Customers demand real choices for bill payment.
Jeff Miller is a director and Gordon Hilbun is a managing consultant with Navigant Consulting. Peter Shaw, formerly with Navigant, is founder and managing director of the Intelligent Project.
In the world of utility bill payments, few issues have generated more controversy than the use of credit, debit and pre-paid cards. Generally, regulated utilities have been unable to build a compelling business case to offer no-fee card payments to customers, preferring instead to partner with third-party processors (TPPs) who happily charge convenience fees to card users. Card companies such as Visa and MasterCard—and the banks that issue their cards—struggle to create the right formula to entice large utilities to absorb card processing fees, in hopes of unlocking one of the remaining hold-out industries with significant card volume growth potential.
However, findings from a recent industry working group indicate 2010 might prove to be a watershed year for card payment of utility bills. The payment card industry is seeing significant growth in the use of debit and prepaid cards. Growth in the use of pre-paid cards could be particularly beneficial to utilities, given that prepaid services in general hold significant appeal to low-income customers. Utilities also are beginning to view card acceptance as a strategic investment, driven in part by utilities’ own desires to engage customers electronically—a prerequisite for the successful expansion of customer offerings enabled by smart-grid applications. At the same time, utilities and regulators are trying to better understand and address the drivers of the no-fee card payment business case. This situation results in two questions utilities must address in order to support the adoption of no-fee card payments: What roles will card payments play in facilitating successful customer programs in the future? And what measures should be taken to navigate the obstacles for rationalizing no-fee card payments for their customers?
Light Bill of the Future
Consumers today expect to be able to pay their recurring bills on their terms—through the Automatic Clearing House (ACH) network, the use of payment cards, or by check or cash. Billers across all industries continue to see growth in electronic payment channels, with corresponding reductions in the use of bank checks and cash. However, despite a recent focus on increasing the availability of electronic payment channels, utilities still lag behind other industries with respect to all forms of electronic payments, including card payments (see Figure 1). Across all industries, payment cards are particularly favored by Generation X and Y customers,1 who use debit cards as a replacement for cash or checks, and credit cards as a way to manage cash flow and take advantage of rewards programs. Debit cards now are the most prevalent payment card option, constituting roughly 60 percent of payment card transactions. The most explosive growth in payment cards, however, is in pre-paid cards, which are particularly popular among low-income customers and used as a substitute for cash, checks, and money orders (see Figure 2).
Current estimates project that from 2007 to 2010, pre-paid card spending will increase from $113 billion to $178 billion,2 corresponding to an annual growth rate exceeding 16 percent. This growth is driven by the roughly 50 to 70 million U.S. consumers who don’t have traditional deposit accounts or have limited access to credit—a demographic segment sometimes referred to as the “under- and unbanked.”3 When combined with credit policies that are growing more restrictive, opportunities for the unbanked population to participate in an increasingly electronic marketplace lie with the expanded use of pre-paid cards. Another major driver in the growing use of pre-paid cards is the increased substitution of pre-paid cards for the cash or check disbursements that payroll systems and government assistance programs historically have used. The increased proliferation of pre-paid cards for government benefits disbursement likely will result in even greater usage among low-income customers, with pre-paid cards eventually becoming a preferred bill payment option.
Until recently, utility bill card payments—mainly provided by utilities through third-party processing (TPP), with a convenience fee—were assumed to be the domain of late payers seeking last-minute, expedited payments. But, as any remittance executive can tell you, the reasons customers pay by card go beyond necessity and include personal preferences. Paying monthly utility bills with a revolving credit card appeals to customers for diverse reasons, from reward points accrual and perceived convenience, to short-term credit access and a desire to eliminate paperwork. Increasingly, however, customers are turning to cards simply for convenience. The dramatic shift in usage from credit to debit, in addition to the growth of prepaid cards, are clear indicators that customers from all income levels increasingly are demanding the ability to pay by card. At the same time, the related convenience fees provide a disincentive for customers to pay by card on a broader scale. Therefore, wide-scale acceptance of payment cards by utilities must be based on a no-convenience fee approach, supported by a compelling business case that meets the needs of utility executives and, as appropriate, regulators.
Additionally, a credibility gap results when utilities publicize that they are transforming into a utility of the future and providing customers with a more personalized and sophisticated experience, yet still charge customers convenience fees for on-demand and recurring card payments. For utilities to engage customers electronically—and leverage those relationships as part of their successful smart-grid programs—customers need to be able to pay using their preferred methods, as they are able to do with other service providers (e.g., cable, satellite, wireless and telecommunications). In this sense, the acceptance of no-fee card payments is central to supporting a utility’s transformation into a utility of the future.
Card-Pay Business Case
The traditional utility business case for accepting card payments is based on the costs associated with no-fee card payments and the related near-term business and financial benefits. And, up to this point utilities have been challenged to demonstrate positive returns. However, recent card payment business cases are proving to be much closer to cost neutral due to the growth in debit and pre-paid cards, driven in large part by the low-income customer segment’s use of payment cards—and the potential savings in servicing distressed accounts. Also, the business case now becomes more compelling because of the longer-term benefits that materialize from providing enhanced customer services enabled by the smart grid.
The primary costs in the traditional no-fee card payment business case remain the direct costs of bank interchange fees, TPP fees, and potential system integration fees to internally process card payments. Additionally, ACH cannibalization—a concern for many utilities that want to eliminate convenience fees—is fairly limited.
