Operators of cashless vending machines and kiosks are scrambling to find relief from new debit-interchange rates, some of which are significantly higher than what they typically paid previously and may wipe out much of their profits, observers say.
New Federal Reserve rules that limit debit interchange to 21 cents plus a few cents to cover fraud and other costs for large issuers could triple transaction costs for many in the cashless unattended payments sector, which consists primarily of small-ticket transactions, Dan Mathews, executive director of the Chicago-based National Automatic Merchandising Association, tells PaymentsSource.
“This is causing a lot of pain among our operators, who are flooding us with questions, and we don’t know what to tell them,” Mathews says.
Visa Inc., MasterCard Worldwide and various payment-processing firms in late September said they would exercise a new interchange fee on small-ticket purchases, including those made in vending machines and kiosks where the vast majority of transactions are less than $2, industry observers say.
Under the new debit rates from both card networks, the vending machine operators debit interchange rate applied to purchases initiated with cards from large issuers on Oct. 1 changed to 0.5% of the sale plus 22 cents from 1.55% plus 4 cents, according to USA Technologies Inc., one of the nation’s largest cashless vending machine operators.
In that scenario, the transaction cost on a $2 transaction would be about 22 cents, compared with about 7 cents under the previous rate, the firm contends.
The discount rate, of which interchange is just a part, varies for cashless vending machine operators because of differences in acquiring banks and processors. But the vast majority of cashless vending machine operators will be affected by the new fees, Mathews notes.
The merchandising association is attempting to negotiate with the card networks to find a more palatable middle ground for debit interchange, Mathews says.
MasterCard declined to comment specifically on how new debit interchange rates may affect vending machine operators, but a spokesperson tells PaymentsSource via email the company plans to operate within the debit interchange rates imposed by Congress and the Fed and will “continuously assess the evolving landscape.”
Visa declined to comment.
On Oct. 1 the vending machine organization urged its members in an open letter to contact lawmakers asking for alternatives.
The association also suggested that its members contact their merchant acquirers and payment processors and ask them “to negotiate directly with Visa and MasterCard on your behalf.”
Certain cashless vending industry players are doing just that.
USA Technologies is in discussions with Visa and with its payment-processing firm about the new debit fees, but it is too early to say what might emerge, David DeMedio, chief financial officer of the Malvern, Pa.-based company, tells PaymentsSource.
Some 83% of USA Technologies’ cashless vending machine transactions are initiated with debit cards, and about 70% of those cards are from large banks that fall under the Fed’s new debit interchange rates, he says.
“It’s a difficult situation because the majority of our vending machine transactions are conducted via debit, and the new fees are going to cause big problems for our customers,” DeMedio notes. Many vending machine operators are locked into long-term contracts that do not allow adjustments for debit-interchange pricing changes, he adds.
Apriva LLC, a Scottsdale, Ariz.-based wireless-payments technology company that offers cashless-payment services to the vending industry, also is negotiating with the payment card networks, financial institutions and processors to find a better approach to handling the new debit-interchange rates, Rinaldo Spinella, Apriva executive vice president for unattended payments, tells PaymentsSource.
Spinella did not disclose the direction of Apriva’s discussions with other card-industry players, but he noted that the privately held company continues to offer special transaction pricing to vending machine operators that adopt its contactless payment technology, as part of a program it established in 2009 with Visa.
Under that program, vending machine operators may continue to receive the older, lower debit-interchange pricing, although Spinella declined to specify that exact rate.
“Any operator that wants to add contactless payment technology through us can continue to take advantage of the prior standard debit interchange rate,” he said, noting that its deal with Visa is set to continue through the end of this year.
Although it remains unclear whether the card networks will craft new pricing schemes that may offset some of the effects of the Fed’s new rates, various industry players remain hopeful for better pricing.
“The card networks historically have provided various types of incentives to encourage a movement to card acceptance in vending machines and other unattended payment areas, and it is hard to believe they want to do anything now that would slow that down,” USA Technologies’ DeMedio says.
USA Technologies on Sept. 27 said that the number of cashless vending machines it supports rose 45.1% through June 30, to 119,000 machines compared with 82,000 a year earlier. Its total number of customers rose 83.3% during the same period, to 1,925 from 1,050.
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