The economic slowdown is curbing consumer spending on discretionary purchases, according to recent quarterly reports by card issuers and networks. But certain costs are less avoidable, such as for heating fuel, electricity, water, garbage pick-up, insurance and property taxes. And, even in tough economic times, many consumers still spring for monthly satellite or cable service, mobile-phone service, and even health-club memberships or monthly donations to charities.
The payments industry long has sought to encourage such recurring billers to accept credit and debit cards. And as more cardholders curb their spend on less-necessary goods and services, observers expect the industry's encouragements to grow.
Billers, especially those who provide essential services for which consumers traditionally have paid with checks or through automated clearinghouse networks, are even more averse to paying fees for card acceptance than are brick-and-mortar merchants. But growing consumer demand in some parts of the world for more options to pay bills with payment cards is putting pressure on billers to accept cards without charging convenience fees.
In the United States, paper checks still dominate consumer bill payments, but electronic payments of all types are gaining larger slices of the bill-payments pie.
Of an estimated 21.3 billion bills paid in the U.S. in 2005, consumers wrote checks to pay 65% of them, according to a November 2007 report by TowerGroup Inc., a Waltham, Mass.-based research firm owned by MasterCard Worldwide. By 2007, despite growth in the number of bills consumers pay, checks had shrunk to 58% of 22.4 billion bill payments, Tower estimates.
In 2005, consumers charged 12% of their bills automatically to credit cards or direct debits from bank accounts using the ACH system, according to TowerGroup. In 2007, recurring automatic charges to credit cards or checking accounts paid 13% of bills.
Single online payments from consumers' credit or debit cards represented only 6.8% of bills paid in 2005, barely more than the 6.7% of bills paid with cash or money orders. By 2007, one-time debit and credit card transactions paid 9% of bills, and cash and money orders covered 6.2%, the report says.
TowerGroup predicts the number of recurring bills will continue to grow, and by 2010 one-time credit and debit card transactions will pay 13% of bills. Automatic debits or charges to cards or checking accounts will reach 15% of all bills paid, TowerGroup predicts.
Check use for bill payment is not as prevalent outside the U.S., but card use is not as widespread either, analysts say.
In the debit card-loving United Kingdom, for example, direct electronic debits from consumer bank accounts, whether initiated as single payments from online banking sites or as automatic recurring debits from bank accounts, paid 72% of all recurring personal and household bills in 2006, according to APACS, a payments association for UK financial institutions and card issuers. Brits paid 17% of bills with cash in 2006 at in-person bill-payment locations such as post offices, 5.2% of bills with checks, and only 3% of bills with credit, debit or charge cards, APACS reports.
'Nobody Writes Checks'
Megan Bramlette, managing associate in the London office of Auriemma Consulting Group, says she was surprised by the lack of check use by UK consumers to pay bills when she moved there in August from New York and began setting up new bank and billing accounts.
"Nobody writes checks here," she says. " asked at the bank for a check book, and the guy looked at me like I had four heads."
Steve Carnevale, MasterCard vice president of emerging markets in U.S. commerce development, would not disclose how many billers accept MasterCard or by what percentage that acceptance has grown in recent years, but he said the number is growing. "I can tell you that cards overall have a long way to go in that area," he says. "You're probably looking at 3% to 5% volume for biller categories."
Two forces driving increased biller acceptance of cards are consumer preference for electronic payments and merchants' enhanced ability to deliver them through Web sites or telephone interactive voice networks, says Beth Horowitz, vice president of product development for Discover Financial Services. "Merchants may not have had those robust capabilities before," she says.
Billers also want to reduce their costs to mail paper bills and to process paper checks that return with those paper bills, says David Driscoll, senior product manager for CheckFree, a payment-services vendor owned by Brookfield, Wis.-based Fiserv Inc.
CheckFree enables several electronic payment-acceptance methods for banks and billers, from ACH, credit and debit card payments initiated through bank and biller Web sites to paper checks converted into ACH transactions. So Driscoll often finds himself at the fulcrum of four points of tension over card acceptance for bill payments.
