurring payments awareness

Consumers realize the relevant set of benefits associated with the credit card
recurring payment (CCRP) option. Convenience and stress relief ranked the highest.
Consumers were relieved to know their bills were being paid on time without
having to think about it and the amount of time they saved not having to write
checks (see Figure 3).
Reasons for CCRP Benefits/Advantages Reasons For Initial Use Convenience 53%
53% 42% Stress Relief 18% 45% 19% Only Option Offered 11% – 7% Financial Benefits
9% 15% 9%

Figure 3 Reasons for using credit card recurring payments

Customer Loyalty

Of importance to merchants, over one-third of consumers said they would switch
from one provider to another to enjoy the credit card recurring payment option
if offered (all else, equal), (see Figure 4).


  % Would Switch If Competitor Offered CCRP*
Total Random 55%
CCRP Users 70%
RP Users (Non-CC) 52%
Non-RP Users 41%
Figure 4 Opportunity for providers

A Growing Industry Trend

“Recurring Payments by MasterCard”

To address the growing demand for recurring payments, MasterCard introduced
a program for service providers, that is designed to significantly lower the
cost of acceptance, improve cash flow, and increase customer retention and loyalty.
The program is available to merchants — in the utility, insurance, telecommunications
and cable TV industries. This program, the Service Industries Incentive Program,
or SIIP, has multiple advantages for participating providers.

Service Providers who offer customers the ease and convenience of accepting
MasterCard-branded payment cards for recurring payments can take advantage of
this growing industry trend. By accepting MasterCard cards for recurring payments,
you will be likely to experience a wide range of measurable benefits, including:

• Improved cash flow — quicker turnaround than check processing
• Customer retention and loyalty
• Improved collections — reduced write-offs and bad checks
• Enhanced good will from offering customers a convenient payment option
they want
• Processing ease
• Secure transactions

By accepting MasterCard-branded payment cards, you’re offering your customers
loyalty-building benefits, too:

• Timely payment of ongoing bills
• Earning additional benefits including frequency points
• Ease, convenience, and security of using MasterCard

To support the introduction of recurring payments, MasterCard is offering participating
service providers an attractive incentive interchange rate for all qualified
transactions. In exchange, participating providers agree to promote “Recurring
Payments by MasterCard” to their customers, using a variety of tools ranging
from statement inserts to statement messages. Plus, MasterCard has created a
financial model, which can be used to help analyze the financial impact of MasterCard
card acceptance.

MasterCard International is committed to working with utility merchants to
help them meet their business needs. MasterCard believes that increased communication
and education with utility merchants about how to best administer recurring
payments will increase the utility of the MasterCard card for cardholders and
promote an increasingly seamless payment experience for all parties.

For more information about “Recurring Payments by MasterCard,” please contact
Kimberly Teague, Vice President Service Markets Sales, at 914-249-5474 or Kimberly