Modern times for rural telcos

Cooperatives test the waters of online billing The combination of a cost-effective hosted solution and a market motivated more by efficiency and customer service than profit is bringing electronic bill presentment and payment to the rural markets of Oklahoma and South Carolina - whether they want it or not.

Pioneer Telephone Cooperative and Farm-ers Telephone Cooperative both begin tests this month with an electronic bill payment solution from Derivion (see figure on page 90). The system will give their members the option of using the Internet to view and pay their communications bills.

Like larger telcos that are growing their online customer base at a cautious pace, both cooperatives expect a low initial take rate for the new service. However, for these companies, the rate is expected to be more than enough to make it a cost-effective proposition. It also puts them in a position to respond to the five-year, 500% growth in Inter-net bill presentment and payment recently forecasted by The Aberdeen Group.

"Sometimes there is the [perception] that the Internet is for young urban types, but we have found that rural people use it in a different way," said Jerry Kadavy, senior division manager for Pioneer Telephone. "There is a distance factor, and the Internet can negate that for them."

Even with large numbers of Internet users, Pioneer expects only about a 2% take rate for electronic payment in the first year. "In five years we'll be feeling good if we're at 10%," Kadavy said.

FTC is looking at the same numbers and expects to start slowly. "The [experts] say 10%, but I wouldn't expect that in the first year," said Brad Erwin, marketing manager for FTC."I think it's something we can cut our teeth on and learn along with the customer. It will provide a benefit for all of us down the road once it becomes a prominent facet of doing business."

That benefit comes mostly in the cost-efficiency associated with electronic bill payment. "Let's be honest; it's a cost savings for us," Erwin said. "The cost of billing... is growing every day. If it costs you $1.75 to produce and mail a bill, and you can do it electronically for substantially less than that, then the more people you can get on [the system], the better it is for you from a financial perspective."

The break-even point for implementing Derivion's system is a 3% take rate, according to both cooperatives.

While FTC is trying to get out in front of the competition by introducing EBPP, Pioneer's competition already is doing it. "With AT&T Wireless out there doing this, it's one of those things we have to do just to compete and offer the same kinds of services," Kadavy said.

Both companies were able to get into on-line billing largely because of the application service provider (ASP) model offered by Derivion. "It's not a large cash outlay," Erwin said. "[Derivion] maintains all the server equipment. We send them some files, and they do everything after that. It doesn't require more manpower or resources from us. The financial resources required up front are minimal."

Because its billing system was developed in-house, Pioneer looked at developing its own Internet solution but decided against it. "There were no technical problems we could not overcome, but as far as time to market, we wouldn't be able to do it as quickly," Kadavy said. "Derivion has a lot of relationships already built, and they are in an area where they can pull some weight with other partners that a small telephone company couldn't."

That these two small companies are cooperatives means they are not necessarily motivated by profit. Their charter is different."Our members are our shareholders and owners. We are here to serve them as economically and efficiently as possible," Erwin said.

In a rural market where distance plays a role, convenience is a major benefit. However, personal service is still important to those markets, and the Internet is nothing if not impersonal.

"We have a very high personal traffic rate that still comes into our business office, even though we cover some 3000 square miles. Some of them have quite a distance, [up to] 30 miles," Erwin said.

Still, the company was surprised at the initial take rate when it introduced Internet service in 1995.

"We had some professional wizards and consultants come in to help us evaluate whether we should go into the Internet business or not," Erwin said. "They specifically said, `No, you don't have enough PCs per household to even consider it.' Our CEO said we were going to do it anyway. And it's been phenomenal since. We've grown about 160 new applicants every month."

FTC hopes history repeats with electronic billing, but the customer's lifelong habit of visiting the business office will be hard to change.

Security also is an issue. Whether the Internet security concern is over-blown by cautious consumers or underestimated by e-business companies, the issue still stands as a barrier to widespread adoption of e-billing.

In addition to the functionality of its ASP platform, Derivion provides Pioneer Telephone and FTC with an ongoing marketing campaign to drive the adoption of e-billing. One element of that effort, called Activation Marketing, is to educate the consumer about security.

"There is a lot of confusion among consumers about the difference between privacy and security," said a Derivion spokeswoman. "We are going to help our biller customers talk to consumers about those privacy issues. It is an effort that has to come from companies like us and through billing organizations like the telcos."

Derivion's inetBiller product uses firewalls, packet monitoring, and intrusion detection to secure billing data. It also uses SSL encryption and password protection to protect data integrity.

"For most companies that do business on-line, those things are in place," the spokes-woman said. "These are pipelines that go back and forth through the Internet, but they are secure because they are not open systems where just anyone can access them."

Pioneer Telephone is satisfied with Derivion's level of security. The company now needs to convince its customers."We are impressed with Derivion's security," Kadavy said. "I don't know that you will convince everybody it's a secure thing to do, but I know there are enough people out there already buying books at Amazon. We'll get those people first.As time goes by more people will feel comfortable."

Derivion is aggressively pursuing the second wave of adoptees on behalf of its customers. The company's ASP business model and the way it earns its revenue binds its success - as well as its customers' - to continued growth in the adoption of e-billing. After a very low start-up fee, revenue is generated per transaction. Derivion's strategy is to help our customers with driving adoption, the spokeswoman said. "The more adoption we can help our customers get, the better it is for our business in the long run," she added.

With an industry average adoption rate of less than 10%, Derivion's goal is to drive adoption into double-digits within 12 months.

The company's strategy of developing long-term partner-ships with its customers allows for further exploitation of e-billing benefits. This includes using e-billing as a customer relation-ship management tool and creating more interaction within the billing process.

"When customers come into your office on their way to or from work, you may not have the time for the sales opportunity or the time it takes to explain something," Erwin said. "This way you can send [the information] as an add-on to their bill, and they can look at it when they have time."

Upon entering the market, Derivion's strategy was to open the small and mid-tier markets. The company felt that existing solutions were too cost-prohibitive and, according to Derivion's spokeswoman, "way too intrusive for those markets to even consider." The company claims its ASP model will open those markets for e-billing because of its low implementation and maintenance costs.