Cashless payment has been gaining traction in vending as early adopters of the technology, and its providers, have compiled hard transaction data showing that investment in the infrastructure can increase sales volume and expand margins - even after the cashless transaction fees are paid. The National Automatic Merchandising Association's launch of an industry-tailored cashless payment program, NAMA Cashless Solutions, for its member operators should quicken the pace of adoption. Scheduled to roll out on June 1, the new program offers specially negotiated rates for wireless communication and transaction processing through Bank of America Merchant Services.
But despite the vending association's news and the excitement surrounding the potential that card-based payment holds for vending, doubts remain about the transaction cost: in particular, about the fee structure that underlies cashless payment processing. Among the most mysterious elements are the interchange or "swipe" rates. These are the fees charged by card associations like Visa and MasterCard to manage credit card transactions.
Having a clear understanding of how interchange fees are assessed, and by whom, can help operators make sure they are paying competitive rates.
According to Stacey Finley Tappin, vice-president of sales for Apriva (Scottsdale, AZ), which provides secure data communication over wireless networks and maintains a payment gateway, an interchange charge is essential for practical cashless transactions. Interchange is the fee charged for passing financial transaction information back and forth among the vending machine, a payment processor, the card brands and the banks that issue credit, debit and prepaid cards. This fee is imposed by the card brands - not by the processor - on every card transaction a merchant processes.
"The interchange fees that card associations charge cover a number of costs incurred in conducting credit card transactions," explained Tappin. "Networks like Visa, MasterCard, American Express and Discover have put in place a number of stringent security and operational measures to guarantee the integrity of each credit card transaction. The interchange rates ensure that the infrastructure that enables merchants to accept card-based payments remains robust, seamless and cost-efficient." It is a complex, skilled service, and it costs money to provide it.
In a typical card payment scenario, the bank that issues the credit card deducts the interchange fee from the payment it forwards to the merchant's bank or financial services provider. The rates, which are set by the card associations, are based on a number of variables, including the method in which the card is used, the retail environment and the profile of the customer.
Merchants like fast-food restaurants and convenience stores that sell "small ticket" items, usually priced at less than $15, commonly receive interchange rates that are somewhat lower than those charged to "high ticket" retailers.
Security issues associated with the actual use of the card also figure into the cost calculation. Transactions conducted with the actual swipe or tap of a credit card are charged lower rates than sales conducted without a merchant's seeing the physical card used to make the purchase.
Face-to-face sales, like those made in a fast food restaurant or convenience store, for a low dollar amount and where a cashier can match the customer's signature to the card, are generally considered to be the most secure, presenting the lowest level of risk to the bank of fraud or bad credit, and thus are assigned the lowest swipe fees.
"Card not present" transactions, such as those conducted over the phone or the Internet, represent a greater security risk to the credit card companies, and as result, are assigned higher interchange rates.
Other factors help determine interchange rates, such as whether the card is part of a loyalty program and which bank issues the card. A premium credit card that offers rewards generally will have a higher interchange rate than do standard cards, to offset the cost of the rewards program.
Transactions made with credit cards generally have higher rates than those made with debit cards, which are assigned a lower rate because they are considered less of a risk: they are tied to a bank account from which funds are deducted at the time of the purchase, rather than to a revolving line of credit. "Signature" debit card fees carry a higher risk of fraud than PIN debit transactions and so typically are charged a higher swipe fee.
"For the most part, the vending industry will see interchange rates that are among the lowest in the retail industry," said Tappin. "Of course, most vending transactions are considered ‘low ticket' in terms of the types of transactions that are conducted. In addition, since a card has to be used to make a purchase, the security risk is lower. These are two key factors in keeping the interchange rates low for unattended payments."
Sanford Brown, chief sales officer of Heartland Payment Systems (Princeton, NJ), a leading credit card processor, believes that just as the card companies have established standard rates for various retail segments, the vending industry is in a position to secure a favorable industrywide standard interchange rate, for the reasons Apriva's Tappin cited.
