Transition Time for Retailers' Payment Technology

  Merchants are willing to spend on new point-of-sale technology, especially for PIN-based debit and check electronification. But what about the real high-tech stuff?
  Fact or fiction? In 2003, the star of futuristic Hollywood shoot-'em-ups becomes chief of a $1.4 trillion economy, the fifth largest in the world.
  Fact or fiction? In 2004, merchants will shift to wireless, contactless transactions, consumers will flock to sleek-looking, Web-based kiosks to research and make purchases, and clerks will use hand-held devices to conduct high-end personal service and checkout.
  The answer to Question One is "fact" as Californians elected Arnold Schwarzenegger governor. The answer to Question Two is probably "science fiction," at least this year.
  But high-falutin' point-of-sale technologies are getting closer and it may not be long before paper-reduced (though not paperless) information systems find consumer acceptance in stores. In the near term, however, it's the tried and true POS technologies, albeit modernized, that consumers will be using in 2004.
  More than one-third of major retailers are upgrading their POS systems this year, and another 28% will within two years, according to a survey of retailers' chief information officers by Gartner Retail, a unit of Gartner Group. Over half the managers said their POS budget would increase in 2004, making it the top systems-related investment cited by the executives.
  The spending will be driven by three factors, say retail industry experts. One, current payment terminals are old and need replacing. Two, retailers want to be able to accept online debit cards so they must buy personal identification number pads. Three, some technologies are looking very hot this year, especially radio frequency contactless cards and check electronification.
  Investing big bucks in the point of sale is a radical change for retailers, says Jeffrey Roster, Gartner's principal analyst, global industries-retail. Time was, the retail industry avoided cutting edge technology. But that approach is dead as retailers face brutal cost-cutting competition from behemoth Wal-Mart Stores Inc. and pressure from investors looking for better returns, according to Roster.
  "Wal-Mart and Wall Street are driving this efficiency effort," says Roster. "That settles at the point of sale. The average age of the equipment is five to seven years old. Retailers have squeezed the last piece of life out of the machines."
  The need to replace old equipment fits nicely with a fortuitous legal win for retailers-last spring's settlements of the class-action lawsuit that merchants brought against Visa USA and MasterCard International over signature-based (offline) debit cards. The card associations agreed to drop their "honor-all-cards" policies, allowing merchants to push consumers to use their online, or PIN, debit cards. Merchants favor PIN debit because the interchange rates for such cards historically have been much cheaper than signature debit interchange. The trade-off is investing either in PIN pads as attachments or in enhanced terminals with PIN-debit capabilities.
  The card associations, on behalf of card issuers, charge merchant acquirers interchange fees; acquirers pass the cost on to their merchant clients. Since the settlements, the associations have been jiggering interchange rates. Offline fees generally are now lower than they were pre-settlement ("The Interchange Poker Game," page 22). But PIN debit interchange is rising, both on the Visa- and MasterCard-owned Interlink and Maestro networks, respectively, and on the regional electronic funds transfer networks. Still, PIN debit generally retains a price advantage for the merchant.
  The post-settlement confusion means merchants have to be ready to accept all forms of debit, says Vince Tropea, relationship manager with Chase Merchant Services, the nation's largest merchant acquirer.
  "We don't know where interchange is going in the short term or long term," says Tropea, adding that grocery stores have been ahead of the game in installing PIN pads, but this year other retailers will follow.
  The need to offer new applications like online debit and rewards programs was cited by 45% of the chief information officers that planned to buy POS equipment in 2003, according to a survey from International Business Machines Corp. and Executive Technology magazine (chart, page 29). That was the leading response from the 78 CIOs of major international retailers that were surveyed last spring, as the settlements of the merchant suit was announced.
  Specialty retailers are getting into the PIN-pad game due to the interchange fluctuations and the general growth of debit card use by consumers, says Stuart Taylor, vice president of marketing at VeriFone Inc., a major terminal developer and marketer. And the announcement by Wal-Mart last December that it would stop accepting MasterCard-branded signature debit cards threw another curve ball at retailers.
  "Retailers are looking at what it costs to support certain card products and may drop some things," Taylor says.
