White Paper. Navigating the New Bill Payments Landscape

Transcription

1 White Paper Navigating the New Bill Payments Landscape

2 Evaluating and Balancing the Benefits and Costs of Emergency and Card-Funded Bill Payments As consumers continue to pull away from check writing and become more reliant on the ubiquity and ease of using their credit and debit cards for all transactions, billers face a tough decision between two difficult choices. They can charge a fee for emergency payments especially card-funded transactions and possibly risk customer dissatisfaction, or they can offer card-funded payments for free and absorb transaction costs that can negatively affect the bottom line. A new transactional research study conducted by Fiserv found that when emergency and card-funded bill payments are offered for free, the volume of costly credit card payments can increase by at least 100 percent. By taking a thorough look at their business policies and transactional data, as well as considering best practices and recommendations from experts, billers can intelligently weigh the pros and cons and develop a solution that meets the needs of both the business and its convenience-minded customers. Does absorbing the costs of card-funded emergency payments to increase customer satisfaction make good financial sense? The answer is a resounding maybe. With today s focus on customer-centricity, there s no doubt that keeping the customer happy is on every organization s radar. The question is just how far an organization should go to ensure that happiness without losing the leverage that fees provide to drive consumer behavior. And the answer is unique to each company. Importance of Card Payments for Consumers Studies show that debit, credit and prepaid card usage among consumers is more prevalent than ever not just for shopping and restaurants, but for paying bills, as well. According to the 2013 Federal Reserve Payments Study, debit card usage has risen sharply since 2003 from 15 billion transactions to about 50 billion and it continues to increase. Credit card payments have rebounded from the recession of 2009, growing at an annual rate of 7.6 percent, rising from 21 billion in 2009 to 26.2 billion in And prepaid card payments have experienced the fastest rate of growth compared to other tender types, growing 15.8 percent since Meanwhile, the use of checks has fallen drastically. In terms of bill payment, the annual growth rate of credit card usage for bill payments over the past two years has increased 15.2 percent versus a 9.7 percent increase for ACH usage, according to the Direct Payments for Bill Pay Study conducted by Blueflame Consulting for NACHA in What s driving consumer behavior toward card-funded bill payments? Comfort, ease and the familiarity of daily offline and online purchasing. Card-funded payments offer distinct value propositions for customers paying bills. Plus they are readily available in most people s wallets or pocketbooks, unlike checkbooks, which are

3 routinely carried by less than 30 percent of bill payers, according to the Sixth Annual Billing Household Survey conducted by Fiserv in In addition, the use of prepaid cards continues to increase, especially among those who are unbanked or underbanked. The Seventh Annual Billing Household Survey conducted by Fiserv in 2014 found that among U.S. online households that paid a bill at a biller s website, 37 percent were made via debit card and 36 percent via credit card. Another 3 percent paid via a prepaid card. Motivators to use debit cards for bill payments included easier tracking, the immediacy of having a payment applied, and the proliferation of cards for all their purchases. Key reasons consumers use credit cards to pay bills at biller sites include earning points and record keeping for dispute purposes. Paying at Biller Site Using Credit Card Why did you choose to pay some of your bills by charging them to a credit card? 60% 37% 32% 30% 21% Paying at Biller Site Using Debit Card Why did you choose to pay some of your bills by charging them to a debit card? 50% 45% 44% Earn Rewards Like Cash Back Provides Better Record Keeping if Disputed Prefer to Charge to a Credit Card Safer Than a Debit Card I Can Delay Payment The result is consumers have come to expect and demand multiple bill pay options and funding methods from billers. When visiting biller websites to pay bills, over half of U.S. online households say it s important for billers to offer Visa, MasterCard and debit card It s Easier to Track Payments I Use a Debit Card for Everything I Prefer Immediate Credit for Payment options in addition to other card-funding capabilities. This is especially true for GenY, which values Visa and MasterCard options 12 percent more than average. The proliferation of credit card maximizers those who prefer to use their cards for all transactions to not only build reward points, but also to benefit from the added security and short-term loan a credit card provides is a significant contributor to the rise in card usage. 3

