Credit card companies say they're seeing an increase in volume for energy transactions despite claims by utilities that it costs more for them to receive monthly bills on plastic.
As proof of their desire not to take the credit card route, the utilities that allow customers to pay with a card don't always promote that option.
Holding utilities back are the transaction fees they pay for bill processing. These fees can run as high as 3 percent or more. If a customer doesn't pay the full card balance each month, the servicing bank profits even more. Some utilities, none willing to be named, have tried passing fees on to customers, without much luck. Furthermore, regulatory commissions typically question any costs billed to all ratepayers to fund services used by only a few.
Regardless of the fees, however, Visa U.S.A. Inc. saw total volume for natural gas, electric and water utilities for 1997 rise to $350 million, denoting an 81-percent increase over the year before. This year, Visa is on a 60-percent growth spurt within its utilities sector, meaning potential annual volume of nearly $600 million. Visa's 1997 telecom revenues topped $1.7 billion.
Gas, electric and water utility credit card volume for 1998 could easily top $1 billion when the activity of other credit card companies is included, says Gregory J. Holmes, Visa's director of recurring payment industries.
The number of utilities accepting cards also is growing. Some 8 percent of utilities accepted cards in 1995, whereas 20 percent did in 1997, according to two Visa surveys (see Table 1).More than 79 percent of American households carry a credit card, according to MasterCard International.
The Price of Plastic
Such growth is due partly from convenience, a selling point more utilities may promote as markets become competitive and companies seek more options to entice, or keep, customers. Other factors are at work as well, according to Mychelle Jackson, a service representative at the city public utility of Austin, Texas.
"We're able to get our money faster," Jackson says. "That's the biggest benefit to the program. Also, customers who have been cut off for non-payment and they want back on, a lot of them will call in and charge their utilities." That helps cut expenses associated with disconnecting and reconnecting customers.
Of the Austin utility's 310,000 customers, about 5,300 have their utility charges billed automatically each month to their debit or credit cards. As many as 3,000 others call in monthly to pay bills on their cards. These customers, in industry lingo, are called "one-time payers." Several maintain large commercial accounts of $80,000 a month. Although the utility accepts Visa, MasterCard, Discover, American Express and Visa logo debit cards, it hasn't offered customers the chance to have payments automatically taken from their checking accounts.
Because the electronic draft option only recently became available, there may be a change in customer payment habits, says Marion M. Raley, Austin's assistant treasurer.
"We have never been able to offer direct debit because our accounting system is too old," Raley says. "Now we have a new system and can do that. The credit option was in lieu of the electronic draft option. I suspect there will be a decline in the use of credit cards because of that. But there are still are a lot of people who use credit cards for frequent flier miles and get a vacation each year."
Raley says in the utility's agreement with its processing bank, fees run about 1.8 percent, with an additional "capture fee" of 16 cents per item. Other fees are minimal, including a $17 per month fee rental for a computer terminal and printer.
Michael J. Spall, a spokesman for Con Edison Company of New York Inc., says the utility accepts debit payments over the Internet and by phone via a checking account - $9 million total in May - but doesn't take credit card payments from its 3 million customers.
"New York State is one of these states that does not allow the cost of using a credit card to be passed on to the consumer," he says. "It's a state law¼ So the reason, even though we'd like to consider using credit cards to pay electric bills¼ is if we had to take those costs as a regulated utility, we'd have to pass them on to all our customers and that would not be fair."
If the law changed, Con Ed could consider charging the customer a fee to use a credit card, he says.
Jessica Brown, spokeswoman for Baltimore Gas & Electric, reiterates the point, from the perspective of her 1.5-million-customer utility.
"The reason we don't do it is because we would have to charge a service fee and then we'd have to go to the public service commission and say, Look, we're allowing people to use credit cards and we're having to pay a service fee,'" she says. "We need a rate increase because we have to cover those costs.' And that's, I think, our rationale."
Florida Power Corp. sits on the fence when it comes to credit card payments. It accepts payment by credit card, but doesn't promote or advertise the option, says Angela Fields-McKiver, the company's principal customer service strategist. Why? "We would prefer they choose an efficient or cheaper method, rather than using a more expensive method," Fields-McKiver says. Those methods include check-by-mail or payment at automated kiosks.
Duke Power Co. shares this philosophy.
"We, in the past, have not on a wholesale manner published or promoted credit cards due to the fact that Duke currently picks up that discount fee," says Robert M. Hall, general manager of credit and collections. "If a customer is insistent or really requests to pay their monthly bill, we will take it within certain limitations."
The limitation is that the payment be $1,000 or less. Another instance where credit might be allowed is if a customer becomes delinquent in his payments.
"There is definitely a fee associated with accepting cards," says Holmes, of Visa. "And it is a percentage. It is typically below 2 percent. But that can be more expensive than other forms of payment like check or cash.
