Payment Processing Integration Models for Utilities | CDS Global Whitepaper

Payment Processing Solutions for Utilities: A look at several integration models


IntroductIon

The convergence of increasing customer expectations, operational efficiency needs, regulatory rules, transformational new technologies, and other factors creates tremendous payment processing challenges and simultaneously offers substantial opportunities. It would be wise for every utility to re-evaluate the payment processing business models available, some traditional and some emerging, to help navigate this changing environment. Business models range from managing the entire process in-house to new single-source, integrated solutions. Now more than ever, a customer-focused, tightly integrated, and efficient payment processing system is imperative.

StrategIc Importance of utIlIty payment proceSSIng

Payment processing is sometimes viewed as simply a tactical back office function. That perception is changing. According to Mark Brousseau, consultant and payments expert at Brousseau and Associates, “Payment processing is vital to utilities for two reasons: 1) receivables – the lifeblood of any business and 2) the risk of inadvertent shutoffs. Inadvertent shutoffs, often caused by inefficient and manual payment processing, is the number one cause of customer complaints, and the operational costs incurred as a result are staggering. Payment processing must become part of every utility’s strategic plan given the linkage to receivables management and cash flow, operational efficiency, and customer satisfaction.”

an evolvIng payment proceSSIng envIronment

Rising customer expectations, changing customer behaviors, financial pressures, regulatory requirements, the need for new skill sets and technology advances are transforming and increasing the complexity of the payment processing environment. Utilities are challenged to keep pace in a cost-effective manner. “The good news is that new technologies and payment solutions make it possible to manage these changes, and the operational benefits are tantalizing,” said Brousseau. Some things to consider when developing your payment processing strategy include examining and understanding customer expectations and offering multi-channel payment options.


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Customer expectations

Customers demand multiple ways to receive, view and pay their utility bills. “They want to move seamlessly between payment channels and methods as their financial status, timing needs and preferences change,” said Dave Fields, product manager of payments solutions at CDS Global.

Customers expect consistent, accurate payment information across channels and a retail or e-commerce-like experience. They desire a real-time and holistic view of their account status and transactions. However, customer expectations are not homogeneous. Some customers will continue to prefer traditional payment options, while under-banked customers may likely require the ability to pay with cash or prepaid cards through traditional channels or convenient walk-in locations.

Dennis Smith, director of energy practice at J.D. Power & Associates, discussed the significant linkage between utility customer satisfaction and electronic bill payment and communication methods during an Energy Central/Intelligent Utility webcast late in 2013 hosted by CDS Global entitled, “meeting customer expectations – do utility Billing and payment capabilities measure up?”. Smith said, “Customer satisfaction is generally higher among those using a fully paperless transaction; they receive bills electronically and pay bills at the utility website, have payments auto-deducted from their bank account, or pay at the bank.” In addition, the 2013 J.D. Power Utility Website Evaluation Study concluded that reviewing account information and making a payment are the two most important tasks driving overall

satisfaction with utility websites. The all-important first impression with a utility’s website will likely be formed during a billing or payment transaction.

Luke Nelson, city administrator of Boone, Iowa, shared a story that drives home customer attitudes about utility bill payment options: “Boone’s City Council was considering a $7 million bond issue and was also discussing new utility bill payment options at a public meeting. A newspaper reporter attending the meeting posted information about both of these topics on Facebook. Guess what? The bill payment story blew up, not the bond issue. The reporter said he had more likes and positive comments on that one post than any other city issue. It just goes to show that customers want alternative ways to pay their utility bills – and are screaming that – we just weren’t hearing them before.”

To address increasing customer expectations and changing behaviors, utilities will need to invest in and leverage analytics and robust reporting capabilities. “Advanced analytics will help utilities better understand customer attitudes, behaviors and channel preferences; empowering utilities to increase electronic bill presentment and payment (EBPP) adoption through improved targeting and more effective marketing campaigns,” said Fields.

Payment processing must become part of every utility’s strategic plan.

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Payment methods, payment channels

Until recently, paper checks were the dominant method customers used to pay their utility bills. The utility payment infrastructure was built to process paper checks and it became adept at doing so, driving down unit costs. Utilities were able to combine outputs from their remittance system, bank or lockbox provider, and produce a consolidated view of receivables. Whether driven by the recession, last-minute payment behaviors, convenience, or a desire to take advantage of credit card loyalty rewards, customer payment methods and channels are changing. Consumer to business checks declined more than 7 percent on a compound

annual basis in the last three years, according to the 2013 federal reserve payments Study. “Most utilities receive 50 to 60 percent of payments via electronic payment mechanisms. The result is excess paper check processing capacity, and the infrastructure is no longer optimized,” said Brousseau.