4 Consumers Value Multiple Payment Funding Methods With Checking, Visa and MasterCard; and Debit Cards at the Top Which of the following payment options are important to you for your biller s website to offer (check all that are important)? From Checking Account Visa or MasterCard Debit Card PayPal Discover Amex 14% 12% Prepaid Card 11% 32% A compelling example and factor that is increasing card-funded bill payments is the Direct Express prepaid reloadable Debit MasterCard from the U.S. Treasury. In March of 2013, the Treasury stopped mailing beneficiary checks. All Social Security and other federal benefits are now distributed to recipients by direct deposit or loaded onto the Direct Express card, which has helped more than 3 million Americans two-thirds of whom did not have bank accounts access their federal benefit payments. This means new segments of consumers will be using cards to pay monthly bills. And as more Baby Boomers enter into retirement, this could add to a larger wave of card-funded bill payments. 51% 51% 68% Even more compelling are the results of the U.S. Treasury Department 2012 Direct Express Cardholder Satisfaction Survey, which shows that 91 percent of participants say the card makes it easier to pay bills. The Need for Emergency Bill Payments Among U.S. households, the biggest concerns related to paying bills are keeping track of due dates (35 percent) and the possibility of late payments (29 percent). Whether due to late payment fees, credit score impact or service shutoffs, avoiding late payments is a high priority among consumers. In 2013, 36 percent of consumers paid a bill after the due date (48 percent for GenY), and of those, 70 percent had to pay a late fee. The main culprits of late payments were cash flow difficulties (46 percent) and forgetting when the payment was due (38 percent). Consumers, therefore, desire the availability of emergency bill payments to avoid late payments. Emergency bill payments also known as on-demand, convenience or urgent payments are defined as consumer-initiated payments that need to be recognized by the merchant biller immediately or by end of day. Typically an emergency payment is used when a consumer payment to the merchant will otherwise be received after the due date and done in order to prevent an adverse action by the merchant biller, for example service shut off, a late payment fee or interest charge. In the past year, 30 million households made at least one emergency bill payment, and among GenY households, 42 percent made emergency payments. In the past year, have you made one or more emergency bill payments to avoid being late or incurring a late fee? All Yes 30% No 70% Gen Y Yes 42% No 58% 4

5 When making an emergency payment, consumers use different channels, with the most popular being via the biller s website and via phone call. However, compared to the average consumer, GenY consumers have greater interest and preference toward walk-in bill payments, payments made through a bank or credit union, or payments made using a smartphone. If you needed to make an emergency same-day bill payment to a biller, which method would you prefer to use? (Select all that apply.) At a Biller s Site Calling the Biller Walk In Payment Through FI Bill Pay Using Mobile App or Browser 47% 49% 40% 41% 28% 36% 30% 35% 19% 32% Average Gen Y Consumers also desire the option to make a fast payment without registering with a username and password commonly referred to as a guest checkout option. This is a growing trend: In 2013, 7 percent of online households reported using a bill pay guest checkout nonregistered payment option, and in 2014 it increased to 28 percent. This option is especially popular for GenY bill payers, who reported using a nonregistered bill pay option 38 percent of the time in the past 12 months. The trend is fueled by online retail shopping experiences as well as consumers who desire to save time, especially during emergency payment situations. Nonregistered Bill Pay Guest Checkout Option Becoming More Popular Saves Time and Hassle Why did you not register for a username and password when you paid a bill at a biller website? (Mark all that apply.) Registering Takes too Much Time Didn t Want Another Name and Password Didn t Want to Give My Personal Information to Another Company Ultimately, consumers have come to expect billers to offer fast registered and nonregistered emergency bill payment options, and almost 60 percent say having such an option increases the satisfaction they have with that biller. Consumers Expect an Emergency Payment Option; Having It Improves Their Satisfaction With the Biller Do you expect billers to offer a way to make emergency payments? 74% Yes Only Wanted to Pay Once 26% No What impact would offering emergency payments have on your satisfaction with that biller? 57% Increase 30% Didn t Want More Solicitations 28% 1% 34% 40% Decrease 46% 42% No Change 5

6 A New World for Billers This change in the payments ecosystem has put pressure on billers to accommodate consumer demands, forcing them and the industry to rethink bill payment models free versus fee versus a conditional win-win arrangement, such as free Web debit card-funded bill payments when combined with recurring payments and paper bill turnoff. At the same time, recent legal and regulatory changes that have reduced the cost of acceptance of debit cards are prompting reviews of bill payment strategies. For example, the Durbin Amendment, passed as part of the Dodd-Frank financial reform legislation in 2010 and put into effect on October 1, 2011, caps debit interchange fees, making debit card usage even more interesting and attractive for billers. However, billers can overlook important caveats to the amendment: The cap doesn t apply to credit card transactions and debit cards issued by banks with less than $10 billion in assets. Therefore, billers with a significant number of customers who live in areas dominated by smaller financial institutions may experience higher than expected interchange costs. It also does not apply to reloadable prepaid cards such as the Treasury s Direct Express card mentioned earlier. Billers must be diligent when it comes to forecasting card transactions and the potential for underestimating expenses associated with increases in volume of Durbin-exempted card transactions when offered for free. Such twists make it difficult for many billers to navigate the landscape of card-funded and emergency transaction fees. Yet billers are under more and more pressure to make such tough decisions that could have a big impact on their businesses. Customers who are used to simple, streamlined buying experiences are demanding the same for their bill payments. In 2013, J.D. Power and Associates issued key recommendations to utilities for improving customer satisfaction, including removing bill payment fees. However, following that advice is not so simple and straightforward. For example, utility companies would have to go to regulators to approve a rate change to absorb the cost of fees. Yet regulators have been reluctant to approve rate increases that only benefit a portion of the customer base. The Cost of Customer Satisfaction The expense of card-funded payments is significantly higher than any other form of payment, according to a 2015 study sponsored by Fiserv and conducted by Blueflame Consulting. Credit card-funded payments ranked as the most expensive in each payment channel category, with debit card-funded payments costing slightly less. 6

