Tech Talk: New payment option cuts costs and risks for energy retailers
With bad debt risk spiralling for energy providers, and growing economic uncertainty for customers, both groups are seeking new ways to settle their energy bills. In a new technical white paper, Siemens make the case for leveraging two innovative technologies, Managed Credit and Open Banking, to realise a compelling fourth payment option, which strikes a unique balance between credit risk and operational costs.
Managed Credit is based on existing smart metering technology. Meters are run like normal credit meters, but managed like prepayment meters through a smart phone app or website that maintains a central energy wallet. This delivery model has significant advantages over traditional models. When combined with Open Banking technology, which bypasses mainstream intermediaries, it provides a compelling cost profile.
In their analysis, Siemens shows that Managed Credit has a lower cost profile than all three existing payment options, is more user-friendly than prepayment and is a lower risk payment option than Direct Debit.
It’s this risk which is becoming worrying for suppliers, with the economic climate having driven up bad debt provision for large operators to a reported 74 per cent. These additional costs were reflected in recent Ofgem regulatory default tariff cap rises, where 12 per cent of the Period 6 standard credit cap rise was due to bad debt servicing costs and payment uplifts. Fierce competition, illustrated by market prices of up to 18 per cent below cap for Direct Debit, and 21 per cent below for credit, means suppliers are lowering tariffs to retain and grow their customer base. This is likely to intensify once next-day switching is introduced.
Traditionally, prepayment has been the only option for managing bad debt, leaving suppliers to shoulder significant transaction and commission fees for meter top-ups and cover costs for increased customer service support due to self-disconnection and seasonal standing charge debt build-up on gas meters.
In the current climate, standard credit arrangements are high risk and low benefit for suppliers, with customer bills left unpaid. Ofgem is planning to moderate Direct Debit monthly charges, reducing supplier access to low cost working capital, which will make that option less attractive. Similarly, the energy regulator may clamp down on higher microbusiness customer deposits, designed to cover growing credit risk, leaving suppliers searching for an alternative payment option.
For several years, Siemens has empowered a major challenger brand with Managed Credit, offering the risk-free benefits of prepayment without the high cost to serve, and the user-friendly features of credit arrangements. The Managed Credit Central Wallet feature halves the volume of payment transactions, ensures there is no seasonal build-up of standing charge debt and reduces demands on customer service through user-friendly alerts and auto top-up functionality. As an alternative to traditional smart prepayment options for customers who do not wish to take up the offer of additional hardware, Managed Credit digitalises the In-Home Display (IHD) or Prepayment Meter Interface Device (PPMID).
Managed Credit is increasingly deployed on smart metering programmes globally. In parallel, Open Banking is generating interest from industries with high volume billing demands, utilising a consent-based approach to financial data, allowing parties make payments to each other without the traditional costs. To address this technological advance, Siemens has recently teamed up with system integrator CGI and Open Banking innovator, Ordo.
For an energy supplier managing a significant volume of payment transactions annually, this removes the standard 1 per cent commission fee. This is considerable when prepayment energy customers alone carry out approximately £4 billion-worth of transactions each year. Combined with Managed Credit, open banking technology has potential to deliver an attractive risk profile, alongside a significantly lower cost profile.
The head of Managed Credit at Siemens, Nick Jones said: “We are confident that now combined with Open Banking capabilities, our low cost, low risk Managed Credit technology can create further breakthroughs for both challenger and large legacy suppliers. In addition to domestic customers, microbusinesses could benefit from this new technology, with user-friendly features like auto top-ups and budgeting tools that avoid the risk of disconnection and address cash flow concerns, also removing the need for traditional high security deposits.”
The Siemens technical white paper entitled Managed Credit: The Fourth Payment Option, uses industry data from Ofgem and others to present a robust case for Managed Credit as a fourth payment option, with its unique credit risk and operational cost profile.
Download the white paper here: www.siemens.co.uk/managed-credit-whitepaper