Credit cards can ease financial burdens by making payments as the funds are available. Some people, however, use electronic payments-both credit cards and electronic funds transfers-simply because they are a major convenience.
As for credit card transactions, providers balk about related fees, but realize they must soon offer this payment method to maintain a competitive edge. Not only are customers demanding to be able to pay with a credit card online, but providers are realizing some inherent values in allowing them to do so.
Although some providers are signing on to credit cards, many still prefer traditional payment methods. But what the market is showing is that, no matter what providers like, they may have to base their business decisions on one factor alone: what the customer wants (for more on bridging the gap between service providers and consumers, see "ACH Payment: Keeping Consumer Options Open").
Surging Popularity
To appreciate the growing popularity of credit card usage in the telecommunications market (including payments via online, call center and interactive voice response channels), one need only look at the numbers of recurring payments as a whole. "We will finish this year at a 26 percent growth compared to the prior year, and we will have $37 billion in recurring payments" says Armen Khachadourian, senior vice president at Visa USA. Beyond that, Visa is forecasting 22 percent growth in recurring payments, representing a $45 billion business for the company in the next year. "That is a tremendous growth, especially in a business environment where we aren't seeing double-digit growth rates in any other parts of the industries," he says.
In addition, a recent survey by Visa revealed that one-third of the company's customers want the option of using their credit cards to pay for their recurring bills electronically. In the United States alone, the company has more than 300 million customers and works with more than 130 businesses to manage recurring payments.
Yet telecommunications is just one segment of the recurring payments market, which also consists of industries such as cable, the public sector, health care and insurance. "The growth in the telecommunications industry is almost double that of the entire recurring payments industry growth rate, so we are definitely seeing a bigger demand for telecommunications during the last 12 months than we've ever seen before," Khachadourian says.
MasterCard is witnessing the same growth. In 2001, transaction volume in the telecommunications market was up 45 percent, and thus far in 2002, volume has been up 48 percent, according to Lisa Brzezicki, vice president of new markets.
Brzezicki says that in 1997, 24 percent of all consumers said they would be willing to switch providers to be able to use their credit card and a recurring payment option. In 2000, that number jumped to 55 percent.
"AOL has pretty much demonstrated with 25 million-plus credit card users that people are not averse to paying for subscription-based services with a credit card," says Nils Johnson, president and CEO of Gorilla Mobile, which offers competitive international mobile phone rates.
AT&T has seen a definite increase in the momentum for credit card payments, according to Michelle Bell, district manager of online billing and payment strategy.
Both Visa and MasterCard continue to aggressively target telecom. Brzezicki notes that in MasterCard's ongoing consumer research studies, recurring payment consistently rises to the top of the list in terms of what consumers want. The company is focused on getting more providers to start offering the option to their customers. "MasterCard launched a dedicated effort to support the telecom industry five years ago," Brzezicki points out. She notes that many long-distance providers were interested in offering recurring payment to increase customer retention. The major long-distance carriers have largely accepted credit cards as well as automated clearinghouse payments, according to both MasterCard and Visa, which have been working with the carriers for some time.
What Providers Want
For providers, credit cards may be a double-edged sword: They see credit cards as a way to attract and retain customers, yet credit card companies can hit them with fairly significant fees per transaction. Giving up a portion of revenue simply to allow customers to pay their bills is a tough pill for providers to swallow (for more on the good and the bad of credit card transactions, see "Credit Card Payment Pros and Cons").
Khachadourian says many mobile providers have talked with Visa about offering credit card payment strictly to encourage customer retention and loyalty. "The best way to do that was to take that option away every month where [the providers] send them the bill, and the customer has the option to opt out," he says. By offering credit card payments, providers found that their retention rates doubled, Khachadourian says, because it is a lot more effective to send out a statement each month to thank customers for their business and to show what will be charged to their accounts than to send a conventional bill and give them time to consider changing providers.
Visa has worked with both Qwest and Sprint PCS to roll out credit card payments. Sprint offered a complete digital experience package as part of a promotion to its customers. During the promotional period, Sprint's Visa volume grew 62 percent over the previous year. Even though the promotion is over, Visa volume is now 70 percent higher. "They've created an awareness in the public's mind," Khachadourian says.
So, wouldn't all providers want to offer credit card payment? Khachadourian says, "If it would not work, they would not do it." But not all providers are so enthusiastic.
"We do offer credit cards because they are convenient for customers and they do want to use them, but we do encourage our customer to pay by EFT," says AT&T's Bell. Even when the company promotes its online billing or automatic bill payments options, it pushes other payment options over credit cards.
