The POS Potential Of Web Technology

  The Internet is paving the way for merchants to install high-speed point-of-sale technology at a better price point than a virtual private network or leased line. What are the implications for customer service, marketing and loyalty programs?
  It's often a frustrating experience for a shopper, trying to complete her errands as quickly as possible, to be standing in the checkout line waiting for a credit card authorization. Sure, the process may take less than 10 seconds on average, but for a time-constrained shopper it can seem like a crawl, especially if she sees five more customers in line behind her.
  Ever cognizant of wait times, merchants are beginning to scrap dial-up point-of-sale terminals in favor of integrated networks that utilize Ethernet ports, digital subscriber lines (DSL) and Internet Protocol platforms to support high-speed payment systems.
  The immediate payoff of embracing this strategy is transmission times as fast as those through a virtual private network, the gold standard for high-speed data transmission, at an affordable price. Concurrently, integrated networks provide the infrastructure for Intranets that can be used to deliver sophisticated customer service and marketing campaigns to consumers at key touch points in the store.
  "Retailers that use integrated networks find the world is their oyster," says Richard Mader, executive vice president of the Washington D.C.-based Association for Retail Technology Standards (ARTS), a division of the National Retail Federation. "You can move information faster without the need for leased lines or private networks. They also allow small merchants to enjoy the same data-processing advantages as large retailers that operate private networks."
  Powering this revolution is the Internet, which has made it possible for consumers to shop from remote locations and merchants to quickly exchange data internally and externally for the cost of a local telephone call.
  Ethernet ports on personal computers and POS terminals, DSL and Internet Protocol (IP) platforms act as high-speed transmission gateways that allow more data to run over a merchant's existing links to the Internet.
  "What merchants are looking at is changing the pipe to allow more data to flow through it, not the way the data flows or how it is formatted," explains Eric Duprat, senior vice president of global marketing and product development for Phoenix-based terminal maker Hypercom Corp. "High-speed capability is essential in the merchant business."
  Ethernet ports, which were developed in the 1970s by Xerox Corp., allow for the creation of a hub-and-spoke network in which a single server powers multiple terminals. Merchants that accept cards through wireless terminals frequently use this configuration, commonly referred to as a local area network, or LAN. In the past 24 months, quick-service restaurants (QSRs) have been embracing this technology to accept cards.
  QSRs are deploying Ethernet-based LANs to accept cards through wireless terminals at the drive-through lane, as well as inside the restaurant. All terminals are linked to a single back-office server that connects to the processor through the Internet. The configuration eliminates the need to install dial-up lines for each terminal, which lowers operating and installation costs.
  The technology has proven successful for terminal vendors and merchant acquirers as it meets the requirement imposed by QSRs of completing transactions in three seconds or less. The time limit is aimed at preventing service slowdowns that can result in lost sales. Industry studies have shown that for every 10 seconds by which QSRs cut service times, they can capture an additional 1% in sales volume.
  "You essentially have a shared connection for transmitting data," says Paul Rasori, director of marketing, North America, for Santa Clara, Calif.-based terminal marketer VeriFone Inc. "Mall owners can even use this architecture to equip merchants without storefronts to accept cards."
  VeriFone's Omni 3750 terminal currently offers an Ethernet module and an SSL (Secure Socket Layer) module for connections to DSL. SSL is a security protocol developed by MasterCard International and Visa U.S.A. to encrypt transaction data sent over the Internet.
  DSL, also known as broadband, basically is a fiber-optic cable used by telecommunications companies to carry data and images at lightening speed to various hardware devices, such as personal computers and televisions. With DSL on its way to achieving mass-market status, merchants and consumers are increasingly relying on the technology to provide high-speed connectivity to the Internet.
  In 2002, 6.45 million businesses and households in the United States had a DSL connection, up from about 4.4 million in 2001, making it the largest country with DSL connectivity, according to Point Topic, a London-based consulting firm. South Korea ranks a close second with 6.43 million DSL connections.
  The attraction of DSL is that end-users have instant connectivity to the Internet, thereby eliminating the need for dial-up modems to be part of any Web-based POS application. DSL transmissions are also less prone to interruptions, a frequent problem encountered as a result of static or data overload when connecting to the Internet via a dial-up modem.
  "Broadband is faster and more reliable for transmitting smaller payments than dial-up lines," says Jonathan Palmer, president and chief executive of Tempe, Ariz.-based merchant processor Vital Processing Services, which supports DSL and IP-based services. "The opportunity for acquirers to deploy broadband is real because it is faster and cheaper" in the long run than dial-up or leased lines.
  IP platforms enable merchants to install Web-based applications at the point of sale. These technologies connect a POS terminal directly to the Internet, allowing merchants to download software upgrades from vendors in a few minutes. They also can allow POS terminals to communicate with Web-enabled cellular telephones, handheld computers (personal digital assistants, or PDAs), or customer-service kiosks in the store.
  "The advantage of using an Internet infrastructure is that you can connect sales agents using different data devices to the back office with one network," says ARTS's Mader. "The aim is to bring the Internet into the store and make as much use of it as is practical to make communications more efficient, and cut communications costs."
  That has been a key point in building the business case with merchants to embrace integrated networks. DSL, Ethernet and IP platforms are better equipped to process electronic checks and loyalty programs, two applications being sold aggressively by merchant acquirers and processors.
