Biometrics: Getting in Touch with a Growing Trend

  "People don't want to wait these days," says Kal Abhari, a storeowner in Arnold, Mo., near St. Louis. "It all comes down to customer service and speed."
  And merchant cost.
  Competition is fierce for Abhari and his Phillips 66 gas station and ExpressMart convenience store, as there are eight similar stores nearby catering to impatient drivers. When Abhari took over the franchise in September 2004, many customers were waiting the 90 seconds it took to authorize the checks they wrote for payment. This led to lines of frustrated consumers.
  Meanwhile, accepting credit card payments was hurting Abhari's bottom line. The 2.5% per transaction he pays to accept card transactions costs him $4,000 to $5,000 per month. "My credit card fees doubled when gas prices went to $3 per gallon," Abhari says.
  Last June, Abhari may have hit on a solution when he became the first retailer on the strip to go high-tech with biometrics, a payment alternative that some industry observers say merchants are ready to adopt on a large scale.
  Getting customers signed up is simple, Abhari says. He checks the customer's driver's license, scans one check to register the account number the consumer wishes to use, and then scans both the customer's left and right index fingers to create algorithms based on various data points. When enrollees return to the store to shop, their print is digitized again to verify their identity when paying.
  Abhari uses a print-data reader developed by BioPay LLC, and an approval takes less than 5 seconds. Solidus Networks Inc., which operates under the name Pay By Touch, on Jan. 16 bought Herndon, Va.-based BioPay for $82 million in stock and cash.
  BioPay keeps the actual print copies on file so customers do not have to have fingers rescanned if it decides to change the data algorithm; Pay By Touch discards them. Shannon Riordan, marketing director at San Francisco-based Pay By Touch, says no decisions have yet been made regarding how the companies' various policy differences will be handled.
  Besides providing participants the option to pre-register a debit or credit card for payment, merchants supporting biometrics also can steer customers toward less expensive electronic check payments through the automated clearinghouse system, says Gwenn B?zard, a partner and research director of the Aite Group LLC, a Boston-based consultancy.
  Abhari says he has signed up about 800 customers, and he routes all of their payments as ACH transactions, saving his business about $400 per month in credit card fees. He allows customers to register account and bank-routing data from personal checks, but not payment card information.
  Biometrics providers typically charge from 8 cents to 20 cents per transaction, plus any interchange or other fees that may apply. ACH transactions typically cost less than 15 cents, B?zard says. At a 2.5% rate, a $30 fill-up with a credit card would cost the merchant 75 cents.
  Biometrics appear to be gaining steam, as major vendors merge, merchants seek cheaper payment forms and federal regulators demand greater security standards for banks and retailers that hold consumer data. The technology faces challenges from alternatives such as contactless payments, doubts over consumer adoption and the lack of a major brand-name proponent.
  Abhari paid about $1,900 for his print-data scanner, another scanner that reads check data when customers register, and a terminal where customers key in a 10-digit personal identification number, usually their phone number. Abhari says the system already is paying off with the enrollment of about 8% of his 17,000 monthly visitors.
  Although customers cannot yet pay by touch outside at the gas pumps, Abhari says BioPay representatives assure him their system will be capable of providing that convenience within six months. Once it does, Abhari expects another wave of sign-ups.
  B?zard predicts that early adopters such as Abhari are a step ahead of the 10,000 major retail locations, mostly large grocery stores, that will accept biometric identifications in 2006, up from about 150 in 2005, not including smaller outlets. "The biometrics market is going to take off," he says. "(This year) is going to be a big turning point."
  Merchants that use the Pay By Touch system follow an enrollment process similar to that of BioPay. Customers of both companies only have to enroll once. They then can pay by finger scan at any merchant offering the system.
  IBM stores the personal data of Pay By Touch customers, while BioPay maintains its own database. Officials at Pay By Touch say they plan to integrate their systems with those of BioPay over the course of this year.
  To invest in and fully utilize biometric technology, B?zard says, banks and other financial institutions need to be sure consumers are comfortable using finger scan identification. Although there are nearly 100 biometric vendors in the United States, most concentrate on devices for security and access applications. Only a few firms specialize in the retail environment.
  A Pay By Touch finger scanner for the point of sale costs about $50, but a "soup to nuts" full set up, including all hardware, installation, marketing assistance, training and any subsequent troubleshooting costs about $1,000 per lane, Riordan says.
  Marketing Support
  BioPay provides Abhari with promotional signs and brochures, and he offers a 4-cent-per-gallon discount for biometric customers. But it was the finger scanner novelty that really made marketing easy. The concept of payment-by-finger caused a sensation in the Missouri media, with St. Louis newspapers and TV stations running stories about the ExpressMart.