"We do try to present checking accounts more favorably to encourage customers to choose the checking account option or the demand debit from the checking account," Bell says. "We've done things on the Web site to make that easier for customers-to try to encourage them to go the checking account route." For customers who are on the fence about how to pay, Bell says that putting the checking option first on the Web site often steers their decision toward electronic funds transfer and paying by check online.
AT&T has also tried to remove some of the barriers for EFT-for example, by no longer requiring the customer to mail in a signature for authentication purposes, or offering a view-and-pay option that allows customers to see their bills online and authorize payment electronically.
"We don't advertise and promote necessarily broadly that we accept credit cards," Bell says, "although we are starting to encourage customers to do that on the Web site." She admits there are benefits in accepting credit cards. "If we get customers in an automatic bill payment plan," she says, "then we're assured we get the funds in a timely manner and it might offset some other costs as far as collections, so we don't discourage customers from using credit cards."
Above all, however, Bell says AT&T is committed to offering credit card payment because it is something customers want.
Verizon is another provider that is somewhat reluctant. Today it accepts credit card payment for some services in limited markets, but it is testing feasibility in others. According to spokeswoman Catherine Lewis, the company is conducting these tests in five states: Delaware, Massachusetts, New Jersey, New York and Pennsylvania. In other markets without the credit card option, customers may pay with automatic or on-demand debits from a checking account.
Verizon will not be deciding on credit card payment in other markets until October. The company is currently reviewing how customers are using credit card payment, as well as the system requirements and what it will cost the company.
For now, Lewis says, allowing credit card payments is a difficult business case to make. Although the benefits to the customer are clear, she says, "proving it for a company is a little tricky."
Membership's Privileges
Providers may still be a little skeptical, but offering credit card payment holds out some clear-cut benefits.
MasterCard's Brzezicki says, "We know that customer tenure is incrementally longer" with providers that offer recurring payments.
In addition, according to Khachadourian at Visa, "We found that the communications industry was able to lower their outstanding receivables and improve their cash flow and reduce collection costs associated with bad debt. There was a consumer demand saying they wanted to use their cards, and it makes good cash management sense for the telecommunications industry."
Brzezicki also points to increased cash flow, an improvement in days' sales outstanding, labor savings (depending on how a company is automating), and a reduction in lockbox transaction fees. As well, providers are often lowering their cost of producing statements, strengthening their ability to monitor for fraud, and reducing delinquent payments. "When they get an authorization on that account, those are good funds," she says.
The Dreaded Transaction Fee
When it comes to offering credit cards, there could be no greater impediment to telecommunications providers than the dreaded transaction fee. AT&T acknowledges that such fees are the main reason it promotes electronic payments via checking accounts. "Our preference is the personal checking account because of the transactions costs," Bell says.
Yet when it comes to it, providers realize they will have to face the transaction fees as an unavoidable cost of doing business. Service providers typically must negotiate with the financial institutions on a fee per transaction. "They have choices to shop around for the best fee they can receive," Khachadourian says.
Johnson at Gorilla Mobile says, "Different types of merchants will take different types of risks." The financial institution will do a background check, and look at a company's principals and its financials. The service provider has the responsibility to provide a high level of information security. It must provide a secure CRM interface, firewalls and a secure server. "It's critical to [lenders] that their information is protected," Johnson says.
Providers employ every effort to get a financial institution to lower its rates. AT&T, for example, negotiates rates across its entire enterprise to encourage volume discounts. "We do regularly renegotiate as our contracts come up for renegotiation," Bell explains. "We do work the rates. We leverage our other business units. … I know we leverage our relationships with AT&T Broadband and their customer base and their business side to help with volumes and to help get the rates down. We look across the enterprise to negotiate the best rates that we can for the enterprise."
To support recurring payments, MasterCard has developed an incentive program for services industries, which include telecommunications. The Service Industries Incentive Program was introduced to help the merchant offset the cost of infrastructure changes as members of the services industry evaluate recurring payments, explains MasterCard's Brzezicki. "It is by far the lowest cost" for credit card transactions, she says
Johnson says a provider negotiating fees with a financial institution might want to keep in mind whether the rate offered makes a sensible business plan, whether the lender can scale with the provider's business as its user base grows, and whether the lender will extend that level of credit to the provider as the subscriber base expands. The transaction fee can amount to a few percentage points of revenue per transaction, but a provider would otherwise have to pay for depositing checks in a bank for every check over a certain amount. A provider could also eliminate the cost of printing and mailing invoices if it could somehow entice a customer to view and pay a bill online.
Technical Support
Even if a provider wants to allow credit card payment, it must face a series of challenges in the back office. Options range from outsourcing completely to homegrown models.
