NEWS & SOLUTIONS: ELECTRONIC PAYMENT SYSTEMS

DENISE ZIMMERMAN

An in-house financial switch is becoming an increasingly attractive option for retailers seeking to upgrade electronic payments processing, but cost-justification issues and other ongoing projects have hindered widespread implementation.

Delchamps, Mobile, Ala.; Raley's Supermarkets, West Sacramento, Calif., and Food Lion, Salisbury, N.C., are among those retailers who recognize the benefits of routing their own electronic transactions, rather than going through a third-party processor.

However, technology upgrades for point-of-sale and networking systems -- which provide the framework for electronic funds transfer -- are under way, to some degree, at nearly every chain today. Until those projects are completed, many retailers prefer to stay with tried-and-true third-party processors.

"We have interest in an EFT switch to reduce the time it takes to process transactions, plus we're looking to obtain cost reductions," said Joanne Donley, vice president of information services at Raley's.

The 80-store chain, however, is currently in the throes of a major front-end upgrade to open architecture point-of-sale systems that will support integrated electronic funds transfer, she said. Once the chainwide rollout is complete next spring, Raley's will seriously consider installing its own switch.

"We are looking at implementing our own switch because it will save money," said Delchamps spokesman Richard Overbey. The chain will revisit the issue later this year, he said, as will Food Lion, which expects to have all stores on-line with integrated credit card terminals by year-end.

"This past February, we started rolling out EFT to all our stores, and probably when we finish that later this year, we'll be looking at whether we'll do a switch in-house," said a source in Food Lion's systems department.

The cost savings and processing speed gains possible with an in-house financial switch vary dramatically from retailer to retailer, depending on what electronic payments methods are currently used in-store and how complex the transaction routing might be.

Seventy-five percent of Raley's debit transactions, for example, are drawn on two California banks whose processing centers are located near the chain, "so you can see why we'd be interested in a direct pipeline to those two major banks and not have to go through an outside provider's switch," Donley said.

"Every party you go through charges you something and we would expect to negotiate some cost reductions in our per transaction fee" with direct links to the banks. "It might only be a fraction of a percent, but with the volume of transactions we have, that will mount up very rapidly and give us a significant cost benefit."

Raley's stores process nearly 1 million electronic transactions each month, she noted.

Retailers evaluating an in-house switch are obliged to examine their own operations closely because not all companies would enjoy the same cost savings or productivity gains.

Lowes Food Stores, Winston-Salem, N.C., clearly had much to gain on transaction approval time after linking all 50 stores with an in-house financial switch via a wide area network last month.

The dramatic reduction in processing time -- from 30 seconds to 6 seconds -- was possible because Lowes had been using notoriously sluggish dialup phone lines for credit card approvals. Meanwhile, other retailers, such as eight-store Brodbeck Enterprises, Platteville, Wis., already achieve 6- to 10-second processing times through the use of leased lines dedicated solely to EFT.

If Brodbeck were to install its own switch, transaction processing time savings would be nominal -- perhaps only a second or two would be saved -- said Steve Dittmer, retail systems director.

"So speed's not a big issue. If we were dialup, where it's taking 20 to 25 seconds, there would be a big difference" in processing time, he said.

At Raley's, credit and debit card processing takes about 10 seconds to 12 seconds, said Ian Caldwell, systems development manager. An in-house switch could reduce that time to about 6 seconds.

"In terms of speeding up the front end, it doesn't sound like much," added Raley's Donley, "but it adds up over a days's time, a month's time."

Keeping perspective on the speed issue is essential, said one top level information systems executive at a major wholesaler using an in-house switch for EFT.

"The speed is already there the way most people do it today. There are those who try to get cute and say, 'If I can do it in 3 seconds, I can improve my productivity,' and they start calculating: 2 seconds saved per transaction, etc. But in that time the cashier hardly has time to put one item in your bag.

"There's no savings in going from 5 seconds to 2 seconds," he continued. "But 2 minutes to 5 seconds, sure, that's worthwhile."

Electronic transactions are processed in less than 5 seconds through the wholesaler's central switch, he said, detailing the route: "It goes from the store to the satellite to our headquarters and from us to the banker, and from the banker to the different [card issuer] and comes back authorized to the bank, then to us and to the store, all in less than 5 seconds."

Certified Grocers of California, Los Angeles, has considered installing its own financial switch but will continue using a third-party processor for now, said Ross Mancuso, executive vice president and general manager of Grocers Equipment, the wholly owned subsidiary of Certified that provides retail services.

"Economically, it just doesn't make sense for us to get into our own switch until we get our total network in place. At that point we will re-evaluate it," he said.

Cost-justification for an in-house switch is even more difficult for smaller retailers, like Brodbeck Enterprises, which operates Dick's Supermarkets.

"We have looked at a switch of our own. It's interesting and there are a lot of benefits but it would be cost-prohibitive," Brodbeck's Dittmer said. However, the retailer is still investigating the option, Dittmer said, and might be able to justify the investment by consolidating communications at a central site and piggybacking other applications on the same leased telephone lines used for electronic funds transfer.

"We currently pay what I consider to be a fairly substantial amount monthly on leased lines for electronic payment systems," he said. "But we could have multiple uses for the lines going out to the stores: host support for direct-store-delivery systems, electronic mail, online access to our network."

Dittmer raised another issue that may dissuade some retailers from pursuing their own switching technology: the ever-changing landscape of electronic benefits transfer and its as-yet undetermined impact on retailers' existing EFT systems.

"If we were to put in our own switch, we'd have to develop the link to Wisconsin's EBT system, once that's in place," he said. "And that goes back to the fact that you have to have a lot of internal technical support for these things and we don't have the resources that a larger company does."

Cal Sihilling, vice president of information systems at Alex Lee, Hickory, N.C., which owns Lowes Foods Stores, agreed that installing an in-house financial switch puts new demands on information systems departments.

"It has a lot of benefits but the downside is, you have the headache of managing the technology and the processes yourself," he said.