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Cashless Transactions Take Center Stage As Small-Payments Card Use Accelerates

Posted On: 2/1/2007

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SMALL PAYMENTS ALLIANCE: Peppercoin Inc. and Heartland Payment  Systems Inc. have formed a strategic alliance linking the strengths of Peppercoin's Small Payment Suite and Heartland's value-added payment processing services. At recent Small Payments Conference, Peppercoin president and CEO Mark Friedman (left) and Heartland chairman and CEO Robert O. Carr team up to welcome delegates at the opening session.U.S.A. -- The dramatic increase in the use of cashless payment media -- credit and bank debit cards -- for small transactions was the subject of several educational events late in 2006.

USA Technologies hosted a breakfast during the National Automatic Merchandising Association's 2006 National Expo, with presentations including an update on the growth in card use for small payments, as well as a report from an operator who finds the cashless option valuable in targeting desirable new business. A month later, the 2006 Micro and Small Payments Conference in New York City explored the trend from several angles, including its implications for retail outlets conducting loyalty programs with their own cards.

The consensus is that Americans are eager to reduce their daily dependence on cash by using debit and credit media to make small purchases, as well as the larger ones that now have become virtually unthinkable without credit cards.

In the same timeframe, the National Association of Convenience Stores (NACS) updated its members on an ongoing campaign to mandate the publication of the interchange fees charged by financial institutions for electronic payment processing. At the convention, held two weeks before the NAMA National Expo, the association's leaders explained that the object is to make these charges more transparent to consumers and merchants alike.

Welcoming guests to the USAT breakfast, senior vice-president of sales and marketing Michael Lawlor observed that "debit and credit card -- cashless -- vending is the coming thing; we've been working at it for many years." He explained that the purpose of the event was to bring operators up to date on what has succeeded and, in general, share what USA Technologies has learned. "You must succeed if we are to succeed," he pointed out.

He introduced Alan Drazen, Mid-Atlantic Vending (Moorestown, NJ), to outline the company's experiences with cashless vending using USAT's e-Port terminal. Drazen is a long-time veteran of the ice cream business.

Mid-Atlantic provides truck and machine vending services in Delaware, Maryland, New Jersey, Pennsylvania, Virginia and the District of Columbia. The company concentrates on branded vending, offering a variety of products ranging from ice cream to snacks and candy.

"We've been successful with cashless," Drazen said, "and we've gotten business by offering a cashless vending option."

In vending products at a $2 price-point, placing machines that can accept $5 bills as well as cashless payment media makes a real difference, the industry veteran emphasized. "We'll start with ice cream, and then try to get the other vending business too."

Mid-Atlantic has used this approach to obtain marquee accounts, including a major zoo in the nation's capital. In this large public location, the vending business has grown tenfold; allowing customers to use their credit and debit cards for vending purchases has been a key to that dramatic growth.

"In the first year, we saw cashless sales grow to about 10% of the total volume," Drazen reported. That percentage doubled in the second year, he said, and the company believes that this represents incremental business. "Families visiting the zoo will make multiple purchases, if it's easy to pay for them," he explained. "We now offer milk, snack and candy vending, as well as ice cream."

At another large account, he added, Mid-Atlantic won the ice cream vending business while a competitor, a major carbonated beverage company, did the cold drinks, which had three times the number of machines in place. "And we outsold them three to one," the veteran operator told the audience.


"We were nervous about adopting cashless payment technology," Drazen admitted. "But USA Technologies partnered with us, and helped us put everything into place. They provided tremendous value."

One concern for an operator is that the removal of product from a machine must be reconciled with payments made for the product, and enabling cashless vending might seem to make this task more complicated. "But we get two very helpful reports," Drazen told the audience. "One is a sales summary that lists all cash and credit transactions. The other is a daily 'zero transaction' report, listing machines that didn't sell anything on the previous day. A vender listed on this report needs to be checked out immediately."

