BATTLE OF THE PAYMENT SYSTEMS

Julie Gallagher

In their continuing pursuit of ways to make the checkout process faster, retailers now have some emerging high-tech options that are bringing new intrigue to the point-of-sale.

Biometrics, the practice of automatically identifying people by one of their physical characteristics, has been gaining popularity in many commercial applications as a security device. In retail, where fingerprint scanning has been the preferred biometric option, it has been used in check cashing (see story, Page 54) and employee identification. Now, retailers such as Piggly Wiggly and Lowes Food Stores are rolling it out as a payment system at the checkout lane.

Biometrics offers not only speedy -- card-free, signature-free -- checkout at the POS but rock-solid security for the consumer: fingerprints are much harder to forge than signatures. Moreover, the technology can steer shoppers to less-expensive types of processing, such as automated clearinghouse (ACH). On the other hand, the "big-brother" implications of allowing your fingerprint scan to be on file at the supermarket may be a turn-off for some consumers.

Retailers and their shoppers may prefer another high-tech payment process: radio frequency identification (RFID)-based contactless cards, or objects like key fobs, that consumers wave near or tap on a reader. Contactless cards can also double as standard magnetic stripe cards so they offer the universal usage missing from biometrics. They don't require consumers to offer any record of their fingerprints to the retailer. But they also lack the security from fraud promised by biometrics and as great an opportunity to lower processing fees. And for larger orders, contactless cards may still require a signature.

"We've studied biometrics extensively," said Michael Ross, director of marketing strategy and customer relationship management, Meijer. "We think that contactless payment is what consumers are most likely to accept. Contactless payment will become a part of everyday life in a few short years." Last month, Meijer became the first supercenter or supermarket chain in the United States to accept MasterCard PayPass as a contactless payment option at all of its 171 locations.

Which will retailers and shoppers ultimately embrace? Time will tell. Both methods have a long way to go before entering the mainstream.

CHEAPER TRANSACTIONS?

The fingerprint-scan-based biometric system, which was implemented at a West Seattle Thriftway, West Seattle, Wash., as far back as 2002, allows customers to access their preferred financial accounts by placing their finger on a reading mechanism at the POS. Customers also must provide an access code -- usually their phone number. The code is not used for security purposes but to help expedite the finger-scan authentication process.

Information relating to a customer's finger scan is stored within a secure database maintained by the biometrics technology provider, such as Pay By Touch, San Francisco or BioPay, Herndon, Va. This information cannot be "reverse-engineered" into a fingerprint, according to Pay By Touch.

Retailers, naturally, would prefer that shoppers link their fingerprints to low-cost payment processing methods like ACH rather than expensive ones like credit cards. ACH employs data from paper checks to electronically deduct funds from a customer's checking account. Aside from cash payments, ACH transactions are the least costly type of transaction to process.

Charleston, S.C.-based Piggly Wiggly Carolina, one of the pioneers of biometrics in food retailing, has been promoting the ACH option since it began piloting Pay By Touch's biometric payment system in four stores in August 2004. The system does this by presenting ACH to biometric users before asking them if they'd like to pay with a debit, credit or electronic benefit transfer (EBT) account.

This approach has helped Piggly Wiggly reduce its transaction fees, according to Rich Farrell, director of information systems, Piggly Wiggly. Early on, some credit card customers began to pay with ACH transactions, though the biggest conversions to ACH took place with customers who previously paid for groceries via PIN debit cards and checks.

Two-and-a-half months after the Piggly Wiggly test began, 15% of customers enrolled in the program, and 18% of non-cash payments transactions in the store were being handled by the biometric payment method, according to Farrell

These promising results led to the recently completed rollout of the biometric payment program to the remainder of Piggly Wiggly's 84 company-owned stores. The implementation is the largest to date by a food retailer, though Lowes Food Stores, Winston-Salem, N.C., plans to install a biometric payment system from BioPay in all its 108 stores by the end of the year.

Interchange reductions are not guaranteed for all merchants who adopt a biometric payment system. In fact, retailers are actually subject to a higher interchange fee for debit and credit transactions initiated via a biometric system than for transactions initiated with the debit or credit card, according to Tim Robinson, president, BioPay.

'If you link a biometric payment method to a Visa or MasterCard, then the merchant must pay a 'card not present' interchange fee" charged to Internet retailers, he said. The fee is one-third higher than what is charged for a traditional credit card transaction when a card is physically present -- even though the biometrics transaction is more secure.

Still, it's up to retailers to decide the types of transactions they'd like to connect with the biometric payment system. Stillwater, Minn.-based Cub Foods, a division of Supervalu, decided to link customer finger scans only to checking and EBT transactions. The 75-store retailer recently completed a four-month pilot of the system and will install the technology in four more stores in the next few months, said Julie Rodewald, spokesperson, Cub Foods.

Though interchange rates don't reflect the security of biometric transactions, security remains one of the technology's most appealing features, according to observers. "The difference [between credit card transactions] and the Pay By Touch solution is that someone else can use your card," said Paul Kapioski, president, West Seattle Thriftway. "When a fingerprint is tied to the purchase, you know exactly who you are dealing with. Biometric payments are probably the most secure technology for payment out there."