While determining the costs of no-fee card payments is challenging, a much greater challenge is quantifying the benefits associated with increased usage of payment cards. Utilities must consider the direct benefits associated with increased remittance float, payment risk transfer, reduced collections, and reduced bad debt write offs. These benefits have the potential to be substantial, particularly when adoption rates for low-income customers are included. Utilities also must consider the design of their no-convenience fee card payment programs. Specifically, for utilities to move toward cost neutrality in their business cases, card payment programs must be structured to take advantage of several business case drivers, including cost reductions in billing and collections (see Figure 3).
Utilities also can estimate the indirect benefits associated with increased customer satisfaction and new program adoption tied to services enabled by the smart grid. While these benefits are difficult to quantify today, they do provide real long-term value. As utilities begin offering a broader set of capabilities (e.g., energy management, mobile payments), these indirect benefits will provide quantifiable value, which makes the business case even more compelling.
Finally, an additional indirect societal benefit can be expressed as a result of a reduced carbon footprint, principally tied to the suppression of paper bills from increased card payment adoption. By using a total carbon output for mailing a paper bill and receiving a check payment at 100 grams of CO2 per customer per month, the estimated environmental impact as a result of decreased paper use can be calculated. For example, a representative utility mailing paper bills to 1.6 million customers generates the equivalent carbon output of 451 sport utility vehicles, each driving 11,000 miles per year. If this calculation is applied to the more than 212 million electric and gas customers in the United States, it represents an overall reduction of almost 60,000 SUVs.4 This societal benefit, which might or might not necessarily be quantified, can provide tremendous value to utilities as part of their future positioning by demonstrating a focus on sustainability to both regulators and customers.
Pay at the Pump
Industry pundits accept the fact that the utility of the future will be a more customer-facing organization. However, the definition of customer-facing varies significantly from one utility to the next. Utilities likely will expand from simply providing reliable and low-cost electricity to providing customers with a myriad of services that meet their clean energy needs. Examples of such services—all supported by the smart grid—include:
• Energy efficiency (EE) programs that extend beyond the wall socket to appliance control;
• Demand response and dynamic pricing programs that provide customers multiple device and power use choices;
• Information management programs that support the management of energy consumption and spending, and extend utilities’ communication capabilities to mobile devices; and
• Net metering programs required to support the interconnection of distributed renewables and plug-in hybrid electric vehicles (PHEVs).
As customers engage utilities on a more frequent basis, they’ll develop a new sense of how to manage their personal energy consumption and costs. And as mobile devices continue proliferating, utility customers will more frequently use these devices to conduct routine electronic transactions. For example, a limited number of utilities are piloting text-messaging based systems to inform customers of outages and bill due dates. Because of the increased data-handling capabilities available with subsequent generations of mobile devices and the increased comfort level customers have in using these devices, mobile payments are expected to become an increasingly popular method for electronic payments over the next five to 10 years.
From a future utility bill payment perspective, card payments play an important role in this transformational change. For recurring debit or credit card payments, mobile devices will provide the same capability as the computer does today—the new mobile channel then simply results in a more tailored customer experience and greater customer satisfaction. However, because a large number of low-income customers don’t have ready internet access, mobile payment capabilities likely will result in an increased usage of payment cards. Therefore, for utilities to achieve large-scale adoption of card payments, they must leverage the pre-existing payment card networks to support no-fee transactions through mobile devices.
Another driver for card payments, also enabled by the smart grid, is the increasing intersection of the transportation and utility industries. The mass marketing of PHEVs will be far more important to electric utilities than existing hybrid vehicles are. PHEVs won’t just draw power from the grid through a standard AC electric connection, they also might discharge some of their stored electricity during peak hours to the utility serving the area where the vehicle is parked. This bi-directional interchange between power consumption and power production will add a new level of net metering complexity, exacerbated by the potential for customer account and electronic payment portability across service territories. For example, a PHEV owner drives his or her vehicle to another service territory, plugs in for a recharge and subsequently sells some power back into that grid during peak-demand hours. Standards for how a customer will pay and receive credit for portable charging and discharging aren’t yet developed; regardless, the payment card company network will be the most likely platform to support these dynamic interactions, due to the infrastructure that has been developed and refined through countless pay-at-the-pump transactions.
Historically, utility executives rejected offering customers no-fee card payment options due to the cost—and regulatory barriers—of absorbing interchange and TPP fees. However, the utility card payment business case is moving in the direction of cost neutrality, driven by the increased usage of debit and prepaid cards in combination with a better understanding of the drivers of the business case. Going forward, payment card acceptance should be viewed as a strategic investment in expanding customer engagement electronically—a capability that utilities and energy service providers need in order to attain wide-scale adoption of smart-grid customer programs. In this regard, utilities and regulators need to understand that payment card interchange and TPP fees are relatively small costs to absorb when considering the growth opportunities posed by customer-facing smart grid offerings. While enabling growth in credit, debit and prepaid cards for bill payment isn’t the end game, it is a key part of the solution if utilities are to deliver on their customers’ expectations.
1. Aite Group online survey of 500 consumers, January 2008.
2. The Electronic Payments Study by Dove Consulting on behalf of the Federal Reserve System, March 2008.
3. Estimating the Cost of Being Unbanked, by Tyler Desmond and Charles Sprenger, The Federal Reserve Bank of Boston, Spring 2007.
4. The Environmental Impact of Mail: A Baseline, PitneyBowes sponsored study, June 2008.