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Room to manoeuvre: flexible payments for vulnerable energy customers

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Last editedApr 20235 min read

By Trevor Loveday, on behalf of GoCardless

Vulnerable customers’ treatment by the energy supply industry has long been a source of high-temperature debate between policymakers, regulators, customers and the incumbent industry players. That intensity is creating growing opportunities for challengers to the established energy supply market.

Government intervention on energy bills escalated and the sector regulator has recently stepped in with caps on pre-payment and other tariffs to protect the most vulnerable.

Meanwhile the competition watchdog, the Competition and Markets Authority (CMA), has rapped the suppliers for taking advantage of vulnerable customers.

The reputation of the energy sector, which for many years has been on its knees, is probably at an all-time low. Arguably the clearest evidence of that is the political support gathered by advocates of renationalisation.

But unfairness in the market – perceived and real – has created opportunities for new entrants to seize market share and the number of successful challenger brands is growing. And the policy focus on vulnerable customer groups too is producing openings for new arrivals that come to the market untainted by the past.

Flexible is friendly

When a vulnerable customer suffers a financial blow the real harm is often done by lack of options, not lack of cash. Flexibility in the rate and frequency of payment is a plausible way out, but it’s not to hand for vulnerable customers because they struggle to engage with their suppliers.

Why? It’s a question with many answers. But figures from the CMA offer pointers.

It found that the highest tariffs – those usually paid by non-switchers – are being paid by people who:

  • live in rented social housing (83%),

  • are on low incomes (75%),

  • have no qualifications (73%), or

  • have a disability (74%).

For people wrestling with anxiety, lack of confidence, limited communication skills and more, calling the energy supplier to explain their hardship is not the simple task it might seem to others. So the repeated pattern is one where already physically or mentally unwell people fall into arrears then debt. Then they become more unwell and still more compromised and still less able to deal with their financial burdens.

This doesn’t have to be so prevalent and new entrant energy suppliers are well placed to contribute to making it less so.

So how can challenger energy supply brands better support vulnerable customers to pay their bills?

Deploying Direct Debit

Direct Debit is intrinsically flexible. Yet it is conventionally operated under systems from the 1970s which have often restricted its application in the digital world of the 21st century.As a result, it can take up to ten-days for a new Direct Debit to go live and can be difficult to change once setup. That might be OK as a monthly payment vehicle for middle- and-higher income households to set and, largely, forget.

But technology that makes it simpler and swifter to set up and even to change to respond to events in the consumer’s life is already being applied by many industries including new energy supply brands.

Direct Debit provider GoCardless has reduced the new payment set-up period to two working days. Other features of its technology make it possible for companies to accept all kinds of payments under a single mandate including regular, recurring and ad hoc payments, without needing to resort to using credit of debit cards. With GoCardless payment technology, energy providers can also allow customers to adjust their payment schedule, for example through an app.

Being able to shift an energy bill payment timing or amount is a lifeline for many people whose vulnerability is the product of an income that is irregular or too low to service out-of-the-blue bills.

So the pensioner whose uninsured kitchen ceiling caved in because of a pipe burst; or the middle manager whose job was axed two weeks after she moved home and upped her mortgage 50% needs a bit of slack. And even the family who just let spending get out of control still needs to have a way to get back in control.

Being able to flex payment dates and amounts is a way for customers to engage with their supplier and avoid a downward spiral into arrears, debt and confrontation with the supplier. And the same technology that makes that possible can keep the supplier alert to changes in customer circumstances. So it can act before matters go into a tailspin.

Ofgem has criticised the energy industry for not identifying severe debt early enough and for not putting them on manageable repayment plans. On average customers owe £600 before they start paying back.

Take your pick: uncertain or cold

What is it that traps vulnerable energy customers this way? Fundamentally it’s the rigid and unforgiving structure of traditional Direct Debit solutions.

Vulnerable customers are likely to be on standard variable tariffs. These are the deals available to most people who never switch supplier, like two out of five people earning less that £16,000 a year, according to Ofgem.

“And because of their circumstances, they can suffer more harm as a result,” says Ofgem. Meaning they are possibly only a £10-a-week increase in household expenditure away from having to ignore the next energy bill.

Vulnerable customers – including nearly half of all households on an income below £18,000 –pay their energy bill via a pre-payment meter (PPM). More than two out of five people on a PPM deal say they struggle financially.

While PPM users might be relieved of the prospect of debt to the energy supplier, one in six will stop heating their home for days or weeks because they can’t afford to top up the meter.

Ofgem has recently capped temporarily the price suppliers can charge PPM customers to save them about £80 a year. Switching to a Direct Debit tariff could save them more than £200 a year but there are barriers preventing PPM users from making that switch. Those barriers include the vulnerable customers’ difficulty in making the financial commitment to a conventional Direct Debit arrangement.

More flexible Direct Debit solutions like that offered by GoCardless can also potentially open up new opportunities for PPM customers, who may in the future be able to ‘top up’ through Direct Debit.

And there are other ways, that flexible Direct Debit can help prevent debt build up among vulnerable customers.

New entrant, renewables-focused supplier, Bulb, use GoCardless technology to provide real-time alerts when customers’ payments fail or their Direct Debit mandates are cancelled. The features enable it to contact those customers swiftly and to nip any debt build up in the bud.

Bulb’s customers can choose their payment date and request changes to their payment plan which Bulb can have in place within three working days.

A principled approach

Energy companies and their customers can only benefit from payment methods that prevent or better manage mounting arrears or debt. Traditional Direct Debit has not typically fulfilled this role. But modern Direct Debit is flexible enough to do so - if more energy suppliers see the potential and optimise it in this way.

So Direct Debit and the flexibility it offers to vulnerable customers trapped by a hard payment schedule has clear advantages for customer and supplier. The customer gains options to deal with the unexpected as well as access to better deals.

The supplier, meanwhile, is relieved of the detriment to revenue, and the administration costs that go with managing customers’ arrears. Also the supplier faces less reputation-damaging press associated with debt recovery from vulnerable individuals.

Handing control through Direct Debit to groups who have negligible influence on their finances chimes with Ofgem’s overriding mantra of principle-based regulation. The regulator has moved away from prescriptive rules to demanding that energy companies should always seek to deliver a positive outcome for customers.

In its recent modification of the standards of conduct for suppliers, Ofgem has introduced a vulnerability principle to the domestic standards “that clarifies to suppliers that to uphold their obligation to treat all domestic customers fairly, they need to make an extra effort to identify and respond to the needs of those in vulnerable situations.”

Banking on the future

Further down the line GoCardless says its technology will be boosted by the advent of open banking. This development that crept into the UK in mid January this year will promote the use of APIs to enable developers to build applications to upgrade banking services.

Benefits for vulnerable customers and their suppliers might include the capacity, through a third party like GoCardless, to monitor customer accounts for changes that could signal the beginnings of vulnerability.

Greater flexibility, simpler processes and swifter turnarounds are all characteristic products of the growing sophistication of technology. That creates a means to alleviate vulnerability and has to be welcomed.

Advances in technology are arguably pivotal in the success of today’s cohort of energy supply newcomers compared to the trailblazers of the 1990s. They disappeared as quickly as they came under a barrage of billing failures and wholesale price hikes. While the upstream risks remain, the digital upgrade to the supply market is pervasive and promises better deals for customers who have not been able to secure them in the past.

Trevor Loveday is an independent writer and communications consultant.

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