Automated clearing house (ACH) payments made from the customer’s bank account and credit card payments are increasing. One small utility client of Brousseau & Associates saw credit card payments rise 75 percent in one year! Some utilities pay their bank to process new payment transaction types, others have built entirely new systems, processes and controls, and several utilities are outsourcing some or all payment functions.

Integrated payments

Higher customer expectations and the need for multiple payment channels and methods have created receivables management challenges that can be addressed through integrated payment solutions. “On the heels of the recession, CFOs demand visibility into receivables and require adequate controls to manage their cash position,” said Brousseau. The concept of what Brousseau calls a “receivables hub,” or integrated payments, has emerged. “There is a need to consolidate information from multiple payment channels, bringing together check and remittance processing, card and ACH data, and statement information. A single output to the utility’s billing system enables more receivables to be processed without human intervention, improving operational efficiency and delivering working capital management benefits,” said Brousseau. Today’s business process outsource providers are well positioned to provide a “universal data file” to utilities, according to Fields.

The evolving payment processing environment is not only characterized by challenges; technology advancements offer benefits that extend beyond the ability to consolidate receivables information. Receivables automation tools are a game-changer that should be in every utility’s payment processing arsenal.

There is a need to consolidate information from multiple payment channels.

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Remittance automation

Remittance automation is an absolute must. These systems typically use imaging technology to convert paper checks and remittance documents into electronic images. They automate workflows and improve exception handling. “If a property management firm sends in a single check for 150 units accompanied by a list of the accounts, it may take a full-time resource all day to manually enter that data. With automation, that same work can be accomplished in two minutes! I’ve heard large utilities say that check and remittance processing automation enabled reallocation of 30 percent of their operators, and other utilities attribute up to a 50 percent reduction in call center payment inquiries to process automation, making check images available online, and processing checks sooner – a tremendous savings as some estimate the average cost to resolve a payment-related inquiry at $3.00 per call,” said Brousseau.

Automation is within reach of virtually every utility. “Cloud computing is lowering the cost of automation for utilities when compared to traditional options. Cloud computing also enables vendors to expand service offerings (e.g., cloud-based capture of walk-in payments, eliminating the cost of overnight delivery, accelerating fund availability, and consolidating processing and reporting),” continued Brousseau.

payment proceSSIng BuSIneSS modelS

Utilities have a number of choices when it comes to payment processing business models, ranging from in-house to a variety of outsourced options including single-source, integrated solutions. Each business model has advantages and disadvantages. The most favorable option will vary depending on each utility’s strategic goals and business environment.

Business models overview

In-house

utilities rely upon internal resources for some or all payment processing functions.

It is expensive to accomplish an integrated payment system in-house given the upfront costs, maintenance costs of equipment and keeping current with technology. Lockbox processing and mailing services are particularly costly. There are costs related to acquiring needed skills and maintaining that expertise in a complex payments processing environment, not to mention data security and regulatory compliance. The unit costs of check processing are rising due to the reduction in check payment volumes. Changing customer expectations have required substantial new investments, and that trend is likely to be an ongoing one. The net result is that in-house options are becoming expensive, even for the largest of utilities.

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outsourced

utilities contract with one or more third parties to handle some or all payment processing functions.

The business case for outsourced payment processing has dramatically improved. “Some utilities that outsourced in response to the recession found that outsourcers were only able to handle 80 percent of the work and were not equipped to handle exceptions, sending them back to the utility for resolution. Utilities were required to retain a staff of knowledge workers and technology infrastructure, turning the outsourcing business case upside down. Automation and electronic adoption have changed the whole dynamic. As utilities discover the capabilities available from providers like CDS Global, they will take a fresh look at outsourcing,” said Brousseau. Outsourcing also offers the ability to better adapt to volume swings and cost-effectively scale up and down from a technology and staffing perspective.

Several outsourced models are available and they include:

1. multiple vendors: Utilities contract with multiple vendors to handle payment processing functions and manage the integration.

2. multiple vendors with file aggregation (receivables hub): Utilities contract with multiple vendors to handle payment processing functions with one vendor serving as a file aggregator to consolidate payment files and produce consolidated reports.

3. managed solution (lead vendor + subcontractors): Utilities contract with a single vendor that relies on a combination of self-provided and subcontracted services to handle all payment processing functions.

Integrated, single-source solutions

utilities contract with a single payment processing provider to support all paper and electronic functions.

