The food retailing industry is expending considerable resources — in a major lawsuit and legislative action — to force the major credit card brands to reduce the interchange fees retailers are obliged to pay when consumers pay with credit or debit cards.
While those efforts may eventually bear fruit, individual retailers are also looking for other ways to bring their payment processing costs under control. Fortunately, in recent months a few areas have emerged that offer some cost relief.
In March, a new rule from the National Automated Clearing House Association (NACHA) went into effect that allows retailers to gather all of their checks at the point of sale and feed them through a back-room scanner/imager; the device captures and transmits consumer check data for processing by the Automated Clearing House (ACH) network. The advent of this process, called back-office conversion (BOC), means that retailers can dispense with delivering paper checks while cutting their processing fees.
Last month, Hy-Vee, West Des Moines, Iowa, became one of the first major chains to begin rolling out a BOC system, this one from NCR, Dayton, Ohio, to each of its 224 stores.
In another development, two major banking institutions — HSBC, Prospect Heights, Ill., and Capital One, McLean, Va. — both announced earlier this year that they would support a retailer-branded card that combined debit and loyalty features. The debit card would be “decoupled,” meaning that a consumer could use it to debit her checking account even if the account did not reside at HSBC or Capital One banks. Moreover, HSBC and Capital One said they would be leveraging major payment networks so that the debit card could be used at any retailer in that network.
For retailers, this represents an opportunity to get shoppers to pay for purchases with a PIN-based debit card rather than a signature-based debit or credit card, which engender much higher processing fees. Last month, Pathmark, Carteret, N.J., became the first food retailer to announce it would offer a debit/loyalty card issued through HSBC in a pilot planned to start in December at five to 10 New York stores.
The Pathmark card will leverage the low-cost payment platform and network of Tempo Payments (formerly Debitman), San Mateo, Calif. The card will be accepted at any retailer on the Tempo network, which includes 300,000 stores nationally.
“With large financial institutions like HSBC and Capital One validating decoupled debit, many other top financial institutions and top retailers are paying attention to this opportunity now,” said Mike Grossman, chief executive officer, Tempo Payments.
And in a move targeting the independent retailer segment, StoreNext Retail Technologies, Plano, Texas, announced in May a program, Connected Payments, designed to cut stores' payment expenses. The program includes a subscription for software that allows retailers to prompt shoppers at the POS to use a PIN rather than a signature for debit cards.
Earlier this month, First Data, Greenwood Village, Colo., which offers electronic check conversion at the POS and back room through its TeleCheck division, said it was joining the Connected Payments program as part of an effort to gain more food retailers to adopt check conversion.
Hy-Vee is adding BOC to its operation at the rate of 10 stores per week, and expects to finish all 224 stores by the end of March, said Kevin Reeve, assistant vice president and controller, Hy-Vee. Each store is equipped with NCR's ImageMark Commercial Passport technology, including a device in the back room that captures check images and MICR data. A one-hour webinar is used to train a store associate on the process.
Check images and data are transmitted to Hy-Vee's corporate headquarters. From there, data for personal checks are sent to the Federal Reserve to be processed through the ACH network; images for payroll and other checks not accepted by ACH are transmitted through the banking system and either processed electronically or (if that capability is not yet available) converted to a paper check. After 28 days Hy-Vee destroys the paper checks; it archives check images for two years.
A banking network is required as an entryway into the Federal Reserve, and in Hy-Vee's case it uses the bank that it owns, Midwest Heritage Bank, for this purpose. The chain saves a processing fee it would pay if it used another bank. “We would probably still do [BOC] even without our own bank,” said Reeve. “The bank cost will come down as more retailers use [BOC].”
Though check writing is a declining form of payment, Hy-Vee still processes 2 million checks per month. About 75% of its checks are processed through ACH, which cuts the chain's costs by 4 cents per check compared with paper processing, noted Reeve, who said the chain is aiming at putting 90% of checks through ACH. For checks sent through as an image, there is no cost savings. Another benefit of ACH is that bad checks are returned in four days, compared to 10 days for paper checks. With ACH, Hy-Vee could speed up transfer of funds from shoppers' accounts, but it has decided to keep the same “float” period for shoppers as before.
