Customer Payments

Summary

Along with collecting charges from their networks and forming them into bills, billers must also receive payments from customers. Billers can receive payments themselves or use providers that collect on their behalf. Payment providers can develop (supply side) economies of scale that reduce collection costs by collecting payments for many billers using the same infrastructure.

Customer preferences and biller (dis)incentives will influence which payment methods are chosen and whether new methods can be introduced. Payment choices will be guided by social preferences that are just as important as the technological ones. The tension between the customer and biller preferences will decide when and how payments are made.

How can customers pay their bill?

A wide range of payment options are available to billers though not all can or will be offered to their customers:

Cash - Customers may pay in person at a branch of the biller's or payment provider's business. For example, a gas company may receive payments at their local branch or may allow payments to be collected at branches of the postal service.

Cheque - Cheques may also be paid in person (as per cash) or sent by mail to the biller. The biller may use a 'lock-box' arrangement where a financial institution (possibly their corporate banker) receives the biller's payment mail, opens it and processes the included cheques on behalf of the biller. Cheques may be presented that do not clear (bounce) necessitating a later payment reversal by the biller.

Voucher - The customer pays for a 'voucher' identified by a unique number. The customer enters the unique number when asked for payment and the amount is recognised (with the unique number canceled and not reusable). Billers may restrict the use of specific vouchers to their own billing systems and limit their duration by an expiry date. Otherwise the purchase and use of the voucher is driven by the customer.

The voucher itself may be virtual (just on the internet), printed on a paper docket, or carried on a plastic card (e.g. gift card, prepaid credit card). The voucher 'purchaser' can be a different person to the voucher 'user'. For example, vouchers may be used by parents to control their children's mobile phone use, or relatives may give birthday presents of downloadable music.

Credit Card - Credit card payments can be collected by the biller (i.e. using their own website or IVR), or payment providers may use equivalent facilities to collect payments on the biller's behalf. Each approach will use local connections to the financial banking networks to authorise and settle the credit card payments. The customer will drive when this payment process is performed and whose facilities are used.

Electronic Transfer - Electronic transfers can be initiated from two directions depending on who controls the transaction:

Initiated by the biller (pulled): The biller uses a pre-organised authority to deduct money from the customer's bank account or credit card. The timing and amount of the deduction are controlled by the biller and will be related to the customer's last bill (e.g. Telstra Direct Debit), or when a customer's prepaid balance falls below a specified minimum (e.g. CityLink tollway).
Initiated by the customer (pushed): Smaller customers may use a solution such as BPAY to pay bills directly from their bank accounts (or credit cards) without providing details of these accounts. The customer includes a biller-supplied reference number with their payment to associate it with the appropriate bill / account. The biller can be assured that the funds are cleared (i.e. won't bounce), whilst the customer can decide when payments are made and from which account. Corporate customers may transfer funds directly from their own bank accounts to those of the biller. This facility may be restricted to payments too large for mass market payment providers, or where the transaction costs (calculated by percentage) exceed an equivalent bank transfer fee.

Third Party Payment - Customers can use their existing billing relationship with one biller to pay for services received elsewhere. For example, a mobile phone may be used to pay for parking or refreshments with the amounts paid appearing on the customer's next mobile phone bill. The mobile phone biller remits payment to the various service providers less an amount for their collection 'fee'.

Payments from the Customer's Perspective

Customers will consider a biller's range of payment options based on their own circumstances and the terms and conditions upon which the options are offered, including:

Ease of use - Customers will choose payment methods they can perform with a minimum of fuss. For example, a multi-step establishment process for a direct debit arrangement may deter customers who will choose an easier alternative instead. This customer preference will reduce this method's take-up rate (success).

Low cost - For most payment methods, customers do not incur additional charges when paying their bill. However, some billers may apply a surcharge when payment is made by credit card. The biller is seeking to (partially) recover the costs levied by the credit card providers who authorise and settle completed transactions. These additional costs may reduce the use of credit cards unless customers decide the convenience of credit cards is worth the small additional charge, or they have no alternative (and convenient) payment methods.

