Trends in Bill Payment

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

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
• 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

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
• 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?


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.