Managing A Convenience Fee Program

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1 Managing A Convenience Fee Program Michael Volk Vice President, Commercial Product Manager U.S. Bank Jeremy Krahl Regional Sales Manager Elavon Information Services NACHA Payments 2008 May 21, 2008

2 Agenda Convenience & Service Fees Market Conditions & Trends Payment Network Guidelines & Rules Program Management Case Studies Questions & Answers 2

3 Convenience & Service Fees Convenience Fee additional charge to a payment for use of an alternative payment channel offered by a merchant for payment acceptance. This fee generally covers all costs with payment acceptance. Service Fee additional charge, typically a separate transaction, added to a tax payment assessed to directly offset the fees associated with payment acceptance. Alternative Channel Payments Shifts Shifts the the cost cost burden burden for for payment processing from from the the payment receiver (biller) (biller) to to the the payer payer Available to to billers billersin in any any industry but but more more readily readily adopted as as a payment option option by by public public sector, sector, education and and bill payment billers billers Must Must be be disclosed to to the the consumer Consumer must must be be able able to to cancel cancel payment prior prior to to completing 3

4 Market Conditions & Trends

5 What Customers Want Demand for new and convenient payment channels Consumers want easier and rewarding options Web, IVR, Mobile, Kiosks Over 49 million households pay their bills online* Electronic payments now more than 66% of all non cash payments** Checks now represent less than 25% of bill payments*** Payment Options for the Unbanked Credit/Float Benefit Expedited Payments Consumer Confidence/Payment Security *Jupiter Research, November 2006 **2007 Federal Reserve Payment Study ***Bureau of Economic Analysis,

6 Payment Network Growth Credit Credit Card Card Growth Growth Visa Visa bill payment bill payment transactions have transactions have been been growing growing at at a a rate rate of 25% of 25% per per year* year* Industry Industry wide wide statistics statistics at at a glance a glance Debit Debit products products represent approximately 53% represent of all card approximately 53% of all card payments** payments** Card Card acceptance acceptance for utility for utility payments payments has nearly has nearly doubled doubled over over the last the last seven seven years years from 41% from 41% 81%**** 81%**** Credit Credit customers customers are shifting are shifting into into Rewardsbased programs Rewardsbased programs *Visa **Bureau of Economic Analysis, 2007 ****Chartwell, September 2007 ACH ACH Growth Growth ACH ACH payments payments increased increased by 13.4% by 13.4% in in from from 2006* 2006* WEB WEB increased increased 27% 27% TEL TEL increased increased 14% 14% ACH ACH payments payments totaled totaled $31 trillion $31 trillion in in 2006, 2006, accounting accounting for 91% for 91% of of the the value value of of all electronic all electronic payments** payments** *NACHA **2007 Federal Reserve Payments Study ATM ATM Pinless PinlessDebit Growth Growth Recent Recent changes changes in in ATM Network ATM Network policies policies now now allow ATM allow ATM card card holders holders to to use use their ATM their ATM card card to to pay pay bills bills in in cardnot present cardnot present environment environment No No need need to to enter enter a a PIN PIN Only Only four four ATM ATM Networks support: Networks support: Star, Star, NYCE, NYCE, Pulse Pulse and Accel and Accel Reserved Reserved for for bill bill payment billers payment billers only only Utilities Utilities Education Education Government Government Insurance Insurance Cable/Satellite Cable/Satellite Web, Web, IVR, IVR, Live Live Agent, Recurring Agent, Recurring Payment, Payment, Kiosk Kiosk 6

7 What Billers Receive. Billers benefit from offering additional payment channels Improve cash flow by settling funds sooner Reduce payment processing and check handling costs Reduce expenses created by delinquent accounts Reduce the number of customer service calls and related expenses Reduce charge offs by instantly shifting all non payment risk to the financial institution once card transactions are authorized Increase customer satisfaction and loyalty Customers surveyed favor credit card payments by almost a 2 to 1 margin over all other types of payment options* Billers now have payment network cost nightmare Credit Card (Up to 2.5%), ATM (~$.70), ACH ($.10) *Javelin Strategy & Research,