Moving forward, he said, he expects a continued sales lift as more machines are equipped for cashless transactions and products thus become more accessible. As of mid-October, Mid-Atlantic was running 50 card-capable machines.

At present, the most appealing sites for cashless vending are locations like zoos and highway rest plazas. "These often are viewed by operators as 'transient' locations, but there's a lot of repeat business at stops like that: commuters, local family groups. They become aware of the cashless capability, and they visit the machines more and more often.

"We've been pleased with the results," Drazen summed up, "and we plan to implement cashless vending more and more. I wasn't sure that consumers were ready for it, but the past 18 months have convinced me that they are. I think, as more operators add cashless capabilities, it will give the entire industry a substantial lift." He thinks it likely that, within three to four years, about half a million card-enabled machines will be on location.


USA Technologies' Lawlor observed that the company emphasizes ease of implementation. "There are three steps. The first is to identify customer sites; the second is to install e-Port in the necessary machines. Third, use the USALive network to manage your business," he said.

"We're a hardware and software supplier," the USAT executive explained. "We provide flexible hardware, wireless communication and credit card processing services, all ready to go."

The e-Port terminal can accommodate both conventional magnetic-stripe and new contactless payment cards, Lawlor said; it interfaces readily to bill-and-card validators manufactured by Coin Acceptors and MEI. e-Port also is easy to adapt to situations in which an Ethernet network can be used instead of wireless data transmission. The software offers detailed sales reporting and settlement services. It can work with the operator's existing accountability system, "whether handwritten or handheld," he added. "USALive provides 100% visibility, and we can integrate it all the way back -- to accounts receivable, if necessary. It can be integrated into SAP [the enterprise resource planning database system from SAP AG], as Canteen does."

A toll-free number gives patrons quick access to a help desk, to address debit and credit card transaction chargeback, refund and other administrative issues, so the operator need not grapple with them, the USAT executive continued. As an end-to-end solution, USALive Online accepts transaction information from ePort, from a vender's DEX data capture and storage system, and from Cantaloupe Systems' Seed remote monitoring device. These inputs can be accommodated by a single platform, Lawlor summed up.

John McLaughlin, USAT's vice-president of sales, took the podium to emphasize that the present is an exciting time for the banking industry. "Consumers are shifting to cards," he said, "and the card associations want to work with you. It's my job to understand the issues for both the banking and the vending sides."

There are a great many new payment concepts in the air, McLaughlin observed, and it is important not to get dazzled. Mobile phones, for example, can be equipped variously for use as payment systems; but at present, cards are much more manageable. "Credit limits are lower, and the debit card is linked to the user's bank account; it's 'plastic cash.'" he said.

USA Technologies, which originally developed e-Port to allow patrons of its modular self-service business centers to purchase services with their credit cards, has not only worked steadily to refine the system and keep it up to date with the fast-changing financial and wide-area network fields, but also has tracked and analyzed the rollout of vending machines equipped for cashless payments.

McLauglin reported that one recent study followed 1,100 machines that made about 1.5 million transactions over a three-month period, and the results are worth pondering. "Consumers spend an average of 32% more when they pay by card," he said. This finding aggregates results across all product types, prices and location types. In business-and-industry accounts, consumers spend 24.1% more when they use their cards -- the average transaction rises from $1.12 to $1.39. In such locations, credit card transactions represented 22% of all sales, which thus average $1,608 per machine, per year.

In educational institutions, vending machines fitted to accommodate cashless payment media enjoyed an average 30.2% sales lift, the speaker continued. Cashless sales represented 36% of the total, or an average $1,488 per machine per year. Machines in travel and transit sites saw an average 23.4% sales increase, and those in entertainment venues, a 25.7% boost.

McLauglin added that machines vending higher-priced merchandise did a larger percentage of their sales with cards.

"Automated teller machines have tended to reduce the number of $1, $5 and $10 bills carried by consumers," he reported. "More and more, a prospective patron has to break a $20 before he or she can use a vending machine!"

