As consumers increasingly rely on technology to order food, hail a ride or shop for clothes, they begin to expect greater ease in all types of everyday transactions. When it comes to paying a parking ticket or settling a property tax bill, few people today are trekking to city hall with checkbook in hand.
To support this behavioral shift, government institutions need to provide convenient means of making payments electronically. While constituents can benefit from the efficiency of e-payment, so can governments—especially if they design a solution with an optimal convenience fee structure that maximizes adoption of e-payment among constituents.
Although paper checks are still common among government institutions in particular, the shift to e-payments is good news for the public sector because it can help:
In addition to direct bottom-line benefits, governments can improve the end-user experience through an e-payment system by:
With electronic payments, governments can also pursue a fee structure that works best for their needs. The first question to ask is how the solution and processing should be funded, whether by the government or by constituents through a convenience fee charged with the main payment.
Government-funded model: A government-funded model eliminates all constituent costs, potentially making it ideal for driving adoption of e-payment among the greatest number of constituents. However, government funding may not be realistic, perhaps because of budgetary considerations or local ordinances that require governments to collect the full amount due.
Convenience fee-funded model: If a convenience fee model is preferred, the next question to ask is whether to institute a variable fee structure (e.g., a percent of the payment amount) or a flat fee structure (e.g., a fixed dollar amount that doesn’t change). There are key points to consider when making this decision, including:
|Application:||Utility (energy) payments|
|Sample Size:||127,994 payments|
|Payment amount ($)||Residential payments (#)|
|From $0.01 to $100||29,270|
|From $100.01 to $200||50,042|
|From $200.01 to $300||31,463|
|From $300.01 to $400||11,037|
|From $400.01 to $500||3,577|
|From $500.01 to $600||1,355|
|From $600.01 to $700||538|
|From $700.01 to $800||280|
|From $800.01 to $900||133|
|From $900.01 to $1000||299|
|Application:||Utility (energy) payments|
|Sample Size:||4,009 payments|
|Payment amount ($)||Commercial payments (#)|
|From $0.01 to $100||495|
|From $100.01 to $200||727|
|From $200.01 to $300||600|
|From $300.01 to $400||440|
|From $400.01 to $500||322|
|From $500.01 to $600||225|
|From $600.01 to $700||170|
|From $700.01 to $800||145|
|From $800.01 to $900||111|
|From $900.01 to $1000||283|
|From $1000.01 to $1100||61|
|From $1100.01 to $1200||60|
|From $1200.01 to $1300||58|
|From $1300.01 to $1400||53|
|From $1400.01 to $1500||56|
|From $1500.01 to $1600||17|
|From $1600.01 to $1700||20|
|From $1700.01 to $1800||15|
|From $1800.01 to $1900||8|
|From $1900.01 to $2000||10|
|From $2000.01 to $10000||133|
Source: Examples contributed by Jeremy Appel, J.P. Morgan Product
If the objective is cost efficiency across all payment channels and methods (e.g., electronic, paper check, cash, etc.), and convenience fee-funded e-payment solutions are available at no cost to governments, then e-payment channels can improve government’s financial efficiency. One key approach is to eliminate barriers to adoption by choosing the appropriate fee structure and making sure constituents are aware of the e-payment channel.
Variable fee structure: To increase e-payment adoption in a convenience fee model, a government might benefit from a variable fee structure. Because credit card interchange is a variable expense largely driven by the payment amount and because most constituents make small payments, the variable fee structure can help to minimize costs to the maximum number of payers. By choosing a variable fee, a government can therefore encourage e-payment adoption among a greater number of constituents, which can reduce the overall cost of payment acceptance.
To illustrate, consider this example of how fees could compare for different payment amounts under a variable versus a flat fee structure. This comparison shows how constituents making smaller payments face lower fees under a variable structure:
|Payment Amount||Variable Convenience Fee of 2.5%||Flat Convenience Fee of $2.50|
|$10||$0.25||$2.50, or 25% of payment|
|$100||$2.50||$2.50, or 2.5% of payment|
|$1,000||$25||$2.50, 0.25% of payment|
A constituent making a small payment under a flat fee structure might not adopt the e-payment service, no matter how convenient, because the fee may feel too high in proportion to the payment amount—such as in the example above, where a $10 payment incurs a 25 percent fee. A flat fee structure could inhibit e-payment adoption among constituents making small payments, who may instead opt to pay by less efficient channels, such as paper check.
Flat fee structure: By this same logic, those making large payments—like commercial constituents—will benefit from a flat fee structure. These constituents will face higher fees in a variable structure, but governments can prevent these costs by offering alternative payment methods like ACH or paper check, which don’t incur variable interchange expense.
Promotion: Governments shouldn’t assume that constituents will use e-payment channels just because they’re convenient and have a favorable fee structure. Constituents also need to be made aware of the e-payment channel and its benefits. To that end, it’s critical for governments to implement promotional communications to drive use.
The prospect of reducing costs for both constituents and governments—while also boosting efficiency, maximizing convenience, mitigating fraud risk and increasing constituent satisfaction—should encourage any government organization to consider utilizing an electronic payment solution with an optimal fee structure.