The growing number of policyholders paying their premiums by credit card is creating an ever-growing mound of credit card processing costs for carriers, cutting their margins and hurting their bottom lines. The best way to overcome these rising costs is to implement convenience fees for policyholders who choose to pay by credit card (essentially passing the processing cost to the policyholder, via third party payment processor, in exchange for the convenience of using their credit card), but this solution raises some concerns for carriers. Why? Because retention is harder than ever, and for that reason, some carriers are willing to swallow the processing costs for fear of losing credit card-paying policyholders over a few dollars.
While the idea of losing a policyholder over adding a few bucks for using a credit card may sound trivial, the concern is understandable. Many carriers, especially those who are lagging behind in the digital revolution taking place in insurance right now, likely feel like they are sitting in a house of cards and even the slightest whiff of air could bring the house down. I know my tech is behind the insurtechs and the innovative mature carriers. I’ve just got to keep this house standing until I can figure out a way to modernize my business.
Across the board, loyalty—a critical driver of retention and new business referrals–is in a state of flux. Conventional wisdom says brand loyalty is on the decline, largely driven by those pesky millennials. However, a loyalty study conducted by Facebook in 2016 found 77% of consumers are inclined to return to their favorite brands time after time. Now, that sounds promising. Even millennials are doing their part. Really? They are 1.75x more likely than Baby Boomers to say they want to be brand loyal. Here comes the “but” part.
But, that 77% is deceiving, especially for insurance carriers. And there it is. If you split apart that 77% you find two groups. The first group (37%) “brand loyalists.” We like these people. They are the ones that wouldn’t switch even if there was an option for a lower price or greater convenience. But, who are the remaining 40%? They are “repeaters.” They go back to the same brands time and again, but if a lower price or more convenient option was available, they’d consider switching.
What makes this particularly challenging for insurance carriers is the rising number of alternatives for policyholders, combined with hyper-competitiveness on price. Considering the growing number of alternative products and distribution channels offered by an endless list of insurtechs and some innovative mature carriers, all those “repeaters” are certainly at risk.
Okay, I’ll get to the point. Many carriers are shy about implementing convenience fees for the exact reason I just explained. They are justifiably worried about imposing a fee on their policyholders, thereby potentially irritating them, and losing them. They realize they are living on the edge with a lot of their policyholders—hoping those who are still sleeping through today’s insurance revolution don’t wake-up. And, if they are behind in the race to modernize their own offerings and distribution channels, they know it’s only a matter of time until those sleepers wake-up and churn.
Implementing a convenience fee on credit card transactions is surely too risky in today’s insurance climate, right? Not so fast.
Believe it or not, convenience fees are mutually beneficial for carriers and policyholders. Here are the three main benefits convenience fees present to both parties:
Eliminate (or drastically reduce) credit card processing costs.
This one’s a no-brainer. The number of American’s who paid their bills using a credit card more than doubled from 2010-2016 (Aite, 2017). Carriers are spending millions of dollars per year on credit card processing fees. When we’re using the ‘M’ word, especially in the low margin game that is insurance, we’re talking about a material impact on your bottom line.
We’ve seen many of our customers—even those that have a comparatively much smaller DWP than major tier 1 carriers—save millions per year by implementing convenience fees. It’s also worth noting, these carriers have seen zero negative impact on retention after implementing convenience fees.
Fairness for those that pay with other methods (notably ACH).
Yes, as noted above, carriers are spending millions each year on credit card processing fees. That’s a lot of money, which means carriers must find a way to recoup some of that loss. They can’t cease offering credit cards as a payment option because it is an undeniable preference for many policyholders. So, what do they do?
Well, when the tide goes up, all the boats rise. Because carriers cannot legally add a surcharge for credit card payments (convenience fees can be added when handled by a third party payment provider), they spread the cost across their policyholders by raising everyone’s price. This means those who pay through other methods are subsidizing those that pay with credit cards (so the carrier can mitigate the losses from credit card processing fees).
Note: Policyholders always have the choice to pay through a method that does not have a convenience fee, such as ACH, so it’s up to them to decide if the convenience and/or credit card rewards are worth the fee. Someone paying through ACH shouldn’t be subsidizing someone who’s trying to boost their airline credit card miles.
This leads to our last point…
In a word: Price.
When credit card processing costs are eliminated (or drastically reduced) it improves the carriers’ margins and gives them the ability to be more price competitive. As discussed earlier, the decrease in loyalty combined with the rising number of alternatives is creating retention and acquisition nightmares for carriers. Decreased loyalty is the clear sign of a commoditized market, and what becomes the most important factor in buying decisions in a commoditized market? Price.
With payment processing costs gone (thanks to convenience fees), carriers have more flexibility to compete on price, leading to higher acquisition rates. Additionally, policyholders experience the obvious benefit of cost savings, making the number of alternatives with a lower price smaller, eliminating one more factor when considering churning.