An innovative way to make money from credit
Chris Bishop, Telstra's General Manager for Credit, told us at a conference in Sydney last May that on 5 May his company had introduced a $5 late payment fee on its Australian accounts. That is: if you're late with your payment, they add $5 to your next bill. In fact, $5.50 after 'the GST' came in.
Finance companies and banks have for a long time operated a similar scheme. It's something that some readers may have experienced over the Christmas/New Year period, when we try to take some time off and forget about the bills. If, over Christmas, you bounced a cheque or paid your Visa late, or forgot to pay the HP on your car on time - the chances are you were whacked with a flat rate penalty of $10 or $25 or something similar.
For the financier these penalties are a wonderful little earner. For the customer, they are an unpleasant surprise.
If you get an unpleasant surprise like this, your reaction is likely to be annoyance. If you were annoyed enough you might take your business elsewhere. If you're locked into a 36 month HP contract, it's not easy to move. If it's a credit card, you're not as tied to the one company but if you think about it and work out that all the other banks probably have the same rules, you might well decide you just have to grit your teeth and bear it.
A lot of people moan about their banks and bank charges but many of them don't change. Why do people find it so hard to change banks (or indeed change any sort of supplier)? Is it because they feel the others will be just as bad?
Partly. Our psychologist, Dr Sarah Fifield, who admits to recently being hit with a penalty for missing a Visa payment, adds a couple of other reasons. She says that people generally choose the behaviour that is easiest for them, that is, the one that gives them the most benefits with the least effort. Psychologists call this the path of least resistance.
The disgruntled customer intends to change banks in a "you can't treat me like that" kind of gesture. But changing banks can be quite a process, so the action is postponed for a few days, then a few days more until the indignity of such treatment has mostly worn off, and the motivation to change dwindles to practically nothing. Staying with the offending bank becomes the easiest thing to do - it requires no effort by the formerly disgruntled one. It is worth remembering though that in many cases terminating dealings with one business, and opening an account with another doesn't involve such a difficult process as changing banks. If customers can easily pick up the phone and obtain service from your competitor, then chances are they will do it.
The trigger for making this sort of change is often the cumulation of a number of factors, none of which were enough in themselves. Think of the old saying, 'that was the straw that broke the camel's back'. A series of annoyances is more likely to break the back in this case.
We think this is an interesting area to consider. For obvious reasons, credit management usually focuses on how to get the money out of the customers. It often overlooks the possibility that in doing so we annoy the customers sufficiently to drive them away.
Let's come back to Telstra. Here are the salient points from their website under the heading 'How can I avoid the late payment fee?'
If you pay your bill within 14 days of the due date on your bill, you won't incur the fee... Remember the $5.50 fee doesn't apply to bills under $55. [So they haven't been as ruthless as they might have been.]
Also, the late payment fee can be waived at any stage if you choose Direct Debit to pay your bill. By choosing the Direct Debit option you'll ensure that your bill is paid on time every time. [They are using it as an incentive to move to cheaper and more reliable methods of payment.]
If you're having difficulties paying your bill we encourage you to contact us as Telstra now has a wider range of options to discuss with you (eg changes to your billing period, making minimum payments). We prefer to work with you earlier to find a payment arrangement that suits your needs. [This all appears very reasonable.]
Late payment fees are common business and industry (including telephone carriers) practice. [This is arguable. Some sort of late payment fee - usually interest will be included as a matter of course in most creditors' payment terms and conditions, but many creditors lack the courage to actually impose the penalty. I haven't seen or heard of them used across the board in any other utility company in Australasia, which doesn't mean that someone's not doing it but... My feeling is that Telstra are being very innovative. And well done to them.]
More than half our customers don't pay their bills on time [a very poor strike rate by New Zealand utility standards] and every time a bill comes in late it costs us $36 per bill! The purpose of the fee is to encourage our customers to pay their bills on time and for Telstra to recoup some of the significant costs associated with late payments. [Bearing in mind that half the overdue customers probably pay on or before the first reminder letter, without having to speak to a staff member, there must be some huge costs to get the average up, or some interesting cost accounting.]
So will Telstra lose business as a result of this? The company faces little competition for local calls in Australia but that competition is increasing, and it has many serious competitors for mobile and long distance calls. Despite this, my guess is that, given the way they have applied it, Telstra will lose very few customers as a result of this fee. No doubt Telstra will have some measures in place of their rate of customer loss and will be looking to see if the rate worsens.
Telstra's 2000 annual report says that Telstra Retail is responsible for sales and billing to 8.8 million customers. Their website says more than half don't pay by the due date. Let's say that every month a mere 500,000 of them are liable for the fee and 80% pay. (It is worth noting that they will have difficulty collecting their $5.50 in some cases, but overall they'll probably get pretty good payment rates.) That's $2.2 million a month (the GST inclusive). I suspect that Chris Bishop, or whoever thought to do this, might be in for a bonus this year.
Peter Hattaway is a director of Hattaway & Associates, Credit Consultants.