"The card associations want to capture sales in vending, and I think you'll see them set a rate appropriate for the risk they can measure in vending, which is relatively low, that will work for both the operator and the card issuers," Brown commented.
The Heartland executive said he believes the amendment attached by Sen. Dick Durbin (D-IL) to the current financial reform legislation under consideration by the U.S. Senate (see sidebar, P. 28) will provide some relief to merchants. Most beneficial to vending operators would be the proposed reduction in interchange rates for debit card transactions, which are the payment method of choice for small-ticket transactions.
Brown added that there's an obvious "breakpoint" at which the cost of accepting card transactions makes financial sense in vending. "That dollar amount is obviously higher than the average sale of a soft drink or candy bar," he said. "But I think the hope is to drive consumer behavior to buy higher-ticket items by accepting credit and debit cards. The margins for the low-ticket products may go down, but the net gain becomes positive for the operator as he sells more high-priced items."
Mike Lawlor, vice-president of sales and business development for USA Technologies (Malvern, PA), can substantiate Brown's analysis from data collected through processing more than 20 million transactions. While vending's tight margins leave little room for profit when paying to process the cashless sale of a single candy bar or soda, the good news, according to Lawlor, is that the average cashless purchase price at a vending machine is $1.75. When vending prices are set above $1, credit and debit use increases – and the sale of more products at higher price points improves margins and increases net operating profits.
"Vending customers typically don't reach for their credit cards until you get in the $1.25 and higher range," he noted. "Cashless has the ability to push the price point up, while bills and coins couldn't in the past."
Heartland's Brown explained that, as a merchant service provider, or processor, Heartland operates the computer systems that authorize and settle transactions and convert them into funds to be deposited into the merchant's bank account, and levies its own fees for the service. It also is the processor who collects the interchange fee and pays it to the card companies.
"There are a lot of hands in the cookie jar with each transaction, so it's not a surprise that by the time it gets to vending operators, they're confused," the Heartland executive commented.
Among the various fee structures, the model adopted by the NAMA cashless vending program and many processors is "interchange plus" pricing. This means the merchant service provider passes the actual interchange charges on to the merchant along with a fixed markup. Many merchant accounts also operate on a tiered rate structure, which have an established base rate, the "qualified rate," along with additional tiers that carry a surcharge that is added to the qualified rate.
The Heartland executive observed that it's an unfortunate reality that many processors take advantage of the merchants they serve. He emphasized the importance of operators educating themselves, line item by line item, about the fees they are charged by their processors.
The company established the Merchant Bill of Rights to promote fair credit, debit and prepaid card processing practices on behalf of owners of small and midsize businesses. Proposed as an industry standard, it outlines 10 fundamental rights to protect business owners and promote fairness and transparency in credit and debit card processing.
Heartland bills its customers using the "interchange plus" model, which Brown says is the most transparent and easy to understand, and leaves little room for unscrupulous processors to hike up rates with unfair fees.
"At Heartland, we show on the statement what we pay to the card association and what we earn for the services we provide," he explained. "Our view is that if we're embarrassed about what we earn, then we shouldn't be charging it."
In Brown's opinion, merchants should avoid "tiered pricing," which he says makes it virtually impossible to obtain the details of each individual transaction. "In reality, you're likely overpaying for hundreds of transactions with that methodology," he commented.
USAT's Lawlor said his company's approach is to simplify the process for the operator by charging a single rate per transaction based on an average of the various interchange fees and card types.
"With the projected 50 to 60 million card transactions that we will process in 2010, we have a good understanding of the mix of cards among the four card companies and the mix between debit and credit cards," he explained. "What USAT does is provide our customer with a ‘blended rate' under which each customer will be charged the same preset card processing fee, no matter what card is used or whether it is a credit or debit card."
The preset processing fee is billed as a percent of sales and based on the average card transaction dollar amount. The higher the average transaction, the lower the card-processing fee.
