Putting a Finger on Biometrics

  The spread of biometric point-of-sale systems has been predicted for a long time, but it is hard to tell how widely the technology is being accepted. Vendors claim the number of retailers giving their systems a try is growing, but they will not reveal specific details about their tests, and many retailers are not ready to talk, either.
  Consumers, though, are not shy about sharing their thoughts about biometric payments, which some find cool and others find creepy.
  On a recent Friday afternoon, CCM visited Milwaukee's Pick 'n Save Metro Market, which is participating in a test of Pay By Touch's fingerprint-biometric system. Not a single customer was seen paying for purchases using the system during more than an hour of observation, but with nine checkout lanes, it would be easy to miss shoppers quickly touching finger scanners rather than swiping cards or presenting cash.
  Roundy's Inc., which owns Pick 'n Save, would not comment for this article, but Pay by Touch CEO Eric Bachman says 210 transactions from the Pick 'n Save went through Pay By Touch during the day of CCM's visit.
  Outside the store, customer reaction to the Pay By Touch system was mixed. A few customers said they had not had time to register to use the system.
  "Besides, credit cards are just as fast," one woman said.
  Another woman said she uses the system, but her husband does not. "He's worried about privacy," she said.
  A 20-something woman who works at the store said her purchases tended to be about half with cash and half with Pay By Touch, which draws funds from her checking account. "If I buy a meal at work, I usually pay cash. And when I buy groceries, I use my finger," she said.
  A woman in her 40s said she had never heard of Pay By Touch and that her husband does most of the shopping now that she is in graduate school. "Really? That sounds great. Has anyone figured out how to scam it yet?" she said after hearing a brief explanation of the system. "Then again, no one can steal your fingerprint. Each one's unique."
  A man in his 50s said he would not pay by finger. "Once they have your fingerprint in a database, they can sell it or some hacker can break in and steal it," he said. "Someone can use tape to get your fingerprint."
  Pay By Touch tries to allay such fears by assuring potential customers in its brochures and through clerks that it does not store images of fingerprints, only algorithmic templates based on 40 points on each fingerprint that cannot be reverse-engineered into print images.
  In the U.S., San Francisco-based Pay By Touch and Herndon, Va.-based BioPay are the leading vendors providing biometric systems for the point of sale, according to Joseph Kim, associate director of consulting at the International Biometric Group, a vendor-neutral research and consulting firm based in New York. Kim says they achieved that status by securing their revenue through small transaction fees instead of equipment sales.
  Both BioPay and Pay By Touch claim to be No. 1 in the market, and they are fighting each other in court over patent rights. In January, BioPay filed a lawsuit asking a U.S. District Court in Delaware to declare that certain Pay By Touch patents are invalid and that BioPay has not infringed on Pay By Touch's patents. Shortly thereafter, Pay By Touch filed a countersuit alleging that BioPay is infringing on its patents. Pay by Touch is seeking treble damages and reimbursement from BioPay for the cost of the suit.
  BioPay claims 1.7 million consumers are enrolled for check cashing and purchases, which BioPay says gives it the world's largest non-governmental biometric database. CEO Tim Robinson says 14 million transactions have flowed through the system and $3 billion worth of checks.
  Retailers using BioPay include Winston-Salem, N.C.-based Lowe's Food Stores, which is starting to test BioPay's POS system after having used it for check cashing since November. Others beginning payment tests after having tried BioPay for check cashing include Mauldin, S.C.-based BI-LO, with 300 supermarkets in the Carolinas, and Dallas-based Malone's Cost-Plus Supermarkets, which operates a seven-store chain.
  Winchester, Va.-based Apple Valley Foods, which includes some BP, Liberty and Amoco gas stations and convenience stores, and a Blimpie's restaurant at three sites, has been using BioPay for checkout for 18 months.
  Apple Valley owner Rich Gladu says more than 300 consumers have enrolled in BioPay at his stations, linking it to their checking accounts to pay for fuel or snacks. He estimates biometric represents only about one percent of all transactions at his busiest location.
  "I'm going to guess that at my highest-volume location we only do probably 50 to 100 [biometric] transactions a week," he says. "As soon as it's available at the pump, this will really take off."
  Gladu says the most appreciative biometric users are contractors and construction workers who like having a cashless, cardless payment option.