  Chief VeriFone rivals Hypercom Corp. and Ingenico Inc. agree that the settlements of the merchants' suit brought terminal buyers out of the woodwork. O.B. Rawls, president of Hypercom North America, says retailers want dependable, fast terminals that can accept all forms of debit and offer loyalty rewards for consumers.
  Ingenico, meanwhile, in 2003 had one of its best years, selling about 100,000 of its eN-Touch 1000 terminals to customers seeking to offer online debit and signature-capture capabilities, according to a spokesperson
  'Going Gangbusters'
  Santa Clara, Calif.-based VeriFone believes that combo terminals that communicate with processing networks through wireless, Ethernet technology (so-called Internet Protocol, or IP systems) and traditional dial-up will become popular with merchants. Many businesses already are Ethernet capable but aren't using it for their POS communications. That will change because an IP transaction is as fast as two seconds compared to 15 seconds for dial-up, according to Taylor.
  The lure of low payment-processing costs also has retailers opting for check-electronification services, says Tropea of Chase Merchant Services. Check-processing fees for transactions over the automated clearinghouse (ACH) are cheaper than those for cards, but the paper handling can be costly and cumbersome. Last year, the Check 21 legislation was enacted, making the electronic image of a check a legal document and hence making the old-fashioned check more of a viable electronic payments competitor.
  Check-electronification systems are "going gangbusters," says Tropea. First Data Corp., co-owner of Chase Merchant Services with J.P. Morgan Chase & Co., owns TeleCheck, a provider of check-guarantee and verification services to merchants. In 2002, TeleCheck settled more than 124 million transactions though not all of those were checks at the point-of-sale.
  NACHA-The Electronics Payments Association used a benchmark study from the Federal Reserve to estimate that consumers wrote about 7.5 billion checks at the point of sale in 2000. Less than 1% of the checks were processed electronically, according to Amy Goodson, vice president and general manager of electronic check service at Atlanta-based Nova Information Systems, the merchant-acquiring arm of Minneapolis-based U.S. Bancorp.
  "People tend to forget about check transactions," says Goodson. "Basically, it's an untapped market."
  Nova has signed up about 2,800 smaller merchants to its Electronic Check Service since it was introduced six months ago, says Goodson. The service will be offered to top-tier merchants once Nova certifies the 4690 electronic cash register system from IBM for product use. That could happen by spring, says Goodson.
  For vendors, linking with IBM is essential because Big Blue just may be the Atlas upon whose shoulders the retail POS technology market sits. More than 60% of grocers and 80% of the top 1,000 retailers worldwide use some IBM product, whether it be hardware, software, servers or consulting services, according to Troy Pike, global retail industry leader at IBM.
  Pike agrees that IBM's customers are buying POS equipment after years of neglect. For example, client Sears, Roebuck and Co. made upgrading the point of sale a core element of its store redesign that began in late 2002. Sears centralized checkout areas, dropped some products and expanded customer assistance in others.
  Sears bought about 8,000 POS systems from IBM last year and plans to buy another 30,000 this year and next, according to a spokesperson for the $41 billion broadline retailer. Sears, which plans to roll out acceptance of PIN-based debit cards, declines to discuss other in-store tech innovations.
  For IBM, clients are also considering wireless systems that use radio frequency signals to send and receive payment information, says Pike. The interest grows from the success of the groundbreaking ExxonMobil Speedpass key fob, a contactless transponder.
  Exxon Mobil Corp. has distributed more than seven million of the wands. McDonald's Corp. and Stop & Shop Stores Inc. supermarkets also have run limited live pilots on the system.
  MasterCard plans to roll out this summer a similar pay-with-a-wave, contactless card payment system it has dubbed PayPass. Last year, it conducted a nine-month test in Orlando, Fla., using a chip card system with three of its largest card issuers, J.P. Morgan Chase, Citibank, and MBNA Corp. In Dallas, MasterCard also tested embedded chips in cellular telephones with giant cell-phone maker Nokia Corp.
  In Orlando, the PayPass card was used by more than 16,000 cardholders at 60 merchants.
