Follow the Money

Trends in back-end payment systems include a potentially cash-free future

Many retailers are turning to advances in payment processing to speed POS transactions and availability of funds, drive customer payment preferences, save on transaction and interchange fees, and integrate with loyalty programs.

The most notable trend in payment processing is the move to digitalization of all check and card transactions. Since 2004, electronic payments have overtaken paper-based methods. Check 21 (the Check Clearing for the 21st Century Act), which became effective in October 2004, was designed to reduce some of the legal impediments to processing check information electronically. Electronic images of checks are now accepted as paper checks, but there are still some concerns about the possibility of fraud if the images are tampered with. Credit card acceptance is now overwhelmingly electronic, with only the smallest retailers continuing to process transactions on paper.

Other trends include adding flexibility to accept debit and gift cards, and expanding the robustness and variety of payment processing technologies. Costs to deploy are dropping, and gift cards are increasing total consumer spends. POS enhancements are increasing throughput and efficiency, with several leading drug and food retailers installing RFID-based contactless payments for speed at the checkout.

Cash-Free Future?

At least one industry analyst is predicting a cashless future: "Cash will disappear by 2025, because you can't get bills and coins through the Web," says Maria-Luisa Kun, research director, banking, for Gartner Industry Advisory Services. "The developed world, including China and India, will move entirely to electronic payments." Kun cites the costs involved in processing paper signatures, and subsequent delays for retailers in getting the money they're owed. "Checks are still the number one means of payment in the U.S., but the automatic clearing house (ACH) is very expensive with the paper system, which is why they're moving to electronic imaging," she explains.

Retailers are beginning to react to the cashless movement and the rising costs of processing credit cards by attempting to take control of payment processing. "Wal-Mart is a very interesting case in combating the high costs of accepting payments — especially cards," says Kun. "It wants to transform itself into a bank to take its electronic payment processing in-house. NAFTA currently has four U.S. retailers asking for banking licenses in Mexico for this same reason." The FDIC has agreed to hold a public hearing on Wal-Mart's application, which would be the agency's first-ever formal public hearing on a bank application. Where Wal-Mart goes, the industry often follows, so the industry will be watching this development closely.

New Technologies

In an effort to lower the costs of credit card interchange (the largest single cost within a credit card program), Debitman has built a national infrastructure using the ACH network for retailers and enable them to issue their own interoperable debit cards to share in the interchange revenue. Wal-Mart and Sam's Clubs are accepting the interoperable debit card, among 200,000 locations currently participating in 'The Retailer's Network'. The transaction fee for acceptance is 15 cents, rather than a percentage of purchase; issuers receive six cents minimum on each transaction, regardless of where it is used within the network. Retailers also can combine their loyalty programs with the debit card. As another option, Fifth Third Bank helps retailers to reduce interchange expense by determining the best interchange rate for each transaction.

The current boom in stored value transactions (gift cards) is expected to grow, with more emphasis on combining with loyalty cards, for example with incentives partnered with fuel price reductions for grocery and convenience markets. Important issues to consider include data security and consumer privacy, as well as Payment Card Industry (PCI) compliance for accepting Visa, MasterCard and American Express.

The major third-party payment processors currently include ACI Worldwide, First Data, Total Systems Services, and eFunds (only eFunds offers software for retailers to run in-house). ACI's managed software claims to deliver a strong ROI, especially for its main core switching and fraud products. With the product, retailers can accept returns without a receipt by pulling up the payment tender that the customer had originally used. Pay By Touch, the leading U.S. operator of biometric retail payment systems, is targeting supermarkets to accept biometric payments through the Automated Clearing House (ACH) or credit card with a finger scan, offering increased speed and security to customers. A number of grocery retailers are in various stages of implementing the Pay By Touch system, including Chicago-based Jewel-Osco, the Mid-Counties Cooperative in the UK, Green Hills Supermarket in Syracuse, New York, and a selection of Piggly Wiggly, bigg's and Cub Foods stores. Pay By Touch predicts that more than 6,000 stores will offer its finger scanner-based system by the end of 2006.

Chase Paymentech Solutions, North America's largest financial transaction processor, now supports contactless payment acceptance for its retail customers. Contactless cards have both embedded chips for RFID and magnetic stripes, so they can still be swiped if retailers do not have contactless readers. Benefits of contactless payment include faster checkouts(no signature required for transactions under $25), increased cardholder security, and increased basket size.

Predicted time savings of seven to eight seconds can increase both throughput and customer satisfaction at the POS. As with most technology deployments, there are issues to consider, including the increased demands on retailers' internal IT teams.

Keep Options Open

Not all industry specialists are on board with the "cash-free" scenario. Rob Garf, retail research director for AMR Research, believes there will always be a population segment that uses cash, like the current Generation Y that is functioning, for the most part, without checking accounts. "Retailers will need to be nimble in the future to accept an increasing number of payment options like cell phones, biometrics, or user name and password," he says. "Retailers are currently looking at the notion of connecting their POS terminals with customers' [pre-tax health] flex spending accounts to be able to conduct a debit transaction from them directly. Given the correct security provisions and consumer buy in, this would reduce administrative costs for everyone." Garf advises retailers to look at savings and flexibility for their businesses over the long term: "It comes down to cost and time — taking seconds out of the payment and transaction process."

"Back end payment processing technologies are typically focused on larger tier retailers with higher transaction volumes, for which transaction fees quickly add up," Garf continues. "This isn't for the smaller chain retailers. Retailers are looking for flexibility in the payment types they can accept, including stored value, debit, ACH [for checks and debit], and biometrics, all of which can authorize merchants to directly take funds."