THOUGHT LEADERSHIP THE GOLDEN AGE OF CARD PAYMENTS

Transcription

1 THOUGHT LEADERSHIP THE GOLDEN AGE OF CARD PAYMENTS 1

2 TABLE OF CONTENTS EXECUTIVE SUMMARY... 3 HISTORICALLY, COSTS HAVE STYMIED GROWTH OF CARD PAYMENTS... 3 GOLDEN AGE OF CARD PAYMENTS... 5 MORE VOLATILITY ON THE WAY... 6 UNPRECEDENTED OPPORTUNITY... 6 KEY QUESTIONS... 7 THE GOLDEN AGE OF CARD PAYMENTS 2

3 EXECUTIVE SUMMARY The cost of processing credit and debit cards has stymied card payment growth for bill payment ever since cards were first introduced in Card payments account for 72% of payments made at retail stores, but only 15% of bill payments 1. With the introduction of recent legislation referred to as the Durbin Amendment, organizations that issue bills (billers) may be entering the Golden Age of card payments, an age when advancements are at their highest point. As much as a 40% decrease in debit card processing costs is now being experienced by billers due to the Durbin Amendment. Debit cards are customers preferred payment type; it s now more affordable to give customers their favorite way to pay. This change in economics provides a Golden Age, an unprecedented opportunity for billers to increase customer satisfaction and cost savings by: Addressing the challenge of corporate card payments Incenting paperless billing and recurring payments by tying them to card payments Ensuring that rates reflect post-durbin costs Adding debit cards to ACH auto-pay programs Further changes to legislation, card association fees, interchange and consumer payment preferences may all have a considerable impact on payment processing strategies. Billers need to prepare by deploying a flexible payment system that can easily be adapted to the changes. Golden Age of card payments: Unprecedented levels of customer convenience and cost savings are now possible! ADD DEBIT CARDS TO AUTO-PAY GOLDEN AGE ARRIVES Mobile introduced for card payments First bank card introduced Customer Convenience Cost Savings Billers began accepting cards Billers offer web for card payments Durbin Amendment lowers cost of debit cards Visa introduces flat rate interchange for specific billing industries s 2000s Corporate card programs Paperless billing and recurring payments incented with cards Rates reflect post- Durbin costs Payments system-ready for uncertain future Source: Federal Reserve, UPC, Payments and Interchange Management 1 Hitachi Consulting, Aite Group, ACI analysis Consulting 3

4 4 HISTORICALLY, COSTS HAVE STYMIED GROWTH OF CARD PAYMENTS A Golden Age generally refers to a time when advancements are at their highest point. One can argue that given recent legislation, card acceptance for bill payment is entering that Golden Age. Very few billers accepted cards for payment prior to the mid 1990s. The high cost of acceptance prevented cards from achieving measurable growth. Given that the size of the average bill payment is generally considered large and the variable cost structure of card processing (interchange), billers were hard-pressed to come up with a value proposition that supported card acceptance in their normal payment channels. Retail stores by comparison embraced card payments much earlier and were receiving 43% of their payments with a debit or credit card before the end of the 1990s 2. In the late 1990s, some billers began to accept cards through self-service phone (IVR) channels and in the early 2000s began to include the internet. For the most part, card acceptance was limited to consumer fee-based payments where a consumer pays to use the alternative payments channel and the high cost of card acceptance could be offset by the consumer fee. In the mid 2000s, as more competitive biller categories began to emerge with relatively lower average payments, such as telecommunications, card acceptance became commonplace in these industries and led the way as the first biller categories to promote widespread card acceptance. Although consumer demand for card payments was on the rise, unfortunately for other biller categories, such as utilities, the lack of competition and relatively low margins prevented general card acceptance. For other categories, such as insurance and consumer finance companies, their high average payment amount and the variable cost structure of card processing was just too costly to include cards in their payment options. As the card associations looked for new growth strategies for card acceptance, bill payment was an Majority of payments in retail stores made with a card, while costs stymie growth for bill pay % OF PAYMENTS MADE WITH CARD 80% 70% 60% 50% 40% 30% 20% 10% 0% BILL PAY RETAIL STORES Source: Aite Group, Hitachi Consulting, ACI analysis 2 Hitachi Consulting obvious choice. While growth in traditional retail stores continued at staggering rates, bill payment lagged behind. The Aite Group estimated that the usage of cards for bill payment was just 6% of overall payments in 2004 (see graph). In an effort to address the differences between traditional retail stores and bill payment, Visa and MasterCard began to establish new interchange categories specific to certain biller categories. In April 2005, Visa introduced the Visa Utility rate followed by MasterCard in October This new rate was unprecedented from an interchange perspective in that it offered a flat $0.75 rate for consumer credit and debit card utility payments. Up until then, all Visa and MasterCard interchange programs were based on a percentage of the payment amount. The programs were welcomed with minimal interest from the utility community, as these lower rates were still higher than traditional check processing. Prior to October 2011, the cost to accept cards had generally remained high. Even with lower interchange rates to incent card growth, the fact has remained that card processing costs were appreciably higher than traditional payment options such as checks. In addition, the fact that only the basic consumer credit and debit cards were typically eligible for the lowest rates posed additional cost concerns. With card acceptance comes many other classifications of cards, such as commercial, small business, purchasing and rewards cards, that are extremely costly with published interchange rates reaching greater than two and a half percent (2.5%) of the bill payment amount. Due to the high cost and regulation, many billers have turned to consumer fees to allow their customers to pay by a credit or debit card. For example, 93% of utilities accept cards for payment; however, 90% of the investor-owned utilities and 45% of

