First Data Corp. and Stop and Shop Supermarket Cos. are pilot testing a program that lets customers use the grocery chain's loyalty cards to initiate automated clearing house debits from their bank accounts, as well as card transactions.
The test is another step in the general effort by large merchants to find an alternative to cards, and the fees associated with accepting them, at the point of sale. Wal-Mart Stores Inc. and several large grocery chains are already using systems that route customer payments across the ACH network.
However, the very public role of a large mainstream processor in the Stop and Shop test, which began late last year in a dozen of the Quincy, Mass., grocer's stores in the Northeast, might be particularly galvanizing to other companies that have major stakes in the traditional credit card structure.
Though customers can link their credit and debit cards to the Stop and Shop card, industry watchers expect the merchant to promote the ACH option more heavily. This option, which removes the merchant acquirer from the transaction, offers Stop and Shop all the advantages of electronic payments at a lower cost than card transactions.
Barry McCarthy, the senior vice president of product and business development at First Data, said customers will benefit from the Stop and Shop program by being able to use a single card to purchase groceries and participate in the grocer's rewards program.
"A mother shopping with three kids doesn't even have to carry her wallet into the store," he said. "It's a dramatically simplified way to shop."
Customers enroll in the program by giving Stop and Shop their payment card or bank account information, which is linked to their rewards account. They can then use the rewards card to authorize purchases.
Mr. McCarthy said the system is all about offering consumers more payment choices, and not about "driving the customer to any particular payment vehicle."
Caryn Neidel, a Shop & Shop customer relationship marketing manager, said her company has no preference about how customers choose to pay, and would not discuss the cost of processing ACH or card transactions.
"The real reason we even launched the program was customer convenience," she said.
So far, the program has had "positive customer response," Ms. Neidel said, though she would not say how many customers had enrolled. Customers tend to link whatever payment mechanism they are already using.
However, Dan Schatt, a senior analyst for the Boston market research firm Celent Communications LLC, said merchants using this type of program would "absolutely" be looking to steer customers toward ACH payments.
"Half of the battle for merchants is on how to manage the costs associated with payments," he said.
Tim Sloane, the director for the debit advisory service for Mercator Advisory Group Inc. of Waltham, Mass., said being able to initiate ACH transactions "enables the merchant to drive an aggregate interchange which is much lower."
Mr. McCarthy said First Data plans to offer this type of program to other retailers, though he would not name any of them.
Other grocery chains have already linked their loyalty cards to ACH payments, though they do not permit customers to link the cards to their credit or debit cards.
Teena Massingill, a spokeswoman for Safeway Inc., said its customers have been able to link their bank accounts (but only through ACH debits) to its reward cards for several years. "It's been a good program for us," she said. "We've had a healthy response."
She would not say which processing company Safeway uses.
Shaw's Supermarkets Inc., a subsidiary of Albertson's Inc., also lets customers enroll their bank account number in its rewards program.
Gail Sneed, a director at the Fenton, Mo., consulting company Maritz Loyalty Marketing, said that combination loyalty-payment systems will likely become more common.
"I think we'll start seeing that type of product offered through the processing companies," she said.
The Columbus, Ga., processing giant Total System Services Inc., a First Data rival, is watching the development of such programs closely.
Lars Holmquist, who was appointed Monday to be the president of ESC Loyalty, TSYS' loyalty-services unit, said that even though he does not see such programs displacing card products, they will continue to grow as replacements for cash and check transactions.
"If those key fobs are connected to an ACH, and that's the way payment is handled at the store, you reduce the need to carry a lot of cash," he said.
TSYS' rewards system can process credit, debit, and ACH payments, but Mr. Holmquist said only one customer, a small business that he would not name, has linked all three in a single program, as Stop and Shop has done. TSYS, which is majority owned by Synovus Financial Corp., expects demand for processing rewards transactions to grow, and Mr. Holmquist said the company is investing in its rewards technology.
"It's a corner of the market that we're watching very closely," he said. "The ability to use loyalty programs has become a key component of virtually all of our customers' product strategies."
However, Mr. Schatt warned that processors such as First Data and TSYS must walk a fine line to develop these programs without alienating their card issuer customers.
First Data appears to have avoided that pitfall with the Stop and Shop program by offering cards as a payment option, he said. "If they're not going out in a way that offends card issuers, then they can potentially bridge these different payment options."
Other companies are offering merchants payment services that bypass banks. Debitman Card Inc., for example, lets retailers issue their own debit cards and routes the payments across the ACH network.
Wal-Mart Stores Inc., which has said it is applying for a Utah industrial loan charter to act as its own merchant acquirer, agreed in November to begin accepting Debitman cards.
Fastlane, a subsidiary of Combined Payments LLC, plans to introduce a payment system in April that connects driver's licenses to bank accounts. Consumers who provide their bank account number to Fastlane will be able to use their license to initiate ACH debits at participating merchants.
Carl Towner, the chief executive of Combined Payments, said he expects to sign up between 20,000 and 40,000 merchants for the system during the second quarter.
Solidus Networks Inc., the San Francisco biometrics company that does business as Pay by Touch, offers a system that lets people use their fingerprints to authorize payments, either across the ACH network or through cards.
Though combining payments and loyalty cards can add value to loyalty programs, there would be even more advantages if retailers could team up to offer a payment system that is accepted at multiple merchants and is linked to several loyalty programs, analysts say.
"The most successful payments instruments are those that have universal acceptance," Mr. Schatt said. "If the merchants open these programs up ... then it really becomes powerful."
