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Experts Review Progress In Cashless Payment; Option Can Please Patrons And Generate Lift In Vending Sales

Posted On: 7/17/2008

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The convergence of lower-cost, more powerful wireless networks, higher vend prices and enhanced computer-based auditing is encouraging the installation of credit and debit card payment systems in vending machines. At the same time, growing public enthusiasm for cashless purchases has widened the use of "closed" stored-value and debit transaction technology in an expanding range of affinity-group locations. This trend was explored at a panel session during the National Automatic Merchandising Association Spring Expo in Las Vegas.

Moderated by Dr. Michael Kasavana, NAMA Endowed Professor at Michigan State University (E. Lansing, MI), the seminar offered overviews of cashless transaction solutions and reports on their success in the field. The session was introduced by Larry Eils, NAMA senior director of technical services, who has served as secretary of the association's technology subcommittee for more than a decade. Eils is retiring after 20 years of service to NAMA and the industry.

Panelists included system suppliers Glenn Butler, Crane Merchandising Systems; Michael Lawlor, USA Technologies; and Alex Kiriakides, Paykey USA, who also is an operator. User panelists were Mack Wilbourn and Casandra Harmon, MWJ Vending (Atlanta); Ron Bevers, Reno Snax Sales (Sparks, NV); and Mickal McMath, Louisiana Canteen (Lafayette, LA).

"Why cashless?" Dr. Kasavana asked. "For customer payment convenience; for increased transactions; to enable multiple purchases; to widen the range of practical price-points; for enhanced control through reduced cash handling; and for increased revenues." Retailing channels that compete with vending, including convenience stores and quick-service restaurants, have embraced cashless payments and so strengthened the consumer's expectation of having this option available.

He pointed to the rapid expansion of the economy's "self-service" segment, which was pioneered by vending and now includes everything from automated teller machines to "pay-at-the-pump" filling station equipment. The public has become thoroughly familiar with cashless payment when purchasing everything from digital music from iTunes to airline tickets and hotel reservations, the speaker noted.

Industry acceptance of the versatile multi-drop bus (MDB) standard for communication between the vending machine controller and payment systems (as well as many other peripheral devices) has simplified technical development.

Vending long has been familiar with "closed" cashless payment systems, Dr. Kasavana pointed out. These make use of media (traditionally magnetic-stripe cards) that either store a monetary value that can be read by the vending machine, or identify the patron to a central computer which maintains accounts for each user. The speaker calls these "internally hosted" systems. Their advantages include the absence of transaction processing fees and, in many cases, payment by customers in advance of their purchases, which gives the operator the benefit of a "float." Today's internally hosted systems can use a variety of media, including smart cards and memory devices in the form of keys or fobs.

The alternative is an "open" system that allows the customer to use cards issued by a financial institution. Its appeal to patrons is that it allows them to use media they already carry to make purchases from vending machines in the same manner as they do at other retail establishments. These features obviously are good for operators too, since they make it easy to buy something that might be inaccessible if the customer does not have sufficient change or dollar bills. Another advantage is that the wide-area network needed to link each vending machine to the transaction processing center also can be used for remote machine monitoring, enabling operators to improve customer service and fine-tune machine servicing to reduce distribution costs.

Concerns that have slowed acceptance of "open" cashless payment systems by operators include the costs of remote communication, the fee charged for processing every transaction, and the need for security. The card issuers are aware of these concerns, and know that it is necessary to address them in order to continue their penetration of the small-payments market tier.

Consumers certainly favor the option of making cashless purchases, Dr. Kasavana reiterated. Research has shown that 74% of the buying public no longer sees the need to carry large amounts of cash, as they know they can use their credit and debit cards for most of the things they purchase.

In recent years, bank debit cards have caught up to credit cards in popularity, the speaker continued. Between 2003 and 2007, purchases made with debit cards increased from 26% to 33%, about the same percentage as credit card transactions.

"We've heard about Generation X and Y and Z; we now must deal with Generation P -- for Plastic," Dr. Kasavana noted. The 18- to 24-year-old age cohort increasingly is avoiding the use of paper money, preferring cashless media, especially the new contactless "tap-and-go" devices being promoted by the card-issuing organizations.

Early successes with open cashless systems have sketched in guidelines for getting the best results for the investment, the speaker reported. First, it is desirable to approach the task in terms of automating the account, not the machine. Cashless payment and remote monitoring capabilities only provide full benefit within the context of procedures and an information system designed to accommodate them as additional management tools. Second, there are real advantages in implementing a "multifunction platform" that will allow both cashless vending and remote monitoring. Third, there are real negotiating advantages in being able to include cashless vending in a proposal. Fourth, the multifunction platform can tighten security and strengthen accountability. And, in accounts that also receive manual service, it is beneficial to find the synergies between the cashless vending and the manual point-of-sale registers.