5 municipal utilities charged a consumer fee for card payments. Recurring card payments have also lagged in general acceptance. 76% of all utilities offer a recurring ACH program, while only 35% offer a recurring credit card program 3. Fast forward to 2011, when card growth for bill payment had only reached 15% of overall bill payments in the U.S., far behind the 72% of payments to retail stores that are made with a debit or credit card. GOLDEN AGE OF CARD PAYMENTS DURBIN AMENDMENT USHERS IN GOLDEN AGE OF CARD PAYMENTS: ADVANCEMENTS AT THEIR HIGHEST Enter Senator Richard Durbin from the great state of Illinois. Senator Durbin wrote a plan labeled Reasonable Fees and Rules for Payment Card Transactions (known as the Durbin Amendment) to expand the Federal Reserve powers for setting interchange rates related to debit card processing. The ultimate goal was Customer fees prevalent in utilities % OF UTILITIES 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Chartwell 90% 45% CONSUMER FEE INVESTOR OWNED MUNICIPAL to spur economic growth with lower fees. Theoretically, merchants would lower prices on goods with the savings from paying lower debit interchange, and in turn, lower prices would lead to increased consumer spending. The Amendment was a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law July 21, While the Durbin Amendment covers many angles of debit card processing, the most impactful for billers is the requirement that the Federal Reserve Board prescribe standards for reasonable interchange fees. The Durbin Amendment sets caps on the amount of debit interchange that can be charged to a biller for certain debit cards and went into effect on October 1, This legislation limited the interchange fee to no more than 21 cents, plus 0.05% of the transaction amount, plus one cent for bank card issuers that have fraud-prevention standards in place. The legislation is limited to what the Amendment defines as large issuers or banks with more than $10 billion in assets. 10% NO FEE 55% Small issuers are exempt from the legislation altogether and continue to receive debit interchange at the pre-durbin rates. Since large banks tend to cover the metropolitan areas and small banks tend to be regional, depending on the biller s service footprint, debit card transactions that qualify for the lower Durbin rate can generally range from 50% to 80% of the total number of transactions. DEBIT CARD COSTS DOWN AS MUCH AS 40% So what does all this mean for billers? How do these changes impact the bottom line related to card acceptance cost? To get these answers, it s best to look at some hard data. For insurance carriers, pre- Durbin processing rates for premium payments averaged $1.81 versus $1.23 under the new post-durbin rates representing a 32% ($0.58) decrease in overall card processing costs. Companies in other industries are likely to experience a 20-40% decrease in costs depending on industry, average payment amount, and mix of large and small issuers. The 20-40% cost savings assumes an average bill payment amount of $150, a 60/40 split between large and small issuers, and assessments charged by the card association of 0.11% of the payment amount. GIVING CUSTOMERS THEIR FAVORITE WAY TO PAY NOW COSTS BILLERS LESS Now that the cost of accepting cards has decreased, it s more affordable for billers to raise customer satisfaction. Debit cards are the most preferred form of payment by customers. 85% of consumers own a debit card, and debit cards are the preferred method of payment by 57% of debit cardholders 4. Companies looking to increase customer satisfaction can increase the number of places they accept debit cards (e.g., adding debit cards as an option to ACH auto-pay, mobile and web payment experiences) 3 Chartwell 5

