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Technology Advances Add Cashless Options To Help Operators Adapt To Customer Demand

Posted On: 10/25/2002

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ATLANTA - Convergent advances in data processing and communications are adding a new dimension to cashless vending. The inevitability of this development, and the benefits operators can derive from it, were explored at the National Automatic Merchandising Association's 2002 National Expo here.

There is nothing new about the concept of using something other than coins or banknotes to make vending purchases. Tokens of various sorts have been around for just about as long as vending equipment. Stored-value payment systems based on magnetic-stripe cards (and more exotic media, like plastic "keys" with breakaway teeth) date back a quarter of a century or more. All of these media have found some vending application.

While the United States has paced the world in consumer use of credit cards, it has lagged some other nations in wide availability of prepaid instruments, especially smart cards. However, wide acceptance of card-actuated automated teller machines has led to the rollout of more broadbased debit or "bank" cards. In conjunction with major credit cards, which enjoyed their explosive growth in the last quarter of the 20th century, these have increased consumer noncash payment options.

In recent years, the fast-growing popularity of cellular telephones has prompted extensive experimentation in "mobile commerce," generally involving the owner of a cell phone placing a call to purchase a product. The actual process can entail communicating with a bank to authorize debiting the user's account, or having the telephone network operator add the charge to the customer's monthly bill. Like smart cards, "m-commerce" applications appear to be finding favor more quickly in Europe than in the United States.

The Vending to the Year 2000 study conducted for NAMA by the Hudson Institute in 1986 predicted that cashless payment systems, probably based on smart cards, would become prevalent by the turn of the century, and advised operators to stay alert to developments in "electronic funds transfer" with an eye to adopting cashless technology as soon as it became practical (see VT, November 1986).

In a follow-up study commissioned by NAMA four years ago (The Future of the Vending and Foodservice Management Industry), the Hudson Institute researchers reiterated their belief that cashless payment systems are coming, but observed that the process was taking longer than they initially had predicted.

The corner may have been turned, and cashless vending thus has been a hot topic at industry meetings over the past several years. The most recent was a panel discussion moderated by Dr. Michael Kasavana, NAMA Endowed Professor at Michigan State University; panelists were Michael Lawlor, USA Technologies (Wayne, PA); Greg Westnedge, Marconi Online (Norcross, GA); and Warren Philips, Validata Computer & Research (Montgomery, AL).

Dr. Kasavana provided an overview of the present state of the cashless vending question (his term for the combination of technologies that make this possible is "v-commerce"). He pointed out that the industry's adoption of NAMA's vending industry Data Transfer Standard has made it much simpler for third-party developers to propose "v-commerce" applications based on data communication (often wireless), and one of these applications certainly is cashless vending capability.

Reasons for operators to adopt cashless vending as soon as it's feasible for them to do so include the benefit of offering payment convenience to a public that increasingly prizes this, Dr. Kasavana noted. Making it convenient, and easy, for people to buy will result in increased transactions. And making the vender-patron transaction interface more friendly will encourage multiple purchases and permit offering popular items at price points considered too high in today's coin-and-bill equipment.

As a bonus, a cashless purchase provides enhanced management controls; the transaction is thoroughly documented automatically, and there is no cash to collect from the machine. All these benefits mean increased revenues for operators who are able to make the transition to cash-plus-cashless vending.

The moderator pointed out that, at present, there are five major cashless payment approaches: credit and debit (bank) cards, "proprietary and online" systems such as the stored-value or user ID card systems increasingly favored on college campuses, smart cards, "m-commerce" services, and RFID and proximity devices. These last, sometimes considered contactless smart cards, can identify an authorized user to a suitably-equipped vending machine, which will deliver a product and bill (or debit) the user's account. Such systems include Mobil's "SpeedPass" pay-at-the-pump instrument, the little Coke-bottle-shaped keychain devices deployed by Coca-Cola and Stitch Networks' unit (now USA Technologies) at the XIX Winter Olympic Games in Salt Lake City early this year (see VT, April), and the device that enables subscribers to the FreedomPay to make both manual and vending purchases from a growing roster of operating companies and other retailers. There obviously is a degree of overlap among these broad groupings.

Dr. Kasavana pointed out that "v-commerce" will have specific advantages to offer business and industry, schools and colleges, public sites like airports and convention centers, and retail locations. It thus potentially can expand the vending location base very substantially.

The moderator then introduced the panelists. USA Technologies' Michael Lawlor led off.


Lawlor reported that 30% of all transactions in the United States now are cashless, and that figure is expected to rise to 50% by 2010. Worldwide credit card purchases increased from a little more than half a trillion dollars in 1990 to $2.24 trillion in 2000, and the end is not yet in sight.

