The National Automatic Merchandising Association announced a newly formed relationship with Bank of America Merchant Services at the recent OneShow in Chicago. This alliance may be the catalyst for widespread acceptance of cashless vending in the United States.
Formed in 2009, BAMS is the nation's largest bankcard merchant acquirer, with comprehensive knowledge of card brand rules and regulations. It has applied this expertise to designing a custom program offering NAMA members rates negotiated exclusively across relevant industry segments: vending, coffee service and foodservice.
The NAMA Cashless Solutions program is a networked, hardware-neutral end-to-end solution, implemented with qualified communications suppliers and card associations to provide payment reconciliation and account management. NAMA also is working to provide a broad range of preferential financial services to its members.
While cashless vending has been around for a long time, using payment media like tokens, transponders and stored-value instruments, the vending industry has had difficulty adapting to the rapid spread of "open" bank credit and debit card capability to retailers that accept small dollar transactions, like quick-service restaurants and transit authorities. Consumers have been migrating from cash to card payments in record numbers, and vending has not kept pace with this development.
The Smart Card Alliance estimates that there are more than a billion transaction payment cards in the United States, and about 10,000 transactions conducted every second. J.P. Morgan predicts that the annual volume growth of electronic transactions will continue to increase by 11% to 16% annually for the next several years.
This tremendous volume of card-based transactions is made possible by a complex, costly infrastructure that captures customer account information, encrypts it and then applies it to authorize, reconcile and settle payments. The parties that maintain this infrastructure recover their costs through fees assessed at the different stages of the process. The retailer, or "merchant," who accepts cards pays those fees as part of the sale.
CASH COSTS MONEY, TOO
Operators considering the effect of card-processing fees on profit margins might start by considering the often-unrecognized costs of handling cash in a vending business. Industry research indicates that most "cash-bound" companies incur cash-handling expenses that amount to 2% to 5% of revenue. These costs are attributable to collecting, counting, auditing and depositing coins and banknotes. Some operators contend that, when the expense of additional security measures (electronic locks and video surveillance), transportation procedures such as using an armored car service, and the software applications required for control, reconciliation and reporting are taken into account, those cost estimates of 2%-5% are understated.
Similar scrutiny of cashless payment transactions led NAMA to develop its Cashless Solutions program. It offers a straightforward cost-plus pricing method, specially negotiated transaction processing fees and access to gateway-dependent processing incentives. The vending operator is the "merchant of record," and there are no merchant application or account setup fees. There are no bundled-rate pricing or average pricing tiers. Security is assured by the application of PCI (Payment Card Industry) standards across the processing network. No monthly minimum card-processing volume is required, and the program offers fast access to merchant funds from electronic transactions.
The operator receives reconciliation-friendly monthly reports and statement consolidation by card type (Visa, MasterCard, American Express and Discover). In addition, the program offers dedicated 24/7 customer support through Bank of America Merchant Services.
The objective of the program is to make it practical for NAMA members to offer customers the convenience of cashless payment at a reasonable cost, across small- and large-average transaction prices.
The NAMA program's rates are considered to be among the best available in all relevant industry segments. All that's needed to understand the rates is a simple cost multiplier formula that's applied to the transaction amount. Payments to operators are deposited without rates and fees applied, as these are stated and reflected in monthly statements. Wireless communication costs are calculated on a flat-rate monthly gateway service schedule with local-area network configuration options.
Card acceptance processing fees are often difficult to decipher, as reconciliation involves at least four parties:
• Issuing bank - the entity that extends credit to the cardholder, provides the card and maintains the cardholder account;
• Acquiring bank - the entity that accepts the payment on behalf of the merchant (also called the "merchant bank");
• Card association - Visa and MasterCard are associations of banks; American Express and Discover have structures that perform similar functions;
• Payment processor - the entity that provides security, connectivity and reporting services for transmitting, approving, processing, reconciling and settling electronic transactions.
In addition to these four entities, there are a minimum of three other considerations in a cashless transaction network: merchant of record, card reader and communicationchannel. The merchant of record is the business entity authorized to receive noncash payments, while the card reader is the hardware device at the point of sale. The card reader captures and secures the purchaser's account information and transaction details and initiates transaction flow. A communication channel moves data through a "gateway" to the "payment processor," which in turn reconciles the transaction and deposits funds to the merchant of record. A card association, or equivalent, oversees the entire process and enforces adherence to rules and regulations.
An operator who sets out to choose a cashless payment program will do well to keep in mind 10 important considerations.
First, the ease of establishing a relationship with a payment processor. The NAMA Cashless Solutions program is pre-negotiated. Second, what does it cost to apply and to set up an account? These steps are done at no cost under the NAMA program.
Is the processing solution PCI-compliant from end to end? PCI standards assure high security. The NAMA program only works with PCI-compliant providers.
Fourth, who is the merchant of record for the account? Under the NAMA program, the operator is always the merchant of record. What service and support facilities are available to merchants? When the wireless gateway is run by the NAMA program provider, the operator-merchant receives 24/7 technical service and support.
Sixth, what types of cards are accepted, and how are transactions reported? The NAMA program accommodates all major card brands (Visa, MasterCard, American Express and Discover) and the transactions are reported accordingly.