6 MORE VOLATILITY ON THE WAY Billers should be aware that the cost and regulatory components are vulnerable to change. LEGISLATIVE CHANGES Many payments experts have speculated that Durbin s attack against debit cards is just the first phase of the war against interchange. The current version of the law capping interchange only applies to debit cards and credit card interchange. Others see Durbin as having unintended results, like increased bank fees to consumers and no noticeable changes to retail pricing, and suggest there could be a repeal of the legislation. BANKS COUNTER ATTACK The New York Times reported that the Durbin legislation will cost banks $6.6 billion in 2012 alone in decreased revenues from debit card interchange. With external pressures on earnings, the banks have been forced to look for new ways to make up for these losses. Changes in banking fees as well as credit and commercial card interchange will be a logical choice to help fill this void. Card processing cost Insurance companies $2.00 $1.80 $1.60 $1.40 RATES AND FEES VARYING As the card associations and banks look to recover from Durbin s impacts to their bottom line, billers should expect to see changes to other card interchange rate categories and card processing fees. Visa has already announced a revamped pricing strategy taking effect in 2012 that introduces new fees, such as the Fixed Acquirer Network Fee (FANF). CONSUMER PAYMENT PREFERENCES SHIFTING For the large bank card issuers who are impacted most from Durbin, many have speculated that a renewed push for credit cards will ensue. Changes in reward points may lead to a longterm shift in consumer payment preferences. UNPRECEDENTED OPPORTUNITY TO INCREASE CUSTOMER SATISFACTION AND COST SAVINGS ACCEPT CARDS WITH THE END GAME IN MIND Now that we have explored the history of card acceptance for bill payment and what has gotten the industry to this point, and speculated on what changes the biller community should be aware of, how should a biller approach card acceptance to ensure they are providing the optimal card payment program for their customers and their company? The answer is to make sure bill payment strategy starts with the end game in mind providing the optimal card experience by maximizing convenience and minimizing cost. CORPORATE CARD COSTS CORPORATE CARD COST SAVINGS Keeping the end game in mind, billers should design a card acceptance program that caters to customers who use preferred card types to pay their bill that will offer broad acceptance and minimize card processing cost. Generally speaking, consumer credit and debit cards have lower interchange costs than commercial credit cards. One strategy that can ensure broad appeal to the consumer base and minimize the number of commercial cards received is to only offer cards to residential or consumerbased clients. The payment interface can easily be designed to only offer card-based payment options to customers with residential or noncommercial based accounts, thus increasing the likelihood that the biller will receive a consumer-based card $1.20 $1.00 CUSTOMER SATISFACTION $0.80 $0.60 $0.40 $0.20 $0 PRE-DURBIN 4 Mercator Advisory Group, Phoenix Marketing International 6 POST-DURBIN ADDING DEBIT CARDS TO ACH AUTO-PAY PROGRAMS TO RAISE CUSTOMER SATISFACTION Companies that only accept recurring payments via ACH should consider adding debit cards to their recurring payment programs. As noted, debit cards are customers preferred form of payment. Industry data has shown that as much as 90% of cards used