8 Industries Affected Government Utilities Property taxes, fees, fines, penalties and licenses Many county and state laws prohibit the collection of revenue during the act of payment collection Electric, gas, telephone, wireless phone and cable Education Tuition, fees, room and board Insurance Property, auto, casualty, health and life insurance Property Management Property assessment payments 8

9 Payment Network Guidelines & Rules

10 ACH & ATM Debit ACH ATM Networks Fee can be one or two transactions Fee can be flat, percentage or tiered Fee can be for recurring payments Star, NYCE, Pulse and Accel Restricted to specific industries Fee can be one or two transactions Disclosures must be specific that fee is not being charged by the ATM network Fees can be for recurring payments Fee must be disclosed to the payer Payer must be able to cancel transaction 10

11 Visa Property Tax Payments Visa Tax Pilot rules apply to the payment of personal income, real estate property, other personal property, unemployment, sales and use and business income. Fee can be set up as a percentage based convenience fee for Visa and other credit card transactions Fee can be separated into a second transaction The convenience fee must be the same for all other non Visa card processors (MC, Amex and Discover) Different fee can be charged for ACH transactions Fee can be collected by a third party service party Other Payments Must provide a true convenience in the form of an alternate payment channel Fee is designed for one time payments only Fee cannot be applied to recurring payments Fee must be a flat fee Fee must be equally assessed to all payment types in the same channel Fee must be included in the total amount of the transaction: it cannot be split out from the payment Fee must not be authorized and settled separately from the primary transaction Fee must be assessed by the same biller actually providing the goods or services Cannot charge convenience fee when using Utility Rate Program Note: Visa does not allow merchants to establish minimum or maximum amounts 11

12 MasterCard Education & Government Visa Tax Pilot rules apply to the payment of personal income, real estate property, other personal property, unemployment, sales and use and business income. Fee can be set up as a percentage based convenience fee for Visa and other credit card transactions Fee can be separated into a second transaction The convenience fee must be the same for all other non Visa card processors (MC, Amex and Discover) Different fee can be charged for ACH transactions Fee can be collected by a third party service party Other Payments Fee can be tiered, percentage based or flat. Fee must be assessed equally to all payment types in the same channel Fee can be authorized and settled separately from the primary transaction. Cannot charge convenience fee when using Utility Rate Program 12

13 American Express & Discover American Express Does not discriminate or discourage the use of American Express in favor of any acceptance brand Fee can be tiered, percentage based or flat Fee must not be explained as a fee for using American Express Allows third parties to collect convenience fees for tax payments Discover Allows surcharge for government and Universities under special program when Discover is the only one accepted Surcharge can be assessed on traditional payment channels (face toface) and alternative payment channels (internet, IVR, kiosk) Allow different fee for non card payment methods (ACH) Fee can be tiered, percentage based, or flat 13

14 Payment Network Association Rules Recap If you allow the following networks: *You can setup the following convenience fees: Type of Payment VISA MasterCard ACH Visa MasterCard ACH All Payments X X X Flat Flat Flat X X Flat Flat X X Flat Flat X X X X X Flat %, Flat, or Tiered %, Flat, or Tiered Must be same fee as MasterCard %, Flat, Tiered, or Custom Visa Tax Pilot Program X X X % or Flat X X % or Flat X X % or Flat must be same fee as Visa must be same fee as Visa %, Flat, or Tiered %, Flat, or Tiered 14

15 Program Management

16 Key Biller Decisions Leverage Who can charge convenience fees? What alternatives & incentives are available Education Tax Payments Utilities Property Mgmt Analyzing Processing Costs (e.g., Interchange) Lower emerging market interchange rates (Visa/MC Utility rate programs) Higher ticket transactions may require a convenience/service fee program due to cost Charge a convenience/service fee or absorb the costs associated with payment acceptance? Fee Calculation & Management What payment networks do you want to accept? Balancing fee revenue over all payment networks 16