  Robinson says biometric transactions in stores that offer BioPay range from low adoption up to 20% of electronic transactions.
  Bachman would not disclose the number of Pay By Touch enrollees, transaction totals or amount of funds the system has handled. He did say, however, that in stores that use Pay By Touch, 10% to 50% of total transactions are biometric.
  Charleston, S.C.-based Piggly Wiggly Carolinas Co. Inc. is rolling out Pay By Touch in all of its 114 stores. Other retailers using or testing the system include Blockbuster, Milwaukee-based Roundy's and West Seattle-based Thriftway.
  Fingerprint verification has become the preferred biometric at the point of sale over such other options as iris and voice scans and hand geometry because it presents the best combination of a number of factors, including cost, accuracy and size. Strong fingerprint solutions are capable of processing thousands of users without allowing a false match and can verify nearly 100% of users with one or two placements of a finger, according to an International Biometric Group report on fingerprint biometrics.
  Most retailers have shunned biometric payment systems because of cost and technical issues. But the 9/11 terrorist attacks spurred increased government spending on biometric security systems, which helped drive down the cost for other applications, including payments, according to Bachman.
  Vendors would not reveal what they charge retailers for add-on biometric readers (some retailers are piloting them for free), but it is believed to be in the hundreds rather than thousands of dollars. Some fingerprint sensors are as thin as coins and their housing as small as cell phones, which makes them fit easily alongside existing POS terminals.
  BioPay and Pay By Touch fingerprint scanners are small readers that link to most existing electronic cash registers and payment terminals. Retailers usually deploy an in-store enrollment kiosk, which scans fingerprints and creates a template using an algorithm based on physical features of the print. That print is verified from a central database when scanned again at checkout.
  When customers enroll, they place a finger on a scanner from twice (for BioPay) to five times (for Pay By Touch). Often, they will be encouraged to enroll a second finger, usually the other index finger, in case the first finger enrolled is later unusable, such as because of a cut or bandage.
  Customers also enter another number that is easy to remember, usually a phone number, then link their enrollment to one or more payment methods, such as the automated clearinghouse systems using check information, a credit or signature-debit card (if the retailer allows it) or electronic benefit transfers cards. They also can enroll store loyalty card information.
  When paying, consumers choose the biometric option on the POS terminal, place an enrolled finger on the reader and enter whatever number they used to enroll. Once the system confirms their identity, shoppers can pay with one of the options they chose during enrollment. BioPay processes transactions for its retail customers at this point. Pay By Touch sends the information to the merchant's processor. Loyalty card discounts automatically are deducted from the sale.
  Multi-Store Use
  Both systems allow enrolled customers to pay biometrically at other stores that use the same proprietary system. For example, if shoppers are enrolled to use Pay By Touch at Piggly Wiggly, they can pay for purchases at a video or clothing store that uses the same system without having to re-enroll with the new retailer. The same is true for BioPay.
  Merchants can avoid interchange costs by steering customers toward using ACH payments. A spokesperson at NACHA-The Electronic Payments Association would not say how much ACH fees are because they can vary greatly. But, he says, ACH generally is considered the cheapest payment method besides cash.
  Robinson would not say what percentage of BioPay's activity are ACH transactions, but the vendor recommends that retailers make ACH the only biometric payment option. Customers still can use credit or debit cards, but not biometrically; they have to swipe them the old-fashioned way.
  The biometric systems retailers install to lower payment-related costs will end up costing them more if too many shoppers pay with credit and debit card information, Robinson cautions. Not only will retailers not avoid card issuers' credit and debit interchange rates, he says, but they will end up paying higher card-not-present fees, which Visa and MasterCard charge for biometric payments. Discover and American Express charge card-present rates for biometric transactions.
  Choice Options
  Shannon Riordan, Pay By Touch director of marketing, does not believe card-not-present interchange will be a problem by the time biometric use increases. "Because biometrics is so new, there isn't a category for us yet," she says. "We're working to create that transaction category."
  Pay By Touch executives believe that limiting consumer payment choices could only serve to annoy shoppers, which is why the company recommends its retailers present biometric service as a comprehensive wallet that can include multiple bank and credit card accounts.
