Merchants Use Loyalty to Help Propel ACH-Based Payments

  How can merchants take advantage of the automated clearinghouse system's cheaper transaction costs? Give consumers a loyalty discount and watch them turn to merchant-friendly ACH debit products.
  That is what retailers Flash Foods of Waycross, Ga., and Muskegon, Mich.-based Wesco Inc. have found after implementing ACH-debit card programs that tie in to store loyalty.
  Through the programs, both merchants say they save nearly half the cost of credit card transactions when customers use ACH cards instead. Wesco, which says it averages 5,500 ACH-debit transactions per month, also claims 70% of its ACH -card customers switched from using higher-cost debit and credit cards.
  ACH debit occurs when funds are drawn from consumers' checking accounts using account and bank-routing information from personal checks provided at registration. The funds are transferred between banks over the ACH network. As merchants battle the credit card industry over interchange, more industry players are emerging that specialize in supporting ACH-debit payments. Among them include National Payment Card LLC, Tempo Payment Inc. and Pay By Touch, all of which are ramping up merchant programs across the country.
  Each of the programs has similar goals. And each faces significant obstacles.
  One observer, though, paints a positive forecast for ACH-debit initiatives. "ACH-debit programs are picking up steam and will continue to do so," says Nancy Atkinson, senior analyst at Boston-based Aite Group. "Merchants want interchange relief."
  But other observers say ACH-debit initiatives are not growing as fast as proponents would like everyone to believe, as efforts to reduce transaction-processing costs using ACH networks have been going on for 20 years.
  "We don't know whether companies like Tempo or any other type of system will be successful or not," says Michael Herd, spokesperson for NACHA, an association that develops and oversees rules for ACH payments.
  Nevertheless, ACH-debit card programs are gaining some traction. Tempo cards will be accepted at 800,000 merchant locations within the next year, while National Payment Card has six retail chains committed to rolling out its program representing 1,500 locations. Pay By Touch, which uses fingerprint biometrics to authenticate payments, including ACH debit, is accepted at 2,200 locations.
  San Mateo, Calif.-based Tempo's goal is to meet the needs of merchants looking for less-expensive transaction costs and a means to generate revenue. The PIN-based Tempo Payment Network, formerly called Debitman, charges merchants 15 cents per transaction. Retailers who issue the cards receive a marketing rebate of 6 cents or more per transaction. They also receive that amount in interchange when their card is used at other merchants' locations in the network.
  "We figured we could issue a PIN-based card for security, and then when the transaction has been authorized pull the money through the [less-expensive] ACH network," says CEO Mike Grossman. "People say Tempo is an ACH card, but it's more a PIN-based network that goes through the existing payment infrastructure."
  Some 200,000 retail locations accept Tempo cards, and 600,000 more will accept the cards once Chase Paymentech Solutions Inc., a leading merchant acquirer, completes its integration within the next 12 months.
  ISSUANCE ISSUES
  "I believe Tempo is becoming more and more popular, and our partnership will help them achieve that even further," says Diane Donoghue, executive vice president of Chase Paymentech's retail network service.
  While Tempo is gaining on the acceptance front, few retailers have agreed to issue its cards. Grossman would not say how many cards merchants have issued thus far but says the number is growing, preferring instead to focus on acceptance trends.
  "We are moving toward complete ubiquity at a very nice pace," he says. However, it has a long way to go, as there are more than 5 million merchant locations in the U.S. that currently accept traditional credit and debit cards.
  But Tempo is making headway with other partner announcements in addition to its agreement with Chase Paymentech. In April, HSBC Retail Services announced the OptiPay ACH payment card deal with Tempo and loyalty-program developer Concept Shopping Inc.
  OptiPay cards will be branded with the participating merchant's name and will link to participating consumers' checking accounts. The cards will be backed by a customized rewards program based on consumers' past purchases. HSBC will provide the card-management services.
  HSBC, which also invested $8.7 million in Tempo last year, plans to have merchants participating in the next six months, according to ATM&Debit News, a Cards&Payments sister publication.
  Some Tempo merchants already are pleased with their results. Wesco, a small chain of 51 convenience and gasoline stores, started working with Tempo in June 2006 to counter the rising cost of credit and debit card acceptance, says Bryan Link, Wesco marketing director. To spur customers to use Wesco Debit cards, Wesco is giving the cardholders 2 cents off per gallon on gasoline purchased, he says.
