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How Governments Can Drive Adoption of Electronic Payments
Convenience and constituent satisfaction are just two of the reasons why government institutions should consider moving to a fully integrated and automated e-payment application. Learn about the considerations to weigh when implementing e-payment.
JEREMY APPEL, Executive Director, Receivables Product Specialist
September 27, 2017

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.

Good News for Government

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:

  • Strengthen controls: In the 2017 Payments Fraud and Control Survey from the Association for Financial Professionals (AFP), 75 percent of organizations that were victims of fraud attempts or attacks in 2016 experienced check fraud.
  • Improve efficiency and reduce costs by automating processes: Eighty-eight percent of organizations point to efficiency gains as a primary driver for converting to electronic payments, according to the 2015 AFP Payments Cost Benchmarking Survey. Well-designed e-payment applications can enable payment posting and cash application with fully automated straight-through-processing with valid data on every e-payment.

Convenience Is King

In addition to direct bottom-line benefits, governments can improve the end-user experience through an e-payment system by:

  • Allowing constituents to make payments easily via their preferred channel (e.g., web, mobile, phone or point of sale), method (e.g., credit card, debit card or ACH) and language.
  • Reducing friction through real-time payment authorization and direct interaction with the government’s backend systems. For example, payer or invoice data can be transferred into the e-payment application so the payer doesn’t have to type that information manually.
  • Eliminating paper and minimizing the risk of forgotten or late payments through additional capabilities like electronic bill notification, stored payment accounts, online bill history and recurring auto-payments.

Flexible Fee Structures

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:

  • Reputational risk: Under a flat fee, the underlying credit card interchange expense of processing a single large payment is subsidized by many constituents making many small payments. This inequity carries reputational risk for governments, and may be unpopular among constituents. In contrast, a variable fee structure more equitably aligns constituent costs to the underlying processing expense, so it can minimize complaints and related reputational risk.
  • Payment size and payer type: A government needs to balance the interests of individual and commercial constituents. The constituent mix becomes more commercial-intensive as payment amounts increase—but most payments are small and most small payers are individuals, as the graph below illustrates. When determining an appropriate fee structure, it’s important to note that analyses of average payment amounts can be heavily distorted by a small number of commercial payers that make very large payments.

Example Distribution of Payments (#) by Payment Amount ($) by Segment

Residential consumers

Application: Utility (energy) payments
Segment: Residential consumers
Sample Size: 127,994 payments
Total value: $24,608,871.76
Mean: $192
Median: $174
 
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

Commercial consumers

Application: Utility (energy) payments
Segment: Commercial consumers
Sample Size: 4,009 payments
Total value: $2,318,809.95
Mean: $578
Median: $341
Payment amount ($) 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

Encouraging Constituent Adoption

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.

 

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