"Consumers want to do this," Lawlor said. "They use the Internet; they like self-service and convenience." And, as vending products move up the value scale, their prices are increasing to a point at which many patrons would prefer to use a noncash payment medium. With the vend price of packaged soft drinks moving above $1.00, and premium ice cream and food items costing substantially more, many prospective patrons think twice before making a cash purchase. "Cash is becoming restrictive to consumers," Lawlor suggested.

Early prepaid card systems (the vending industry then called them "debit" cards) demonstrated that the convenience of noncash payment tends to increase sales, and this is still true, Lawlor explained. On average, adding a cashless payment option to a vending machine has boosted sales by an average 15% and, by facilitating multiple purchases, has increased actual transaction value by as much as 40%.

Other benefits include greater price elasticity, which always has been desired in vending; freedom from the "nickel increment" never was attained by any of the "pennying" concepts explored in the 1950s, '60s and '70s. And today's cashless systems provide a detailed audit trail, so transactions made with them are easy to reconcile with conventional vends; in fact, since no one has to handle money, accountability is tightened, the USA Technologies principal pointed out.

Although cashless payment systems have found ready acceptance and fairly widespread use in certain markets, notably colleges and universities where the medium can be applied to other applications as well, there have been major structural obstacles to implementing credit or debit card acceptance , and, lately, "m-commerce" , in vending. In both cases, a prime difficulty has been equipping the vender to communicate with a remote computer owned by a financial services provider, in order to authenticate the user and authorize the charge. And low-value purchases in general confront the problem of dealing with the cost of processing the transaction. Card issuers and telecommunications companies are keenly aware of this, and are seeking solutions to meet the evident consumer demand for cashless payment options.

Such options now exist, Lawlor emphasized. He suggested that operators start by identifying the machines that would benefit most greatly from allowing patrons to make cashless payments , those selling merchandise for over $1.00 , and plan to upgrade those first. He summed up by observing that the cost of the technology needed to implement cashless payments continues to decline, and the advantages become more apparent day by day. These include not only increased sales, but also a competitive point of difference that an operator enjoys by offering something many people want, but few competitors are prepared to provide.

USA Technologies developed a financial processing platform able to bill "micropayments" to credit cards as part of its original modular, self-service business center concept, which is deployed successfully in hotels and conference centers. The company later developed "e-Port," a user interface that accepts credit cards and supports a flat-panel video display and true network interactivity, if desired. This has proven successful on machines manufactured by Dixie-Narco for Eastman Kodak Co., and is finding wider application as operators become more familiar with the concept.


Next to speak at the NAMA seminar was Marconi's Greg Westnedge, who explained that "m-commerce" technology was developed primarily by telephone companies and cellular equipment manufacturers. The principal argument in favor of using a cell phone to make a purchase is that it can be very convenient, Westnedge pointed out.

And there's a very extensive potential market, the Marconi executive added. At present, it is estimated that one out of every five people in the world has a cell phone; in the United States, more than half of the population does, and in some cities, as many as 68% have them. Thus, a purchasing method that can be used by people already equipped with cell phones can be expected to find a large audience. By 2005, these methods are expected to do more than $40 billion in volume.

"A wireless device can be the integration point for adding an 'm-commerce' option to a vending machine," Westnedge pointed out. As operators find more and more reasons to equip vending machines for remote data communications, and the technology becomes increasingly compact, reliable and affordable, making the move to wireless becomes more cost-effective.

In practice, Westnedge explained, the prospective patron walks up to the vending machine and finds a placard that provides a machine identification number, and a telephone number to call. Simply placing the call and keying in the machine number enables the vend. The machine invites the patron to make a selection. A similar offer might be made to patrons equipped with wirelessly-networked "personal digital assistant" handheld computers.

New cellular telephone features can add sophistication to this basic model, the speaker noted. He reported that, in Australia, owners of cellular telephones with text messaging capabilities have been invited to participate in a test program with snack vending machines; to date, sales have increased by 16% to 35% , despite a 20¢ charge to customers for using the service.

"M-commerce" requires a network, just as credit and debit card sales do, the Marconi executive said. "The telephone companies don't want to become your bankers," he reported; and so at present, if vend purchases are to appear on a monthly statement, that statement probably will not be a telephone bill. Thus, a separately-run "m-commerce" network is required. This need is recognized, and such major players as Nokia are working to address it.

The success of "m-commerce" tests in vending suggests that it represents an option that will be viable just as soon as an infrastructure is created to accommodate it, Westnedge added. In a Coca-Cola test, he instanced, the "m-commerce" feature produced a revenue increase of 10% to 15%, and purchases made by cell phone generated 15% to 20% of all sales revenue after six months.

