NEWS & SOLUTIONS 1997-12-01

MARK TOSH

As more retailers offer electronic payment options in their stores, debit-card transactions are becoming a preferred form of payment and giving credit cards a run for their money.

Pay Less Supermarkets, Anderson, Ind., is actively trying to increase debit-card use by featuring it first and prominently in any list of payment options. Debit now accounts for about one-quarter of total card transactions at the company.

"We think [on-line debit] makes sense for everybody," said Paul Nicholson, vice president of finance and management information systems at Pay Less. "It's easier than checks for the customer, a very cost-effective pricing structure for the supermarket and pretty efficient at the front end, too."

While many retailers are embracing the various advantages of traditional debit cards, however, a new "off-line" form of debit transaction gaining popularity among consumers has some retailers fretting about potentially higher processing costs.

The fee charged retailers to process an off-line card typically ranges from 1.1% to 1.15% of the total sale, or about the same rate charged for credit-card transactions in the supermarket industry, observers said..

"Retailers are not very happy about the off-line product simply because, effectively, a lot of them are paying the credit-card interchange transaction rate as opposed to the on-line card rate, which tends to be a much less expensive transaction," said George Hood, director of electronic banking operations at Wegmans Food Markets, Rochester, N.Y.

Traditional debit cards continue to gain popularity as the bank networks and stores work together to promote their use. Among the advantages of traditional debit cards, according to retailers, are lower transaction fees, faster checkout times compared with check writing, and better security because of the personal identification number requirement.

With traditional on-line debit cards that operate on networks such as NYCE and MAC, shoppers must enter a personal identification number with their cards at the time of the transaction. The fees for such a debit transaction, which involves on-line authorization, are typically processed at the standard per-transaction rate or a percentage rate lower than that for credit-card transactions.

Wegmans' Hood has seen "some creative thinking" in the industry relative to how stores can incent customers to use debit rather than other forms of payment.

"People have been providing customers with rebates on a periodic basis based on how they are actually paying for their groceries," he said. "By encouraging less costly forms of transaction, the retailer can afford to pay the customer some level of rebate."

He also noted Wegmans is probably going to offer "some general initiatives [for debit-card customers] in the not-too-distant future." He declined to specify the parameters of any particular program.

One area where debit-card use already is fairly strong is the Mid-Atlantic region, which some observers attributed to higher consumer awareness of the major debit-card networks.

"There are two prominent debit-card networks here, MAC and NYCE, and they have a very strong presence," said Thom Shortt, director of retail services at Twin County Grocers, a cooperative wholesaler based in Edison, N.J. "As a result of that, people are much more aware of their debit card and its capabilities."

Shortt said one of the debit networks recently completed a major in-store educational campaign in the cooperative's 150 member stores. "A lot of people use their ATM card as an ATM card, not as a payment card," he noted. "So we had a lot of signage in the stores promoting the fact that you could use NYCE debit cards."

As a result, Shortt said, debit-card use appears to have increased, but information on specific gains was not available.

Debit transactions continue to move forward as the industry focuses its attention on new off-line debit cards, such as MasterMoney from MasterCard International, Purchase, N.Y., or San Mateo, Calif.-based Visa U.S.A.'s check-cashing card. Both payment methods can function either as an on-line or off-line debit card.

American Express Co., New York, also provides a version of a debit card. Upon request, a card member can link the American Express card to a personal checking account.

This allows cardholders to purchase items via the card, however the funds are withdrawn from their checking accounts. A spokeswoman for American Express declined to comment on the processing fee charged retailers for these transactions.

Novus Services, a subsidiary of Morgan Stanley/Dean Witter Discover & Co., Riverwood, Ill., does not offer a debit card at this time.

"These cards have come into their own within the last year," Wegmans' Hood said. "They have been receiving a lot of attention."

"They're becoming really popular in this part of the country, with banks issuing a lot of them," said Pay Less' Nicholson. "The problem is, if you run the card through the credit structure, it gets charged at a higher fee than if you run it through the debit structure."

