Fast Food Meets Fast Payment

  The history of card acceptance in the fast-food industry is marked by a series of fits and starts. A McDonald's, Arby's or Burger King would announce a pilot only to drop card acceptance months later, declaring the test a disappointment. Transaction authorization took too long, they said, a cardinal sin in an industry where quick service is crucial to success. And processing was just too expensive for restaurants that had average tickets of $4, $5 or $6.
  But all that is changing. It appears the elements needed to break into the quick-service restaurant market are finally coming together. As a result, some major players in fast food-including McDonald's, Jack in the Box, Wendy's and Burger King-are rolling out or announcing plans to roll out card acceptance. This long-awaited move comes as technology, consumer demand and competitive pressures combine to produce a business case that fast-food restaurant chains can no longer dismiss.
  Indeed, a recent study of fast-food restaurants by Global Growth Group found that in 2002, 14.47% of restaurants visited accepted cards, up 88% from 7.69% in 2000. Global is a market research firm that studies the fast-food industry.
  "We've seen some pretty spectacular moves by all the major (QSR) brands" to accept cards, says Mark Crager, vice president of merchant sales for Visa U.S.A. In 2001, Visa QSR volume totaled $1.9 billion, a 110% increase from 2000.
  And the market can be lucrative for the card industry. There are about 121,000 QSR locations, accounting for $190 billion annually in sales, says Fred P. Gore, senior vice president of the North American Acceptance Group for MasterCard International. QSRs make up "a hair over 28% of the restaurant industry," he adds.
  Perhaps the most important obstacle overcome by the card industry was the time it takes to process a card transaction. "First and foremost, the through-put of the transaction was probably the biggest concern that merchants had in the QSR segment," Gore says. "Obviously, that's critical to their livelihood. They can't afford any type of delay whatsoever in terms of getting that transaction through, expedited and get the next customer up in line."
  To that end, fast-food restaurants are beginning to adopt the point-of-sale technology originally developed to speed processing of transactions for supermarkets and gas stations' pay-at-the-pump programs.
  In some cases, it now takes less time to process a card transaction than it does to handle cash. Jack in the Box, which has restaurants in 17 states from Hawaii to North Carolina, says it is quicker to accept cards than cash. "It takes eight to 12 seconds to process a card transaction, compared with 18 seconds for a cash transaction," a spokesperson for Jack in the Box says.
  That in turn means more revenue for fast-food restaurants. "To the extent that technology can help speed a customer through the line, that's obviously better for the consumer experience and, more importantly, it's better for the merchant because they get more sales," Crager says.
  According to one industry estimate, every 10 seconds that can be cut from drive-through service increases sales by $1,000.
  The growing number of drive-through windows-which account for between 50% to 65% of a fast-food restaurant's business-seem tailored for card acceptance. It's much easier for a consumer to swipe a card through a reader at the point of order than to dig into a pocket or purse for cash at the pick-up window, observers say.
  "If someone pulls toward a restaurant and sees that there's a huge line (at the drive-through window), they may continue to drive and go to the next location," Crager says. "So the faster people can be processed ... the better."
  Familiarity
  Adding a cardholder-activation system such as those used by cardholders to pay at the pump at a gas station can further increase the speed of a drive-through transaction, says Paul Rasori, marketing director for North America for Santa Clara, Calif.-based terminal maker VeriFone Inc. "By the time you get around to the window, the credit card has already been billed and there's no exchanging of money or counting change," he says.
  What's more, consumers over the past few years have grown accustomed to using plastic in industries previously dominated by cash. That familiarity has made consumers more open to using cards at fast-food restaurants.
  Those consumers "will be able to adapt fairly quickly to using such cards in our restaurants, either through the drive-through or at the front counter," says a McDonald's Corp. spokesperson.
  A Global Growth Group study commissioned by Visa U.S.A. of two major QSR chains found that an average of 98% of customers who paid with a card said the technology was "somewhat" or "very easy" to use. Ninety-six percent said they were "completely" or "mostly" satisfied with the speed of service.
  Because they're able to use cards at so many locations, consumers no longer carry a lot of cash. "It's much easier to run the card through a mag-stripe reader as opposed to fumbling for change," MasterCard's Gore says.
  Another factor in the roll out of card acceptance is consumer demand, Crager says. "The consumer has really driven this trend in terms of adoption seen across the board-not just in quick-service restaurants, but really in all categories which were dominated by cash and checks," he says.
  Some of that demand can be traced to loyalty programs. Consumers who might not otherwise use plastic at a fast-food restaurant might charge a meal just to get reward points, Crager says.
  That's the case for American Express Co., which has seen cardholders enrolled in its Membership Rewards program use the card freely in fast-food restaurants. "People don't care if it's a dollar, $20 or 50 cents, they want points," says Tony Parente, AmEx's director of the quick-service restaurant industry, adding that merchants can tap into "these built-in loyalty programs."
  Some franchisees from all of the major QSR chains accept AmEx cards, including 1,000 McDonald's locations, 7,000 Pizza Hut locations and 7,000 Subway locations, Parente says.