7 Estimated Cost Per Transaction by Payment Type Credit Card CSR ACH CSR TEL Consumer Knowledge of Bill Payment Interchange Costs When Using a Credit Card When you pay monthly bills by charging them to a credit or debit card, do you think the biller pays a transaction fee to the card company? Credit Card TEL Credit Card WEB Automatic Credit Card PINless Debit IVR PINless Debit WEB Walk-In Bill Pay Not Sure 39% Yes 41% Bank Check and List Paper Check No 20% ACH TEL IVR Convenience IVR Convenience WEB Automatic ACH Home Banking $1 $2 $3 $4 $5 $6 Source: Blueflame Consulting for Fiserv, Inc., 2015 Most consumers don t realize that processing a payment takes time and that there is a premium paid for immediate or same-day payment. Conditioned by retail and Web purchases, many consumers expect that no matter the payment method, payments are free and happen instantly or on the same day. That is why they expect billers to offer an emergency payment option. Especially tricky for billers is that customers largely misunderstand what it takes to offer card-funded bill payments. Not only do consumers demand the ability to pay their bills with plastic, they want it free and with immediate payment posting. According to the Seventh Annual Billing Household Survey, 60 percent of consumers don t know that billers are charged by the credit card companies (merchant acquirers and processors) for each cardfunded transaction. 7

8 Consumer Expectation of Payment Timing at Biller Websites From the time you pay a bill through a biller s website, how long do you think it typically takes most billers to credit the payment to your account? Instantly Same Day 16% 27% companies, 105 of which were utilities. Results showed that when billers, and in particular utility companies, offered card-funded payments for free, they experienced a major increase in the number of credit card payments. The usage of American Express, Discover Card and Visa was at least doubled compared to billers who employed a convenience fee. Next Day 27% However, research also shows that when billers Two Days Three Days 6% 18% absorb the card-funded and emergency payment costs, other interesting and beneficial results occur. For example, offering free card payments encouraged Four or More Days 1% more consumers to sign up for recurring payments, Depends on How the Payment Is Made 6% which provides billers with more timely and predictable payment revenue. The Importance of the Channel and Payment Mix A key factor in balancing fee versus free is to reevaluate and optimize the payment mix the combination of payment type and channel that provides the best value for the least cost. Billers should consider each of their payment channels and determine how much value the channel brings versus the cost of offering it. For example, online payments are cheaper and easier to provide, and they empower customers with self-service features and can power e-bill adoption. However, the high-cost and high-touch CSR channel is much better for upselling or cross-selling additional products, and it s more effective for collection efforts. Another interesting finding is that when billers offer emergency card-funded payments for free, there was a significant increase in Web usage, which helps drive consumer adoption of e-bills, self-service tools and messaging alerts. Billers need to take this benefit into account when determining whether to charge a fee, but they must realize that it comes with the probable cost of higher card-funded transaction volume. Channel Mix Comparison: Free Versus Fee Expedited and Card-Funded Bill Payments Fee All Channels Web CSR IVR 12% 31% 57% Free All Channels Web CSR IVR 15% 7% 74% Analyzing Free Versus Fee Transactional Data; Free Payments Can Double Credit Card Volume Fiserv research conducted in 2015 shined a light on several possible scenarios comparing free bill payment and fee bill payment. The study looked at 153 billing 8 Recurring 0% N = 153 Billing Companies Source: Fiserv Analytics, 2015 Recurring 4%