An integrated system will streamline payment processing and yield reduced operational costs. Faster payments posting and improved research capabilities will enhance customer service. “The shifting payments mix and the need to accelerate working capital management demand an integrated solution. By integrating outbound invoicing and billing with inbound receivables processing, utilities have a broad set of data with which to reconcile and post receivables,” said Brousseau. Fields reinforced Brousseau’s view and added, “An integrated solution empowers customers, utilities and customer service representatives by providing visibility into all customer billing and payment activity. Payment issues are resolved more quickly, customers are able to self-manage their own experience, and utilities benefit from happier customers and employees.”

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“With an integrated, single-provider environment, the electronic channel is tied to the paper bill printing and lockbox solution that processes the physical payments. This translates to process efficiencies, consistent information across channels, and a high-quality and easy-to-use electronic customer interface,” said Fields.

There are factors that constrain growth of single-source solutions and among them are lack of awareness, decentralized decision making (e.g., separate requests for proposals [RFPs] for lockbox/EBPP), resistance to change, and concerns about job security. Some utilities may assume an inability to leverage legacy systems or that the costs are out of reach. Existing contracts and prior technology investments may be considerations. Other utilities may fear loss of control, or may desire to use multiple vendors to spread the risk.

Every utility should compare their existing business model to the pros and cons of other models to determine which path to payment processing integration is best suited to their needs both now and in the future.

How to choose which model is right for your utility?

The optimal business model will depend on each utility’s strategic goals, business needs, available resources and other factors. Typically the smallest and largest utilities are more likely to manage the entire process in-house. While smaller utilities may have fewer resources and less technical expertise in-house, they may think that they do not have affordable outsourcing options. The majority of utilities handle one or more payment functions in-house and outsource one or more functions (e.g., outsource lockbox and EBPP and do printing in-house, or outsource printing and lockbox and support EBPP in-house). Utilities that rely on multiple vendors must expend cost and effort to manage and monitor vendor performance, reconcile multiple files from multiple sources, and integrate them into the utility’s systems.

Brousseau advises utilities to look for a provider that offers: 1) a solid track record with both invoicing and payment processing, 2) paper and electronic transactions expertise, 3) robust exception handling capabilities, and 4) data management expertise.

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BuSIneSS modelS proS conS

In-house

• Maintain control (customer experience, timing, operations look & feel, etc.)

• For the largest utilities, potential cost benefits• Avoid vendor management expense

• Higher costs:• Equipment purchase/maintenance• Training/professional development• Regulatory compliance• Adapting to payment system changes• Effort to leverage new technologies• Effort to support new payment methods &

regulatory rules

multiple vendors

• Potentially lower cost• Effort to leverage new technology• Effort to manage payment system &

regulatory changes• Scalability

• Less control• Vendor management/monitoring effort• File management, reconciliation & reporting effort• Potential for divergent goals between the utility

and vendors

multiple vendors with file aggregation (receivables hub)


regulatory changes• Enhanced file management, reconciliation

& reporting• Scalability

• Less control• Vendor management/monitoring effort• Potential for divergent goals between the utility

and vendors

managed solution (lead vendor + subcontractors)


regulatory changes• Potential for enhanced file management,

reconciliation & reporting• Reduced vendor management/monitoring effort• Scalability

• Less control• Lead vendor’s ability to manage subcontractor

performance issues• Potential for divergent goals between the utility

and vendors

Integrated, single-source solution


regulatory changes• Enhanced file management, reconciliation

& reporting• Reduced vendor management/monitoring effort• Scalability• Goal alignment between the utility and the vendor

• Less control• Risk associated with having everything with one

vendor (all eggs in one basket)

Table 1: Pros and Cons of Payment Processing business Models

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two utIlItIeS, two payment proceSSIng caSe StudIeSThe following case studies demonstrate different approaches taken by two utilities. Lubbock Power & Light chose to outsource electronic payment processing while keeping other payment processing components in-house. The City of Boone decided to outsource all payment processing functions and implemented a fully outsourced and integrated solution.

Lubbock Power & Light (LP&L)lubbock, texas, is a college and government town with a population of approximately 230,000. lp&l provides electricity, water, garbage, landfill, storm water and wastewater services to about 150,000 customers.

Background and objectives

LP&L found itself unable to support the payment options that its customers desired. Payment options were limited to mail and walk-in payment via check, cash and money order as well as electronic options of bank draft and ACH. Customers wanted the ability to pay online or via an interactive voice response (IVR) system using a credit or debit card. Customers wanted to pay when they wanted, how they wanted, and via the payment method of their choosing.