  "With the Tempo flat fee [of 15 cents] and our 2 cents discount per gallon on an average 12-gallon fill, it costs us 39 cents compared to an average 73-cent fee for [a similar] credit card transaction," says Link. "Two cents off per gallon really seems to grab our customers' attention."
  MORE SPEND?
  Wesco also provides Tempo cardholders various discounts on purchases of soda, candy and other merchandise in addition to the 2-cent discount on gas.
  Link says customers spend more when using a Tempo card, as many of Wesco's in-store Tempo purchases have been made by consumers who did not previously make purchases in the store. That means they spent money in the stores specifically because of the loyalty discounts.
  To help boost its Wesco Debit Card program, the company in April ran a promotion to encourage clerks to sign up for the card so they could better understand it and sell it to customers. Link says about 25% of its 900 clerks signed up. Stores with the most clerks registered won pizza parties for their staffs.
  In May, Wesco conducted a promotion in which its stores competed for which could sign up the most customers in the Tempo program. The 10 winning stores received pizza and bowling parties.
  Boca Raton, Fla.-based National Payment Card takes existing retailer loyalty card programs and adds an ACH-payment function to them, says Peter Guidi, National Payment Card vice president of sales. Like Tempo, National Payment charges merchants 15 cents per transaction, though National Payment cards cannot be used at other merchants' locations.
  Flash Foods Inc., which operates 180 gas and convenience stores in Georgia and Florida, plans to test and then launch National Payment Card's ACH retailer-loyalty program this summer. The company is pursuing the Rewards in a Flash ACH debit program to counter rising credit card-processing costs. At Flash Foods stores, 52% of sales are initiated with credit cards, which cost the company an average of 57 cents per gasoline purchase, says Jenny Bullard, Flash Foods chief information officer.
  RECOUPMENT HOPES
  The company expects to recoup its investment in the program by converting 5% of its more than 400,000 loyalty cardholders to the program in the first year to produce a savings of $172,000, Bullard says. She says the company will work to convert 15% of the loyalty cardholders to the ACH product in the second year to achieve a projected savings of $516,000.
  "This ACH program is a good step for us to make our loyalty program more beneficial to our customers and at the same time save us money on credit card fees," says Bullard.
  National Payment Card also has programs in which consumers can use driver's licenses that have magnetic stripes to make payments at certain retailers. Some 24 states issue driver's licenses with mag stripes. Traditional payment terminals read the mag stripe and accept the PIN to authenticate the shopper. The transaction is recorded and sent in a batch through the ACH system similar to electronic checks. National Payment charges merchants 17 cents per driver's license transaction, says Guidi.
  One Austin, Texas-based retailer, which the processor was not allowed to name, was able to get 5% of its customer base to sign up for the driver's license ACH-payment program in only three months, according to Guidi.
  And in December, El Dorado, Ark.-based Murphy Oil USA Inc., which operates nearly 1,000 gas stations at Wal-Mart parking areas in 21 states, began implementing National Payment's drivers' license ACH payment system. Murphy Oil also plans to issue Tempo ACH cards.
  Other ACH-based payment products also are making headway, including San Francisco-based Pay By Touch, which uses biometric fingerprint authentication. Participating merchants have the option to let participants enroll credit or debit card information as a payment option, though most opt to support ACH payments only, says Don McNelley, Pay By Touch senior vice president of risk and operations.
  A spokesperson says Pay By Touch charges merchants about 25 cents per ACH transaction.
  Pay By Touch has more than 3.6 million users, though that includes the United Kingdom and Singapore as well as 44 U.S. states. When registering, consumers have both of their index fingers scanned to create algorithms. Another finger algorithm is made when making a purchase that is matched against the one on record for the finger to authenticate the payer. Once registered, consumers can use Pay By Touch at any participating merchant location.
  Securing the transaction is also a main selling point for Pay By Touch. "Transactions are both safe for the consumer and the merchant because there is much lower fraud associated with biometric authentication," says McNelley.
  Consumers are attracted to the program because the biometric authentication secures their account information and they like the concept of not having to carry a payment card at all, says McNelley.
  While there has been much activity with ACH debit, there still are issues of marketing and getting merchants on board with ACH programs, says Dan Schatt, senior analyst at Celent Communications.
  "Merchants have to do their own marketing to get customers signed up, but there certainly is a strong opportunity to tie in ACH payments and rewards."
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