Vending Transactions Still Just a Snack

  Pity poor American consumers, stuck late at work, overnight at hospitals or preparing for drives home after long days at amusement parks. With no cash but ATM-crisp $20 bills, they gaze, longingly, into vending machines stocked with food and beverages that could satisfy them, if only the machines accepted plastic.
  Providers of card-reading terminals and transaction services for vending machines say that all parties win when machines let consumers pay with plastic. Consumers welcome the extra choice and spend more when they pay with plastic, machine operators have less cash to count and transport and card acquirers, processors, issuers and networks get a new source of small-ticket transactions.
  While vending machine operators are intrigued by the idea of adding credit and debit card readers to some of their machines, many are not convinced that widespread deployment is in their best interest yet.
  The National Automatic Merchandising Association says that of an estimated 5 million machines deployed across the country, only 1% to 3% are equipped with credit and debit card readers.
  Philadelphia-based vending services giant Aramark Refreshment Services began working with colleges about five years ago to enable card transactions with students' payments-enabled campus-ID cards. Compass Group, which owns vending operator Canteen, also began offering card-based payments for campuses and other closed-loop payment networks some 15 years ago.
  But linking machines to the outside world for branded credit and debit card payments is another challenge. "We're in an industry where we have low price points," says Brian Zaslow, vice president of marketing for the Aramark division. "With all of our products priced from 80 cents to $2, the challenge is those transaction fees."
  Visa USA's interchange rate for vending, for example, is 1.55% plus 4 cents for a Visa check card purchase and 1.65% plus 4 cents for a credit card transaction. So an Aramark transaction would incur interchange fees ranging from 5.2 cents for an 80-cent check card purchase to 7.3 cents for a $2 Visa credit card purchase.
  Bud Nixon, vice president for information technology at Canteen, lists other costs associated with card-enabled vending machines-hardware and labor to install it, transaction processing and communication, which often is done through wireless connections to cellular telephone networks. "You add all that up, and you need to pick your machines where you can drive higher revenue," he says. "That's the biggest hurdle for us."
  The list price for a credit and debit card enabled vending machine payment terminal by Malvern, Pa.-based USA Technologies Co. is $595, for either its G5 ePort magnetic stripe card terminals or G6 ePort contactless and mag-stripe terminals. That price varies with volume discounts and other deals. The monthly service fee is $9.95 per machine, which includes wireless communication and all services, such as merchant account setup, financial reporting, electronic funds transfer payments and customer service. The company charges a flat rate of 5% per transaction between $1 and $5, so a $2 transaction would cost the operator 10 cents.
  Dale Whetstone, Compass chief financial officer, says Canteen is testing card payments with various transaction providers, which he would not name, on a very small percentage of its machines. "We have proven that there are places where it doesn't make sense," he says.
  Aramark now has some 500 machines deployed that accept credit and debit cards, which is a small percentage of its total. The company is careful to make sure it meets customer demand for payment options and for snack varieties, Zaslow says, but it is important not to add cost where it is not needed.
  USA Technologies says it has the data to show where adding credit and debit card readers can help drive up profits. The company studied 158,280 transactions totaling $330,351 initiated December through February at 500 machines that use its e-Port credit and debit card readers.
  The research found that consumers spend 49% more at vending machines when they use a credit or debit card compared with cash. The average card transaction was $1.88, while the average cash transaction was $1.26.
  RESEARCH DATA
  In comparing locations, vending machines in hospitals showed the largest disparity, with the average card purchase at $2.12, or 138% higher than the 89-cent average cash purchase. Colleges and universities generated card purchases averaging $1.94, 86.3% higher than average cash purchase of $1.04. Entertainment venues, including amusement parks, zoos, museums and theaters, generated 82% higher spend, with a $3.29 average card purchase versus $1.81 for the average cash purchase.
  "There's a lot of common sense to the numbers," says Jim Turner, USA Technologies vice president and channel manager of intelligent vending. "At the hospital, when people are there all night with their loved ones, they don't think about how much they're spending at a vending machine. They're looking for convenience."
