Storming (both me and the weather) along English roads and on into France - where it was more like cruising in bright sunshine - I was struck by the elegance and simplicity of the "peage" system today. Blue arrows above the lane means pay by credit card. Slide up to the machine, insert your card, and the appropriate fee is deducted. Even small fees - the lowest I had was 2.20 euros are handled without fuss. I have no idea how they handle credit card commission payments, but I know that almost nowhere in the UK would let you pay such a small amount with a credit card (even debit cards, with their fixed fee commission, usually attract a minimum of a few pounds)
By contrast, just before I left for France, I had renewed my tax disc online (of course) Super simple process - they send you a reminder in the post (they have my email address now; next year they should try that perhaps. They could chance that I haven't changed it in the interim and, if they get a bounce-back or I don't buy my tax disc within 2 weeks of the mail, send me a paper reminder). Anyway, as I've said before here (once someone had pointed out to me that it was available online), you type in the reference number, it looks up my insurance and MOT status and then you enter your card details and that's that. Except not quite.
There's an extra �2.50 for paying by credit card. As they explain:
The charge levied by credit card companies for this facility will be passed on to the customer. Following a public consultation exercise on a number of different options, a flat rate charge for credit card payments was chosen. The �2.50 charge covers the costs incurred by the Agency for providing this service. Debit card payments will remain free of charge.
The levy is only a little over 1.2% on my tax disc price (which seems to indicate that I am dangerously polluting the environment - in my defence the car is so old that no one seemed to care much about CO2 emissions when I bought it). The �2.50 is, it seems, a fixed fee - not a percentage of the total transaction - so those with efficient cars paying �35/year would definitely feel aggrieved in percentage terms at least.
My own recollection of commission costs for credit cards is that the fee is nearer 2.5%, although it could certainly be reduced by negotiations (Amex and Diners Card used to have commissions nearer 4% I think). It's possible that either (a) DVLA is absorbing the difference, (b) over the spread of different tax disc rates, �2.50 approximates to an average of 2.5% (tax charges for HGV are, it seems, much higher so the percentage would be correspondingly much lower) or (c) they have indeed negotiated a cheaper deal.
It's an interesting dilemma for governments around the world. There are several questions to answer before you commit to allowing credit cards to be used:
- Should you even consider potentially adding to the credit burden of the nation? Whilst government gets the money early and on time with minimal risk of fraud, the country's credit card debt could increase significantly if credit card payment was available across the full spectrum of government services. The long term potential downside of adding to the credit mountain is serious.
- What message are you sending? Those citizens who are already in debt may use their credit cards to settle government bills that they cannot afford, worsening their debt position. Of course, government gets the money from the credit card company, but it leaves the people behind - and is a step removed from knowing about and understanding the problem and therefore unable to help them work through it. Is it right that those who pay the minimum balance every month should incur interest charges on government bills?
- Does your legislation support the idea. When we built the "payment engine" for the Government Gateway, I think sometime in late 2002 (someone will correct me if that's wrong, it could easily have been late 2003), we were unable to offer credit cards through the service - UK government legislation did not allow items such as road tax or personal tax to be paid by credit card. That changed with the Finance Act of 2004.
- Then, what kind of process do you have to go through before you start accepting such payments. Some countries can I imagine, just get going - after all, credit cards are a de facto currency for most of the developed world (in the USA there is almost a complete absence of debit cards I believe). DVLA chose a consultation that was entirely based on the premise that the charge would be passed on to the customer, the only point at issue was what the structure of the charge would be. Interestingly, their paper presents 5 options and none of the 5 were selected - the nearest is the first option that suggests a flat rate of �3.50.
- How do you build the business case? At the simplest level, credit card payments cost more than other forms of payment, purely because of the cost of commission. The real question though is what is the overall cost of your collection process? How much does it cost to handle cash over the counter, cheques through the post (with the dual opening and careful handling those need), debit cards over the phone (IVR and with customer service support), debit cards over the web, direct debit (set up through IVR or with support again) and then credit cards (phone, web and customer support). Wrapped around this is the strategy you're going to undertake about which channels you want to drive. Supermarkets all over the UK have stopped taking cheques in the last few months - so they've clearly made up their mind. Ultimately we're all driving to and end point of direct debit, debit card via the web and credit card via the web - in the short to medium term, these need to be supported by phone support, but why not just IVR? In this context, i.e. at the end point, the extra commission from credit cards will still stand out, but on the route to it, why should it do so? One local council's report from the Audit Commission outlines the various costs incurred:
Direct Debit �0.30
Standing Orders - unknown
Credit and Debit cards �0.71
Girobank swipecards �0.73
Town Hall �0.80
Roosegate Housing Office �1.05
Ormsgill Housing office �1.37
Dalton Town Hall �1.58
The credit/debit card line plainly doesn't distinguish between the two - and I don't think it's an average - so the credit card line would be a little higher, but perhaps not as high as the housing office amounts. Standing orders are flagged as "unknown" - they cost more than direct debits because data has to be rekeyed. I sense here, though, that all of these are manual processes requiring much data entry with the attendant risk of keying errors. The costs also look, generally speaking, not fully loaded - they probably don't include bank handling charges across the board nor "overhead" costs such as premises and so on; but that's me speculating, it's not clear from the data and I may be completely wrong.