  "Everybody in the state read about my small store," says Abhari. "I am not one of the big boys in the neighborhood, so I think I'm doing very well."
  Rising interchange rates are causing merchants to look for less expensive payment alternatives. Last year, Pay By Touch debuted its system at a number of major grocery chains, including Cub Foods in three Midwestern states, the Piggly Wiggly shops in the South and Virginia-based Farm Fresh. SuperValu Inc., a $4.2 billion supermarket operator based in Eden Prairie, Minn., owns all three. Grocery stores famously operate on the thinnest of margins. SuperValu has limited most account links to checking accounts and government electronic benefits transfer programs, so it either pays ACH-transaction rates or 24 cents for each EBT transaction.
  Pay By Touch and the grocers say that these test runs brought high rates of consumer enrollment, with biometric users spending more per ticket than other consumers.
  About 30,000 customers enrolled at the 83 Piggly Wiggly stores that offer biometric payments, and sales rose 12%, according to Christine Barry, an analyst with the Aite Group who studied the Piggly Wiggly results. Abhari says he has seen similar results with his BioPay customers.
  The grocers provide a window on the chances for consumer adoption, says Barry. But banks are torn. Some view biometrics and the ACH option as competition for their debit and credit card programs.
  Pay By Touch may have mollified some doubters of biometrics' chances for success by inking deals throughout 2005 with financial-service companies, manufacturers and investors. In October it secured $130 million in new financing from hedge funds and venture capital firms. It then quickly snapped up BioPay, several software companies and the tainted credit card processor Card Systems Solutions Inc., which provides the company with a broader merchant sales force.
  Pay By Touch also has signed alliance agreements with major suppliers of point-of-sale hardware and software, including VeriFone Holdings Inc., Hypercom Corp., IBM Corp. and NCR Corp. Riordan says Pay By Touch soon will announce rollouts with two of the top 10 U.S. supermarket chains.
  Many large retailers, including McDonald's Corp., have decided to go with "tap-and-go" contactless cards such as MasterCard International's PayPass. And that might end up pushing biometrics aside.
  "Biometrics are in conflict with contactless in that it competes for resources and attention," says Aite's B?zard. It might be difficult, for example, for a merchant to run pilots on both contactless and biometric programs. And installing both could lead to cluttered counters and confused customers.
  "We looked at biometrics over the years," says Bob Riesenbach, manager of new initiatives for Wawa Inc. "But contactless made more sense to us from a number of perspectives," including brand recognition.
  The Wawa, Penn.-based chain of 540 convenience stores in the Mid-Atlantic states installed contactless readers in October for MasterCard's PayPass, American Express Co.'s ExpressPay and a new Wawa Visa card issued by J.P. Morgan Chase & Co. that uses Chase's blink technology.
  Name Recognition
  Indeed, there has been a concern that the biometric vendors are too small to build nationwide use for consumers. "Biometrics is not associated with a particular bank or payment network," says Riesenbach.
  The Pay By Touch and BioPay merger could ease some of those fears, as competing technologies and lack of interoperability only serve to reduce merchant interest. "You need one standard out there. That's what slows this down now," says Dan Schatt, an analyst with Boston-based Celent LLC. "In terms of working directly with the merchants at the point of sale, Pay By Touch is emerging as the dominant player."
  Pay By Touch began in 2002 when Solidus bought Indivos Corp., garnering several dozen patents covering the use of finger scanners that process payments for retail outlets. That initial move may have given Pay By Touch a lead in serving merchants, says Kessler. "They assembled a portfolio of patents in this area," he says. "[Customers] might be a little leery of others."
  Patent War
  Tim Robinson founded BioPay in 1999. Its Paycheck Secure system is designed to help the unbanked. Client merchants, for example, use the system to confirm noncustomers' identities when they come in to cash their paychecks. BioPay offers its paycheck and payment products in 1,500 retail locations and has about 2 million enrolled consumers, says Donita Prakash, the company's vice president of marketing. Pay By Touch reports having agreements that will cover 7,000 total stores.
  BioPay filed for 40 patents, many for technology similar to that used by Pay By Touch. Early last year, the two companies sued each other, charging patent infringement. The conflict came to an abrupt halt shortly after BioPay was awarded its first patent last November. On Dec. 6, the companies announced that Pay By Touch would buy BioPay, making the lawsuits moot. Observers say the timing was not coincidental.
  "Once BioPay had their own intellectual property, Pay By Touch saw them as a competitor and settled the lawsuit," Kessler says.
