Insurance Payments Transformation
Aaron Schneider, VP, Bank of America Merchant Services
October 23, 2007
Agenda
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Introduction
Credit Card Players, Debit Card Players
Costs of Credit Card, Debit Card Acceptance
PIN-less Debit, What is it?, Costs
Current Landscape
Benefits
Payment Methods
Growth Opportunities
Merchant Marketing
Technology/Implementation Options
Questions/Comments
Introduction
• Major trends in billing and payment technology in the insurance
industry:
– Increase in electronic presentment and payment
– Increase in credit card payment
– Decrease in check payments
• Payment card growth is slowing in the most mature bill payments
segments — telecommunications and cable/satellite/ISPs — while
growth remains healthy in the insurance and utility segments.
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Credit Card Players
• Visa and MasterCard Issuers
– Includes Citibank, Wells Fargo, Wachovia, Bank of America, Chase,
Suntrust, PNC, and hundreds of others
• Visa and MasterCard Acquirers (Processors)
– Includes Chase, Bank of America, First Data, Fifth Third, and many
others
– Independent Sales Organizations (ISOs)
• Third-Party Technology Vendors
– Includes Bill Matrix, Fort Knox, Speedpay, Kubra, CyberSource, Various
Bank Technologies, and many others
• American Express and Discover (act as issuer and acquirer)
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Costs of Card Acceptance
• For a typical credit card
transaction, the Interchange
fee represents over 90% of the
total cost of card acceptance.
• Visa and MasterCard have
created more than 152
different Interchange levels,
although only a few typically
apply to insurance companies.
• “Interchange qualification”
represents a significant cost to
all insurance companies.
5
5% Visa and MasterCard
Associations
2% to 5% Merchant
Processor
90% to 93% Interchange Cost
Costs of Card Acceptance
• Visa Interchange fees (paid to issuing banks) for insurance companies are:
1.43% + $.05 for credit or .80% + $.25 for debit/check card
+ Visa assessment fees of .0925% (paid to Visa)
+ Acquirer fees of X (negotiable depending on volume)
____________________________________________________
= Total Cost of Acceptance
Example Cost Calculation
$100 Insurance Premium= $1 .48 in Interchange fees (paid to issuing bank)
+ $ .09 paid to Visa
+ $ .08 paid to acquiring bank processor
$1 .66 in total cost
(1.66% effective rate)
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Costs of Card Acceptance
• MasterCard Interchange fees (paid to issuing banks) for insurance
companies are:
Credit (card not present consumer non-rewards rate) is
1.89% + $.10 or .80% + $.25 for debit/check card
+ MasterCard assessment fees of .095% (paid to MasterCard)
+ Acquirer fees of X (negotiable depending on volume)
______________________________________________________
= Total Cost of Acceptance
Example Cost Calculation
$100 Insurance Premium= $1 .89 in Interchange fees (paid to issuing bank)
+ $ .09 paid to MasterCard
+ $ .08 paid to acquiring bank processor
$2 .06 in total cost
(2.06% effective rate)
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Costs of Card Acceptance
Interchange and assessment fees for other industries:
• Mail Order/Phone Order Merchant = Visa Consumer Card (non-rewards)
Interchange of 1.85% + $.10
• Consumer Utility = $.75 Interchange flat fee for Visa and MasterCard
• Supermarket = Credit Visa Interchange of 1.24% + $.05
• Petroleum = Debit MasterCard Interchange of .70% + $.17
• Large Ticket B2B ($7500 +) = Visa Interchange of .95% + $35
Example Cost Calculation for $10,000 Visa Insurance Premium Payment from
Level 3 Corporate Card Customer
$10,000 Insurance Premium= $130.00 in Interchange fees (paid to issuing bank)
+ $ 6.93 paid to Visa
+ $ 10.00 paid to acquiring bank processor
$146 .93 in total cost (1.46% effective rate)
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PIN-less Debit
• Allows ATM/Debit cardholders to pay bills at bill payment merchant
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–
–
–
Web site
Voice response unit (VRU),
Live customer service representative or call center
Recurring payment
• Transactions are processed online, in real time
• Transactions limited to biller categories that fit a specific low-risk
model (utilities, insurance, telecom, financial institutions)
• Bill payment merchant assumes the transaction liability and is
responsible for authenticating cardholder at time the transaction is
initiated
Source: First Data ® : “Real-time Debit Alternative Payments STAR® PIN-Secure & STAR® Bill Payment”
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PIN-less Debit
• Insurance is a core category for the STAR Bill Payment Service.
Nearly 15% of total transaction volume comes from insurers.
– 558 billers
– 89 new in 2007
– 78 insurers
• Approval rate for STAR Bill Payment is 90%.