  "We allow people to put the credit card in but we try to control the use of it by listing ACH first or doing a promotion or prompting at the register," Riordan says. "Despite card-not-present fees, they're still seeing an ultimate cost savings."
  Merchant groups, including the National Retail Federation, are complaining more loudly about Visa's and MasterCard's April 1 interchange rate increases and are fighting back by promoting acceptance of cheaper cards such as Discover.
  "Retailers' margins are extremely thin," says Mallory Duncan, federation senior vice president. "The profit margin for retailers is about 2%. Well, interchange is breaching 2%."
  Biometrics represents another potential bargaining chip retailers could hold over the associations, says Dave Hogan, Federation senior vice president. He has heard talk among members about biometric use at the point of sale, but he does not expect much action yet.
  Long Wait?
  "People are looking at it, but we haven't seen mass adoption," Hogan says. "It's not that it's not a good solution, but any time a retailer is going to upgrade a point-of-sale system, it takes years."
  Training staff and consumers to use new technology is one issue. Cost is another. Even if biometric systems can be added to existing terminals, most retailers will not act until their POS terminals need to be replaced, Hogan says.
  Hogan predicts merchants will be thinking about biometrics more in the next few years because they tend to follow replacement cycles of seven to nine years, and the Y2K compliance scare spooked many retailers into buying new equipment in 1998 and 1999. That means a larger-than-usual number of retailers will be looking to replace their POS terminals over the next few years, which is when they will be looking for the latest and greatest technology.
  Bachman and Robinson say they have not heard talk of Y2K-era terminal replacements, but they agree retailers pay close attention to their competitors when planning equipment purchases. Whether current users expand or discontinue biometric use will influence others.
  A survey conducted by Supermarket News for its annual technology issue published in January found that 25% of respondents said they plan to test or launch a biometric system this year. International Biometric Group says that in 2004 retail and ATM applications represented 2.8% of revenues for the biometric industry. The group projects that in 2008 retail and ATM applications will represent 5.2% of biometric revenues, still a small percentage compared with other such applications as criminal identification and network access, but a dramatic increase.
  While biometric identification in payments has drawn less fire than, say, news of the potential for radio frequency identification chips being implanted under people's skin, fingerprint-based payments systems spook a lot of consumers. For one thing, many people associate having their fingerprints logged with being booked, says International Biometric Group's Kim.
  "The other [issue] is informational privacy. 'What are you going to do with my fingerprint? What are you linking it to?'" Kim says. "I'm not saying the concerns are illegitimate, but they do stem from a lot of misunderstandings of how this technology works."
  However, public fears of terrorism and identity theft also have grown in recent years, making some consumers more accepting of and accustomed to biometric identification systems to enhance perceived physical security at airports and financial security at ATMs and payment terminals. And now that more consumers consider it fair for retailers to verify their identities to cash checks, they might be more disposed to allow biometric verification to pay for groceries and DVD rentals.
  BioPay stores fingerprint images in a central database. Robinson says some consumers will never believe that their fingerprints are not being stored and that vendors and retailers should not worry about losing customers over that issue. "It's not going to persuade the consumer, and it really hurts the merchant," he says, explaining that if current systems ever become obsolete, vendors will need to be able to retrieve images of enrollees so retailers will not have to have them re-enroll.
  Pay By Touch does not store images, and Riordan says images are not necessary for upgrades. "We can with the template upgrade and change our system based on what we have," she says.
  Some consumers will give up a bit of their privacy in exchange for incentives, as they do by using trackable loyalty cards to get two-for-one deals, Robinson says.
  Allaying Fears
  Rita Postell, manager of community and employee relations for Piggly Wiggly, says cashiers that shoppers have known for months or years have helped calm the worries of many consumers reluctant to try Pay By Touch. So has seeing other shoppers use it.
  "It took awhile, but as time went on, more and more people registered and people behind them would see people utilizing the system, and they would become curious," she says.
  Piggly Wiggly's biometric use is criticized on a number of religious Web sites with comments such as, "I wonder how doubters will reconcile biblical prophecy when we move to a cashless society?" and "Anyone participating in this by choice brings my blood to boil instantaneously."
  But Robinson points out that religion is just one demographic that cannot predict where biometric payments will catch on first. "You wouldn't expect the hot spot of this to be the Carolinas," he says. "But deep in the Bible Belt is where most of the activity is occurring."