Is it over for transaction fees?

Last spring, when California's Department of Motor Vehicles debuted an online vehicle registration renewal program where people could pay by credit card, thousands of people flocked to the Web site.

In June alone, about 22,000 vehicles were registered online. But on July 1, the state began charging a $4 fee to cover the credit card payment option. Traffic to the site (www.dmv.ca.gov) dipped to 17,000.

"The minute [the $4 fee] went into effect, the usage dropped," said Arun Baheti, the state's director of e-government. "Clearly, it had an effect on the usage."

State officials said the proportion of eligible users has declined from 5 percent to an average of 2.5 percent since the fee was imposed. The site is averaging about 15,000 transactions monthly. Although Baheti said he has heard that some lawmakers are interested in repealing the $4 fee, and Gov. Gray Davis' administration opposed it, the state legislature has not taken any action. However, the state is studying various models for financing e-government online projects.

California is not alone in questioning whether convenience fees are needed as technology helps governments become more efficient.

Some say their return on investment is so good that it doesn't make sense to charge citizens extra fees. Some say convenience fees discourage people from using online services. Others say it's not fair to charge online users more than people who conduct business face to face.

Still, several e-government veterans say people don't mind paying a little extra if it saves them time, gas and parking money. They say charging convenience fees are the chief — and sometimes the only way — for smaller governments to pay for technology and e-commerce. And they say they would rather charge a fee than raise taxes.

"It's probably too early to know how [the issue's] going to work itself out," Baheti said.

Turning People Off

Many state and local governments charge people some type of convenience fee for e-government services, such as paying parking tickets, filing online taxes, renewing driver's licenses or tags, applying for a fishing license or renewing a professional license. Businesses also pay user fees, but often they pay less than they paid before the online option was available.

State motor vehicle departments, which consistently deal with heavy volumes of residents and businesses, have emerged as the most likely agencies to be the first to provide interactive Web-based services. A few are also leading the curve in how those services are changing.

There are basically two reasons why governments charge convenience fees. First, companies that equip governments with technology levy a fee on transactions to recoup their investment, so government agencies then charge fees to even things out.

Second, governments, like merchants offering an online credit card payment option, impose a fee to pay credit card company surcharges, or interchange fees, typically 2 percent to 3 percent of the transaction amount.

A classic example is what happened when Arizona, in a partnership with IBM Corp., posted one of the nation's first online transaction programs in 1997.

IBM provided start-up and operational expenses for the state's Web-based vehicle registration renewal (www.servicearizona.com). People were offered instant renewals via the Internet or a telephone interactive voice response system (IVR). To use the online or IVR system, residents had to ante up $6.95 per transaction, which went to IBM. Usage was sluggish at best.

"What we saw was a lack of interest," Arizona CIO Art Ranney said.

In that first month, the system recorded about 2,500 transactions — Internet and IVR combined. Over the next year, the system averaged about 4,700 transactions a month. Gov. Jane Dee Hull thought it didn't make sense to charge online and IVR customers more than residents who renewed at a Motor Vehicle Division office. Legislators nixed the fee during the 1998 legislative session. The service became fee-free in mid-October 1998.

The first month, Internet and IVR transactions jumped to 13,129. The next month, it rose to 17,300. In December 1998, it climbed to 19,486. Since then, usage has climbed steadily, and in December 2000, the MVD recorded 42,755 transactions — more online than by phone.

Ranney said there's some real movement across the country to eliminate convenience fees but that they're justified in some cases. For instance, reserving a recreational park area online would be a convenience for a resident, and because it's a low-volume use, he said charging an extra fee would be acceptable.

John Kelly, Arizona's former CIO and now Intel Corp.'s government affairs manager, agreed. "I don't think convenience fees are bad or wrong on their face," he said. "They're still appropriate for some enhanced service, but you need to approach it very carefully, and you need a motivated audience."

For example, he said if an agency digitized older records that could benefit lawyers, then it's appropriate to add a fee to recoup costs.

Jeremy Sharrard, an analyst with Forrester Research, said companies doing Web-based business with governments might not mind paying extra fees because those fees are still cheaper and save companies time compared to getting the information other ways.

But he said "user-charged, citizen convenience fees are not long for this world." Sharrard wrote a report titled "Sizing U.S. eGovernment," released in August, that concluded that fees hinder use of state and local sites.

"Constituents won't pay extra to conduct marginally more convenient transactions online," the study found. "As a result, Forrester believes that governments will eliminate user-charged fees by 2002."

Sharrard said that if governments want site traffic, they're going to have to eliminate fees.

'An Easy Call'

Virginia's DMV (www.dmv.state.va.us) is one of the few, if not the only, state agency to offer a discount if residents renew their driver's licenses or vehicle tags via the Internet, mail, fax or touch-tone phone. For license renewal, it's a $1 discount for five years. For tag renewal, it's a $1 discount for a year and $3 for two years.

Virginia DMV Commissioner Richard Holcomb said the services debuted in 1999 for free, then the discounts came later. "At no point was there a consideration to [add] a technology fee to our transactions,'' he said. He said Virginia offered the discounts because it cost only $2 to process a transaction online, by phone, by fax and by mail as opposed to $5 to process a transaction face to face. "It was an easy call," he said.