"If they were to try and account for and settle all card transactions back to each vending machine, it would be a nightmare," commented Lawlor. "[Our fee structure] keeps it simple for our customer to know what the fee will be for every card transaction that happens in their machines, and to settle and account for it very easily."
He added that USAT can provide a breakdown of the swipe cost for each card and its own fee for customers who want the specifics on how it arrives at its rates.
"When you add together the interchange rates from Visa, Mastercard, Amex and Discover, and the processors' fees, you're looking at a lot of fees for one small vending transaction," he commented. "There was a sense of paralysis in the past, because operators didn't know what all the terms meant and how to decipher it all. With our program, all those fees can coexist behind us, with a very simplified cost structure."
Simplicity is at the heart of USAT's end-to-end cashless model, and its rate structure is no exception, he emphasized. While NAMA's new program gives the operator the flexibility to purchase hardware, wireless and merchant service from separate providers, USAT's selling-point is the convenience and predictability it offers the operator by serving as a one-stop shop.
"Whether it's the largest bottler or the smallest mom and pop operation, we provide the ePort card reader, with wireless technology built in; we set up the merchant account and process the transaction from end to end; and we track all sales data by machine and transfer the money to the operator's bank account," explained Lawlor. "It's easy to deploy, and it's scalable. In our view so far, we have seen having separate hardware and data service providers and processors as not being as good for customers. The opportunity hasn't been presented to us, but we'd consider participating in the NAMA program if there's a fit for us, and if it can benefit our customers."
KNOW WHAT YOU'RE PAYING FOR
Whatever the payment processor and rate structure, Heartland's Brown strongly advised operators to take the time to read and comprehend the statement they receive each month. "If you throw your hands up in the air because you think you can't understand it, and just walk away, you allow yourself to become a victim of those who might not have your best interest at heart. And not only because they're trying to take advantage; they may even make a mistake," he explained. "You need to be educated enough to catch it. Ask your processor to explain the statement, and if they can't, you know you have a problem."
Brown explained that many processors raise their fees twice a year, when the card associations adjust their interchange rates. The unscrupulous ones "pad in" small rate increases that can add up significantly over time. Since they don't disclose the breakdown of costs, many merchants believe the card companies are charging higher interchange rates than they actually are.
"Many processors who aren't playing fairly want to blame Visa and MasterCard for the cost of acceptance," he said. "But in reality, it's the processor who ultimately controls the end price to the merchant. We don't view Visa and MasterCard as the ‘bad guys.' It's the many processors who don't want to do business in a fully transparent manner who are to blame, which is why it's important for merchants to educate themselves."
Heartland helped the National Restaurant Association develop an interactive online calculator to enable restaurateurs better to understand and reduce the costs associated with their credit card processing. Brown said this can be a useful resource to help vending operators understand the basics and added that he'd like to see the vending industry develop such a tool specific to the interchange rates of this market segment.
The NRA site - knowyourcardrates.com - features a card processing rate calculator that allows a restaurateur to enter a few pieces of data from his or her current card processing statement and get an estimate of the total processing costs, understand who is receiving those fees, and take steps to lower the overall costs.
Another tool Heartland created to guide merchants is costofaburger.com, an educational site that discusses the intricacies of processing statements and offers a fictional monthly statement operators can use as a tutorial when reviewing their own.
New tools are coming along to assist vending operators in determining the impact of a move to cashless on their profits. The National Automatic Merchandising Association is readying a calculator, based on the fee structure of its new program and a knowledge base showing before-and-after performance of many locations in seven categories. This historical data was compiled by USA Technologies on the basis of its pioneering work with operators over the past decade.
Every advance in customer convenience, starting with multi-coin mechanisms and continuing through coin changers to bill validators, has required greater investment and imposed higher maintenance costs on operators. These expenses were more than offset by the greater convenience they offered patrons, and the price flexibility they gave operators. From this perspective, the cashless option is the next step in an ongoing process.