  The card industry also has addressed the pricing issue that deterred QSRs from adopting card acceptance. MasterCard has developed for fast-food restaurants a so-called convenience interchange rate based on percentages rather than a fixed rate. "Ten cents on a $100 (transaction) is one thing, 10 cents on $7 is different," Gore says.
  In addition, the two leading personal identification number-based POS debit networks-Maitland, Fla.-based Star and Montvale, N.J.-based NYCE-in January implemented interchange policies specific to QSRs. Interchange is paid to card issuers by acquiring banks, which pass the cost along to their merchant clients.
  Star issuers will receive a flat 12.5 cents per transaction, the same Star rate paid by supermarkets that generate 15 million or more transactions per year. NYCE issuers will receive 0.5% of the sale, plus five cents, up to 22 cents, which is the same qualified rate NYCE provides for non-supermarket merchants that generate at least 15 million transactions. QSRs will not have to meet volume thresholds under the Star and NYCE rate policies.
  Visa and American Express don't have separate rates for fast-food restaurants. But they, along with MasterCard, argue that any increase in processing costs is more than offset by a substantial increase in tickets-anywhere from 40% to 100% over the cash ticket, depending on the card brand. The average ticket size in the fast-food industry "runs between $3.25 and $6.50, and we've seen it increase from that up to $7 upwards to $21 (for pizza)," Gore says.
  'Revenue Opportunity'
  With such increases, QSRs "are understanding that the benefits of accepting cards far outweigh any costs associated with them," Crager says.
  While some experts remain skeptical that card use by QSR customers will become as prevalent as in other merchant segments, some say fast-food restaurants will find benefits, particularly from PIN-based debit card acceptance. "It's less costly and less prone to fraud than credit cards, and PIN-based debit enables them to provide other services as well," including cash back, says Barbara Span, Star vice president. "It also opens a revenue opportunity for financial institutions when their cardholders make an electronic payment instead of paying with cash."
  Furthermore, card issuers and acquirers aren't the only ones to profit from card acceptance by QSRs. Processors also stand to benefit.
  Star's parent, Memphis, Tenn.-based Concord EFS Inc., in December said McDonald's had chosen it as its provider of credit and debit card processing.
  McDonald's also is recommending Concord to franchisees as the preferred provider of processing services, a Concord spokesperson says, declining to estimate the potential processing volume from the contract. Concord will provide transaction routing, authorization and settlement.
  Another major processor-National Processing Co.-also is getting a piece of the QSR action. NPC in December signed a multi-year agreement with Jack in the Box Inc., the nation's fourth-largest QSR chain. San Diego-based Jack in the Box, which began testing card acceptance in 1998, at year-end 2002 accepted cards at 150 of its 1,870 restaurants nationwide. "We plan to accept cards in 850 restaurants by May and in all of them by 2004," a Jack in the Box spokesperson says.
  NPC will provide Visa and MasterCard authorization and settlement, and support PIN-based debit.
  Recognizing that there's little risk in the fast-food market, MasterCard altered some rules to make it easier for QSRs to accept cards without slowing service, Gore says. "If people are going to defraud a merchant, they're not going to defraud fast-food merchants," he says.
  Under MasterCard's QSR program, merchants don't need to obtain a signature or give a receipt, speeding the processing of transactions. Merchants also need not obtain authorization for transactions under $25.
  For its part, Visa has a payment service "that leaves the need for a signature up to the merchant themselves ... which helps them from a speed perspective," Crager says.
  Competitive pressures are another factor pushing fast-food chains to adopt card acceptance, Gore says.
  Indeed, industry leader McDonald's late 2002 commitment to card acceptance will spur some other chains to roll out card acceptance, observers predict. "It's a competitive industry. If McDonald's puts in payment acceptance, you can't be one of their major competitors without it," says O.B. Rawls, president of Hypercom North America, the Phoenix-based terminal maker.
  Adds Ken Neeld, president and chief executive of Delphi Display Systems: "Once a McDonald's decides they're going to go forward (with card acceptance), then it really becomes the cost of competition." Delphi manufactures order-confirmation systems for drive-through windows.
  Nevertheless, some are unconvinced that QSRs will produce a revenue windfall for processors, card issuers, and the major card brands. "The good news is (that the QSR market) is all incremental business," says Jeffery Baker, senior research analyst at Minneapolis-based U.S. Bancorp Piper Jaffray. "But it's real small" in terms of transaction amounts.
  Challenges Remain
  Processors can expect just one cent to five cents per transaction in revenue, Baker says.
  There's no doubt that challenges remain for card acceptance in QSRs. For one thing, terminal makers will have to meet the differing needs of a corporate-owned store versus a franchised store, VeriFone's Rasori says. Franchise stores are more likely to use traditional point-of-sale terminals while corporate-owned stores typically have standard ethernet connections with encryption.
  Terminal makers already are designing POS hardware that can meet the needs of different QSR players ("A Fast-Food Fix," December, 2002). Rawls estimates that among the top 10 QSRs, there are probably 350,000 "lanes of opportunity" for card-reading terminals.
  Perhaps the most persuasive argument for card acceptance can be found in the business pages-stories about declining sales for QSRs, Rawls says.
  "If you can do something just as simple as taking plastic payment cards to get an uplift in tickets and an increase in sales, why not?" he says. "It makes business sense."