Visa is helping providers deal with the complications by offering payment solutions. One issue that providers face is the credit card expiration date. Another is the loss or theft of a credit card, and issuing the customer a new card with a new number. "Historically that has forced customers to give their current information to their service provider, or the service provider to go and ask for that information when the customer transaction is declined," Khachadourian explains.
In order to avoid that inconvenience for providers, Visa has developed a service called Account Updater. It updates account numbers electronically in the back end. To accomplish this, the telephone company gives Visa the name of the account numbers that it processes, and the financial institution gives Visa the account numbers of all the expired cards with their corresponding extended new expiration dates, or obsolete account numbers with their new updated account numbers. Visa cross-references those account numbers and gives the provider that information, so that the transactions are authorized and kept current without requiring customer action. On average, according to Khachadourian, these updates occur about twice a month.
Banking on the Card
Regardless of the back-office requirements and challenges providers face, if customers are demanding to pay via credit card, providers may not have a choice. As more providers push toward electronic bill presentment and payment, credit cards may prove to be an asset rather than a cost of doing business. If allowing recurring payments through credit cards truly does encourage loyalty and customer retention, providers may not be so grudging to accept them.
| ACH Payment: Keeping Consumer Options Open Somewhere between providers and consumers, a rift exists when it comes to electronic payment: Providers see the inherent benefit and cost savings of electronic payments, but many consumers still cling to traditional payment options, such as checks remitted with invoices. A new operating rule promulgated by NACHA–The Electronics Payments Association that became effective in March allows remitted checks at lockbox locations to be translated for payment into e-checks using the Automated Clearing House (ACH) Network. NACHA’s operating rules standardize payment formats for the ACH Network. The new rule may well help providers support processing of their recurring payments and act as an alternative for consumers wary of using a credit card to pay their telco invoices. An e-check—also referred to more formally as an accounts receivable conversion, or ARC—is a debit to a checking account that is performed electronically through the ACH system. It can be initiated at the point of sale where a customer purchases goods or services, on the Internet, over the telephone or through an accounts receivable application. With the new rule allowing conversion of paper remittances to electronic payments, a check received at a provider’s lockbox may be used for originating an ACH debit to the customer’s account. One stipulation is that billers must notify consumers if they intend to use checks as source documents for ACH debits. The debit appears the same to the consumer; however, the consumer’s physical check is not returned. Rather, checks submitted electronically are destroyed to avoid the risk of double posting of a payment. NACHA spokesperson Michael Herd comments that typically it is cheaper to process electronic payments than checks. The returns for telecommunications companies come faster, and they are able to learn about payment problems faster. In addition, Herd says cost reductions occur as processing efficiencies help trim away the added expense of processing each check at the lockbox. Herd says NACHA is expecting a significant increase in the number of ACH payments as a result of the new operating rule. He says potentially hundreds of millions of checks per year could be translated into e-checks under this new procedure. He adds that although many providers encourage monthly direct debit payments, “a substantial amount of their customers will choose to mail in their checks for quite a while longer.” With the new rule, customers will still be able to send in checks, while businesses can treat those payments electronically. In general electronic processing is cheaper, because it requires less work to prepare each item for deposit, and because the checks are destroyed and do not have to be transferred, which is a cost. In addition, the provider will receive payments a lot faster—sometimes up to a week earlier—or will be notified faster if there are errors with any payment. Consumer bill payers enjoy some passive benefits under the new rule, Herd says, since a converted check is governed by the Federal Reserve’s Regulation E, which offers some additional protection against error and fraud. The new NACHA rule may well increase further the number of ACH payments each year. In 2001, according to NACHA, ACH payments grew by more than 1 billion, a 16 percent increase, to reach of total of nearly 8 billion, with an estimated value of $22.2 trillion. What’s driving that growth, Herd says, is the use of electronic payments for direct payments, payroll direct deposits and check conversion into electronic payments. Direct payments of all types increased more than 17 percent in 2001 to 2.6 billion. These payments, valued at $1.6 trillion in 2001, include preauthorized debits using the ACH Network, typically for recurring bills such as services and utilities, mortgages, loans, investments and charitable contributions. More than 200 million e-check payments occurred in 2001, converting paper checks into e-checks using the ACH Network. An estimated 74.6 million e-checks originated on the Internet, compared with 8.7 million via telephone. The bulk of e-checks originated at the point of sale. With these increased numbers of electronic payments, NACHA further predicted earlier this year that ACH payments will double by 2006 to total more than 15 billion payments. |
| Credit Card Payment Pros and Cons Here are the tradeoffs that providers must weigh when they consider whether to offer customers the option of paying by credit card. Pros Cons |