From June 1999 to May 2000, when the Web systems went live for vehicle renewal registrations, the site averaged about 6,700 transactions per month. When the discount was offered in July 2000, it rose to 13,544 transactions. Since then, Web usage has averaged nearly 16,000 transactions monthly.

Holcomb said the real benefit is to his department. "We're sort of talking about a reverse paradigm," he said. "We provide a convenience discount because it's more convenient for the DMV to process the transaction by doing it over the Web. It's cheaper and easier for us doing it over the Internet."

With Virginia's population increasing, he said the online alternative has also helped save money by helping the state avoid building new DMV offices.

Randy Street, executive vice president of sales and marketing for the Atlanta-based EzGov Inc., an e-government provider, said the company charges convenience fees. But he said recently it has seen a "dramatic shift" from the convenience fee-financing model to a software-licensing model.

With the software-licensing model, Street said governments pay money to cover how much it costs to clear transactions and/or for a company to store data on its servers. He said governments may be charged more if a greater bandwidth is needed or for more floor space in a hosting facility to store additional hardware. Those costs don't include licensing, hosting and maintenance fees.

Street said Riverside County, Calif., and DeKalb County, Ga., used to charge citizens convenience fees for online property taxes, but both counties recently switched to the other model. He said Beaufort County, S.C., launched its online vehicle tax payment with the new model as well.

Street said convenience fees made sense for governments interested in experimenting with e-government at low or no cost. But past that stage, he said the potential of e-government increases, and the convenience fee model is a hindrance.

Chris Neff, senior director of marketing for Overland Park, Kan.-based NIC, which built and operates 12 state portals, said there's no single funding solution for government. "As far as the trend, our perspective is each government approaches its business differently," he said. In most states, NIC charges convenience fees, usually $1 to $2 per transaction.

He said in California and Arizona, officials "out priced" their services and may have been out of touch with their constituencies. "It's in nobody's best interest to out price a convenience fee in the marketplace," he said.

Neff said NIC encourages its government clients to form a governing board — which could include representatives from the private sector, government agencies, or other associations and interest groups — "to ensure oversight and independence of the portal and to ensure interest. They own the portal and set all policies."

The company also tracks satisfaction rates with online users, he said. For example, an August 2000 online survey of people using Indiana's state portal (www.accessindiana.com) revealed that an overwhelming majority didn't mind being charged convenience fees.

"If NIC is out of touch, there's no way we could succeed," he said.

Paying to Play

Jaye Jordan, Public Technology Inc.'s director of electronic commerce, said that beyond fees, he didn't see any other viable means for governments to fund technology. PTI is the technology support arm for the National League of Cities and other government organizations.

"Governments have to get funding somewhere," he said. "If you begin to make it free, then you have to be prepared to fund it."

Or you can give customers options. Minnesota's Department of Public Safety, which recently began offering a vehicle registration renewal program developed by EzGov, charges 1.75 percent of the renewal price for people who pay by credit card. EzGov gets the money.

But the site also offers another option: an electronic transfer of funds from a checking or savings account. No fee is charged if people choose that option — slightly more popular than using a credit card.

Carolyn Purcell, executive director of Texas's Department of Information Resources, said there is no flap about convenience fees in Texas. "We don't hear it in Texas," she said. "And believe me, we care what our citizens think."

She cited a June 2000 University of Texas study (www.utexas.edu/research/tipi/reports/dir_final2.htm) that found that most people oppose both the use of general tax funds and the sale of government-collected data on individuals to pay for e-government services — they would rather see advertising on screen or pay directly for services. Furthermore, the study found, "e-government does not seem to be in the category of something everyone should have and use, like public education. Rather, it seems as if people perceive it as a value-added service whose costs should be shouldered by its users."

Another recent Texas task force state study (www.dir.state.tx.us/egov/report/index.html) found that although other states, such as Pennsylvania, Iowa, Florida and Massachusetts, favor a tax-funded model and do not charge user fees, more than 55 percent of Texans said using tax dollars to support e-government is unacceptable.

Phil Barrett, director of e-government in Texas, said the state's model is totally self-funding.

KPMG, he said, paid all upfront costs for the entire technology infrastructure, as well as the development and maintenance of the state portal, Texas Online (www.state.tx.us). To recoup its investment, KPMG charges convenience fees.

Barrett said the state allows the company to charge fees for some applications but not others. He said the company hopes to break even in three years, after which the company and state would split revenues in half.

In deciding to charge a convenience fee, Texas agencies work closely with KPMG to determine whether it's needed and the amount. Then the state's Electronic Government Task Force, representatives from state agencies and governor's appointees from the business, municipal government and civic sectors review it, Barrett said.

"That's sort of the check and balance to make sure the application going on Texas Online is appropriate, for one, and, if there is a convenience fee, it's at an appropriate level," Barrett said.

Over time governments can trim costs as Internet e-commerce increases, but that hasn't happened yet, Purcell said. She said people are getting hung up on convenience fees, forgetting people are getting a service they want.

"The people of Texas don't really care whether they register their vehicle with the city, the county or the state. By presenting a sort of seamless base or a seamless front end, it means that a citizen doesn't have to be steeped in knowledge about bureaucratic boundaries," she said.

That said, Purcell wouldn't be surprised if the convenience fee situation changed.

"In this business, you can almost guarantee it will change," she said. "I fully expect it to morph to stay current with the technology. We'll keep our ear to the ground to that end and provide information to the legislature."

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