Seventh, are industry incentives or discounted rates offered by the gateway provider? The NAMA program provides access to industry-specific incentives. Are rates and fees applied on a "cost-plus" or "blended" basis? The NAMA program is a cost-plus-rate program, without pricing tiers.
Ninth, when and how are transaction dollars paid to the merchant? Under the NAMA program, revenues are typically direct-deposited within 48 hours of a transaction.
Finally, what are the communication costs and gateway options? The NAMA program has specially negotiated wireless and LAN configuration rates.
WORK IN PROGRESS
NAMA is aware that criticism of electronic transaction processing targets three aspects of the mechanism: transaction definition, rate transparency and evolving fees. For this reason, the association will work continuously to improve the cashless program.
With regard to transaction definition, the NAMA program includes specially negotiated rates for wireless communication and the processing of transactions for vending, coffee service and foodservice members. The trade association also is exploring ways to restructure multiple-product purchases (multi-vending), in an effort to redefine average transaction pricing so as to enable even lower processing rates across industry segments.
As for rate transparency, it's important to understand that processors describe proprietary fee schedules in various ways, and these do not provide a basis for transparent comparison. The lack of rate transparency often leads to complexities and misunderstandings of fee structures. The NAMA program relies on straightforward cost-plus pricing, avoiding blended or average-rate pricing or tiered price structuring.
Fees evolve because card associations regularly change interchange and risk-assessment rates that may result in unanticipated variation in card-processing costs. NAMA is working to ensure that its program remains stable and is sustainable for its members. Interchange updates are automatically passed through as they occur, resulting in a more predictable expense model.
In conclusion, it's well to remember that NAMA commissioned a study by the Hudson Institute in 1986. It was titled "Vending to the Year 2000," and one of its predictions was that cashless payment would become common in vending by the end of the 20th century. When the new millennium began, a Hudson Institute executive returned to a NAMA convention to summarize the developments that had occurred over the preceding decade and a half, and to evaluate the earlier study's accuracy in predicting events.
He observed that cashless vending payment had not become mainstream; but he emphasized that he still believed the prediction itself was correct - only the timing was inaccurate.
MICHAEL L. KASAVANA, Ph.D., NCE5, is the NAMA-endowed professor of hospitality business at Michigan State University (East Lansing). He leads research into current and near-future developments of electronic commerce and transaction processing technology, and has created instructional materials and software products. Kasavana has been actively exploring Internet, intranet and extranet opportunities for many aspects of the hospitality industry, including virtual cash transactions, application service providers, e-procurement and effective website design. He recently completed research exploring technology's impact on vending productivity and competitive advantage. He is credited with coining the phrase "V-commerce," and teaches a course on the subject at the School for Hospitality Business of MSU's Eli Broad College of Business.
Under the NAMA Cashless Solutions program, processing fees are computed on a cost-plus basis. The association's Web group is developing an online "cashless calculator" to make this computation easy to perform. This is a simple way for members to simulate transactions with the hardware cost, communications fees and processing rates, in order to determine the financial effect of adding cashless payment capability to a machine.
The calculator allows the user to select among industry market channels. It comes preloaded with summary data provided by USA Technologies from its knowledge base, which was assembled by analyzing more than 15 million cashless transactions.
The calculator will be available to NAMA members at vending.org by selecting the "technology" tab, then the "cashless vending" option, and then "cashless calculator." Members are encouraged to test cashless scenarios with this tool. Additional resources are available on the NAMA website: vending.org.
Terms related to open-system credit and debit card cashless payment:
Acquiring bank: Also called "acquirer" or "merchant bank," the financial institution that enters into an agreement with a vending operator ("merchant") to accept and reconcile electronic payments.
Card associations: Visa and MasterCard are associations of card-issuing banks; American Express, and Discover Card have established network administrative organs that serve the same function. They set transaction terms and interchange rates for merchants and issuing and acquiring banks.
Chargeback: A transaction returned to a merchant bank by a card issuer because of a disputed transaction. The merchant bank may then return (i.e. "charge back") the transaction to the merchant.
Gateway: Also called "payment gateway," a network infrastructure that allows the transportation of electronic payment and transaction data from a point of sale to a processor for settlement.
Interchange fee: Levied on the merchant to reimburse the account holder's (issuing) bank for expenses associated with transmitting payment to the retailer's bank. Normally this fee is spilt between the acquiring and issuing banks.
Issuing bank: Financial institution that distributes electronic payment cards and maintains cardholder relationships (billing and payment collection).
Merchant agreement: Contract between a vending operator (merchant) and a merchant bank that sets forth the rules governing acceptance, reconciliation, and settlement of electronic transactions.
Merchant discount rate: The MDR determines the fees applied to each electronic payment transaction as interchange, merchant and transaction fees.
Merchant of record: The merchant recognized by the card associations as the entity authorized to accept cashless payments.
PCI compliance: Conformity to standards developed by the Payment Card Industry Security Standards Council, an international forum established to enhance, maintain, publish and implement data protection standards. These standards specify the security requirements that protect cardholder and transaction data.
Payment processor: The entity providing authorization, verification, clearing and settlement services for merchants and cardholders.
Third-party processor: A non-processor entity that performs transaction authorization and processing, account record-keeping, and other business and administrative functions for issuing and merchant banks.