Trends in Bill Payment by Chris Trayhorn, Publisher of mThink Blue Book, April 1, 2003 One of the most significant trends within the payments market is the increasing substitution of electronic forms of payment for traditional paper-based payment forms such as cash and checks. The impact of this trend is being felt in all bill payment industries, and this warrants a response from utilities in both regulated and deregulated markets. Regulated players need to broaden payment options to maintain customer satisfaction levels. Deregulated players need to offer all payment options to acquire and retain customers. Over the next few years, electronic payments are likely to surpass checks as the most popular form of payment. Cash payment transactions will likely stay fairly constant. Checks’ share of noncash transaction volume has already decreased over the past decade and will drop even further over the next decade as electronic payments increase their share of transaction volume. This change is driven primarily by advances in technology and consumer demand, specifically the consumer’s desire for convenience and the increase in technology-enabled payment options. Electronic payment transactions fall within four distinct categories: 1. General purpose credit cards: Includes co-branded credit cards, charge cards, co-branded charge cards, secured credit cards, T&E cards, commercial cards, and new payment technologies that route transactions through card association networks. 2. Private label cards: Includes those run by individual retailers or gas companies, fleet card, and third-party receivable owners. These cards are typically used only for transactions at the issuing company. 3. Offline/online debit: Offline debit refers to debit transactions requiring a customer’s signature. Online debit refers to a debit transactions requiring a PIN, and funds are settled over EFT networks. Debit payments are extracted directly from the consumer’s bank account. 4. Automated Clearing House: ACH networks used to transfer payments electronically from one account to another. Consumer Bills Checks still dominate consumers’ bill payment behavior. However, the use of electronic payment for paying bills is on the rise. Most billers recognize the benefits of switching customers to electronic payments. The cost of bill presentment, check processing, and float are enough to warrant consideration of automatic, electronic payment options, which often eliminate the need for presentment and result in significant float savings. On top of this, offering electronic payments is quite often a customer satisfier, as many consumers prefer to use these payment options. Companies use a variety of strategies to drive consumers to use electronic methods: • Pull strategy: Offering price incentives to use electronic forms of payment, which replace paper bills. This strategy promotes migration among customers who are ready to make the transition, while still catering to those who are more comfortable with checks. • Push strategy: Penalizing customers who continue to receive paper bills with additional fees. This strategy will generate some customer dissatisfaction, and this should be weighed against the cost savings generated by eliminating the paper bills. • Providing multiple electronic payment options to cater to diverse consumer preferences. For example, offering bank deductions only will not address the segment of the population that is uncomfortable releasing bank account information to third parties. • Offering value-added services such as archiving and spend analysis capabilities for electronic payments. • Emphasizing trust and security with the electronic payment options and illustrating the decreased likelihood of late payments and associated fees. Bill consolidation Web sites are on the rise. However, direct biller sites are currently in the lead and have the competitive advantage with respect to customer ownership. As these consolidation Web sites grow and banks increase their presence in the bill presentment and payment space, direct billers will face increasing threats in their ability to directly own the customer from a payment perspective. Automatic Bill Payments The use of credit cards as a recurring payment option in bill payment industries is growing at a significant pace. For example, spending on American Express cards in bill payment industries has grown at an average annual rate of 21 percent over the past three years. Credit card recurring billing is growing in many industries, including cellular, long distance, cable, insurance, subscriptions, and even residential rent payments. In the past, credit and charge cards were traditionally used as a borrowing vehicle or a medium to pay for travel and entertainment expenses. Consumer trends indicate, however, that a growing number of people increasingly perceive these cards as a cash management tool. People are becoming more insistent on using credit/charge cards across many new industries, and they often desire the convenience and security of paying this way. Combined with loyalty rewards programs, credit and charge cards are a powerful incentive for consumers to be loyal to those companies that accept their payment option of choice. Demographic trends are also playing a part in this shift; younger consumers are more likely to favor electronic payments methods than paper. As this segment matures, the speed of electronic payment adoption should accelerate. Consumer Research In 2001, American Express commissioned AB Research Associates to determine the level of consumer demand for automatic payments in bill payment industries and the impact such programs would have on consumer perception. The results below are based on a population of 300 American Express card holders who are responsible for bill payment and have paid some bills using methods other than credit or charge card automatic billing in the prior six months: How will offering