According to estimates, there were about 65 million of the new off-line cards in circulation by the end of the second quarter. Earlier this year, MasterCard and Visa moved to gain wider acceptance for the debit cards by instituting a $50 cap on liability for lost or stolen cards. This customer protection is expected to take effect early next year.

Roundy's, Pewaukee, Wis., a cooperative wholesaler doing debit and credit business in about nine states, has seen the off-line debit cards used to varying degrees in different market areas, according to Tim Clausing, director of retail services.

"We are early in the process of discovering exactly what this may mean," he said, adding that Roundy's is "very concerned" about the higher fees associated with off-line debit transactions and is "exploring our options in this area."

A spokeswoman for MasterCard said the MasterMoney off-line debit card uses the same processing network as a credit card and, for that reason, has the same fee structure as a credit card.

MasterMoney cards generally cannot be processed as debit transactions because they use the credit network, she explained.

To address the issue of off-line debit cards, Nicholson said, Pay Less is training cashiers to recognize the off-line debit cards and make sure they're processed as debit, rather than credit, transactions.

If the cashier or shopper chooses credit, no PIN number is required to gain authorization for the transaction. Either way, the transaction shows up on the customer's checking account statement.

In any case, electronic-payment transactions continue to rise in supermarkets. Jack Brown, chairman, president and chief executive officer of Stater Bros. Markets, Colton, Calif., said purchases on debit and credit cards account for about 20% of total sales and continue to increase.

The 111-unit chain, which began the debit- and credit-payment program only in 1995, prominently displays the names of the cards it accepts in advertising on Sundays and Wednesdays. "It's been far more successful than we thought," Brown noted.

"I wanted to be absolutely sure there were no costs [with debit and credit cards] that would have to be passed on to cash-paying customers," he added. "But the cost of processing the cards is paid for by the fact that the average purchase on the cards is twice as much as the average order without the card."

Valu Food, Baltimore, promotes the use of debit cards in its weekly circular and with several types of in-store signage, including danglers from the ceiling, signs at every register and in the windows.

"We let it be known shoppers can pay in a number of ways," said Stu Denrich, vice president of MIS at Valu Food. He estimated about 12% of total sales at some of the company's 17 stores are debit- or credit-card transactions.

Denrich also credited the debit-card networks for raising consumer awareness of the cards with their own advertising campaigns. "Once consumers started to realize they could use their debit cards at the supermarket, they started doing it," he said.

Valu Food expects more consumers to switch to debit, Denrich said, as they become more comfortable with the card. There are no plans to increase the current awareness campaign.

"Consumers are getting more adept and starting to use debit cards more because more businesses are accepting them," he added.

Riser Foods, Bedford Heights, Ohio, also has found more of its customers using debit cards, even though the company has not actively encouraged shoppers to choose debit as a payment option.

"We haven't promoted debit, but we do offer it for customers who want to take advantage of it," said Al Van Luvender, vice president of MIS at Riser. "We treat debit more as a customer service because of the extra expense to handle debit cards and the inherent problems that we encounter with taking them."

Still, debit cards now account for about 12% of Riser's total dollar sales, up from 10% a few months ago, Van Luvender said. Credit cards account for 11% of sales, up from 9% a few months ago. At Riser, 31 of the company's 35 stores are set up to accept debit cards.

Debit cards are also strong in parts of the Midwest, where Dahl's Food Markets, Des Moines, Iowa, estimates nearly 16% of sales are rung up on debit cards. The 11-store company was one of the first to accept debit cards when it began the practice in the early 1980s, said Frank Tamse, manager of accounting.

Interestingly, the retailer has achieved this high level of debit use without any organized effort. "We don't promote debit cards because we don't do advertising of any kind," Tamse explained. As for plans to encourage consumers to use debit cards, he noted, "It's the customer's call. We don't want to push people to do one thing or another."