• Research shows that when asked what type of card they would prefer
to use to make a bill payment, consumers selected debit cards over
credit cards by nearly a 5-to-2 ratio.*
• More than one-third of consumers say that they would pay more bills
electronically if they could use their debit cards.*
“2007 Consumer Payments Preferences and Usage Study”; Phoenix Marketing International / ESP Payments Practice
Source: First Data ® : “Real-time Debit Alternative Payments STAR® PIN-Secure & STAR® Bill Payment”
*
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PIN-less Debit (Bill Pay Debit)
• STAR, NYCE, and PULSE Debit Networks have approved insurance companies
to accept PIN-less debit transactions
• .65% + $.175 = capped at $.62 + processor/third-party vendor fees
Sample Effective cost of a $500 premium= $.62 + $.25= $.87
This equals effective rate of .17%
• Litigation currently exists regarding PIN-less debit patents. Litigation may be
resolved in next 12 months.
• ATM/debit transactions increased about 23% between 2005 and 2006 *
• One third-party vendor insurance client saw a 224% growth in PIN-less ATM
debit transactions from May 2005 (15%) to July 2006 (33.6%)
* Source: ATM&Debit News EFT Data Book September 2006
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Current Landscape
• Bill payment volume is a sizeable opportunity with volume
concentrated in insurance, utilities and telecommunications
Consumer Bill Pay Sales Volume*
$953 billion (CY05)
Other
Cable/Satellite/ISP
Property
Other
Management
8%
11%
Telecom
18%
34%
34%
20%
20%
Utilities
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Insurance
5% 9%
Insurance
9%
Property
Management
Business Bill Pay Sales Volume*
$419 billion (CY05)
Utilities
11%
Telecom
12%
36%
28%
Life/P&C Insurance
Source: Visa U.S.A. PIC Analysis
* Represents bill payment portion of segment volume only; totals may not sum due to rounding.
Current Landscape (e-Commerce)
Personal Insurance
Commercial Insurance
• Can policyholders send payments via
Web site?
• Can policyholders send payments via
Web site?
– Yes – 100%
• Payment methods customers can set
up from Web site.
–
–
–
–
–
Single payment credit card – 20%
Recurring credit card – 10%
Single payment EFT – 25%
Recurring EFT – 15%
Recurring debit card – 10%
• Electronic bill presentment for
customers?
– Yes – 40%
– No – 60%
• Electronic bill presentment for agents?
– Yes – 40%
– No – 60%
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Source: ICE survey
– Yes – 47%
– No – 53%
• Payment methods customers can set
up from Web site.
–
–
–
–
–
–
–
Single payment credit card – 17%
Recurring credit card – 10%
Single payment EFT – 24%
Recurring EFT – 17%
Single payment debit card – 17%
Recurring debit card – 10%
Monthly pay plan only – 3%
• Electronic bill presentment for
customers?
– Yes – 24%
– No – 76%
• Electronic bill presentment for agents?
– Yes – 30%
– No – 70%
Current Landscape (Payment Plans and Fees)
Personal Insurance
Commercial Insurance
• Methods of charging credit card fees
• Methods of charging credit card fees
– Do not offer credit card payments – 10%
– Do not charge fees on credit card
payments – 20%
– Charge standard installment fee – 60%
– Discount standard installment fees – 0%
– Charge more than standard installment
fee – 10%
• Amount charged for electronic payments
made via Web site
–
–
–
–
No charge – 62.5%
$0.01 to $3.00 – 12.5%
$3.01 to $5.00 – 12.5%
$5.01 to $8.00 – 12.5%
• Amount charged for payments via phone
–
–
–
–
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No charge – 62.5%
$0.01 to $3.00 – 12.5%
$3.01 to $5.00 – 12.5%
$5.01 to $8.00 – 12.5%
Source: ICE survey
– Do not offer credit card payments – 44%
– Do not charge fees on credit card
payments – 11%
– Charge standard installment fee – 39%
– Discount standard installment fees – 0%
– Charge more than standard installment
fee – 6%
• Amount charged for electronic payments
made via Web site
–
–
–
–
Does not offer electronic payments – 33%
No charge – 55.5.%
$3.01 to $5.00 – 5.56%
$5.01 to $8.00 – 5.56%
• Amount charged for payments via phone
–
–
–
–
Does not offer payments via phone – 39%
No charge – 50%
$3.01 to $5.00 – 5.5%
$5.01 to $8.00 – 5.5%
Current Landscape
• Online bill payments accounted for 39% of bill payments among
online households in 2006, an increase of 4% from 2005.
• Volume of checks sent by mail fell 4%, accounting for only 34% of the
volume of payments.
• Consumers paying at least one bill online per month rose to 74%,
compared to 69% in the previous survey.
• Consumer adoption of online bill payment has more than doubled
since January 2002, when 37% of online households reported paying
at least one bill online.
• Half of property/casualty insurers are currently offering electronic
bill presentment and payment to their policyholders, and nearly half
have it for their agents.
Source: The 2007 Consumer Bill Payment Survey, a study by Harris Interactive Inc. and The Marketing Workshop Inc.
Source: 2006 Celent report, “Billing: Business and IT Issues for P/C Insurers.
