Over the winter break, Verizon announced (and then retracted) that it would begin to charge customers a $2.00 convenience fee in 2012 to pay their monthly bill online or over the phone — except in a multitude of cases “where the fee is waived or where no fee applies”. Huh? That’s what we said, too. But our confusion didn’t last long. It turned out this bold pricing move had a shelf life of less than 48 hours, as the company quickly heard from outraged customers and saw the obvious parallels to the still smoldering Bank of America debit card fee fiasco.

So, let’s tear this one apart and figure out if it was crazy or not? The answer might not be as clear cut as you think. To help understand why, let’s get back to billing basics. There are three broad things that most billers care about — presentment method, payment channel, and payment method. Not all billers have the same goals and objectives, but I would argue that all billers frame their ‘funds collection’ strategy along these lines.

Presentment method is the easiest of the three dimensions, as bills are usually presented in paper form or electronic form. Paper presentment of monthly statements is a gigantic cost to billers. As a consequence, paper turn-off (or PTO as it is called) is a strategic objective for most billing czars. This is not always true, as some billers like to use the monthly statement to cross sell other services. But its usually true.

Payment channel is a more complex dimension, as many billers will accept payment through a half dozen or more channels. Payments might be initiated through the mail, from an online banking environment, from the biller’s website, over the telephone, from a local store, etc. There are lots of channels, and lots of variation in each channel. Payment initiated from a local store, for example, could be done over the counter with a clerk or through a kiosk.

Payment method is an obvious dimension, and one that is usually fairly broad. Consumers might pay with a check, with a general purpose card, with their bank account, with a closed loop prepaid card, or with cash.

The thing that makes bill pay unique is that the payment channel and the payment method are only marginally related — and both are totally independent of how the bill is presented. A card payment for example could be done against a card on file, could be done on a one-off basis at the billers website, could be done over the phone via an IVR, or done over the phone with an operator. But the same thing could be said for an ACH payment. And a walk-in payment off the street could be cash, but it could also be a check.

Nothing bothers billers more than a customer that demands a paper statement, initiates payment over the phone through an operator, and then pays using a premium credit card. Said differently, nothing bothers billers more than a customer that demands the most expensive bill presentment method, initiates payment through the most expensive channel, and then pays with the most expensive payment method.

Strategically, most billers are trying to do three things:

1. Move customers from paper bill presentment to electronic presentment
2. Move customers from manual payment channels to computerized payment channels
3. Move customers from expensive forms of payment to less costly forms of payment

How they do this is an art form, and usually involves some combination carrots and sticks.

With this as a backdrop, let’s circle back to Verizon. Their $2.00 bill payment convenience fee applied only to one-time card payments made online or made over the telephone. Many telecommunications analysts, in an attempt to help justify the fee, were quick to point out that Verizon, after all, did have to pay card transaction fees (authorization fees, interchange, etc.) to accept this form of payment. So why not charge a convenience fee to help offset the cost? Sounds good, but they also had to pay the same exact transaction fees for recurring payments against cards on file. And recurring card payments were explicitly waived from the $2.00 surcharge! So the cost argument doesn’t hold water.

To me, the Verizon $2.00 bill pay convenience fee was a stick-based attempt to move some of their customers from a less dependable one-time payment channel to a more dependable automated recurring channel. Why less dependable? That one’s easy. It’s less dependable because it is up to the customer to remember to pay. The customer wants to pay, intends to pay, but forgets. While the late payment reminders go out, Verizon has the customer’s goodwill, but not their money.

An obvious alternative would have been to use a carrot rather than a stick. Instead of penalizing customers that occasionally want to do a one-time online payment, they could have offered any number of incentives to sign up for recurring payments (or AutoPay in Verizon terminology). If they really wanted to finesse it with some heads up ball play, they could have offered special incentives to get a recurring debit card on file order to take advantage of Durbin debit fee caps.

This is all, of course, probably a gross oversimplification. We don’t know. Verizon might have very well have tested various incentive schemes and found they didn’t move the needle on customer behaviour. Maybe what is needed is a combination of carrot and stick — and a slight rethink of how they engage their customers around billing.

So, back to where we started. Crazy or not? Wanting to move long-term customers to recurring payments is not crazy. But there has to be a dozen better ways to get there other than by charging customers a “convenience fee” to pay their bill.