7 for bill payment today are debit cards and, as discussed, the new debit card processing cost offered through the Durbin Amendment offers much lower processing costs for a majority of the debit cards processed. USE CARD ACCEPTANCE TO INCENT LOWER COST CONSUMER BEHAVIOR The end game for a biller should also be to ensure that consumers are adopting internet and phone-based channels that allow for self-service and marketing opportunities. Billers can use card acceptance to incent consumers to adopt these channels. To make sure a company is getting the most bang for their buck when accepting cards, billers should consider: DELINQUENCY RETENTION Offering card payments to customers that sign up for recurring payments. Customers that sign up for recurring payments are 18% less likely to leave 5 and have a 70% lower delinquency rate 6. INTERCHANGE MAKE SURE POST-DURBIN RATES ARE REFLECTED IN PROGRAMS Keeping the end game in mind of minimizing card acceptance costs, billers should ensure that the program they are implementing or that is already in place accurately reflects the new lower cost structure. For billers that choose not to charge a consumer fee, make sure the arrangement with the card processor enables taking advantage of the Durbin rate. For billers that have a consumer fee program for card acceptance, make sure the fee is reasonable given the new cost structure. PREPARE FOR THE UNEXPECTED As we have previously discussed, billers need to remember that the card processing environment is forever changing. Understand that the future may bring changes, both positive and KEY QUESTIONS negative, to the Durbin Amendment or other legislation, changes in consumer payment behavior and changes in processing cost or interchange. KEY QUESTIONS DEPLOY A FLEXIBLE PAYMENT SYSTEM Many billers lack the agility to quickly adapt their payment systems to take advantage of new opportunities because they use multiple non-integrated systems for different payment channels and payment types. Those billers who use a single integrated bill payment engine across their enterprise will be able to quickly adapt to the pending changes. STRATEGIC REVIEW: WILL ORGANIZATIONS ENTER THE GOLDEN AGE? Will your organization reap unprecedented levels of customer convenience and cost savings by entering the Golden Age? Answer a few questions to find out. YES OR NO? POSTAGE & PRINTING In the past six months, have leaders from across the organization come to agreement on an updated strategy for accepting cards? Offering card payments to customers that agree to go paperless. Billers that tie card acceptance to paperless billing can reduce their delivery cost by $0.40-$0.50 per bill 7. CALL CENTER CALLS Offering card payments to customers that enroll in online services. Customers that receive electronic bills at the biller s website are 39% less likely to call a customer service representative at the biller than customers who receive a paper bill 8. Is your organization using card payments to cater to preferred customers? (e.g., corporate card cost savings) Do card payment options incent desired consumer behavior? (e.g., paperless billing, recurring payments, web self-service enrollment) Are post-durbin rates reflected in your cost structure? Has your organization deployed a payment system that is easy to change to keep up with new opportunities? (e.g., single integrated bill payment engine across the enterprise, easy to work with) Ability to deliver unique user experiences to different customer segments If you answered four or five questions with a Yes, then you are well on your way to enter the Golden Age. If you answered less than four Yes, then senior leaders in the organization should conduct a thorough evaluation of their strategies for raising customer satisfaction and cutting costs to enter the Golden Age of card payments. 5 Aspen Analytics 6 ACI survey of 1,000 households 7 BlueFlame Consulting 8 American Banker 7

8 ABOUT ACI WORLDWIDE ACI Worldwide, the Universal Payments company, powers electronic payments and banking for more than 5,000 financial institutions, retailers, billers and processors around the world. ACI software processes $13 trillion in payments and securities transactions for more than 250 of the leading global retailers, and 21 of the world s 25 largest banks. Universal Payments is ACI s strategy to deliver the industry s broadest, most unified end-to-end enterprise payment solutions. Through our comprehensive suite of software products and hosted services, we deliver solutions for payments processing; card and merchant management; online banking; mobile, branch and voice banking; fraud detection; trade finance; and electronic bill presentment and payment. To learn more about ACI, please visit www. aciworldwide.com. You can also find us on 8 Americas Asia Pacific Europe, Middle East, Africa +44 (0) Copyright ACI Worldwide, Inc ACI, ACI Payment Systems, the ACI logo, ACI Universal Payments, UP, the UP logo and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its subsidiaries, in the United States, other countries or both. Other parties trademarks referenced are the property of their respective owners. ATL