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Is It Finally Time for Prepay?
By Ron Chebra, Sr. Principal Consultant, KEMA
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While prepaid services are standard business in many industries, they have yet to catch on in the utility industry. But its time may be coming for utilities.
The reason is two-fold. First, consumers in many industries are realizing the inherent advantages of prepayment. Second, with advances in technology, meters can now incorporate more functionality at lower cost.
Two-way communications with integrated prepaid functionality reduce the cost of implementing prepaid metering systems into back-office systems. Traditionally, the expense has blocked prepay programs at many utilities, but, while technology has improved, costs have dropped significantly over the past two years.
Other industries continue to see increasing numbers of customers choosing prepay for services. A recent KEMA study analyzed trends in three industries regarding optional prepay programs: Consumer Retail, Long Distance Telephone and Wireless Telephone.
Consumer Retail
Some retail consumers prefer to use prepaid cards instead of cash. About 13% of consumers have personal prepaid cards, states a study from the American Bankers Association.(i)
The holiday season is normally the peak use period for purchasing and giving gift cards, the most common type of prepayment services. The average consumer spent $88 on gift cards during the 2005 holiday season – about 16% of their gift budget, according to BIGresearch. Gift card sales totaled about $18.5 billion during the 2005 holiday season, a 7% increase over $17.3 billion in holiday sales from 2004, stated the company.
Gift card spending in the 2006 Christmas shopping season gift card spending was $27.8 billion, according to the National Retail Federation.
Long Distance and Wireless Telephone
Consumers are also increasingly prepaying for phone services – for those both over traditional land lines and wireless networks. The increase in prepayment for landline-based services is particularly remarkable, given that overall long-distance revenues have dropped significantly over the past three years. “Bundled offerings” that mix local and long distance services with flat rates have driven much of the decline in overall long-distance revenue. But while long distance revenue has decreased 10%, prepaid cards have increased about 1% per year, according to the Federal Communications Commission.(ii)
At the same time, prepayment for wireless phone services is on the rise. The current penetration of prepaid wireless customers is 15% with a forecasted compounded annual growth rate of 9.3%, states the Cellular Telephone Industry Association. This growth is due, in part, to several factors:
The penetration of contract-based, post-paid cell phone users is nearing saturation. In 2005, about 72% of the population had standard phone cell offerings.
Wireless phone carriers including VirginMobile, TracFone, and other Mobile Virtual Network Operators (MVNOs) (iii), are developing bundled plans mixing phones and payment plans. At the same time, they are targeting wireless services to many non-traditional market segments, including youths and those on a fixed income.
Consumers adopt prepayment plans to guard against technology obsolescence, manage overage charges and avoid expensive early termination fees, which can often reach $175.
Carriers use prepaid programs to target specific customer classes, including those who do not have service or can no longer obtain post-paid phone service.(iv)
Approximately two-thirds of prepaid phones are purchased as a package with available minutes of usage from store shelves. Additionally, almost 20% of customers report purchasing a packaged phone from the Internet. The remaining 15% of cell phone purchasers secure activation cards separately from their mobile phone (applicable to selected cell phones).
The majority of prepaid wireless telephone customers use a card provided by their local retailer to purchase additional airtime minutes, while more than one-third use the provider’s web site to make this purchase. Approximately 10% of prepaid customers use their handsets to purchase additional minutes.
Prepayment in Electric Utilities
Prepayment trends in these industries indicate strong growth, but utilities remain reluctant to adopt prepayment as a viable means to reduce risks, offer payment options, and serve the high-churn segments of their customer base.
For more than a decade, U.S. electric utilities have been interested in prepaid metering programs. Utilities generally view prepay programs as opportunities to provide new customer billing options that can increase revenue, improve cash flow, reduce delinquent payments, and reduce the number of customer service disconnects/reconnects. As a bonus, prepayment may even increase satisfaction for the least satisfied customers.
Still, prepay is not significantly deployed throughout the U.S. Of the 6 million prepay meters around the world, only 100,000 were in the United States – and many of those are at one utility (Salt River Project).
While the utility and participant benefits can be significant, several obstacles remain before prepay garners widespread penetration. Regulators and customer advocacy groups continue to maintain that prepaid metering services are inherently discriminatory because they target high-risk, slow-paying, or often-delinquent customers. However, given the right promotional aspects of prepayment systems, regulatory and consumer acceptance may be beginning to come around.
Another traditional barrier has been the incremental costs utilities must undertake to offer this program. However, as more and more intelligent meters are developed and deployed in utility Advanced Metering Infrastructure (AMI) programs, the incorporation of prepay enabling functionality is facilitating the potential rise in its adoption. These functionalities include an under-the-glass service disconnect relay, bi-directional communications network and robust back office and retail payment systems. Many utilities are considering these to be the norm, rather than the exception.
These obstacles have resulted in a current state where less than 5% of United States utilities today offer any type of prepayment programs to electric customers, according to research from Atlanta-based Chartwell Inc.
Although the overall penetration of prepayment in the US is relatively small, the statistics gathered from these programs show that many of the anticipated benefits, such as customer satisfaction and reduced delinquency costs, can indeed be realized. However, many of the substantial benefits such as improving cash flow, eliminating hefty deposits from some customers, and providing a greater consumer awareness of energy costs, can only be realized over time.
Concurrent with the favorable changes to opposition and evolving technology, one approach that would seemingly justify these service reconnection devices is the benefit that can accrue to all parties through the ability to turn off a service point upon customer move out.
Customers gain because the service disconnect confirms finalization of the billing process, thereby eliminating a potential billing dispute. Utilities see a reduction in uncollected accounts due to consumption on inactive meters. Likewise, during customer move-in, these devices could enable customers to establish service by a simple phone call, without the utility incurring costs for scheduling and dispatching field service personnel to establish service. Finally, utilities could cut off service to a group of customers as the final step in an emergency plan that could help to increase grid reliability.
More meter manufacturers now include this disconnection or reconnection device as an option under glass at a reasonable incremental cost – often at $50 or less. This feature now gives the utility the flexibility to offer prepaid services now or at a future point when this payment choice becomes less of a contested issue.
Whether advanced payment programs are rapidly adopted in the electric utility business plan or the perceived discriminatory services continues to stall prepaid initiatives, it is apparent that prepayment services in many industries continue to gain favorable acceptance.
In many cases, customers do not even realize they are really paying for services in advance. This has been the approach that other commodity arenas, such as cable TV and high-speed Internet, have been realizing for years.
For utilities to anticipate the trends already in place with other industries, utilities would be wise to gauge the short- and long-term benefits of provisioning all advanced meters with service disconnection devices. In the short term, utilities could potentially improve their handling of customer turnover; in the long-term, they could position themselves to take advantage of future programs that may become more prevalent over time.
For more information, contact:Ron.chebra@kema.com
Footnotes:
(i) www.aba.com, American Bankers Association, 2005/2006 Study of Consumer Payment Preferences.
(ii) www.fcc.org
(iii) MVNO’s do not own their own wireless network, but buy services from a traditional provider. They typically package phones and services as a bundle.
(iv) This may be for any number of factors, such as prior delinquencies credit-challenged or un-banked. The Federal Reserve estimates that about 13% of American households don't own a checking account and 10% of American households have no bank account at all.
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