In fact, consumers have been eager to find alternatives to cash for a long time. McLauglin pointed out that, five years ago, supermarkets were doing 80% of their volume in cash and check transactions; today, 80% are done with cards. Overall, between 2000 and 2005, transactions made with credit and debit cards have increased 70.7%.

The reason is convenience, he noted, and thus vending machines are a logical area of expansion for cashless payment technology. "This is not something that's 'on its way' -- it's here," he repeated. "I think, in five years, most vending machines will be equipped for cashless transactions."

At the 4th Annual Small Payments Conference, organized by SourceMedia Inc. with sponsorship from Peppercoin Inc., and held at the Marriott Financial Center Hotel in New York City, the swift and steady growth of consumer enthusiasm for low-ticket cashless purchases also was in the spotlight.

A highlight of the conference, which was themed "Transforming Transactions," was the presentation of the latest annual survey of the small-payments market conducted by Ipsos Insight, a unit of Ipsos in North America, with support from Peppercoin.

Ipsos in North America is a member of the Ipsos global survey-based market research group. The study took the form of a  scientific random-sample telephone survey of 1,000 Americans ages 18 and older.

A key finding of the research was that more than 67 million Americans had used a credit or debit card for a purchase of less than $5 in the 30 days prior to the interview date.

The research also indicated that merchants face limited growth opportunities with traditional "membership rewards" cards commonly used in loyalty programs today. Fewer than 20% of survey respondents indicated they would be willing to carry additional reward cards. This implies that the appeal of these programs tends to be restricted to the retailers that implemented them early.


However, consumers did express strong interest in using a prepaid balance at merchants with whom they frequently shop. More than a quarter (27%) of survey participants responded positively when asked if this option interested them. Younger Americans are even more likely to adopt a prepaid program; the positive response rate was 42% among those ages 18 to 34.

"The data shows that credit and debit cards are becoming a preferred payment method for a variety of small-payment purchases in the physical world," said Matt Kleinschmit, vice-president of Ipsos Insight. "This suggests that merchants, retailers and card issuers alike could all benefit from increased consumer access to credit and debit cards as a small-payment option."

Mark Friedman, president and chief executive officer of Peppercoin, said that the study lends weight to the growing conviction that small cashless transactions have arrived as a practical, real-world proposition. "This year we reached an inflection point in the small payments industry,"  said Friedman. "Consumers have clearly demonstrated that, when given the chance, they will use credit and debit cards for small payments purchases.

"Additionally, the current loyalty program model needs to be reworked to eliminate the overwhelming amount of cards consumers need to carry," Friedman continued. "Merchants today have an unprecedented growth opportunity by combining credit- and debit-card-based small payments with loyalty and prepaid programs."

Today's predominantly coin-based enterprises appear to represent a major opportunity for credit and debit cards, the study found. Extrapolating from the response, the research suggests that 26 million consumers used a credit or debit card to pay  mass-transit fares or tolls, while 63 million Americans would use credit or debit cards  for these transportation services if they could.

The vending market evoked a similar response, with more than 42 million consumers willing to use credit or debit cards for vending purchases. This represents a substantial revenue growth opportunity for transit and vending operators as well as card companies, since consumers typically spend more when using card-based payment systems.

By examining consumer spending habits, the survey sheds light on the most common small-payment cash transactions. When asked where they made frequent purchases over the past 30 days, respondents indicated: 32% purchased coffee or another beverage at least six times; 11% purchased coffee more than 20 times; 24% purchased items at a fast-food restaurant at least six times; and 15% purchased items from vending machines and/or kiosks at least six times.

There is, then, a growing consensus that people will use their credit and debit cards to make purchases from vending machines, if the machines allow them to do so. Robert Carr of Heartland Payment Systems sees the opportunity (and the difficulty) for vending operators as not dissimilar from those faced by a great many merchants.