Experience also has begun to provide answers to the perennial question of cost, Dr. Kasavana continued. The hardware cost tends to average $350 to $500 per machine; communication expense comes in at around $10 per month. Processing fees absorb about 5% of revenues. And it has demonstrated that the principal challenges are installing the readers and negotiating the transaction fees.

Kasavana turned to the panel to illuminate these topics. Glenn Butler of CMS Streamware led off by pointing out that "closed" systems can take the form of stored-value or "connected" -- online -- implementations. The latter have benefited from a variety of developments, and currently are being used in conjunction with everything from hotel room keys to thumbprint readers. In general, the online kind is more challenging to install because a central server is involved. Open systems obviously come into their own in high-volume public locations.

"Open systems are important because consumers are moving toward cashless payments; they're used to a cashless world," the Streamware executive said. "And the consumer experience with vending simply must improve. Vending is the last major retail channel in which cash is needed. Visa and MasterCard are focusing on eliminating cash." What's more, he added, installing cashless capability provides a compelling talking-point when it becomes necessary to adjust prices; for example, the operator can argue for parity with convenience store prices.

Another advantage offered by cashless systems that is likely to become more apparent over time is that they make it much easier to allow multiple purchases with a single insertion, Butler said. It is easy to visualize a bank of machines that would invite the patron to establish a credit with the cashless medium, then select a drink and a snack.

It also is worth keeping in mind that there are locations in which a hybrid approach makes sense. This features one or several terminals that customers can use to revalue closed-system payment media with their major credit and debit cards. Where feasible, this generates fewer but larger transactions through the open system, and provides the benefit of the "float" to the operator of the closed system. Also worth exploring is the opportunity of working with nearby merchants to widen the use of the proprietary payment medium; many colleges are doing this.

While some locations can be served by machines that accept only cashless payments, most continue to require cash payments too. Butler observed that there are a number of attractive approaches to meeting this need efficiently, including bill validators with combination bezels that incorporate card readers; MEI offers one, and CMS Payment Systems has teamed up with Heartland, a major transaction processor, to launch a combination system that incorporates Crane NRI's Currenza bill recycler that can pay back small-denomination bills in change. "Most modern machines have two slots, if you need to install both a cashless terminal and a bill validator," he added. And all contemporary audit systems are able to parse a DEX file to accommodate both cash and cashless purchases.

Butler pointed out that a practical cashless or composite payment installation requires a machine that is both DEX capable and MDB compliant. MDB handles the interaction between the vending machine controller and the payment appliance, and DEX keeps track of cash and cashless payments for audit purposes. Machine-to-machine networking within the location not only can  improve remote communication, but also can lower its cost. And today's cellular networks offer greatly improved reliability.

As for cost, Butler said, the hardware expense can range from a low of $250 to $600 or more, if the operator must work with one of the systems developed specifically for colleges.

Is it worth the expense? "I've spoken to people who can demonstrate sales lifts of anything from 15% to 80%," the Streamware expert reported. "The 80% increase was registered in hotels, when guests were able to make purchases with their room keys."

Mike Lawlor of USA Technologies led off by observing that USAT presently serves about 30,000 clients of all kinds, all over the country, and thus has amassed considerable experience with real-world cashless payment implementation. "What works, and what doesn't? And when should you start?" he asked. "Let's start with the last question: You should start now. The vending market has to change; consumers demand it. Don't wait until it's forced on you."

Lawlor pointed out that vending's average net profit has declined from 9% in 1999 to 1.5% last year. "Costs are going up, and you can't align vend prices with those costs," he warned. "Unit sales drop when the price exceeds $1, with cash payment. We're not capturing the market for fast-growing new cold beverage types that sell for higher prices."

By contrast, experience in colleges, white-collar workplaces and healthcare institutions has shown that sales at vend prices over $1 increase when patrons can make cashless purchases, the USAT executive reported.

Between 2000 and 2005, there was a 70.7% increase in card usage, he noted. The growth in use of debit/check cards has been particularly striking, and these media tend to be used for small transactions.

"McDonald's had the same concerns as you have," Lawlor reminded the audience. "They found that adding cashless capability generated more traffic and produced higher check averages."

Experience with cashless vending has shown a similar effect. In educational institutions, adding the cashless option has produced sales increases of 25% to 40%; in white-collar workplaces, the increases have been in the range of 15% to 25%.

Overall, the speaker summed up, the consumer average purchase is 32% higher when cashless payment is available. "Customers will make multiple purchases, and they'll buy higher-priced items," he said. And higher vend prices increase card usage. Keep that in mind as your costs go up."

