Consumers may like the option of paying with plastic, but the proliferation of electronic payment systems has presented some problems for supermarkets. Not only has point-of-sale technology had to adapt to new demands, but, transaction costs for credit and debit cards place a strain on the industry's traditionally thin margins.
sing activity-based costing to rationalize the cost of financial transactions.
SN: Given that supermarkets' acceptance of credit and debit cards, as well as EBT for government programs, seems to be inevitable, what can the industry do to make these payment systems more cost-effective?
HOMA: The industry has to look at bringing the processing of electronic payment transactions in-house. Technology is to the point that it is feasible -- even for medium-sized retailers -- to switch directly to the [credit and debit] approval networks.
In addition, supermarket retailers have to work with the debit networks to stimulate the growth of low-cost transactions, such as debit, which is less expensive than credit. We should maintain an extremely conservative approach regarding credit-card acceptance and look at persuading the customer to use debit.
NICHOLSON: The biggest cloud on the horizon is the discount rate. The rate that the industry is paying now is pushing our limits of affordability, and the credit-card industry is clearly making noises that it's a bargain rate that they intend to take away. Our industry really needs to try to get a reduction in that rate as opposed to an increase.
The rate is about 1.1% today, so in an industry that averages a 1% bottom-line margin, paying 1.1% on a credit-card transaction is pretty steep. There are some advantages to accepting credit, so one can't look at it as simplistically as I just did. I believe that credit cards are definitely something that we want to be involved with -- at the current discount rate. But if that goes up significantly, I think we'll be hard-pressed as an industry to be able to have large amounts of our sales on credit.
SMITH: My answer is kind of "top of the mountain." I think the financial institutions and food retailing need to get to an activity-based costing model for electronic payments. The only way we can get there is if the industries can say to themselves, "We will charge you based upon the cost to provide that service." We are not there today, and we need to get there. I believe this is an area where our industry organizations can help us the most. It's an area just begging for attention.
There are other things a supermarket can do to be more cost-effective. It can "piggyback" systems together -- electronic payment systems, point of sale, pharmacy adjudication, e-mail, etc. But I don't think it's appropriate to focus on the information systems part of it because we're going to be picking up pennies while we're walking over $5 bills. We can't save ourselves enough money for it to be a significant contribution compared to the restructuring opportunity we have with financial institutions.
SN: Why would financial institutions be interested in doing this?
SMITH: If the charging mechanism -- the fee-based mechanism -- were based on activity costs, I believe that there would be opportunities for the financial industry to market additional services from the grocery launching point. But only if they are configured properly from a fee standpoint.
SN: Let's talk specifically about EBT. Is the industry ready to accept this payment method? Will its benefits outweigh the costs of required changes?
DRURY: EBT does look pretty promising, especially since it removes a lot of paper from the system, and paper is never cost-effective. That one alone will do more for reducing our costs than anything. It depends on how we're compensated, because certainly retailers have a cost in that transaction, and some states are more generous than others. But I think, realistically, the net benefit to all parties is going to be a very positive one.
SN: What about smart cards, which have information embedded in a microchip on the card. Will this technology become a significant player at supermarkets?
HOMA: Maybe in our lifetime. They may add value to retail in some applications. For instance, Women, Infants and Children programs may start to drive smart-card usage if the infrastructure is in place. But there are a lot of barriers yet. I don't think the standards are where they need to be for the technology to be rapidly deployed, and I'm not sure the forces that are driving smart cards in Europe apply here.
SMITH: We're not quite seeing the case for benefits yet, so we have a wait-and-see attitude. We do think it's inevitable. We are concerned about the variety of cards, and whether there will be standards. So we're clearly very interested, but we'd like to see a little more maturity and more of a clear path.
DRURY: I've heard about states using smart cards for their WIC programs. Frankly, I'm hoping we don't do that. All of our technology in the stores is geared around magnetic-strip cards. We would have to put a whole new batch of technology in stores for one program. The alternative technology I'd like to have examined is for people receiving benefits to get something comparable to a coupon book. Supermarkets already do coupons, so we have that technology in place. European Authorization Number extensions [on the coupons] would make it possible to pin down who's receiving the benefit. In that EAN-128 area, you could put in the recipients' Social Security number or something else identifiable. That technology has an opportunity to make sense rather than smart cards.
SN: That could help keep the supermarkets' technology investment down.
DRURY: There's also only a certain amount of real estate at the front end. When you start adding more gizmos, it becomes more difficult to find room. And it's important to keep that a fast, efficient area of the store.