UNSTACKING THE DECK

MINA WILLIAMS

Retailers are trimming the fat from costly electronic payments an ounce at a time.

While encouraging customers to choose payment options that carry lower fees, operators also are upgrading equipment and using the clout of industry groups to cut -- or at least control -- payment costs. Most retailers are resigned to the fees associated with credit and debit cards, check processing and electronic benefits transfers as a cost of doing business, but they are making some progress in their efforts to improve efficiencies. Above all, customer convenience remains their top priority.

"It is difficult to convince customers to change their method of payment," said Bob Sands, director of risk management and financial services at Seaway Food Town, Maumee, Ohio.

"Most customers have a comfort level with how they complete their transaction," said Marv Imus, vice president of Paw Paw Shopping Center, Paw Paw, Mich. "I would rather work toward what the consumer wants and encourage and enhance rather than dictate and have customers feel uncomfortable."

"We are happy to take whatever payment method our customers want to use," said Frank Tamse, manager of accounting at Dahl's Food Markets, Des Moines, Iowa.

Facing this uphill battle in shifting consumer behavior, retailers have turned their cost-shaving eye to operations-based issues. For example, at Seaway Food Town, the payments system is integrated with the point-of-sale system and all payments are routed through the host switch, permitting the retailer to obtain the lowest transaction-processing fee, Sands said. The lowest-cost payment option is the electronic check when used in conjunction with the retailer's Food Town Plus frequent-shopper card.

"The Visa Check Card and MasterCard Master Money debit cards continue to be the most controversial payment type," he said. The cards look like credit cards, but if processed as off-line debit without using a personal identification number, they cost almost the same as credit in interchange fees. If processed as an on-line debit (with a PIN), these transactions are routed through the regional debit networks and are much less expensive than credit cards. "Obviously, we prefer that these transactions be routed as on-line debit. We have been somewhat successful in training our cashiers to identify these cards and then to ask the customers to press 'debit' and enter their PINs, so the transactions are routed as on-line debit transactions," Sands said.

Many of the independent retailers interviewed by SN lamented that the size of their business precluded them from packing much punch with financial institutions. As a result they are turning to their co-op, wholesaler and trade associations to assist them in finding relief.

Associated Grocers, Seattle, and what is now Unified Western Grocers, Los Angeles, banded together three years ago in a joint venture to form a third-party processor. According to industry sources, the group is in the process of getting additional wholesalers to participate and is in discussions with other groups.

"It's the co-op of co-op approach," said Doug Mills, general manager for Supermarket Transaction Services, the Seattle-based group. "This is a case of two wholesalers trying to lower costs for their members. We are living proof of what can be accomplished."

While the primary driver of forming the joint venture was lowering transaction-processing costs, an added benefit has been more reliable service for the wholesalers. The wholesalers said they believe that this reliability is adding operational bonuses to their retailers by providing a system running at 99.8%-plus uptime with redundancies and back-ups built in for added safety.

"Additionally, we felt that the opportunity is there for better controls for the times when new products are introduced," Mills said.

In the Upper Midwest, Spartan Stores, Grand Rapids, Mich., is providing strategic negotiating services and point-of-sale equipment to its members. "Spartan gets us as low a cost on transactions as possible," said Paw Paw's Imus. "As an individual I don't have much of a voice, but as a group, it helps."

Operators also are using the collective clout of trade associations for lobbying to keep rates static. State grocer associations, the National Grocers Association and the Food Marketing Institute were cited by operators as groups helping them to obtain the most cost-effective fee structures.

Legal methods were identified by operators as another means of keeping at least some controls over credit- and debit-card fee structures. A recently filed class action lawsuit is expected to legally examine financial institution policies regarding forced acceptance of certain networks when alternatives are available, and forced acceptance of certain credit and debit cards. At issue are not only supermarket operators' transaction fee percentages but also retailers being forced to take debit cards in marketing areas where there is very little debit-card penetration.

Other relief may be around the bend for electronic benefits transfer costs as industry groups lead a movement for interoperability across state lines. Quest Operating Rules, developed by the Electronic Payments Association, is a new way for various states to process EBT transactions. This move is particularly important as the marketing areas of more retailers extend across state lines.

These moves are particularly important as the use of credit and debit cards is nationally on the rise while the use of cash and checks as a means of payment remains strong yet static, according to industry experts. Meanwhile, the costs of processing transactions in the credit and debit arenas continue to mount.

Despite all these initiatives, retailers are finding that day-to-day they must rely on operations rather than lawmakers or shifting consumer habits when it comes to reducing transaction costs.

"We cannot afford to not take credit," Mills said. "If we don't, customers will just go across the street or down the block. What we can do is try to help customers to understand the various banking products they are carrying around."

Retailers interviewed by SN said that communication with customers can be used to educate them about financial options in their wallet.

"We want to let them know that when they use a personal identification number-based transaction, they could get cash back, plus they would avoid the surcharge at the in-store automatic teller machine," Mills said.

"Through training, we have been able to acquaint cashiers with what to look for with the various cards customers present. The newer check cards can be used as an on-line debit, for example," Sands said. "It is a continual training issue. If those newer check cards go through as an off-line debit, we are charged the same interchange rate. If we ask the customer to use a PIN, then it is a lower cost on-line debit."

"As we get more into EBT and a cash-less mind-set, using other forms of payment may take hold," said Imus. "Currently, we only do about 10% of our business in the credit and debit lines. It plateaued a year ago."

Electronic check transactions may hold another key to trimming transaction-cost fat. This system involves a customer presenting a paper check for the retailer to capture the magnetic ink character reader information. The check is returned to the customer marked as used along with a receipt for the customer to sign. Using this method the transaction clears electronically.

"Check usage will continue to increase," Mills predicted. "We have to mitigate those costs." The Associated Grocers and Unified Western Grocers joint venture plans to launch a pilot in the second quarter of this year to help drive costs out of the acceptance of paper checks. "We first want proof that the concept works and actually see what the consumer response is to it. Then we can build a program and market it with purpose."

Industry experts predict that lowering the cost of check handling will result from eliminating paper at the point of sale by converting the payment electronically.