  The PayPass card will be a boon to stores where time at checkout is of the essence and the average ticket is less than $25, MasterCard says. A PayPass transaction at a fast-food drive-through window was 12 to 18 seconds quicker than a cash transaction. In the Nokia test, which included only 700 cardholders and 10 merchants, the pay-by-phone program cut average transaction time by six seconds, MasterCard found.
  PayPass will appeal to merchants seeking "convenience, simplicity and fast throughput," says Murdo Munro, vice president of mobile commerce at MasterCard. The device melds well with a MasterCard rule that drops the signature requirement for transactions under $25 at certain merchants.
  But PayPass faces the same chicken-and-egg challenge as other new technologies. Financial institutions won't issue a PayPass card until there is consumer acceptance of the technology. Customers can't use the card without the plastic in hand. And merchants won't invest in terminals capable of reading a PayPass signal until customers are using the cards.
  Chase Merchant Services' Tropea voices the dilemma when he discusses the system with clients. "My merchants ask, 'how many cardholders are there out there?' I say 11 guys in Orlando," Tropea says. "Everyone wants to try something new but they need a solid business case."
  Regarding contactless systems, some industry experts say consumers would prefer more places to use their magnetic-stripe card, rather than some new technology. Costs are a hot topic.
  Vivotech Inc., based not far from VeriFone in Santa Clara, has been a provider of the contactless payment card readers in MasterCard's test. A retailer buying in volume will pay about $300 per terminal for the device and installation, a Vivotech executive told CCM's sister publication Card Technology in the magazine's January issue.
  MasterCard says the contactless cards will cost $1.00 to $1.50 more than a standard card, depending on the quantity purchased.
  MasterCard remains confident that adoption will occur, predicting last December that four million to six million of the cards will be distributed by year-end 2004.
  Several major MasterCard members are committed to PayPass, Munro says, though he won't name names. PayPass will increase their interchange income by shifting cash transactions to card purchases, encourage new merchants to become card acceptors, and make cardholders more loyal, argues Munro.
  VeriFone's Taylor says his company is siding with MasterCard on the future of contactless payments. "PayPass is receiving a lot of consumer acceptance," he says. "You will see significant retailer rollout."
  The chip in the PayPass meets the international standard for communications technology called ISO 14443. That means that PayPass cards could potentially interact, with some tinkering, with the many mass-transit systems around the world that are using the ISO 14443 for their contactless payment systems. (ExxonMobil's Speedpass doesn't use that standard, instead operating with a proprietary system from Texas Instruments Inc.)
  Closer to home, American Express Co. has been experimenting with radio-wave devices using ISO 14443. "There may be some differences (among payment networks), but the transaction is like a magnetic stripe in that the same technology is used," says Munro. "You need only one technology."
  The Seattle Seahawks of the National Football League are conducting another radio frequency card test. Vanguard ID Systems has distributed about 50,000 contactless radio frequency ID (RFID) cards that are ISO 14443 compliant for the pilot, called PowerPay. Cardholders can designate the payment account of their choice on the cards and get discounts on stadium concessions at Seahawk games.
  The idea of using technology to reward the customer with a deal, or to speed checkout, is still relatively new to many retailers, according to Gartner's Roster.
  "It used to be 'how do we decrease costs?' That's still true," says Roster. "Now, driving revenue is key to the chief information officer. The CIO is looking at their job in a fundamentally different way."
  Commonplace
  This new view is playing out with some merchants piloting programs using biometrics for payments, kiosks for customer interaction, and handheld devices for quick checkout and personal-touch customer service.
  Self-checkout systems are becoming commonplace at supermarkets. The number of do-it-yourself lanes grew 47% from 2001 to 2002, and sales of the systems themselves could reach $1 billion in 2005, according to IHL Consulting Group. IBM and its major electronic cash register competitors-NCR Corp. of Dayton, Ohio, Fujitsu Limited of Tokyo, and Wincor Nixdorf of Paderborn, Germany-make the systems.
  Much of the new technology ideas were on display this January in New York City at the National Retail Federation's 93rd Annual Convention & Expo. At the show, the world's fifth-largest retailer, D?sseldorf, Germany-based Metro Group, showed off its Future Store supermarket that included personal shopping assistants, kiosk information modules, self-checkout, and RFID for the supply chain.