LP&L sought to reduce operational costs by shifting from a largely manual and paper-intensive environment to one characterized by electronic payment processing and customer self-service. LP&L’s plans called for continued use of its in-house mail-in payment processing and lockbox that were working well and leveraging its recent investment in a receivables hub. The utility planned to outsource the electronic payment processing solution.

Alternatives considered

LP&L quickly determined that it would seek an outsourced solution. It did not wish to handle debit and credit card transactions in-house due to the potential liability associated with theft and fraud. The utility also had insufficient resources to support and maintain payment card industry (PCI) compliance in-house. “We wanted an integrated solution for electronic payment processing. We wanted to minimize the number of vendors involved because of the management challenges. We required the ability to post in real-time and looked for a vendor able to handle merchant services and all of the transactions required to get the money into our bank account electronically,” said Dana Box, customer service manager at LP&L.

The decision process

LP&L interacted with multiple utilities and vendors to refine its requirements. For example, it decided early on to accept Visa and MasterCard and to absorb convenience fees. Major decision factors included: the ability to use LP&L’s receivables hub API, deliver the deposit in a timely fashion electronically, provide electronic reporting and balancing, and cost.

We wanted an integrated solution for electronic payment processing. We wanted to minimize the number of vendors involved.

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LP&L implemented a solution relying on a combination of LP&L’s in-house capabilities, CDS Global’s end-to-end electronic payment processing solution, and a few other partners, streamlining the environment and simplifying reconciliation.

Results

LP&L’s decision to implement a combined in-house and outsourced processing model produced a multitude of benefits, simplifying what could have been a far more complex process. LP&L was able to continue to leverage its efficient in-house mail-in payment processing capabilities and investment in a receivables hub. Most importantly, LP&L customers are happy, as a 45 percent electronic payment adoption rate demonstrates. Customers have several recurring and non-recurring payment options and can make payments online or via an IVR on a 24/7 basis. Customer self-service is a reality, and customers prefer the power to conduct business when and how they want. For example, customers now have the ability to select their bill payment due date.

Customer adoption of electronic payment methods translated into substantial operational savings for LP&L. It was able to close its branch in-person payment location as a direct result of a 50 percent decline in walk-in payments. In addition, electronic payments have improved cash flow.

CDS Global’s reporting and automation capabilities also paid big dividends. LP&L can determine in near real-time if a customer has paid electronically, enabling the utility to restore service more quickly and avoid inadvertent shutoffs. “CDS Global’s consolidation of customer payments made through online banking was icing on the cake, eliminating our need to manually post these payments daily, easily saving the equivalent of one full-time resource,” said Box. Going forward, LP&L has plans to look at kiosks and offer a mobile to text and text to mobile app.

City of Boone, Iowa

Boone, Iowa, has a population of 13,000. the city of Boone provides water, storm water and wastewater services to 5,200 largely residential utility accounts.

Background and objectives

In 2008 and 2009, the City experienced significant revenue declines as customers conserved water in response to the recession, and rising rates related to mandatory sanitary sewer system upgrades. “Our revenues must match our expenditures, and revenue declines caused us to re-examine how we could streamline operations. We were simultaneously exploring new customer payment options,” said Nelson, city administrator. Payment processing was an area of focus given the operational inefficiencies that were known to exist. After a number of unsuccessful efforts, the City started investigating integrated payment processing solutions and requesting proposals.


Operational inefficiencies

The City of Boone was frustrated by manual, inefficient and error-prone payment processing. The process of loading up printers with meter read files, manually associating bills with accounts, printing bills, folding bills, etc., was full of challenges. If the utility’s newsletter had glossy pictures, the printers sometimes jammed leading to reprinting the bills. There were problems every month, often requiring two or three days to complete the billing process. “The staff was stressed, and the process was time-consuming and wasteful. If I am making it sound bad, it is because it was,” said Nelson. Utility customers made it clear that they wanted alternative ways to pay their utility bills, and the City wanted to better satisfy customers and offer payment options beyond mail-in, in-person and convenience-fee based credit cards.

Alternatives considered

The City explored many alternatives in an effort to streamline payment processing and to provide the new payment methods customers desired. The City changed its bill style, worked with its local bank to process checks, and tried check scanning and some automation. Alternative ways of accepting credit card payments and online capabilities were evaluated. “We had even more errors and more issues. It was a mess,” said Nelson. A piecemeal solution was thought to be the City’s only option. “We were not aware that integrated payment processing solutions existed,” said Nelson. After learning about CDS Global’s integrated solution, Nelson met with the utility’s finance officer and billing supervisor. “Our eyes lit up given the possibilities,” said Nelson. Even so, expectations were low that an integrated solution would be affordable or fully meet the utility’s needs.