But biometrics is unfamiliar enough to cause some shoppers apprehension. "As with any new program that is implemented, we've had a few customers [who are averse to trying the technology]," said Rita Postell, manager of community and employee relations, Piggly Wiggly. Other demographics have surprised retailers. "Lots of senior citizens have been happy to sign up for the service," Kapioski said.

Biometric adopters are coaxing reluctant customers with incentives programs. In the past Piggly Wiggly ran an incentives program designed to get customers in the habit of using the system. For example, customers were awarded $5 for using the biometric payment system five times, said Postell. Cub Foods allowed its customers to earn one chance in a raffle for a year's worth of free groceries each time they paid via the biometric system, Cub's Rodewald said.

MEIJER GOES CONTACTLESS

Customers aren't the only ones who may be apprehensive about biometrics. Many retailers aren't convinced that biometric payment systems are the best choice for their investment dollars. After investigating the technology, Grand Rapids, Mich.-based Meijer Stores decided to go with contactless credit card payments, which it thinks will become a more mainstream application for payment.

Contactless credit cards contain a radio frequency (RF) chip that allows customers to tap or wave the card in front of a reader to initiate and complete payment at the POS. Meijer refers to this capability as FasTap.

"It's part of the effort to invest in servicing customers more quickly and efficiently," Meijer's Ross said. Contactless credit cards are now offered by all the major credit card associations including Visa, MasterCard and American Express.

Though rare in grocery, contactless payment is popping up in other retail formats. Exxon Mobil's SpeedPass device for fuel pumps has paved the way for this technology. Earlier this year, Dallas-based 7-Eleven announced plans to test contactless payment in 170 of its stores, hoping to expand acceptance of the payment method to all its 5,300 stores, according to a statement. Another convenience retailer, Sheetz, plans to use MasterCard PayPass chainwide. CVS, Woonsocket, R.I., has also gotten into the contactless arena by purchasing 12,000 contactless payment readers from Phoenix-based Hypercom in June.

Meijer has installed contactless readers throughout the store, including POS stations in the pharmacy, photo and electronics departments. They've also been installed at registers within fuel centers, and will be installed at fuel pumps this fall, according to Ross.

Meijer's contactless readers, from VeriFone, San Jose, Calif., are attached to existing VeriFone devices used at the POS to swipe traditional credit cards. Meijer will continue to accept traditional credit cards for payment. It's Meijer's expectation that in the future an RF chip will be installed in devices such as cell phones that can be tapped on a contactless reader to initiate payment.

Meijer also recently began distributing a PayPass Meijer Platinum MasterCard to its customers. According to Meijer, the card combines the features of the Meijer private-label loyalty card with a contactless MasterCard. The contactless Meijer MasterCard will replace the traditional Meijer MasterCard that the retailer previously offered to customers as part of its loyalty program.

"A half-million customers [carried them previously], and they've received a new [contactless Meijer Platinum MasterCard] in the mail," Ross said. "The new card still has the traditional magnetic stripe so that a customer can either tap it or swipe it based on a retailer's offering."

At Meijer, signatures will not be required for users of the Meijer contactless MasterCard if their transaction total is less than $50, Ross said. Meijer requires signatures on all payments made with the traditional Meijer MasterCard. Customers will not be held responsible for charges made on a stolen contactless card, Ross said.

"We wanted to make sure that the signature threshold was high enough so that most transactions don't require a signature," Ross said. The absence of a signature may leave Meijer more susceptible to fraud, but Ross said that its interchange fee for each transaction is not higher than it was with the traditional Meijer MasterCard. Interchange fees are based in part on costs associated with fraud.

There are also contactless options available for retailers who are interested in keeping their interchange fees low. Last month, Bellingham, Wash.-based Accelitec launched PayPilot, an ACH-based contactless payment system.

The RF device employed to initiate these transactions can be used in the form of a retailer-branded card, key fob, key chain, button or cell phone, according to Tom Bartz, chief executive officer, Accelitec.

Starting With Paychecks

Some retailers are easing themselves into biometric payment acceptance by first using the technology to prevent fraud in customer paycheck-cashing services.

"Paycheck applications are a safe first step in a full-scale biometric checkout deployment, as the services are not utilized by as many people as payment applications," said Philip Youn, consultant, International Biometrics Group, New York. "By first introducing paycheck cashing functionality, deployers can develop the infrastructure of their system in preparation for biometric payment functionality roll-out."

Such was the strategy employed by Gilroy, Calif.-based Hispanic grocer, Ateaga Grocery, in its two stores. The retailer began leveraging a biometrics system from BioPay as part of its check cashing service last year, according to Robert Shiraki, owner, Ateaga Grocery.

The successful system quickly paid for itself, he said. He will soon begin piloting BioPay's biometric payment system at all of the six terminals within one store and all of the three terminals within the other store.

"We had been offering a check cashing service for a number of years, but we've never been able to minimize the risks associated with it," Shiraki said. "The year before we implemented the system, we lost $47,000 to fraudulent checks. Since we've implemented the system, virtually no fraudulent checks have come in."

Most customers have had a favorable reaction to the biometric check cashing application, he said. "But of course customers who have something to hide don't like it."