17 Key Biller Decisions Resources Pricing & Adjustments Maintaining compliance Servicing Biller Managed Third Party Managed Managing Adoption Rates Drive usage or expedited payments Alternate payment channel usage Without a fee: 10% 40% With a fee: 1% 3% 17

18 Biller vs. Third Party Managed Biller Managed All aspects of the program are managed by the Biller Biller defines fee(s) to be charged to Consumer Biller receives payment and convenience fee All Month end fees are paid by Biller Biller can define if program generates revenue (fee collected is higher than processing costs), is revenue neutral, or partially subsidized (fee collected is lower than processing costs) Biller is responsible for compliance of the program VS Third Party Managed Third Party will manage the program Third Party will define the fee(s) to be charged to the payer All fee based revenue is typically retained by Third Party All month end fees are typically paid by Third Party Third Party programs are generally revenue neutral to the biller Third Party is responsible for compliance of the program 18

19 Case Studies

20 Property Taxes Many local governments are prohibited from collecting revenue for payment processing Many governments cannot budget in credit card interchange Property taxes can be paid by credit card with convenience fee Card Fee can be percentage ACH Fee can be Flat Two transactions Second transaction to third party processor Need to analyze payment network distribution (ACH vs. Credit Card vs. ATM Debit) Example Average Property Tax Payment : 3,000 Annual Tax Payments: 10,000 Estimated Annual Online Payments: 2,000 Credit Card ATM Debit Card Card Total ACH Debit Distribution 60% 20% 80% 20% Payment Costs 2.5% $.70 $56.42 $.10 Payment Network Costs $90,000 $280 90,280 $40 Est. Conv. Fee $56.45 $56.45 $

21 Higher Education Many universities or local colleges are unprepared to manage and collect convenience fees. One transaction Payment + Convenience Fee If Visa is used Flat convenience fee Must charge the same amount for all payment networks Can charge different flat fees for IVR vs. Internet Need to analyze payment network distribution (ACH v. Credit Card v ATM Debit) Example Average Tuition Payment : $6,000 Annual Tuition Payments: 25,000 Annual Online Payments: 7,500 Credit Card ATM Debit Card ACH Debit Totals Distribution 80% 20% 20% 100% Payment Costs 2.5% $.70 $.10 Network Costs $900,000 $1,050 $150 $901,200 Est. Conv. Fee $ $

22 Property Management Property Management Company to Community Association Relationship Example Monthly Property Assessment Payments, Special Assessments Associations Doors Average Payment Term Settlement to Community Association Remittance Data to Property Management Company Association 1 Association $50 $200 Monthly Quarterly How do you manage fees across many associations? Association 3 95 $65 Monthly Number of Doors Average Payment Amount Association 4 1,100 $25 Monthly Term (Monthly, Quarterly, Annually) Expedited payment strategy Association $450 Quarterly Fee less than Late Charge Single Transaction, Fixed Fee Association ,000 Annual 22

23 Pricing Implications Annual Baseline Actual #1 (Payment Amount Larger) Actual #2 (Credit Card Larger) Actual #3 (Payments Amount Lower & Credit Card Larger) Number of Payments 72,000 72,000 72,000 72,000 Average Payment Amount $150 $200 $150 $200 Payment Network Distribution ACH 50% Credit Card 50% ACH 50% Credit Card 50% ACH 20% Credit Card 80% ACH 20% Credit Card 80% Convenience Fee $1.90 $1.90 $1.90 $1.90 Projected Payment Network Costs $138,600* $138,600 $138,600 $138,600 Actual Payment Network Costs $138,600 $183,600 $217,440 $289,440 Projected Annual Profit $0 ($45,000) ($78,800) ($150,840) *Est. credit card rate: 2.5% *Est. ACH fee: $.10 23

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