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Insurance Payments Transformation. Aaron Schneider, VP, Bank of America Merchant Services. October 23, 2007. Agenda. Introduction Credit Card Players, Debit Card Players Costs of Credit Card, Debit Card Acceptance PIN-less Debit, What is it?, Costs Current Landscape Benefits

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Insurance payments transformation l.jpg

Insurance Payments Transformation

Aaron Schneider, VP, Bank of America Merchant Services

October 23, 2007


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Agenda

  • 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


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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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2% to 5% Merchant

Processor

5% Visa and MasterCard Associations

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.

90% to 93% Interchange Cost


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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

    • 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 PracticeSource: 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)

Business Bill Pay Sales Volume*

$419 billion (CY05)

Other

Property

Management

Other

Cable/Satellite/ISP

8%

9%

Insurance

Insurance

5%

Property

Management

Utilities

36%

34%

11%

12%

Telecom

20%

28%

Telecom

Utilities

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.


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Current Landscape (e-Commerce)

Personal Insurance

  • 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%

Commercial Insurance

  • Can policyholders send payments via Web site?

    • 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%

Source: ICE survey


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Current Landscape (Payment Plans and Fees)

Personal Insurance

  • 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

    • 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%

Commercial Insurance

  • Methods of charging credit card fees

    • 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%

Source: ICE survey


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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.

Bill Payment Methods of Choice, 2006

Responsible for Household Bill Paying (n=308)

* 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

  • Statistics reported from a top 5 insurance company (based on revenues)

Approximate % of overall payments

(among all types of insurance)

paid via credit card


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Stats for Top Insurance Company

Percentage of payments paid via credit cards in 2006 and 2007 for specific lines 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 [email protected]


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