The smorgasbord of electronic payment methods now available in supermarkets is only going to expand in coming years. The spread of electronic benefits transfer programs and tests of smart card-based payments are supplementing the rapidly growing roles of credit, debit and electronic checks.
Retailers, in general, are bullish about the significant advantages the enhanced array of payment options offer, and note that consumers using credit and debit cards often purchase higher-ticket items and have larger overall order totals.
"From a psychological standpoint, customers no longer need to reach into their wallets and shuck out money," said Bill Hayes, spokesman for IGA, Chicago.
"With plastic, it seems the resistance to spend goes away, and consumers tend to buy more quality, higher-ticket items. They no longer have to monitor how many bills they are carrying in their wallets," he added.
Debit cards and electronic check options also offer retailers lower transaction fees than credit cards, along with operating efficiencies and quicker access to payments, both of which can improve profit margins.
On the downside, however, many retailers remain concerned that transaction fees will increase and cancel out some of the advantages of offering a wider array of electronic payment options. In addition, many retailers feel that making the right hardware and software purchases can be a guessing game, especially in the areas of EBT and smart cards, because of the lack of consistency and standards among programs in different regions of the country, as well as slowdowns in point-of-sale operations during initial smart-card tests.
There seems to be little question, though, that the percentage of electronic payments will continue to grow well into the new millennium, and that ultimately that means better business and higher sales for retailers.
"We are already seeing electronic payments becoming an alternative to cash due to a larger, and in some cases younger segment of society comfortable with these options," Richard Sarkissian, partner for consumer business practice for Deloitte & Touche, New York, told SN.
Supermarket retailers also need to understand that "plastic" payment options will support the alternative-shopping methods they are exploring.
"There is an opportunity for retailers through electronic payments," said Frank Dell, president of Dellmart & Co., Stamford, Conn., a consulting firm that focuses on the operations and strategies of food and consumer industries. "Once the Internet really explodes in the industry, there will be an even faster pace of EPS acceptance industrywide.
"It is said that 20% of groceries ultimately will be ordered through the Internet, and grocers need effective payment systems to support this," he added.
Retailers would like to ensure that consumers use the payment methods that cost them the least to process. For the foreseeable future, debit cards head that list.
"If we had our way, retailers would do business in an [on-line] debit environment," said Mike Wheeler, senior vice president and treasurer for Hy-Vee, West Des Moines, Iowa. "We would like to see cash for smaller transactions and [on-line] debit for big transactions."
Retailers favoring on-line debit are enticed by its flat per-transaction processing fee. Credit and off-line debit transaction fees are generally higher and are based on a percentage of the total order amount. Off-line debit cards do not require customers to provide a Personal Identification Number to authorize a transaction, and transmit data through credit switches.
In general, retailers are concerned and unsure of what to expect from climbing fees.
"I see a trend of [processing] costs going up, and even now you can see the lower-cost tenders, such as cash, declining and the higher-cost methods increasing," said Larry Turner, treasurer for Kroger Co., Cincinnati. Turner also chairs the Electronic Payment Systems committee for the Food Marketing Institute, Washington.
"We need to find a way, as an industry, to deal with this," Turner said. "We could reward consumers for favoring a specific form of tender. For example, we could award gift certificates or additional [frequent-flier] miles and points if customers paid with a debit card, check or private-label card, rather than a credit card."
Sources agree that the supermarket industry needs to band together to try to reduce transaction-processing fees, or at the very least keep them at a reasonable level.
"The banking industry is the most fee-happy industry that ever existed," said Dellmart's Dell. If fees continue to rise, "ultimately [the banking industry] will shoot itself in the foot, and delay the supermarket industry completely moving to an electronic payment transaction set."
Another key factor focusing retailers on electronic payment systems is the government's move toward EBT as a method of distributing food stamps and other types of benefits. Recipients access their benefits using either magnetic-strip cards resembling debit or credit cards, or smart cards that store data on an embedded computer chip.
"The government said it was going to pay individuals their food stamps electronically, and supermarkets needed to find a way to accept the recipients' payments," said Kroger's Turner. "Now it is costing us more money to accept benefits just through the conversion of equipment alone.
"The costs continue to add up because there is no standard vehicle or equipment available for multistate operators like us," he added, noting that Ohio has chosen to accept benefits through smart cards.
"Our Cincinnati stores have installed smart-card readers, but if customers go over the state line to Kentucky, those stores have different equipment in place," he explained. "Even though Kentucky is not equipped to process smart-card EBT, we need to be able to take care of that customer."
Proponents of smart cards as a benefits distribution method point to their ability to store not only "electronic cash," but also customer-loyalty data, reward points or even bottle-deposit refunds. But adoption of the technology in the United States remains in the testing phase, although it is much more widespread in Europe.
A select number of supermarket retailers are currently testing smart cards' electronic cash capabilities through a pilot test on New York City's Upper West Side, which includes 450 participating merchants to date. However, sources say the card processing still lacks efficiency.
"We saw transactions taking up to five minutes, because cashiers needed to keep track of the total of the order, and the amount of money being deducted from the card," said Hy-Vee's Wheeler. "I feel this is still not yet an efficient means of payment."
Currently, the cards are offered for free or for only a minimum fee. Eventually, however, retailers expect this to change. "As the technology approaches, there will be fees for smart cards, and who will pay $1 to have $20 loaded on a card?" Wheeler asked. "This is a bank's last chance to charge for cash."
"The industry is not at a stage where there is enough of a critical mass or trend to make this a standard payment option," said Deloitte's Sarkissian. "The idea of using one card to make store purchases, charge telephone calls, pay for postage, hold a bank account, [and contain] driver's license, health records and other crucial information is a good concept, but it is probably further down the line to becoming widespread."
Some retailers are exploring electronic checks as a method to remove costs from payment processing. Customers present a check and a magnetic ink character reader at the POS scans the check number and account number. The MICR data is transmitted to an electronic check-acceptance network, compared to data stored on a negative file, and authorized instantly.
Upon acceptance, the physical check is returned to the customer, but the payment is electronically deducted from his or her account. This process can eliminate the 10- to 14-day clearinghouse process often needed for retailers to learn if the funds are available.