- And finally, are you actually going to charge? In the USA, the IRS allows payment by credit cards, and does not pass on the fee although several third parties do (including those who accept phone payments - which attracts hundreds of millions of dollars a year in payments) - those who settle by phone seem happy to exchange that additional cost for the thousands of air miles that they receive in return. The IRS had 1.5 million online credit card payments in 2005. US consumer affairs organisations are worried about the impact on people's finances and whether they're doing the maths right, i.e. how much is an air mile really worth to you? MSN Money, on the other hand, encourages it. The real question is perhaps better phrased as "will you be subsidising credit cards if you pay the commission and therefore disadvantaging - i.e. increasing the costs - for those paying by other means"
Oddly, despite the public consultation exercise conducted by DVLA, there's not a standard approach in government (sharp intake of breath and expression of surprise from all around no doubt). As far as I can see, local councils were largely "told" to allow credit and debit card payments in one of the Better (Best?) Value initiatives. But, for instance:
- East Hertfordshire council don't allow credit card payments, for fear of encouraging those already in debt to take on more debt
- The Waste Management Service in Bromley is unable to accept credit cards, perhaps because of system issues
- In Stockton, credit card use is discouraged because of the additional costs that the council would face (indicating that they don't pass the commission costs on)
- Generally, the Inland Revenue does not accept any credit card payments for taxation payments
- I found one council, although I've lost the link, where they did the maths on accepting credit cards and found that it would cost them �26,000 a year in commission. On the positive side of the balance, they speculated that payments would be made earlier, there would be less evasion and that, overall, this would counter the cost. It seemed a reasonable business case. In general, I found few local councils who stated on their site that they would pass on the transaction costs to the customer - and, whilst it wasn't a complete sample, I must have checked 20 sites. One that did pass on the cost was Tonbridge and Mailling, who didn't say how much the charge was.
What I think is interesting is that, as so often the case, each of these decisions is taken locally - and the business case is built locally. Transaction charges for credit cards can be varied based on how big you are and, I'd like to think, what your risk profile is. After all, the commission charged by credit card companies has a couple of components:
- Their need to make a profit (so covers the costs of customer acquisition/marketing, operations/processing etc)
- The cost of money - credit card companies generally pay the originator of the request (the merchant or, in this case, government) before they receive the money from their card holder
- The risk inherent in the transaction. All credit card companies put aside reserves to cover fraud, bad debt and so on. With government, fraud is almost certainly zero - I'm unlikely to pay my parking fine/council tax with a credit card I've stolen from someone else. The bad debt risk doesn't go away.
On the council side, the costs of processing vary by a few factors:
- The degree of automation. A no-touch service is cheaper to operate than one that requires customer service follow-up or telephone handling
- The volume of transactions handled and whether that creates a reduction in commission
Taking all of these together, it doesn't seem too big a step to argue that if a government developed its payments service around 4 or 5 payment gateways that routed to two or three different authorisation providers, the total volumes available would allow for a significant reduction in commission - remembering that fraud is going to be zero.
The increased flexibility in payment terms and the agreement with the credit card companies to pay early should ensure that government has more cash sooner than it would have with cheque payments - and should therefore allow the commission cost to be offset entirely. This should ensure that no one is receiving an unfair subsidy.
Abandoning payment by cheque and switching everything to direct debit seems a sensible first choice. Changing phone support to be 80% IVR for direct debit set up, credit and debit card handling a sensible second step. And then working as a collection of local government authorities or central government departments to sign blanket deals that recognise the volumes and risks inherent in government transactions versus more standard consumer transactions. Governments may save enough money in the entire process to allow them to underwrite the bad debt side of credit card payments made to government agencies, making the risk to the credit card company zero and allowing only for a "profitability payment".
This approach has to be balanced by the need to ensure that money is collected. I imagine that over the years each local council has found what it thinks is the best way for its own area to get maximum collection - and one of those ways is to offer as many varied payment methods as possible. I couldn't fine one that used bartercard but perhaps that's worth a go too. None accepted Paypal either, but I guess that is backed by a credit card so is much the same.
Following a suggestion like this, some folks in local government would likely instantly lament the high cost of setting up an IVR, training it for local, regional accents and so on. The answer to that is to buy one, two or three IVR systems for a variety of local councils and services, not 100,200 or 300, or one for every local council. At the same time, customer support is centralised into a few locations, and local difficult collections maintained for the can't pay/won't pay people who need some more direct attention. As long as we continue to set everything up in the borough (loosest sense of the word - city, county or metropolitan area would all work) in which the money is paid, then whilst unit costs appear individually small, aggregate total costs continue to be high.