Hy-Vee also expects to save on armored-car courier fees since it will be shipping only cash to banks. “We should go from six-days-per-week service to three days in most markets,” said Reeve.
Reeve said the cost of the back-room scanner at each store is about $1,500. Hy-Vee also invested in two servers and NCR software at headquarters to process the check transactions. Denis Bergeron, NCR's director of product management, said that the cost of the scanner plus headquarter hardware and software averages out to about $2,500 per store. Hy-Vee expects a return on its investment in the BOC technology in “less than a year,” said Reeve.
Reeve said he expected more retailers to have adopted BOC by now, and couldn't explain why more haven't. Bergeron said while Hy-Vee was NCR's first BOC retail customer, “others are in the works.”
Retailers are required to advise shoppers at each checkout lane with a sign that their checks will be processed by BOC rather than by paper. They have the right to ask the store to process their paper checks instead, which means that an image of the check would be transmitted rather than MICR data. A few Hy-Vee customers have insisted on the paper/image method. “We try to persuade them that [BOC] is fine, but there are a few hard-liners,” said Reeve.
While BOC only became available to retailers in March, electronic check conversion at the POS has been an option for many years. However, the cost of installing check scanners at each checkout lane has limited adoption of POS conversion among food retailers (Wal-Mart Stores being a notable exception).
First Data, the primary provider of POS check conversion, is trying to reverse that trend by partnering with companies like StoreNext to enable retailers to add imageless check conversion to their existing front-end technology without additional upgrades, said Brett Narlinger, senior vice president of national sales for First Data.
Last month, First Data announced that Meijer, Grand Rapids, Mich., will roll out TeleCheck's POS check conversion system — Electronic Check Acceptance (ECA) — chainwide. Over the past few months, Unified Grocers, Commerce, Calif., has started implementing ECA at 20 to 30 independent supermarkets, said Mike Brown, Unified's general manager, retail technology. The stores pay 25 cents per check for both electronic conversion and a check guarantee service, he said.
The transmission of check images has been allowed since October 2004, when the Check Clearing for the 21st Century Act, or Check 21, was enacted. Not all banks are able to process electronic images of checks, but most are working toward that point. Even when check image processing becomes ubiquitous, Reeve believes that ACH check processing will continue. “I doubt ACH will be replaced, because it is so efficient,” he said.
But NCR's Bergeron believes that in five years or less there will be a “critical mass” of electronic image processing, resulting in that technology becoming the dominant process for check processing. “It's accelerating quickly,” he said.
Some retailers have tried to steer shoppers away from using credit cards at their stores by issuing store-branded debit cards that double as loyalty cards. Tempo Payments, for example, has provided retailers with a turnkey solution for issuing store-branded debit cards.
This year, however, Tempo made the decision to cede the card-issuing function to large financial institutions, beginning with HSBC, while still handling the decoupled debit transaction through the ACH. It is also willing to cede the payment-processing function to other national networks such as the MasterCard and Discover networks.
Rich Savner, director of public affairs for Pathmark, said it became the first food retailer to offer a PIN-based debit/loyalty card through HSBC and Tempo for a number of reasons. “If credit users use this card, it will help Pathmark save a little on fees associated with the transaction process,” he said. “It will also help provide efficiency at the checkout if check writers swipe this card instead of stopping to write a check.” At the same time, the card will allow shoppers to get loyalty discounts.
Pathmark and HSBC did not disclose the transaction cost for the debit card, but Grossman said that in Tempo's experience with its network the cost is about 15 cents per transaction.
Prior to Pathmark, CVS/pharmacy, Woonsocket, R.I., announced in June that it was launching a pilot of the HSBC-issued debit/loyalty card in 141 Indianapolis stores. CVS is also tapping the Tempo payment network and debit platform.