Drugstores, following the lead of supermarkets, are moving rapidly toward modernizing their payment systems with debit cards and other innovations.
In the past two to three years all the major pharmacy chains-and many smaller ones-have been updating their point of sale systems, initially to accept credit and debit cards but also with an eye toward smart cards in the future.
The Rite Aid chain has already deployed 25,000 smart card readers in its 3,900 stores.
The developments are seen as a boon to banks and their efforts to encourage paperless transactions. But as in the early rush of supermarkets into on-line debit cards, financial institutions are not driving the process. Debit cards got their initial boost from retailers, tied more to their marketing strategies than to the banks'.
Besides being interested in incremental sales and taking advantage of the analytical advantages of on-line transaction technology, the pharmacy industry is heavily influenced by the federal government's electronic benefits transfer mandate. Since drugstores handle significant volumes of Medicare and Medicaid payments, for example, they see a need to prepare quickly for electronic processing.
Competition from supermarkets and big discount retailers-which were quicker to embrace new payment forms-is also a factor. Drugstore chains have been consolidating rapidly, and many have diversified into groceries and other merchandise to try to gain market share.
The movement toward EBT, debit, and chip cards is "a big opportunity" for banks, said Joseph C. Pisano, director of retail sales for Verifone Inc., the Hewlett-Packard Co. subsidiary that is the largest vendor of POS card-reading terminals. "I think banks are going to become bigger in those areas."
The more advanced payment acceptance raises the retailers' sophistication, enabling them to track customer behavior and mine the data for more sales opportunities.
"When the government comes out with a program like EBT, the drugstores have to be able to service every customer that walks through their doors," Mr. Pisano said.
Pharmacies that have installed advanced card readers find "the system can justify itself on the basis of identifying on-line versus off-line debit cards and being able to do frequency-type loyalty programs, electronic gift certificates," said John Marshall, vice president of sales of Hypercom Corp., No. 2 to Verifone in installed terminals.
Many states are delivering human services benefits electronically, relying on cards and terminals to replace paper checks, vouchers, and food stamps. All are required to do so by 2002. Stores need to upgrade from traditional credit card terminals to handle EBT.
CVS of Woonsocket, R.I., is among the chains that have rented terminals from state agencies where food stamps are on-line. CVS, which has 4,100 stores in 25 states, began taking debit cards in the Atlanta area two years ago. Last month it began rolling the terminals out companywide.
"On-line debit is now cheaper to process all the way through, so if we can get people to switch to debit it's actually a win-win for us," said Raymond Auger, director of application development for CVS.
CVS is considering a smart card program for next year, either one that resembles a prepaid telephone card, or one with "a true integrated chip" that could be used for multiple applications, Mr. Auger said. But "it doesn't make sense to put in 19,000 smart card readers when the business case is still somewhat ambiguous."
So far, Rite Aid Corp. of Camp Hill, Pa., is the only major drug chain to have introduced smart cards, now predominantly as a replacement for gift certificates. Some big retail chains-including Kmart Corp., Sears Roebuck & Co., and Federated Department Stores-have rolled out analogous programs on magnetic stripe cards.
When Verifone announced the sale of its SC 250 chip card adapters in February, Rite Aid store technology director Bob Kostosky said they "open up a new area of products and services" and "enable us to reward customers through a convenient and secure, integrated system."
A spokeswoman for Rite Aid refused to comment further on its plans, but industry sources said they revolve in part around EBT.
Peter O'Neil, director of technology programs for the National Association of Chain Drug Stores, Alexandria, Va., said its members have "some concerns" about smart cards.
"One is the cost to implement, the second is the lack of standards, and the third is lack of space at the point of sale," he said.
But these merchants have tremendous cost justification for debit cards, Mr. Marshall said. "They really do know their business and are looking for solutions that bring value to them, versus to their bank or credit card processor."
More than a year ago, Walgreen's of Deerfield, Ill., installed terminals to accept debit cards and other types of electronic fund transfers. All 2,563 stores in 35 states and Puerto Rico are equipped, said Michael Polzin, a spokesman.
"The big rationale for installing them was to add another convenience for our customers, to give them another reason to choose us," Mr. Polzin said. "It can also simplify the checkout process for cashiers."
Mr. Auger of CVS predicted the federal government's interest in converting benefit payments to cards would ultimately prompt further innovation.
"Debit has finally matured," said Mr. Auger. "Debit had been touted for five years as if it was here, and it really had a pretty long gestation period before it was accepted. I think smart card is where debit was five years ago-it definitely has a future, it's just going to take a while before it becomes really viable."