Heartland Payment Systems provides credit and debit card, payroll and related processing services to clients, primarily restaurant, hotel and retail merchants, throughout the United States. It processed its first card transaction on July 15, 1997, with a business investment of $1 million. Today, the company has become the sixth-largest payment processor, with more than $40 billion of annual processing volume from its current merchants. Headquartered in Princeton, NJ, Heartland maintains offices in North Olmsted, OH, Frisco, TX, and Phoenix, AZ. A service center in Jeffersonville, IN, provides customers with 24-hour support and technical service. The company purchased Debitek, a pioneer in the development of card-based cashless payment systems for vending, last year (see VT, March).

Carr explained that Heartland's swift and steady growth has been based in large measure on a different acquiring view.

"We believe that our future is based on providing good solutions for merchants," he said. "What does the merchant get? We have to present a value proposition; ours is our system. I'm a systems guy, and our system is our 'secret sauce.'"

This client-oriented view is important to an acquirer today, he said, because considerable consolidation is taking place in the acquiring world. An acquirer is the institution with which a merchant contracts to "acquire" card transaction requests and process them, relaying them to the "issuer" of the card for authentication, then returning the approval or denial to the merchant.

Consolidation is taking its toll because of weaknesses in the traditional way in which acquirers do business, Carr explained. "What's broken in the industry can be illustrated by thinking about a 10¢ transaction fee for a 75¢ purchase from a cold-drink machine," he said. Transaction fees have several components, and a critical one is the "interchange" fee. During every transaction, the acquirer must perform an "interchange" with the institution that issued the card being used to make the purchase, which levies a fee for this service. According to Carr, the principal card associations have played with the interchange fees, and acquirers thus blame those associations for the reluctance of many merchants -- potential clients of the acquirers -- to accept cashless payment media.

"We don't play games," the Heartland executive said. "We offer a three-year contract with no rate increases."

Large entities that can tinker with fees without having to tell anyone what they're doing pass the costs down to the merchant; this is not a high-tech approach, the speaker noted. A "merchant bill of rights" drive has been launched to mandate the publication of the interchange fees being charged. Carr thinks it important for merchants to get behind this drive.

"The small- and mid-size merchants who run the country are not watching credit card fees," he reported. "But those fees can become the third or fourth highest cost of running a retail business. What is the transaction fee? Merchants should know, and they should know how many middlemen may be collecting parts of those fees: as many as 12! It's essential to educate them."

Heartland does not outsource its sales force nor its payments platform, Carr explained. As a young company, it has built a modern infrastructure from the ground up. "Heartland is now an end-to-end processor," he said. "And we're so new that we're the only service with 21st-century technology. We want to be the financial services provider for the small guy."

There obviously is tremendous growth potential in efficient, cost-effective processing of small cashless transactions because there can be so many of them. Carr noted that there are several ways of growing -- for example, signing up 1,000 new accounts a week. But a company that does that will incur rollup costs, and it is difficult to predict how steep these will be. "What is the substantial long-term model?" he asked.

It may be possible to find answers by looking at successes and failures to date. Among "abject failures" have been programmable chip cards, launched with extensive "toolkits" to permit development of a wide range of customized applications but not backed up by an infrastructure that could support their use, and some of the more ambitious attempts to provide multifunction media for the campus marketplace.

Successes in which Heartland has been involved include its investment in the Parcxmart smart card system, a payment medium that rolled out successfully in New Haven, CT. Developed by Parcxmart Technologies (Hampton Fall, NH), this was presented to the city as a method of streamlining its parking meters to greatly reduce labor and expense, and was supported by local merchants. The card is a prepaid instrument; merchants provide them to residents at no cost, and the residents purchase value (a minimum of $10, a maximum of $100) and use the cards not only for parking meters and at municipal garages, but also at private parking garages -- and to make purchases from local merchants. The system has been well-accepted by everyone involved in implementing it, and is attracting interest from other cities.

Another success, Carr said, has been Heartland's acquisition of Debitek, which has developed a wide range of very workable cashless payment solutions for a diverse customer base.

In the short term, he explained, the company's goal is to grow from its present one billion annual transactions to two billion over the next three years. The tactics Carr proposes to accomplish this include "creating solutions that will make merchants want to participate in the system."

