NEWS & SOLUTIONS ELECTRONIC PAYMENT SYSTEMS

DEENA AMATO-McCOY

The ongoing challenge of making acceptance of electronic payments cost-effective has retailers and wholesalers seeking a variety of solutions, such as in-house financial switches, to process these transactions.

Others are seeking ways to get consumers to use less expensive payment methods, such as debit cards and electronic checks rather than credit cards.

"The supermarket industry needs to find a way to make this service more affordable," said Tom Howell, director of operations and store systems for Nob Hill Foods, Gilroy, Calif. "Maybe we need to explore different switches, or do them internally, to make this happen. Ultimately we need to figure out a better way to offer this service to our customers," he added.

Like most supermarket chains today, Hannaford Bros., Scarborough, Maine, accepts credit cards chainwide. "From a retailer's perspective, credit cards are the most expensive way to buy groceries, and at this point we have a significant number of customers using credit cards," said Steve Campbell, manager of financial services at retail. "But at some point we need to measure the value of accepting the cards vs. the costs and rewards of not accepting them."

An increase in the credit-card transaction rate charged to supermarkets by Visa USA, San Mateo, Calif., exacerbates the problem of constraining electronic payment processing costs. Visa will raise the supermarket credit transaction rate from 1.10% to 1.15%, effective April 1, 1998.

According to an industry source, MasterCard's basic interchange rate is also 1.10%.

Discover's interchange rate is 1.15%

Supermarkets are also beginning to accept American Express cards at checkouts.

American Express' interchange rate is based on the volume of its card transactions and the rate can range from 2.1% to 3.25%.

"The increase [Visa's interchange rate] is not a surprise -- actually many people anticipated it," said George Hood, director of electronic banking operations for Wegmans Food Markets, Rochester, N.Y. "Though this is not a shock for us, that does not change the fact that we are not happy about the increase."

The interchange rate for credit cards is the per-purchase percentage paid by merchants to the bank or financial institution that issues the card. Sponsoring banks typically add several tenths of a percent on top of the basic interchange rate, so the rate charged to supermarkets for credit transactions varies among chains.

While the .05% increase appears small on a percentage basis, "when you consider the millions of transactions a chain incurs along with the average order size of these transactions, there will be a significant increase in our payment transaction fees," said Hannaford's Campbell.

Several retailers and wholesalers have invested in the technology to operate their own financial switches in an effort to cut cost and complexity out of electronic payments. For example, Supermarket Transaction Services, Seattle, was established in August 1996 by two wholesalers, Associated Grocers, Seattle, and United Grocers, Portland, Ore.

STS currently provides credit, debit and check authorization services to approximately 400 retail locations, said Richard Lester, vice president of information services for Associated Grocers. It is in the process of adding electronic benefits transfer services for retailers in Oregon, he added.

Both Associated and United "had been offering transaction processing as a service to our own retailers," for several years prior to establishing STS, said Lester. "Now we've shared the cost of updating all our hardware and software for all of our customers. That's allowed us to offer these services to other wholesalers, who can in turn offer transaction services to retailers," he noted.

Wegmans, a 53-store chain that has accepted credit cards since 1988, believes the best way to fight higher electronic payment costs is to create a shift in customer payment behavior.

"This is the long-term solution. We need to do more in terms of encouraging debit and electronic check options rather than credit," said Hood. "Many customers are acclimated to a credit process, so we have to determine how to shift payment behavior to more cost-efficient transactions."

Debit-card transaction rates are typically lower than credit-card rates. And Visa's rate increase will not affect its debit transaction rate, which will remain at 36 cents per transaction.

Retailers seeking long-term solutions may be motivated by the fear that Visa's increase could be the beginning of more rate increases from other credit-card companies.

Visa had already increased supermarket rates from their introductory rate, going from 1% to 1.1% in April 1994. "When the rates increased in 1994, we reacted with surprise," said Hannaford's Campbell. "This time it is less of a surprise and more of a concern."

For its part, Visa notes that supermarkets still pay among the lowest rate of any retail segment. "Even at the new 1.15% interchange rate, supermarkets are still receiving the lowest rate overall in the system," said Bruce McElhinney senior vice president of established markets for Visa. For some retail segments, transaction rates could rise to as high as 3.5%, he noted.

Visa cited escalating costs for members issuing cards in certain areas, in addition to growing expenses to reduce fraud and chargebacks, as factors contributing to the increase.

Hannaford's Campbell disagrees. "Credit-card fraud in the supermarket industry is lower than in any other retail segment, making us a very small percentage of overall credit-card fraud," said Campbell. "A good analogy for placing this increase [on all retail segments] is like punishing the whole class to stay after school because of one bad student."