"On the other hand, there are benefits associated with card acceptance that are not associated with other forms of payment, such as customer satisfaction, customer convenience [and] customer demand. So there's a cost for providing that level of service. And most of the companies that are accepting, if you asked them why they accept, many of them said they began accepting because of customer requests."
A Worthy Investment?
Not only will these customer satisfaction tools help utilities be more competitive, says Holmes, they also will help to retain customers. Other benefits are improved cash flow, increased sales to new customers and customer enhancement (see Table 3).
To the extent that there is cash flow improvement, there's some improvement in bad debt. But "bad debt is something that is not necessarily going to be cured by accepting cards," Holmes reports. "In fact, the consumer¼ [who's] most interested in paying on their card is the more upscale customer, the one who lives in a large metropolitan area, has a relatively large household income, is college educated. It's the type of consumer that many businesses consider their best customer and they're the ones they want to keep happy and they're the ones they want to keep on their books."
Visa offers a special interchange rate of 1.43 percent, plus five cents. On top of that, banks serving utilities charge a "modest" mark-up fee, Holmes says.
MasterCard in April began promoting a lower rate for recurring payments. The company would not release the figure, but Lisa Brzezicki, a company vice president, says it's 30 percent lower than it was previously.
"That is a significant incentive opportunity for a merchant to take advantage of," she says. "And it was done to assist the merchant in defraying some of their start-up costs - their systems development, those kinds of things. And really to be more in line with the dynamics of the industry."
Holmes points out that many utilities don't have the hardware and software systems to process recurring payments. Telecommunications companies have led in this area, which is one reason their volume is higher than that of the gas, water and electric industries combined.
Like Visa, MasterCard's surveys show that convenience is the primary motivator in being able to pay with a credit card. Some 42 percent of consumers said so in a recent survey, Brzezicki says. And when they sign up to pay recurring bills, there are other benefits.
"People who sign up for recurring payments by credit card are longer-term customers than the general population," Brzezicki says. Studies show that a customer who signs up for recurring payment by credit card stays a customer for between 24 and 36 months, which is significantly longer than average. "Historically, that wouldn't be an issue in utilities, but with deregulation, it will be a competitive issue," she says.
She also insists that when the payment costs are broken down credit card processing costs are "in the ballpark with other payment methods."
Holmes says utilities have looked for a way to "ease the pain" associated with closing some of their payment offices. They've looked to card acceptance as a way of enhancing customer service levels when they're potentially cutting back services.
"Utilities have told us that by reducing the number of customers that come into the payment offices, they actually save money," he says. Why? Walk-up transactions are labor intensive, and therefore more costly.
"As competition increases and more and more utilities begin accepting and those that offer recurring payment or one-time payments, they begin to differentiate themselves from the incumbent utility," Holmes says. "You will see more card acceptance and more recurring card acceptance."
Research shows that about one-third of all consumers say they want the option of using a Visa card to pay for a variety of bills, including gas, water and electric bills. Yet when asked if they would opt to pay on a card, less than 10 percent said they would.
Holmes says that's more a factor of customers not being familiar with how to go about charging their utility bills.
And that's what his company and other credit card companies hope to change - soon.
Joseph F. Schuler Jr. is senior associate editor of Public Utilities Fortnightly.
Understanding Recurring Payments
What do Consumers think?
A recurring payment, or RP, is an arrangement whereby a consumer authorizes a merchant or service provider to bill against one of his accounts at set periods. RPs aren't as widely accepted by consumers and merchants as checks or debits against bank accounts. A 1996 study by the National Consumers League and the Opinion Research Corp. found that 20 percent of its respondents who own credit cards have used them to make RPs. Fifteen industries account for more than $500 billion in RPs, including telecommunications and utilities.
The most popular method for paying recurring bills is writing checks (93 percent).
36 percent of consumers use automatic deductions to pay at least one of their recurring bills, typically bills that are less than $100 and for fixed amounts.
Some 82 percent of respondents are aware that recurring payments can be paid with credit cards.
Some users are motivated by perks or discounts, including frequent flyer programs. About 41 percent of consumers indicate a greater likelihood to use RPs by credit card if incentives were offered.
About 31 percent of users say they're uncomfortable with the loss of control inherent in the RP method. Some 23 percent, typically those who carry a balance month to month, are concerned about accumulating debt on which interest can accrue. They cite temptation to float their debt.
The motivation to use RPs are convenience (42 percent), merchant insistence (35 percent), acquisition of discounts and rewards (10 percent) and the timely payment of bills (10 percent).
About one in four consumers (24 percent) said they would switch away from a company if a competitive merchant offered a RP option.
Source: MasterCard International Consumer Research; Recurring Payments Report, 1997.
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