Billers want to add credit and debit cards to the choices of how customers can pay their bills, but they do not want to pay extra fees for enabling those choices. ACH payments cost them only a few cents per transaction. Cards can cost billers from a flat 75 cents for the average $227 transaction among CheckFree's billing customers to $3.41 on that same $227 for a 1.5% card-acceptance rate. Moreover, card issuers and networks want to increase card acceptance without decreasing interchange, Driscoll says.
Indeed, the emotions about card transactions run high on both sides of recurring bill payments.
Driscoll relates a discussion about CheckFree's card-acceptance services with a large wireless-telephone provider, which he would not name. "I told him we didn't have a free solution for them." Driscoll says. "He stopped me and spent the next hour and a half telling me how much he hated interchange."
And Driscoll recently sat in on a meeting with a major card network, which he also would not name, during which his boss repeatedly tried to discuss lowering interchange for payments to recurring billers.
"The guy said, 'Interchange is off the table. We don't want to talk about interchange,'" Driscoll says. The third time Driscoll's boss broached the subject, the network executive said, 'If you bring it up again, you'll be asked to leave,'" Driscoll adds.
Milwaukee-based Metavante Corp., another provider of card- and noncard-payment processing for banks and billers, faces the same need to serve clients on opposite sides of recurring bill payments. "It's about convenience for the consumer and giving them choices but also trying to bring value to the banks, merchants and billers," says Jeff Lewis, president of Metavante's e-Payments Division.
Lewis says enabling billers to accept cards represents a growing market for Metavante. And now that Visa Inc. and MasterCard Worldwide are public companies instead of bank associations, Lewis says he expects the two top card networks will become increasingly eager to lure more billers to accept credit and debit cards without extra fees for consumers.
In 1999, only 41% of electric, natural gas and water utilities in the U.S. and Canada accepted cards, according to a report released in September by Atlanta-based Chartwell Inc., a utility-industry research firm. By 2006, 81% of utilities accepted cards. However, 58% of those utilities charged consumers fees for paying with credit or debit cards, with the average fee at $4.13, Chartwell reports.
In April 2005, Visa launched its Utility Program, in which utility acquirers pay issuers a flat 75 cents per transaction if the acquirer's client utility agrees not to charge extra fees to customers who pay with Visa cards.
MasterCard made similar changes for utilities in October 2006, charging acquirers 75 cents in interchange per credit or debit transaction, regardless of whether the acquirers' client utilities charged convenience fees. But those clients had to charge the same to accept all payment card brands, and they could not favor any other form of payment that would put MasterCard at a disadvantage.
This past April, MasterCard dropped the utility rate to 65 cents per transaction for all of its consumer credit cards except World Elite, which remains at 75 cents. MasterCard dropped the interchange to 45 cents per transaction for debit MasterCards.
A spokesperson for American Express Co. would not disclose the discount rate AmEx charges utilities, but she confirms that the network allows convenience fees from billers as long as they charge the same for all card brands.
As do other issuers, AmEx encourages cardholders to pay bills through a bill-payment section on its Web site. AmEx promotes automatic, recurring payments as a way cardholders may rack up rewards points while never being late with payments to billers, the AmEx spokesperson says.
AmEx also lists on its Web site recurring billers that accept its cards. "We actively work with merchants to develop and execute custom marketing campaigns designed to promote the capability," she says.
Discover Network in May began to offer merchants and acquirers a card-updater service similar to those Visa and MasterCard have offered since 2003. Some 20 of the 100 largest utilities in the U.S. use the service, Horowitz says.
MasterCard also is reaching out to a wider variety of recurring billers. For example, the network added new interchange rates in April for insurance and property-rent transactions.
The interchange applied to card-not-present transactions to property managers for rental payments is 1.1% of the bill-payment amount on most consumer and World credit and debit cards. That amounts to an $11 fee for a $1,000 rent payment.
But landlords would have to pay $19 for the same rent at the previous rate of 1.89% plus 10 cents on a MasterCard nonrewards credit card and $16.56 for a debit card payment at the old rate of 1.64% plus 16 cents.
The interchange rate for MasterCard Elite credit cards is 2.2% plus 10 cents for rent payments (though few holders of those exclusive, high-end cards are likely to be renters).
Bills may never be welcome reminders of household duties, but card acceptance is making bill payments a little easier for consumers. CP