The high cost of credit transactions continues to rankle retailers. But what can they do about it?
That was one of the biggest questions addressed at the Food Marketing Institute's Electronic Payment Systems Conference, held Feb. 1 to 2 at the Omni Hotel in San Diego, in conjunction with FMI's Marketechnics show.
Certainly, the interchange rates for credit transactions - the largest component of the fees paid by retailers - have come under legal attack. Albertsons, Kroger, Safeway and other large retailers filed suit last year against Visa, while a class-action suit filed by several trade associations was brought against Visa, MasterCard and a slew of banks.
And last month at the its Midwinter Executive Conference in Phoenix, FMI announced a multi-association program to move the card associations to "transparent, cost-based interchange fees that would level the playing field for merchants," said Tim Hammonds, FMI's president and chief executive officer.
According to Debitman, Chico, Calif., which operates a debit card network, a supermarket typically pays $1.48 to banks for a $100 credit card purchase and 17 cents to 50 cents plus bank fees for personal identification number-based debit card purchases. Signature-based offline debit typically runs 35 cents per transaction, said FMI.
More than 40% of sales at food retailers are now processed via electronic payments, a percentage that is growing monthly, said Bryan Croteau, senior business analyst, consumer financial services, Hannaford Bros., Scarborough, Maine, at the payment conference. As a result, he said, "the cost of electronic payments is one of the fastest-growing expenses" for retailers.
"Our plastic [volume] grows 10% over the prior year - that's the norm for us," said Jacki Snyder, director of electronic payments, Supervalu, Minneapolis. "We look at our P&L and the line item for bank card fees is certainly a bit out of control and growing faster than anything else on it."
Apart from waiting for lawsuits or other industry action, individual retailers can take steps to alleviate some of the cost pressures, speakers said. "There are savings opportunities," said Croteau, at a payments conference session called "Developing a Payment Strategy - Breaking it Down to Basics." "They are not silver bullets, but little pieces, and every little bit is important."
Patricia Lenti-Crane, vice president, national sales, Bank of America Merchant Services, Charlotte, N.C., stressed that retailers should avoid putting themselves in a position where their interchange rates are "downgraded" to a much more costly status. One reason for this is that transactions are key-entered rather than processed using a mag-stripe reader. At one store, it was discovered that a mag-stripe reader was not functioning because "flour from the bakery was corrupting the read head," she said.
To reduce their interchange expense, a few merchants have resorted to limiting the number of card brands that they accept, thereby "opening the door to exclusive pricing arrangements," said DeNel Jackson, manager, retail bankcard services, Target, Minneapolis. Another cost saver, said Lenti-Crane, is to prompt shoppers at the point of sale for a PIN, allowing an offline debit card to be routed as a less costly online debit transaction.
A method for preventing too many costly offline transactions from accumulating is to implement a system that sends e-mail alerts when "the number of offline transactions exceeds a pre-established threshold over a specific time period," Jackson said.
Chargebacks - disputed transactions that are charged to the retailer - are another cost retailers can attempt to manage, Jackson said. For example, to avoid chargebacks, "you may want to consider supervisor approval of any key-entered transaction over a specified amount," she said. That way, "you can ensure the quality of imprints" obtained for key-entered transactions.
To avoid imprinting cards altogether, Jackson noted that many card associations are allowing retailers to use CVV numbers - the three- or four-digit numbers on the back of a card - as proof of a card's usage.
Jackson also advised that retailers provide feedback to individual stores on types of chargebacks observed and how they can be prevented. "One way is to send monthly memos to stores detailing any chargebacks over an established amount or of a recurring nature," she said. "This is a great way to educate your cashiers and let them know what they can do to cut chargebacks."
The ACH Way
One way to avoid high interchange fees is to get more shoppers to pay via the automated clearinghouse system. Hannaford, for example, issues its own PIN-based ACH card to cut transaction costs. Hannaford tries to convert shoppers to using the ACH card by stressing its consumer benefits - the security of using a PIN, the convenience of the cash-back option and the absence of bank fees. "We're not saying, 'Please [use the ACH card] to save Hannaford money,'" Croteau said.
Another retailer planning to issue a PIN-based ACH debit card program from Debitman is Thornton Oil Corp., a 161-unit convenience store chain based in Louisville, Ky. "We wanted a card that could be accepted and reduce our fees," said Chris Kamer, chief financial officer, Thornton Oil. "ACH is the only thing out there." Thornton plans to merge a loyalty program with the ACH card "so that we can issue a lot of cards," he said.
According to Debitman, merchants accepting its ACH card pay just 15 cents per transaction in interchange and switching fees. In addition, as issuers of the card, retailers earn 6 to 9 cents per transaction in their stores as well as when the card is used at more than 200,000 locations that are part of Debitman's Retailer's Network.
ACH also factors into the plans of a small but growing number of retailers that are turning to biometric technology as a way to rein in interchange costs. Biometrics allows shoppers to identify themselves by touching a scanner with the tip of their index finger; the fingerscan is linked to a form of payment. While that payment can be any electronic source, some retailers are limiting it to lower-cost forms such as ACH transactions.
One such company is Supervalu, which is using biometric payment from Pay By Touch, San Francisco, at 115 of its corporate stores across four banners (Cub, Farm Fresh, bigg's and Hornbacker's). "We felt the need to take some control over our destiny even if it's just a small piece," said Snyder of Supervalu.
Supervalu decided to offer ACH payment via biometrics because it had no loyalty card and because "consumers didn't want another card in their wallet," said Snyder. "We felt consumers were ready for this."
In the initial test, Supervalu offered ACH and electronic benefits transfer at four Cub stores, and ACH and Discover card at four Farm Fresh stores. The ACH option is the first one seen on the payment terminal. "Customers who use it really like it," Snyder said.
One challenge encountered by Supervalu has been getting shoppers to bring their checkbooks into the store to sign up for the ACH-based biometric system. Another is explaining that an ACH transaction via biometrics is effectively the same as using a debit card. "Having a store champion is critical to the success of biometrics," Snyder said. "You have to sell it to the consumer so they understand the benefits."
Snyder said that among the ACH biometric customers, 75% were previously check writers while 25% were debit card users. "We'd like more to come from debit," Snyder said. "But we're pleased that these check writers are using ACH rather than migrating to debit."
Supervalu's Check Test
Supervalu, Minneapolis, believes in preparing for the future.
So when Solutran, Minneapolis, which manages Supervalu's returned checks, suggested about a year ago that the retail/wholesale giant run a pilot testing digital check processing following the new federal Check Clearing for the 21st Century Act, Supervalu agreed to do it.
A Cub store in Minneapolis that processes 700 checks per day was chosen as the site for the test, which is ongoing. Instead of sending checks out to be processed in the conventional way, the store brings checks to a back room. There, they are put through a reader that captures the MICR information as well as an image of the front and back.
The images are sent to Solutran, which converts them into image replacement documents that are sent to banks. The originals are destroyed in the store. When Check 21 is fully adopted, banks will be able to accept images of the checks and process them electronically.
Apart from dealing with some checks jamming the reader, the process has been an "overall positive experience," said Jacki Snyder, director of electronic payments, Supervalu.
The test is also preparing Supervalu to implement back-office conversion, whereby the MICR information is electronically processed through the automated clearninghouse system. BOC will become viable when NACHA, responsible for ACH, allows stores to gain authorization for it by providing notice to consumers at the point of sale. That rule change is expected this year.
"We see a lot of benefits coming with [ACH] back-office conversion," Snyder said. "But we believe there will be a combination of ACH and Check 21 processing when all is said and done."