The Size of the Challenge
Water remains relatively inexpensive. So if a handful of end-users can’t, won’t, or forget to pay their water bill, you wouldn’t think it would have much impact on utility finances. It turns out that payment performance is actually a really big deal that costs the industry hundreds of millions of dollars each year. As of 2010 U.S. water utilities generated over $42 billion in annual revenue and given the pace of rate hikes over the past few years that number is now likely closer to $50B. Perhaps unsurprisingly, water utilities report being unable to collect between 0.5% and 1.5% of billed revenues each year. To make the math simple, let’s assume that 1% of $50B in annual revenue is uncollectible which equals losses of $500 million each year.
“Water utilities are unable to collect $500 million each year from poor payment performance.”
Yet it doesn’t end there. Many customers that are unable to pay their bill are subject to costly service disconnections that add to utility losses. It’s estimated that each service disconnection costs the utility at least $20, even after recovering reconnection fees. With the average water bill in the U.S. costing around $65 per month, $500M in unrecoverable bills is equivalent to up to 7.5M disconnections each year costing the industry an additional $150M in lost revenue.
In addition to the revenues that are entirely uncollectible, there are millions more that are delinquent or only partially paid, further impacting the water utility’s ability to maintain financial stability.
Assisting the Customer
To address these challenges, many water providers offer Customer Assistance Programs (CAPs) to the most vulnerable community members. Adoption of these programs, however, has historically been very low and less than 7% of utilities spend more than $25,000 each year on CAPs. There are three primary reasons that CAPs are chronically under-subscribed:
- Customers who may be eligible for CAPs are simply unaware that the programs are available. Utilities are not aggressive in marketing these programs and have a difficult time targeting customers that are most in need.
- Social stigmas associated with being financially disadvantaged discourage customers in need from applying for assistance programs.
- The CAP application process is typically onerous and requires detailed financial disclosures. The difficulty in completing the program applications and providing personal financial information erects a hurdle to program adoption.
So what can utilities do to improve payment performance, reduce delinquencies, and increase adoption of Customer Assistance Programs?
It turns out there are many opportunities to address these challenges, reduce bad debt, and improve financial resilience. Let’s take a moment to review some of the best practices that are emerging to address these challenges:
- Improved payment experience and discoverability
One solution to address payment performance is to start with improving the payment experience. While many utilities offer multiple payment options, the experience of actually paying your water bill can be confusing. Oftentimes, each payment option (credit card, debit card, ACH, etc.) is implemented through different vendors with unique interfaces, thus leading to confusion for the end-user. Other times, the enrollment process may require downloading a pdf file, printing the form, and mailing it back to the utility or the user’s financial institution. Unifying payment options under a common and easy-to-use interface minimizes the steps required to complete a payment, eases discovery, facilitates auto-pay, increases paperless billing enrollment, and improves overall payment reliability.
- More channels to pay
End users like options. Some people prefer to pay their utility bill in person, while others like the ability to pay remotely over their mobile device, set-up a recurring payment from a credit card, or pay through an Interactive Voice Response (IVR) phone system. Making sure that customers have many methods to pay provides the opportunity to meet the needs of each customer and thus improve the likelihood of an on-time payment.
- Flexible payment schedules
Allowing users to pay WHEN they prefer, not just HOW, also creates additional flexibility and can lead to improved performance. For example, some customers have a difficult time setting aside enough money each month for their utility bill when they are paid on a bi-weekly basis. Offering the ability to schedule payments that align with pay check periods, or even making pre-payment options available, reduces the amount of each payment, making it easier for at risk customers to afford billed amounts.
- Predictive analytics to inform proactive outreach
Utilities can do a much better job anticipating users that are less likely to pay their bills and taking proactive steps to address this sub-set of customers. Modern data-analytics technologies can comb through years of payment and consumption history and generate highly accurate predictions of those users that are more or less likely to pay their bills on time. This provides utility managers the opportunity to design targeted campaigns to address these at-risk customers.
- Micro targeting
Using predictive analytics and other demographic, census, financial, and consumption data to better segment customers creates the ability to target specific customer groups with offers and programs that will help improve their payment performance. For example, low income residents should be offered money saving efficiency program information and more detail on Customer Assistance Programs (CAPs) for which they might be eligible. Simultaneously, utilities have the capability to lower utility bills through demand management programs and enroll disadvantaged customers in assistance programs to improve water affordability, thus reducing bill delinquencies and non-payment.
Moving up the Adoption Curve
It’s important to acknowledge that many of these best practices and recommendations are not easy to implement. Implementing new analytics platforms, changing billing systems and payment structures, and designing and implementing CAPs are non-trivial efforts for the typical utility. All of these activities require cross-functional coordination, stakeholder support, and some level of financial and human resource investment.
“Improving payment performance requires cross-functional coordination and stakeholder support.”
But given the level of revenue that is lost each year due to non-payment, delinquencies, and shut-offs, it is in the best interest of the water utility, the end-use customers, and the broader communities to make these investments. The business case is clear and the payback periods are very short. Not all of these approaches need be implemented concurrently, and a staged approach can spread the costs over time and departments. It’s also important to identify experienced vendors who provide the data analytics and customer engagement technologies to help utilities address customers in need.
As with most things, the first step to solving a problem is to determine the underlying causes for the challenge. In this case, an acknowledgement of the reasons for the revenue collection challenges the industry faces creates opportunities for incremental improvement that will help to create greater balance in social equity and a more resilient water utility for the future.