  Entertainment venues also tend to sell higher-priced items, so consumers are more likely to pay with a card instead of loose change, he says.
  Transaction Network Services Inc., a Reston, Va.-based data-communications company, sells card readers, wireless modems and processing services for transactions across a variety of sectors, including vending of Pepsi cola and other food and beverage products. Thomas McCole, vice president of the company's Synapse Wireless Group, agrees that card-enabled vending machines work well in such locations as airports, convention centers and resorts.
  The key to the equation is a greater need for cashless convenience and consumer acceptance of vending item prices starting at $1.25, McCole says. "That's the break-even point," he says. "$1.25 is where it begins to have a return on investment."
  McCole would not disclose TNS pricing for its services and for the wireless modems, antennas and card-reading terminals it receives from West Chester, Pa.-based Mars Electronics International. He said most companies charge a monthly service fee of about $10 per machine, not counting transaction fees.
  Matt Talbot, vice president of product management for TSYS Acquiring Solutions (formerly Vital Processing), says vending-machine operators can pass along interchange costs for many items to consumers more easily than they might believe. "Every merchant is extremely sensitive to the issue of interchange, but from a consumer's point of view, it isn't such a price-sensitive issue," he says. "If a customer is willing to spend $3 for a (piece of) cake, I'm not sure the consumer would stop buying the cake if it were $3.40."
  Card-network promotion of small-ticket card payments and rewards for everyday spending has helped prime consumers for expecting cashless vending machine payments, too, says Turner. USA Technologies recently released the G6 model of its ePort line of card-reading terminals for vending machines. It can read both card magnetic stripes and contactless chips embedded in payment cards.
  Niki Manby, Visa vice president of market development, says that contactless readers are well-suited for unattended vending machines because the reader is protected and not open like a mag-stripe card slot. "That means less wear and tear over time," she says. "The contactless terminal on a vending machine may improve the life cycle of the terminal."
  McCole says Transaction Network Services has considered enabling contactless payments for vending operators, but he does not believe there is enough demand from those merchants or cardholders for chip readers yet. "We have looked at it, and Pepsi would like to do that. But there are just not that many contactless cards out there at this point," he says. "Most machines don't even accept (mag-stripe) credit cards."
  An issue for vending operators considering whether to enable their machines for card payments is connectivity. Many operators prefer to avoid the imposition of asking a host to allow a machine to tap into its telephone or Internet networks to route card transactions. Moreover, it often is not feasible for an operator to have its own telephone or Internet connection installed on someone else's property.
  Turner says USA Technologies assures telephone and computer-network managers that its card readers transmit PCI encryption standard-compliant card data out of the network, and they are not capable of other functions (such as snooping). Also, the transactions can occur either as they happen or be sent in batches once per day, usually late at night.
  CELLULAR TIES
  The proliferation and lower cost of cellular telephone technology has helped make wireless transactions feasible. USA Technologies sends encrypted card data over Cingular's wireless network; Transaction Network Services uses Nextel.
  McCole says wireless connectivity works well for many locations far from telephone or network cables but not those deep in the bowels of buildings where signals cannot reach. "The coverage is not the same everywhere," he admits. "It works in one part of the building but not another."
  Turner agrees that weak signals are a limitation, but if there is a signal at all, batches of offline transactions can often be sent at night when wireless signals are strongest.
  Card equipment and service providers can sweeten the deal for vending operators by reminding them that a connection for payment transactions also allows connectivity for other third-party machine-monitoring services, says Anthony Gracia, vice president of retail services for MasterCard International. Operators can then see what products need to be restocked, how much cash is in machines and whether there are any service issues such as broken cooling systems, he says.
  Gracia says vending machine merchants today view credit and debit card payments with the same curiosity and hesitance as once did quick-service restaurants. "They're looking at an average ticket with cash that they know will increase with payment card acceptance, but they're still trying to get their heads around that acceptance," he says. "They'll get there, and the business case will work."
  Time will tell where consumers will welcome being able to use payment cards to buy snacks at vending machines. It also will determine where they will not.
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