recurring billing on credit cards impact on consumer perception? • 52 percent say they are much more or somewhat more likely to stay with the current provider of a service if they offered automatic billing on their card and others did not. • 78 percent agree that it is important for merchants to accept the payment methods that customers prefer. Will offering recurring credit card billing improve the collections process and generate incremental float benefit? • 54 percent agree that using a card for automatic billing of recurring expenses increases the likelihood of paying the bill on or before it is due. • 57 percent agree that using a card for automatic billing of recurring expenses makes one confident that the bills would be paid correctly and on time. How does the consumer view recurring billing on credit cards? • 59 percent agree that using the card for automatic billing of recurring expenses makes it easier to avoid late payment fees and penalties. • 58 percent agree that using the card for automatic billing of recurring expenses makes the payment process easier and more convenient. • 56 percent agree that using the card for automatic billing of recurring expenses helps to save time paying bills. How do consumers view paying utility bills on their credit cards? • 25 percent say they would feel more positive toward a merchant who gave them the option to use automatic billing on their card to pay electric, gas, and oil bills. • 26 percent say they would be likely to use automatic billing on their card to pay electric, gas, and oil bills The key take-away from the research is that consumers value choice and will reward companies that provide it to them. A driver of consumers’ preference for credit cards is the collection of loyalty points, since respondents who collected rewards points tend to respond more favorably when compared with those who did not. The impact in deregulated markets is clear: offer consumers choice and flexibility or they will leave. In regulated markets, players who are interested in maintaining higher levels of customer satisfaction, brand affinity, and perception need to broaden the offering of payment options. Areas of Benefit Credit card automatic bill payment is a solution that can work very effectively for both the utility company and the consumer. Consumers can sign up on application forms, over the phone, or through the Internet. It helps to strengthen the relationship with customers and reduces the high cost of replacing them. With increased competition, building loyalty is the key to success. Some of the benefits from the biller’s perspective include: Guaranteed Payment By utilizing credit card automatic bill payment, the utility company will have no bounced checks, should have no collection charges, and will be paid automatically and on time. Faster Payment Funds are available much sooner to utility companies offering credit card automatic bill payment. Most credit cards offer the biller payment within a few days. Improved Cash Flow Increased monthly receipts can result in greater financial flexibility, lower cost of capital, and better business planning. Lower Operating Costs Costly and inefficient processes associated with nonpayment can be reduced as well as late payment and insufficient funds and billing and statement processing costs. Automatic Customer Updates Certain companies offer automatic customer updates for expired and lost cards, which reduces calls to customer service centers. Improved Customer Satisfaction Offering multiple payment options can only improve customer satisfaction ratings, especially with those customers wedded to certain payment options. Improved Customer Acquisition/Retention In deregulated markets, new entrants will use any advantage they can to acquire new customers, including offering incentives such as collection of credit card rewards points. Players that don’t offer similar payment options run the risk of increased attrition. A study is currently being commissioned by American Express to collect qualitative data on the benefits of automatic credit card recurring billing. Companies across multiple industries are being surveyed, and the following quotations were generated from individual respondents: “Customer service is better for credit card holders because we can address billing problems faster.” – Top-10 Internet service provider “Because of recurring billing, our delinquency rate is at a low rate of 3 percent.” – Multi-state health club “Credit card payments are slightly better because they allow for authentication which verifies other customer information.” – Top-10 Internet service provider Consumers are looking for more convenient, cost effective ways of paying bills. Automatic payment methods can leverage this trend by satisfying the desire for convenience and by helping consumers avoid late fees or other charges due to late bill payments. Credit cards already have a critical mass advantage when it comes to capturing these payments, and consumers are increasingly motivated by the rewards options available. In deciding how to roll out a variety of payment options, utility companies need to look at: • Consumer convenience: Is the payment option easy to use or familiar to the consumer? • Consumer security: Does the consumer feel comfortable with the payment option? • Consumer benefits: Are there benefits for the consumer to use the payment option (rewards points, for example)? • Cost savings: Does the payment option lower the cost of bill presentment, processing, float expense, etc.? • Additional biller benefits: What other benefits, such as marketing support, does the payment facilitator offer to the utility? Conclusion In both regulated and deregulated markets, automatic bill payment options should be considered by utility companies to improve customer satisfaction and retention as well as lowering the cost of processing payments. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.