Considering "m-commerce" as yet another method of consumer activation raises the question of combining cell phone-vender communication with Internet access. This surely is possible, but not necessary, Westnedge said; "m-commerce" requires no more interactivity than displaying an invitation to a customer who has followed the instructions printed on the machine. However, true interaction would permit a variety of enhancements such as couponing, loyalty programs and other promotional and customer relations tools. "Smarter" cellular phones are on the horizon, Westnedge concluded, and these are likely to increase the flexibility of "m-commerce" developments.

Validata's Warren Philips asked the audience whether the concepts of wireless authentication of card-based or "m-commerce" cashless transaction represents thinking that is wildly "outside the box" today.

"In our industry, it is; but not in our daily lives," the Validata founder observed. "We need to integrate new technology into traditional route accounting and management systems to enable a seamless transition to new ways of doing things."

Cashless transaction processing is only one of these things, Philips pointed out; but integrating it into vending management software involves several elements. A principal one, of course, is that a cashless payment represents money, and thus the operator must account for it.

The enabling technology that has made it possible to implement practical remote vending machine monitoring, auditing, and cashless payment transaction processing and accounting systems is the vending industry's Data Transfer Standard, Philips emphasized. First proposed in 1986, this is an adaptation of the older DEX uniform communication standard developed for route delivery distribution to supermarkets.

In brief, Philips said, a DTS-compliant vending machine controller organizes the data it captures into three groups: cash, column turns, and activity-error. A machine designed to record and transmit this information in industry-standard format is an efficient and effective starting-point for any program that entails totaling cash and noncash payments, and for reconciling them with removal of product from each column.

Over the past decade, machine manufacturers have been providing DTS capability (which the industry seems to have agreed will be called "DEX"), and this capability has become more uniform and more comprehensive with each generation of equipment. Since vending machines tend to have long earnings lives, Philips said, the great majority of operators have an installed base that includes machines with no data capture ability, nearly full data capture ability, and several intermediate stages of DTS compliance. Fortunately, upgrade kits are readily available to convert older venders for uniform DTS capability.

"Do you have this capability in your machines?" Philips asked the audience. "Gather this information; know what each machine can do." Assessing one's equipment in order to determine just what (if anything) needs to be done to make each piece fully DTS-compliant is an essential first step in planning to add communications capability. Once that capability is in place, it will provide audit support for cashless vending, as well as such desirable features as remote auditing, inventory monitoring and status reporting.

Philips pointed out that the industry's "decision support model" has evolved to include handheld computers on routes and in the warehouse, intelligent money room equipment that can send information directly to the company's central computer, and consequent improvements in route reconciliation speed and accuracy, and in product inventory control.

The next step is consolidation of all payments, and the commission system, with purchasing and general-ledger functions like accounts payable, the speaker added. "It's becoming easier and easier to answer the question, 'Did we get all our money?'"

Beyond this lies not only the lure of cashless payment, but also the ability to obtain detailed, timely and accurate information by machine, account and route. That information will change the manner in which the industry's inventory pipeline is kept full, and its contents are moved from point to point.

"The perfect time to arrive to fill and collect a vending machine would be at the moment when there was just one item of every selection left," Philips pointed out. Obviously, this is impossible to attain in the real world, but the industry can do a much better job of approximating it than has been done to date.

The quality and velocity of the information needed to increase service efficiency also makes possible much more sophisticated category management, and entirely new brand marketing concepts, the Validata founder summed up. Thus, cashless vending is an appealing incentive for operators to look at upgrading their vending machine electronics and, perhaps, their management software; but the same things that make cashless vending possible also confer a great many other benefits.

And, he concluded, none of these advantages would now be within reach if it had not been for the 16-year effort to develop and implement data communication standards coordinated by the National Automatic Merchandising Association. This, Philips said, is a reason for every operator to support those standards.

In a question-and-answer period following the session, an operator asked Westnedge which mobile telephone technology, if any, is preferable for "m-commerce."

The Marconi executive replied that Western Europe has agreed on GSM (Global System for Mobile communications), which also is widely available in the United States. Marconi thus has used GSM to date, but sees no reason why well-supported rival methodologies could not be used as well.

Another audience member wondered whether the major credit card issuers are, in fact, interested in penetrating the market for very low-value transactions.

Lawlor replied by defining "micropayment" as "under $10," and he emphasized that these transactions represent the greatest untapped opportunity for credit card companies. "They know that, and they are interested," the USAT executive emphasized.

Dr. Kasavana concluded the session by observing, wryly, that the adoption of new technologies by nearly anyone goes through some well-defined stages, which include wild enthusiasm and total confusion; but there are rewards for those who stay the course, especially the ones who cross the finish line in a timely manner. While there surely are dangers in being the first to embrace a new idea, he warned, it more often is fatal to be the last.