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Customers Choose Cash & Cheques To Get Charged 2007-03-12

Posted by clype in Money.
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  • Why should I be charged more for paying a bill by cheque or cash rather than direct debit?

That is the question being asked by an increasing number of customers of big organisations such as ‘BT‘ and the newly enlarged ‘Virgin Media‘ empire.

From 2007-05-01, ‘BT’ will levy an increased charge of 4.50 GBP/quarter on people who pay their bills by cheque or cash.

And ‘Virgin Media’ charges 5.00 GBP/month as a so-called ‘administration charge’ for customers who do not sign up for direct debit payments.

  • The average payment by ‘Virgin’ customers is just 43.00 GBP/month for their cable TV, phone and broadband bills.

The suspicion is that this is just a way of squeezing more money out of customers and that these charges bear little relation to any real extra cost involved.

Support for scepticsm comes from Mr. David Llewellyn, professor of money and banking at Loughborough University.

‘I am pretty sure the Virgin figure has no relation to the true cost,’ he said.

‘Virgin Media’s’ 5.00 GBP/month processing charge is paid by about 1.5 million of its customers.

‘The cost reflects our processing costs,’ said a ‘Virgin Media’ spokesman.

But she did acknowledge that ‘some of it will be an incentive as well to encourage people to move to direct debit.’

‘BT’ points out that customers who are paying via cheque or cash are not, in fact, going to pay an extra 4.50 GBP/quarter.

Until now those who were paying via direct debit or a monthly payment plan had 1.00 GBP/month knocked off their line rental. That discount will now apply to all customers.

So the net increase to the cheque and cash payers is just 1.50 GBP/quarter.

‘Effectively, we are replacing an existing discount with a charge, which results in a 0.50 GBP/month decrease for some customers and a 0.50 GBP/month increase for others,’ said a ‘BT’ spokesman.

‘The charge will not apply to customers on our “Light User” and “In Contact Plus” social telephone schemes,’ said ‘BT’ .

Even so, now that the line rentals are aligned, 4.50 GBP is the apparent extra cost of paying by cheque or cash every three months. ‘BT’ will not reveal exactly how it arrives at that figure, but claims that the processing fee covers not only the charges made by its own bank, but also its in-house processing costs and also the charge made by post offices, which also accept ‘BT’ bill payments.

‘We believe it is a fair and reasonable charge and is amongst the lowest such charges,’ said ‘BT’.

An automated payment process, such as direct debit, is cheaper to run, for both banks and their corporate customers, than one that involves people opening envelopes and counting figures on bits of paper. It also saves money on chasing customers who fail to pay on time, or indeed at all.

But teasing out the real costs of processing cheques or direct debits is not easy.

  • BACS, the inter-bank money transmission service, will not reveal the basic cost per item it charges to the banks.

And the banking organisation Apacs (Association for Payment Clearing Services) says there are no current, meaningful, average costs for the banking industry as a whole.  Back in the mid-1990s it carried out some research on the cost of money transmission in the UK, at the time it came to the conclusion that the cost to a bank of processing a cheque was 0.44 GBP and that of a direct debit was 0.21 GBP.

Direct debits were first introduced in 1966.  In the mid-1990s ‘British Gas’ became the first organisation to offer customers a discount for paying by this method.

But there are reasons, other than cost and convenience, that make this payment method attractive for service companies, like utilities, with lots of customers making regular payments.

Professor Llewellyn says the evidence is that people who pay this way are less likely to move to another supplier.

‘Direct debits are inclined to lock you in,’ he said.

‘And if the money has already been deducted you have no bargaining power,’ he added, suggesting that companies that prefer direct debits as a method of payment should be wary of charging too much.

‘This is very comparable to penalty charges being charged by banks, which “The Office of Fair Trading” said should be related to cost,’ pointed out Professor Llewellyn.

‘I am pretty certain these charges are not,’ he warned.

Some customers are clearly not convinced that these non-direct debit charges are fair, and neither are some MPs.

In the UK Parliament, an ‘Early Day Motion’ — which is a traditional expression of ‘back-bench’ opinion — criticising the new ‘BT’ additional charge, has been signed by 77 MPs.  So far, the telecoms regulator ‘Ofcom‘ is fairly relaxed about the issue.

‘We have looked at this,’ said a spokesman.

‘The main option is to leave “BT” as there is competition these days, people are free to leave if they want,’ the spokesman pointed out.

But ‘Ofcom’ has said it would monitor the effect of these charges and if it gets a deluge of complaints then it will look again.

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