TRANSACTION THROUGHPUT

KIM ANN ZIMMERMANN

Fees for processing electronic payments continue to take a big bite out of profits, but retailers need to offer customers a wide array of payment options to remain competitive. The ongoing challenge, retailers tell SN, is to keep the fees as low as possible as the number of credit, debit and electronic benefits transfer transactions continues to climb.

In reaction to rising processing fees, many retailers are working through wholesalers and other organizations to negotiate lower rates. Others say that while they are not discouraging the use of credit cards, they are doing little to promote their use and when customers do choose to pay by plastic, some retailers are steering them toward the cards that charge lower processing fees.

While processing costs are a big concern, retailers are also finding they need to beef up their hardware, software and communication systems to keep up with the rising number of transactions.

"The cost of electronic payment processing, particularly credit cards, is a big number and something that we have to continue to manage," said Bob Melcher, director of information services for Prescott's Supermarkets, West Bend, Wis. "No one would suggest taking out the credit cards; it serves a big segment of our customers. We're happy to be able to offer credit cards, but we're constantly working to keep the costs down," he said, while noting that doesn't include the costs necessary for upgrades to the point-of-sale systems to keep up with demand.

While it is true that electronic payments incur higher fees, there are benefits to retailers as well in the form of larger average orders and customer convenience, industry observers note.

"True, the credit card is more expensive than a cash transaction, but usually the basket size is higher," noted Joan Wharton, marketing manager for Fleming Cos., Oklahoma City. "One of the figures tossed around indicates that a cash customer's average transaction is between $22 and $23, while the average debit or credit order is $50," she said.

While larger retailers have more negotiating power with credit-card companies than smaller independents, smaller supermarkets are finding they can band together and work through wholesalers such as Fleming to control processing costs.

"We've got hundreds of retailers and we renegotiate the fees every year. We can certainly provide a substantial discount," Wharton said.

"One move that we've made is to work with our wholesaler, Spartan Stores, to improve our rates for processing electronic transactions," said Marv Imus, vice president and owner of Paw Paw Shopping Center, Paw Paw, Mich. "We get the look of a chain in terms of our fees, and they take over some of the administration. However, we're still very much concerned about the cost," Imus said.

As fees rise for processing of electronic payments, credit cards are beefing up their marketing efforts to encourage customers to use their cards in the supermarket. For example, some credit-card companies are offering incentives such as bonus airline miles for purchases made at the supermarket.

"The credit-card companies are very good at promoting themselves, and some have gotten extremely aggressive in promoting themselves for use at the supermarket," Imus said. "They're offering bonus airline miles for purchases made at the supermarket, and the customers want that, obviously," he said.

Credit cards are only one segment of electronic payments retailers are grappling with. There are also debit cards, which retailers report are an increasingly popular payment option as many consumers use the card not only for purchases but to obtain cash back to avoid fees many banks are charging for automatic teller machine transactions.

While the fees for these transactions are lower, "We're seeing the number of debit transactions go up as people become more comfortable," Imus noted.

And, as the number of food stamps and other state- and federally supported programs are processed electronically, electronic benefits transfer will become even more of a factor in the overall cost of electronic-payment systems. The concern is not simply the processing fees, but the increasing complexities of the transactions. For example, the benefits can be used for bread and milk, but not for cigarettes, and the rules vary widely. The point-of-sale system must be programmed to deal with these restrictions.

"These programs have been so difficult to administer because each state has its own regulations, and in areas where customers cross state lines, it is difficult," said Fleming's Wharton. "In some cases, the programs vary from county to county," she said.

Prescott's is now gearing up for EBT. "In Wisconsin, they're beginning an EBT pilot in one county, which doesn't impact us because we don't have any stores there, but by February it will be statewide," Prescott's Melcher said, noting that it will require some upgrading of systems to be able to handle the transactions.

Prescott's is also upgrading its POS systems to handle on-line check authorization, Melcher said. "Basically, we've been handling checks from the standpoint that if a check comes back, we populate our front-end with that account information and we know not to accept another check. But we don't get information until the check comes back, which is too late if you have a check runner. What we'll be upgrading to is to be able to do on-line authorization," he said.