9 Billers must take the possibility of increased card usage into account when planning for free card payments or get caught with a hefty unanticipated cost of doing business. It s imperative to have strategies in place to mitigate the increase and ensure value to the business. For example, if offering free credit card payments will prompt more customers to use cards that earn rewards points and cost the biller more per transaction, the biller s costs would increase, negating any business justification for removing the fee. Billers must also consider that once they remove transaction fees, it s extremely difficult to put them back in place without doing significant damage to the customer relationship. Finding the Right Combination Finding balance between fee and free is possible. By clearly understanding the effects of each fee/free scenario, billers can find the right formula that ensures the benefits outweigh the costs. Before making a decision to provide card-funded payments for free, billers should gather all the available company and industry data on the true all in costs and obtain realistic forecasts from payments experts. Free card payments can trigger higher usage, thereby eroding the business case. Geographic region can also play a part since the Durbin Amendment s cap on debit interchange fees doesn t apply to smaller banks. Yet more Web payments may yield customer care call deflection, higher e-bill adoption and personalized messaging. And when considering in-sourcing versus outsourcing bill payment functionality, it s critically important for billers to factor costs associated with PCI compliance and risks associated with data breaches. It s imperative that billers embrace an omnichannel billing and payment strategy to meet consumer demand for choices. Increasingly, companies need to meet customers where they prefer to receive and pay their bills. Comprehensive and integrated solutions from walk-in cash bill payments to mobile bill payment and alerts will pave the way for billers to succeed in the ever-shifting, fragmented billing and payment landscape. Digital lifestyle adoption and millenial household formation will continue to grow ACH and card-funded bill payments. Meanwhile, PCI and other compliance burdens, hyperchanging consumer behaviors and preferences, changing costs, and regulatory environments will favor outsourcing the mission-critical function of billing and payment. There is a menu of options and possibilities that billers can adopt, and billers might find that creating a hybrid of fee and free and giving the consumer choices will provide the most benefit for both the company and its customers. For example: Customer service representatives are high-touch and may be seen as a premium service, so charge a fee for card payments made with a representative. Consider tying free debit and credit card payments to e-statement registration and paper turnoff with recurring payments. Grandfather existing free card-funded payments users, and charge a fee for new customers desiring to use more expensive forms of payment. Because commercial cards tend to have higher transaction costs and are often used to earn points and fall outside of utility rate regulation, charge a fee for using them. 9

10 Another option is to consider surcharging consumers who use credit cards instead of the lower-cost debit cards. Visa and MasterCard both allow merchants to surcharge for credit transactions. However, billers need to be aware that some state laws don t allow a surcharge on use of credit cards, creating further complexity when developing a payment solution. stop charging fees for card payments can sometimes find themselves unprepared to absorb the higher overall cost and complexity associated with the increased volume of more expensive payments. In addition, once a biller allows free card payments, they lose any leverage they have with their customers to drive preferred consumer behavior. Navigating the Course When determining card-related policies and managing the many intricacies involved with card payments, billers need not go it alone. A payment solutions expert provider can help find the unique mixture of costs and benefits to fit the organization s business model. A good provider can also relieve billers from the oppressive duty of managing regulatory and security compliance, which can not only be time-consuming, but expensive. With today s constantly evolving and sophisticated cyber attackers, data security is more important than ever. Due to the high potential cost of card payments, billers must apply human engineering and related customer adoption strategies to optimize interactions and gain value from customers looking for a free bill payment. By carefully examining customer habits, working with the service provider to incorporate best practices, and weighing the benefits and costs, billers can find a way to keep customers happy while protecting the bottom line. To gain better insight into navigating the new bill pay landscape, contact your Fiserv representative for an expert payment channel optimization review. Fiserv provides its biller clients with thought leadership, consultation, expertise and data analysis to help the biller find the strategy that best fits their unique situation and business goals. Careful Consideration; Smart Policies Deciding to offer free card-funded payments involves much more than the flip of a switch. When it comes to deciding between fee and free, each organization has a myriad of things to consider. While billers are under pressure from customers, competitors and stakeholders to offer free card payments to their customers, those who choose to 10

11 About the Authors Eric Leiserson is a senior research analyst at Fiserv. He has authored several white papers and case studies on consumer behavior and attitudes with respect to banking, billing, and payment and mobile practices. In addition, he has conducted numerous primary research projects and webinars in the areas of social media, mobile bill pay usage, consumer segmentation, longitudinal surveys, Web usability and focus groups. Jack Lamey is a senior product manager at Fiserv. As a payment practitioner for the past 15 years, his primary focus is on payment acceptance, compliance and best practices of credit and debit card and ACH bill payments. He is an active participant in NACHA s Alliance Council and received his AAP (Accredited ACH Professional) designation in His professional expertise includes Lockbox and EDI payments, accounts receivable, cash reconciliations and billing. About Fiserv Fiserv is driving innovation in Payments, Processing Services, Risk & Compliance, Customer & Channel Management and Insights & Optimization, and leading the transformation of financial services technology to help our clients change the way financial services are delivered. Visit for a look at what s next now.

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