  These technologies also can move batch data between a merchant and processor faster than through a dial-up modem. It can take up to two minutes to transmit 10 kilobytes of data using a 1200-baud modem and more than an hour to download software upgrades as large as 500 kilobytes at 1200-baud, according to Hypercom.
  Hypercom's ICE 5500 Plus and T7 Plus terminals are equipped with 56-kilobytes-per-second modems capable of downloading applications as large as 1.5 megabytes in about three minutes compared to 20 to 25 minutes for terminals equipped with older, 128-byte modems. The modem can switch to 1200- or 2400-baud mode to transmit transaction data. Each terminal can be equipped with an Ethernet port in lieu of the modem to create a virtual private network.
  "The 56k capability is a necessity for fast downloads of large batches of data and lets merchants upload non-payment applications," says Hypercom's Duprat.
  To many merchants such capabilities are nice, but what they really want are hard data to quantify their return on investment in Ethernet, DSL and IP platforms. While deployment costs for an enterprise-wide integrated platform range from thousands of dollars to more than $1 million, most merchants can expect to recover their investment within two to four years, according to New York-based Deloitte Consulting.
  In comparison, virtual private networks start at $10,000 and can cost several hundred a month to maintain. Leased lines cost several hundred per month plus installation. Though cheaper at first blush, neither system offers the scalability or flexibility of an integrated network. In addition, cumulative maintenance and upgrade costs for VPNs and leased lines can exceed those of an integrated network.
  Open Standards
  Other benefits of integrated networks include increased reliability and uptime, reduced system support and development costs, and improved operations management and cost control. Merchants also can add new hardware or software applications quickly in response to competitive threats.
  "Enterprise store systems deliver significant tactical and strategic value to retailers," says Carl Tymann, a senior manager for Deloitte Consulting. "It is a technology that is allowing early adopters to differentiate their service and products in new ways."
  Making this possible is that integrated networks are based on open operating standards, which free merchants from being tied to proprietary software and hardware. More vendors competing in a marketplace mean more opportunity for merchants to buy software and hardware that fits their budgets. It also makes it easier for merchants to scale the size of their network as needed.
  "Once an open standards-based network is in place it is easier to add or subtract hardware, which gives retailers more flexibility in configuring the network," says Mader. "Open standards make high-speed networks more affordable to merchants and can reduce the cost of maintenance and upgrades."
  As a result, merchants may find it more practical to link POS terminals to the back-office server to operate real-time loyalty programs that deliver rewards at the point of sale and allow for more accurate reconciliation of transaction data at the close of business on a single network.
  "From a network perspective, open architecture means greater flexibility when it comes to choosing applications to communicate between two different devices," explains Gale Peters, vice president of sales and marketing for Datacap Systems Inc., a Chalfont, Pa.-based provider of integrated payment systems. "That lets merchants improve operational data flow, which saves time at the end of the day. It also reduces the chance of accounting errors, and makes it easier to spot cashier skimming."
  Cell Phones
  Applications are even being developed that enable cell phones to store credit card account data, download them to a POS terminal to initiate a purchase, then upload an electronic copy of the receipt. Some merchants are leveraging wireless Internet technology to arm sales representatives with PDAs that can call up inventory and ordering information on the sales floor, in addition to ringing up sales.
  "Open-systems architecture brings more choices to the retailer when crafting business rules and processes that will give them a competitive edge and positively impact the bottom line," says H. Paul Gay, president of Memory Technology Corp., a Bellevue, Wash.-based IT consulting firm. "With hardware off the proprietary bus, merchants can enjoy the benefits of lower operating costs, as it is easier to add on compatible hardware devices than to build an entirely new system around them. They can also enjoy greater choices for features and functionality."
  POS terminal vendors now offer a variety of Internet-based hardware that can display advertising, conduct marketing research and enroll customers in loyalty programs in a matter of seconds.
  There also is talk of using IP networks to communicate with contactless smart cards as the customer moves through the store. The concept is to create sophisticated customer-loyalty programs in which consumers insert their smart card into a kiosk each time they enter the store to unlock details of their purchase history. Merchants could use data captured on the chip to create instant marketing messages displayed at the check-in kiosk or the point of sale.
  Merchants also could use the network to track in-store marketing strategies. Once the merchant knows a customer is in the store, it can compare the items purchased by the customer to those that were part of an in-store promotion. The data can be disseminated to tailor future promotional campaigns to customer purchasing habits.
  "Merchants can create a personal experience that will entice the customer to come back over and over," explains Gay. "It's about more than just throughput; it's about marketing the right product at the right time to the right customer."
  Mind you, very few retailers have yet transformed the much-touted potential of chip-based loyalty programs into reality. Only Target Corp. among the major merchandisers has such a program in operation today. Target is outfitting its discount stores' POS equipment to read the chip on its smart Visa card, and is offering electronic coupons through the card.
  Although the business case for integrated networks is gaining strength, some merchants are still inclined to protect their investment in VPNs, just as mom-and-pop merchants are apt to stick with dial-up terminals out of the belief they are the most economical solution for their POS needs.
  Such perspectives are short-term views in a world of rapidly changing POS technology, backers of the new systems say. "The cost to install an integrated network from scratch is expensive," concedes ARTS's Mader. "But the bigger question is whether retailers can afford not to do it. The operational efficiencies gained are making integrated networks part of the cost of doing business."
  How quickly merchants buy into the belief depends on the ability of acquirers and processors sell them on the benefits of this technology.