The decision process

The City was thorough and deliberate in its evaluation. Site visits and multiple scenarios were analyzed before issuing a RFP. Conservative cost savings estimates including only equipment, mailing and paper costs, were shared with the City’s Utility Committee. Based on that information, a decision was made to seek proposals. Three firms responded, though two of the vendors lacked a fully integrated solution and could only offer a phone number to call for some payment processing functions. “I was blown away by the potential cost savings and other benefits of CDS Global’s proposal,” said Nelson.

Results

The City of Boone made the decision to move forward with the single-source, integrated payment processing solution proposed by CDS Global. The solution addressed the operational challenges that the City had faced for so long, supported the payment methods that customers wanted, and delivered substantial operational savings. “We estimated a 5 to 10 percent savings and have realized a 50 percent savings in personnel cost alone by redeploying resources and avoiding the need to backfill one resource,” said Nelson.

Today our staff is more focused on customer service, less focused on problems.

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Six months following implementation, the process is more streamlined and customer satisfaction is improving. There were hurdles to overcome, including some timeliness and processing issues that contributed to a temporary dip in customer satisfaction. “Today, our staff is more focused on customer service, less focused on problems, and the work has more meaning. We are on a good path. I think we have skipped a decade of technology, and we are positioned to address future needs,” said Nelson.

BeSt practIce advIce

The table below summarizes best practice advice from the contributors to this paper.

MARk BRouSSEAuConsultant & Payments Expert

Brousseau and Associates

DAnA BoxCustomer Service Manager

Lubbock Power & Light

LukE nELSonCity Administrator

City of Boone

• If you have not yet automated, you need to automate!

• know the cost of all of your transactions before you start

• Look for an integrated, single vendor solution

• Adopt an integrated approach• Think end-to-end to maximize

RoI (outbound invoicing to inbound payment processing)

• understand resource impacts related to “going electronic”

• A piecemeal approach will not provide the same benefits & may create more issues

• Do not focus solely on check automation given changing payments mix

• Real-time is really important• Do your research, compare real-time to batch & the

impact on back-end & other processes• Look at the entire collections process, how it works &

how you want the customer experience to feel

• Take the big step, you will be so much better off

• Seek tools that streamline exceptions handling

• Carefully evaluate convenience fees• Consider rising electronic adoption, transaction costs,

payment probability, cash flow, amount & frequency limits, etc.

• Recognize that there will be challenges

• Do not underestimate the importance of data output for posting & research

• Determine how to handle customers with a history of returned checks that move to electronic methods – e.g., will you permit payment via check or debit card?

• Talk to those who have been through the process; we could certainly share advice based on our experience

Table 2: best practice advice

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Closing thoughts

Payment processing is strategically important to every utility. The customer satisfaction and operational benefits described in the LP&L and the City of Boone case studies reinforce this point. It is easy to envision other utilities deriving similar if not more substantial results.

For utilities that have yet to develop and implement a comprehensive and integrated payments strategy, it is time to move payment processing to the front of the line. This is true especially in light of the growing number of payment channels and payment methods, higher customer expectations, and the tremendous benefits offered by new technologies. A well-thought-out strategy that includes a thorough evaluation of the business model options available is recommended. Ultimately, each utility will need to determine the approach that supports their business goals and best fits their unique circumstances.

“Data suggests that there is not a lot of time to wait. Even if utilities think they have it under control, the variables are changing fast. It may be tempting to say, ‘I have a tight capital budget and will put this off for a bit.’ That would be an awful decision – a career-limiting decision for operations managers and for CFOs that must have access to accurate receivables information in order to manage the utility’s cash and debt load – it is just folly,” said Brousseau.

Utilities should take a holistic view of payment processing. Evaluate and fully consider all business models available including single-source, integrated solutions. The potential financial, operational and customer service benefits are intriguing if not compelling. Selection of an integrated payment processing solution can free utilities to focus on core utility functions that directly impact the quality and reliability of utility service provided to customers.

about cdS global

CDS Global has been a leading provider of end-to-end business process outsourcing for more than 40 years. In the utility sector, CDS Global provides comprehensive and integrated payment solutions that incorporate paper-based remittance processing, bill printing and mailing, and electronic billing and payment functionality, enabling utilities to focus on core utility business functions.

Interested in learning more about integrated payment solutions?Contact us to learn how integrated payment solutions from CDS Global can help you simplify your business.

CDS Global 1901 Bell Ave.

Des Moines, IA 50315 866.897.7987

cds-global.com

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Payment Processing Integration Models for Utilities | CDS Global Whitepaper