  Metro Group, with sales last year of $61 billion in 2,300 locations, has been testing its Future Store since last April in Rheinberg. Chief Information Officer Zygmunt Mierdorf says there has been a 12% sales increase and a 30% rise in customer traffic at the store. Metro declines to discuss sales specifics or the uptake of various devices being tested. But executives say this is the start of a 10-year test of the future of retailing so early statistics won't be meaningful.
  To use all the high-tech equipment, a consumer must use Metro's affinity card to log onto the system through a computerized personal shopping assistant on a shopping cart. The assistant includes a monitor that sits at the handgrip of the cart for easy viewing.
  As the customer selects items, she scans them on a reader on the assistant. It tracks and displays the consumer's sales total, offers recipes and a visual store map, and adds up bonus points earned for purchases.
  The consumer can use kiosks to check prices and learn about compatible products, say a red wine with a meat purchase. At the checkout, the consumer hands her affinity card to the clerk. The card is scanned and purchases are totaled. The consumer can pay by card, check or cash.
  The affinity card is not a payment device, but Mierdorf says that is something Metro brass is considering. "We want to talk about that with the card companies," Mierdorf says. "The idea is to use the affinity card for payments so the customer uses only one card."
  Metro uses software from Bangalore, India-based Wipro Ltd. in the shopping assistant to track the cart and the customer as she moves through the store. This will help with staffing at checkout counters, allowing retailers to send clerks into the aisles to help shoppers when needed, says Mani Subramaniam, principal consultant for Wipro.
  The Future Store uses the RFID for inventory control. Chips are embedded in pallets full of goods soon to be shipped from a manufacturer or distribution center. In a few cases, chips are embedded in individual products.
  RFID chips are core to a massive move by Wal-Mart to speed and improve its inventory and distribution systems. Wal-Mart plans to have 100 major suppliers using the chips by the end of this year. By 2006, Wal-Mart wants all its distribution centers and 300 suppliers to use chips in all inventory.
  This revolutionary plan by Wal-Mart, the world's largest retailer with $245 billion in sales in fiscal 2003, looks to change the supply-side of the retail business. At this time, Wal-Mart hasn't said if the chip will have an application at the point of sale.
  In the U.S., Albertsons Inc.'s Midwest subsidiary, Jewel-Osco, and Stop & Shop are testing some of the Future Store technology at their supermarkets ("Grocery Cards Get Another Scan," page 34).
  Biometrics were given a boost at the NRF show when IBM announced it would market systems from Pay By Touch for a year to its retailer clients. San Francisco-based Pay By Touch has been testing its fingerprint payment systems with grocers and a major movie rental chain.
  Merchants have been wary over biometrics because Visa and MasterCard categorize the transactions as card-not-present, warranting a higher interchange rate. A Pay By Touch spokesperson says it is working with the associations to reconsider that approach to biometrics.
  Skittish Retailers
  Kiosks represent a technology that can appeal to retailers but may not have payment applications. Symbol Technologies Inc. of Holtsville, N.Y., is promoting a $1,300 model with a 5.7-inch screen that uses the Microsoft Windows operating system. Consumers use a menu-style touch-screen system to check prices, products, and specials. Store staff can view their schedules and log in or out.
  Symbol is one of many vendors with "line-buster" wireless hand-held systems for clerks to use at peak sales times. The systems usually take only card payments, and involve one device with a mag-stripe reader and often another that prints receipts. Clerks strap the systems to their waist, then roam the aisles or stand near stationary checkouts and conduct transactions.
  Line busters are meeting mixed responses from retailers, primarily due to security. Stores demand that they can view and monitor their checkout lanes. That's not guaranteed with line busters.
  Additionally, crooks have intercepted the signals from the wireless terminals. Vendors are selling systems that reportedly stop that problem but retailers remain skittish.
  It's not a given that the new technology means more electronic payments. But it's logical that consumers using high-tech devices to shop will also use their cards, or card accounts, as their primary payment vehicle.
  Talk of new technology at retailers this year is shaping up primarily as new point-of-sale devices that are capable of processing all debit card payments. Contactless payments may gain some breadth while other technologies remain in various pilot stages. Chalk up 2004 as a transition year.