Paykey's Alex Kiriakides explained that his involvement in cashless payments began eight years ago when one of his locations told him about a system that was in wide use in Italy. "I wanted a cashless solution for my vending business, and that one sounded promising, so I tracked it down," he recalled. "When I found it, I liked it so well that I decided to sell it in this country."

Paykey is a hosted internal system that offers operators a very wide range of attractive possibilities, Kiriakides said. "It can be a third payment option -- coins, bills and Paykey."

The best way to get started is to look for simple applications in locations that can benefit most. "Don't begin with a difficult problem that a client wants you to solve," he recommended. "Keep it simple, and don't focus on a tiny piece of the problem."

Paykey can be installed as a server-based network, or in MDB-compliant machines that include at least one used to revalue the keys by use of the bill validator. Server-based systems appeal to larger colleges and universities and correctional facilities; MDB machine-based installations often are preferable in business and industry sites and in smaller educational institutions. In either case, installing a Paykey system tends to make it more difficult for the account to change operators, the industry veteran noted.

An MDB installation is easier, and a good way to get started is to make one in a location that has 200 employees and five machines. "This will cost you about $3,200, and it's DEX-compatible," Kiriakides reported.

While using one validator-equipped machine to recharge the keys is simple and efficient, there are advantages to offering a recharging station that accepts major credit and debit cards; this can be an automated teller machine and, if its card reader is a USA Technologies ePort, it will provide audit reports to the operator. It is sensible to set a minimum value of $20 to $25 and a maximum of $50; a few people will lose their keys.

"Over half of all the transactions made in the United States are cashless," Kiriakides summed up. "You can use all types of systems in your business. Apply cashless technology to create new opportunities for gaining clients and building account loyalty. Cashless adds excitement, and it's fast and easy."

The operator panelists then described their experiences with cashless vending, and the panel fielded questions from the audience. Ron Bevers of Reno Snax Sales led off by reporting that people will pay more for purchases made in locations like airports, because all the retail outlets feature higher prices. "They expect a premium price, and they'll pay it if they don't have to pull cash out of their pockets," he explained.

And the ability to offer cashless vending is a strong bargaining-point, Bevers added. "We get five-year contracts, not one or two. Our bill validators last longer, and cashless frees up people in the counting-room. With a credit/debit card terminal or a Paykey reader, there are fewer dust and dirt problems than there are with cash."

An audience member asked about vandalism. MWJ Vending's Wilbourn replied that people have damaged a reader's facia, but have not yet put one out of action.

Another participant asked whether anyone has experienced difficulty with dispute resolution, when a consumer challenges a charge on the card statement.

MWJ's Casandra Harmon replied that, in 18 months, she has not had a problem. Bevers said that he has had a couple of incidents. "We get a report from USA Technologies; I bring it to the account and ask the complainant to bring in the disputed bill. And they always have said, 'Well, it's not that big a deal.'"

Lawlor reported that it would be very difficult to conduct a plausible dispute. "They must physically swipe the card, so they have little recourse -- unlike Internet purchases," he pointed out.

A third seminar-goer asked whether anyone on the panel is operating machines that do not accept cash at all.

"Not yet, but I have a proposal coming up for bid, and we will suggest that," Bevers said.

Mickal McMath, Louisiana Canteen, said that he has installed a Paykey system for a jewelry manufacturer whose employees cannot carry cash on the premises.

Kiriakides observed that he had an account that was happy with cashless-only vending. "But it began to attract walk-in trade, and we had to put the cash option back," he said.

Another operator wanted to know which option military locations require.

"Both," Lawlor explained. "Soldiers seldom carry cash, but transients do."

A conference-goer asked whether it would make sense to equip a college campus with a closed system in the dormitories and other restricted areas, and an open system in locations open to transients.

"The administration usually will tell you what to use," Butler replied. "But do look at the hybrid systems."

Lawlor added that a number of universities make use of multifunction campus-card systems designed specifically for that market, like those developed and marketed by cBord and Blackboard. "These are expensive, but you may have to use them," he said. "We've found that campus card use is prevalent among freshmen and sophomores, who tend to live on campus; it falls off among juniors and seniors as they move off campus. The upperclassmen will use debit/check or credit cards."

"How do I introduce cashless vending to the patrons?" an audience member wondered.

Bevers suggested offering an introductory promotion, such as giving out keys with a starting value of $10 or so. He also has conducted raffles for prevalued keys. "When you start out, work with the location's purchasing staff," he recommended. "Once you're installed, work with the human resources people."

"How about fraud? What happens if someone uses a stolen credit card?" a participant wanted to know.

"The card is pre-authenticated," Lawlor explained. "If it was stolen and the theft wasn't reported, the thief could probably get away with using it. But the thief probably isn't going to use the card to make purchases from vending machines."