The Parcxmart is such a system; it includes both "open" and "closed" loops, and encourages the community to become involved. On the other hand, major cashless programs that involve 10¢ processing fees for 75¢ transactions are impediments to attaining Heartland's objective.

Looking at small payments today, Carr suggested that "waiting for the killer application that will solve everyone's problems is the wrong way to approach the problem. First, the 'ecosystem' has to work. We need to find a better value proposition for merchants, and not keep asking how we can extract higher fees."


The industry today suffers from "inadequate partial solutions," the speaker noted. And a prime target for expanding cashless small transactions -- the vending industry --  seems mostly unwilling to accept any transaction expense at all. Since the majority of vending installations will need not only to accommodate cashless media but also to communicate with acquirers over a wireless network, it is difficult to know how to work around this. "There are ways to get services to operators, but there don't seem to be any solutions that are acceptable to most operators today," he reported.

And the operators aren't entirely wrong, Carr pointed out. "Small-payment solutions often don't justify the cost of implementing them," he said.

One approach to addressing this is to provide a medium that offers a single solution to varying requirements: perhaps an employee ID badge that also can be used as a parking card, a prepaid card and a major credit card. This sort of package can offer enough benefits to the location to justify  absorbing the system's costs, freeing the operator to provide service and support without worrying about recovering capital investment. "There's obvious appeal in an integrated, 'holistic' solution," he said, "and I don't like the word 'holistic!'"

Vending, and similar self-serve businesses like coin laundries, certainly recognizes that customers would like the ability to make cashless transactions. They also recognize the costs and hazards associated with handling coins and bills. There is value in the increased sales that result from freeing the patron from the need to come up with cash to make a purchase, and the decreased costs and administrative expenses that result from getting cash out of the machines.

A well-thought-out cashless program for vending will provide a reporting system that reconciles cash and cashless payments with removal of products from inventory. This also can help vendors, Carr suggested. "A big problem for the vending industry is that many locations don't trust operators' commission calculations." Trusted general-ledger reconciliation can give operators a tool for assuring their accounts of an honest count. This will offer a competitive edge, help  account retention and improve communications between operator and client.


Adding loyalty applications that maintain customer interest and spur sales by rewarding frequent purchases will offer still more value to the operator, the speaker continued. "The thing to do is tie in all the stakeholders: the merchant, the patron and the location management."

Providing an integrated multiple solution to augment value has been done very successfully in enterprises that resemble vending and sometimes incorporate it. Recent examples of successes are Blackboard Inc. (Washington, DC), which markets a well-thought-out system to colleges that combines payment and access control with educational software; The CBORD Group (Ithaca, NY), an international organization that offers an extensive menu of applications for a wide range of foodservice, nutrition and facilities management functions; Peppercoin Inc. (Waltham, MA), which has worked steadily to integrate a spectrum of services, from intelligent aggregation to a small-payments gateway, into its Small Payment Suite, and to back up basic cashless transaction capability with value enhancers including loyalty and rewards programs and "virtual prepaid" capability; and Parcxmart.

There will come a point at which the cashless-payment service provider, who must make a profit to stay in business, and the vending operator, who must keep costs down for exactly the same reason, will meet in the middle. Heartland Payment Systems proposes to become the number-one acquirer for small- and medium-size merchants, and in working toward this end, it may accelerate that process.

"Why do issuers charge a 10¢ transaction fee on a purchase from a vending machine? Because they can," Carr summed up. This is a hurdle that needs to be overcome, and he is confident that it can be. "When it was a violation of the rules to publish interchange information, we did anyway," he recalled.

Peppercoin's Friedman, who followed Carr at the rostrum, noted that transactions of $25 and less total $1.4 trillion annually, and this surely represents an opportunity. He concurred with Carr's call to pay close attention to the needs of the merchant, whose cooperation is essential if the opportunity is to be fully realized.

"The mindset of the typical merchant