  "It was probably one of the factors in the decision," acknowledges Prakash. She says the two will fit well together, with Pay By Touch focusing on top-tier merchants and BioPay on second-tier retailers with revenues between $100 million and $1 billion.
  There are other promising vendors. Ron Smith, the founder and president of Round Rock, Tex.-based Biometric Access Co., says thousands of stores throughout the country use his company's SecureTouch finger-scan system. Most use it to identify employees when they punch in for work or to allow customers to cash payroll checks.
  This year, Biometric Access plans to get its system into checkout lanes, says Smith. "The potential for this technology in retail is so big that no one company can fulfill it," he says.
  These vendors will need the support of independent sales agents to market their technology to merchants, says Celent's Schatt. "There is an already established merchant-acquirer sales force out there that you really need to tap into," he says.
  Granted, Pay By Touch can claim significant merchant signings last year, says Schatt. But it still will take several years to sign up enough large merchants and to educate their staffs and customers before ISOs are comfortable enough to push biometrics throughout the world of payments.
  Furthermore, acquirers that push biometrics will confront a dilemma, Schatt believes. Biometrics might allow most of their merchants to avoid credit card fees, but acquirers will lose out on their share of those fees. "That's when things will get interesting," Schatt says.
  Biometric payments are so new that the battle over account linkages has not boiled over yet. Merchants, such as SuperValu, may desire lower ACH costs and limit linkages to card accounts. In such circumstances, grocers will have to come up with a worthy response when their customers demand the option to link their credit card, and its rich rewards program, to their biometric account.
  Until that conflict comes to a head, biometric vendors are seeking to reach consumers through several markets, including college campuses. Many schools use biometric identification to control access to labs and other restricted places. But this January, Gaithersburg, Md.-based Sodexho USA, a food-service and campus management company, will begin scanning the fingers of willing students at the University of North Texas in Denton and at Washington state's Gonzaga University.
  The program will allow students to use print scans to pay for meals at some school cafeterias and any off-campus merchants Sodexho signs up, says Ric Rocca, Sodexho senior vice president of strategy and education services. "The technology has been around a while, but I think it's more acceptable now, especially among young people," he says.
  Campus Use
  Robert C. Huber, a veteran consultant on campus payment systems, cautions that it is too early to say biometrics will penetrate the college market. In comments echoing those of Wawa's Riesenbach, college administrators tell Huber the vendors are unproven. "There are no key players that have been around more than five years," says Huber.
  Since college administrators increasingly want all-campus payment systems that allow students to purchase meals, books and retail supplies, and to also control access, the retail biometrics programs spreading across the country are too limited. In concrete terms, it is going to take "a fair amount of research and development to integrate this unusual and fairly new technology into a campus-card system," says Huber.
  But biometrics is receiving the intense scrutiny that may convince even skeptical university presidents, at least with regard to print-scan accuracy. Since 1996, the International Biometric Group LLC, an independent research firm in New York City, has done five major evaluations that measured the accuracy of everything from iris to finger to face scanners to produce performance benchmarks. Samir Nanavati, a group analyst, says the research house will publish findings from its sixth round of tests in July. "Biometrics are getting a lot more commonplace, and there is a need to have baseline performance standards," Nanavati says.
  Consumer acceptance also will play important role that will determine whether biometrics players in the payments industry are successful, observers say.
  Several other biometric technologies for payments also have made headway. Fujitsu Ltd. of Japan unveiled in 2005 its Palm Secure scanner that identifies users by reading the pattern of veins in their hands. This system is unusual because users do not have to touch the scanners, which can be important in countries with a high level of concern about spreading disease.
  The Palm Secure system is installed in about 60% of the ATMs operated by the Bank of Tokyo-Mitsubishi, says Joel Hagberg, vice president for marketing and business development of Fujitsu Computer Products of America Inc., Fujitsu's American subsidiary. Fujitsu manufactures finger scanners in the United States and sells them to other vendors, but it has bigger plans for the Palm Secure.
  "We were the first to market with a hand [scanner]," Hagberg says, noting the company sees an opportunity to create some brand-name recognition by building high-end software for the hardware and selling it in the United Kingdom, Germany and the United States. Their success with Tokyo-Mitsubishi shows it can work in the worlds of retail and financial services, he adds.
  "Once their average consumer sees it at their local bank, they'll be more comfortable using it at the grocery store," Hagberg says.
  Last year, biometrics appeared on the radar screen of merchants, banks and many consumers. Vendors may make 2006 the year that biometrics makes its biggest inroads to date in securing merchant acceptance.
  (c) 2006 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com