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Benefits of electronic payments
Benefits to insurance companies:
• Improves cash flow and increases profits
• Timely payment
• Streamlines payment processing
• Reduces handling costs and losses
• Reduces risk of losses from bad checks
• Improved customer service and consumer perception
• Labor and operational efficiency
• Consolidate and automate electronic deposits to your accounts
• Decrease lapse rates
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Benefits
Benefits to your customers:
• Choose from multiple methods of payment
• Take comfort in knowing payments are fast, reliable and secure
• Rewards (frequent flier miles, cash back, ease of accounting)
• Addresses most consumer security concerns
• Speeds up time to statement
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Payment Methods
• Cardholders demonstrate a desire to pay through various channels,
indicating opportunity in both the biller direct and consolidator
models
• Example of biller direct is a merchant who allows payment directly on
the merchant’s Web site
• Example of consolidator is a third-party vendor who accepts the
payment on behalf of the merchant
• Advantages of consolidator include ease of implementation, speed of
implementation, less compliance liability
• Disadvantages of consolidator include loss of control
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Payment Methods
• While card acceptance has grown, most Visa cardholders use
multiple methods to pay bills.
82%
Send checks
via mail
13%
24%
52%
Use online
bill pay
at bank
Web site
Use all three
methods
35%
Bill Payment Methods of Choice, 2006
Responsible for Household Bill Paying (n=308)
12%
75%
Pay by biller-direct*
* Pay directly to biller by payment card or EFT from checking or savings (online or by phone)
Source: Visa U.S.A. Research Services, 2006
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Growth Opportunities
Approximate % of overall payments
(among all types of insurance)
paid via credit card
13%
13%
11%
11%
Credit Card
Percent age of Payment s Paid via
• Statistics reported from a top 5 insurance company (based on
revenues)
9%
7%
5%
3%
1%
2006
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2007
Stats for Top Insurance Company
Percentage of payments paid via credit cards in 2006
and 2007 for specific lines of insurance
95%
Cr edit Car d
Payments Paid via
Per centage (%) of
100%
90%
87%
85%
79%
80%
75%
70%
St andard &
N on-St andard Aut o
H om eowners
Type of Insurance
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Growth Opportunities
• In terms of credit card acceptance, this top 5 insurance company
reported their credit card growth rates over the past three years are
as follows:
– 2005: 29% growth
– 2006: 30% growth
– 2007: 13% growth (year-to-date)
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Insurance Inserts
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Insurance Company Statement Insert
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BillPay Marketing
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BillPay Marketing
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Merchant Marketing
• Biller (merchant) marketing of Visa Bill Pay generated more than 180 million
direct marketing impressions in the last year.
• Participating marketing partners within the insurance industry included
Farmers Insurance and St. Paul Travelers Insurance.
• In the retail (non-bill payment) marketplace, there is minimal amount of
growth potential for payments.
• Visa, MasterCard, American Express, Discover, STAR, NYCE, PULSE, and
many of the major issuers are all focused on increasing the amount of bill
payments paid via credit card, debit card.
• These companies are going to more aggressively market bill payment to
consumers who are going to request bill payment capabilities from insurers.
• Marketing will include television, Web, statement inserts, magazine and
other forms of media. Incentives are being increased to push consumers in
this direction.
• What is the message to pass to your customer service agents who will be
taking calls from customers that want to know, can I pay with my credit card?
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Technology and Implementation
• Outlining needs – Which lines of insurance?, pricing concerns
• Accept payments face to face at agent office, mail order via lockbox,
phone order via customer service rep or automated phone system
(IVR), Web payments, Direct or Consolidator model?
• Convenience fees or no convenience fees?
• All customers or exception items? (marketing or no marketing?)
• Which payment types?
 ACH/E-Check
 Visa Consumer Transactions, Visa B2B-Level 2 and Level 3
 MasterCard Consumer Transactions, MasterCard B2B-Level 2, 3
 STAR, NYCE, PULSE
 American Express Consumer, American Express B2B
 Discover
 International Payment Types
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Technology and Implementation
• Business to Business – Examples: Agent to Insurer, Corporation to Insurer
• Visa Level 2, Level 3, and Large Ticket Level 3
• Mastercard Level 2, Level 3, and Large Ticket Level 3
• International Payments – Consumers in many international markets prefer
methods other than Visa/MC/Amex/Discover
• Example- France – Carte Bleue, Carte Vert
Italy – Carta Si
UK – Maestro, Solo, Electron
Ireland – Laser
Scandinavia – Dankort
Germany – Bank Transfers, Direct Debit
Asia – Bank Transfers (similar to wire transfer)
• There is no single source acquirer with a single platform that can process all
domestic and international payments. Multiple acquirers would need to be
chosen for many implementations involving both domestic and foreign
processing.
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Technology and Implementation
• Choose third-party vendor, bank vendor, or choose to code directly to
a payment processor (proprietary or non proprietary concerns)
• Choose processor (acquirer)
• Establish connectivity (Internet API, frame relay)
• Test and certify connectivity
• Train users
• Go live
• Closely monitor fees and Interchange levels
• Stand-alone payment projects can take 4-6 weeks to implement
• Fully integrated payment projects can take 2-6 months to implement
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Questions/Comments/Discussion
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Thank you
• Aaron Schneider, 1.954.558.0252
aaron.schneider@bankofamerica.com
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