Anonymity - Customers may wish to retain some degree of anonymity when paying their bills. Anonymity can be sought to retain personal privacy, and/or the fear that the personal details shared during payment may be misused by the biller or others. Contact phone numbers, bank accounts, home addresses and email addresses are all details that customers may wish to keep secret. Customer anonymity can be expressed in two types:

Personal: Can the individual customer be identified? Payments made in cash or by credit voucher allow an account to be settled whilst hiding who is making the payment. This anonymity may make it difficult for the biller to communicate with their customer without an alternative channel (e.g. beeps from an electronic tollway tag, message when signed into an internet portal)
Financial: Can payments be made without revealing a customer's financial details? Customer may be unwilling to reveal their bank accounts' details for fear they will become public, or that unapproved transactions will be performed. The CityLink tollway (Melbourne, Australia) provides an anonymous account type as a payment option (identity is only established for an infringement notice when the tollway is used without paying).

Similarity to established practice - Customers will be more likely to use a payment method they are already familiar with. This inertia makes it difficult to introduce new payment methods since they must compete with established habits.

Available and Useful - Customers can only use a payment method when it is available from their financial institution and their biller offers it as a payment option. As more bills can be paid by a new payment network, and more financial institutions are link into it, customers will be more likely to find a bill they can pay from their existing financial institution (its 'tipping point'). This negative example of Metcalfe's law can be difficult to overcome since there is little incentive to implement or use a new payment method whilst its installed base is small and the customer can't make use of it. To become successful, payment providers PayPal (US) and BPAY (Australia) both had to overcome this problem.

Control of payment timing - Billers and customers each have their own cashflow that they optimise for their own benefit. Billers expect their bills will be paid by the date specified. Customers may pay on time or have insufficient money to cover bills as they fall due. Customer control of when their bills are paid provides leeway to delay some payments until sufficient money is available. For example, customers may defer bill payments until after their next payday or when a cheque has cleared. Customers may prefer payment methods where they retain control of when a payment is made, rather than methods controlled by billers that deduct amounts at a fixed point and penalise (charge) if insufficient funds are available.

Payments from the Biller's Perspective

Prompt payment - Billers, like all businesses, are keen to receive payment within the payment terms offered, and even happier if payments are made earlier. Payment methods driven by the biller (rather than the customer) reduce the impact to the biller's cashflow, and avoid the need to chase the customer for non-payment.

Pre-payment - Even better than prompt payment after the fact, pre-payment captures the money from the customer upfront with the biller reducing the prepaid balance as charges are incurred. The lower credit risk that pre-payment provides must be balanced against:

Limits customer spending: Customers may view this as a positive feature, but from the biller's perspective it limits the potential revenue. The ability to easily recharge / increase the prepaid balance will support increased customer spending.
Requires balance management: Incurred charges must be promptly deducted against the pre-paid balance to avoid the customer receiving more benefits than they are entitled to (paid for).

The biller's product catalog (songs downloaded across the internet with iTunes) or market reach (worldwide mail lists) may make it too difficult or expensive to bill and collect payments using post-paid solutions. Other products (such as mobile phones) will have market segments that prefer pre-payment over their post-paid equivalents.

Low cost to support - The biller must choose solutions appropriate to their size, industry, customer base and product/service selection. Each additional payment method a biller supports must be integrated into and reconciled with their billing and financial systems.

The providers collecting money on the biller's behalf will charge for their services. The biller must decide whether, on balance, additional channels increase the biller's collection costs, their customer base and/or the complexity of their billing systems. A biller with an expensive payment solution may choose to widen the choices they offer by including cheaper payment methods that lower the average cost per payment, attract customers that won't use their existing payment choices, and provide a path that allows the older method to be phased out or de-emphasised (perhaps using disincentives).

Appropriate to the biller's market - Billers may provide choices to a domestic market that are unsuitable and/or unavailable to international customers. Billers whose market is worldwide may only offer payment solution available across their customer base.

Payment methods restricted by market segment - Billers may restrict payment methods to ensure that large corporate accounts are paid by electronic transfer (a relatively cheap option) rather than by credit card (one of the most expensive options). For mass market customers, the choice of directly transferring money into the biller's bank account is unlikely to be offered.

Tags: Billing, Payments