Not long ago, a merchant's decision about the kinds of payments it would accept from its customers was among its least complicated management challenges and had little strategic significance. The list of payment forms was rather short, and the decision had little impact on the merchant's overall profitability. This is no longer the case. Today, merchants are confronted with a long list of payment options, each with its own set of cost, efficiency, and usage considerations. Ultimately, the forms of payment a merchant accepts can be a competitive advantage, affecting sales and customer loyalty.
In an effort to understand how merchants evaluate different kinds of payment products, how merchants' banks (i.e., merchant acquirers) support these products, and how the newest of these payment products work, the Payment Cards Center sponsored a conference entitled "Innovation at the Point of Sale." The one-day event brought together more than 60 payments professionals, including representatives from six of the 12 Federal Reserve Banks, the OCC, the Board of Governors, institutional payment innovators, and national retailers.
T. Jack Williams, a senior vice president at National Processing Company (NPC) who helped organize the event, opened with an overview of merchant processing and various payment innovations currently in development by his firm and partner clients. Williams explained how merchant acquirers, such as NPC, serve merchants by obtaining approval and facilitating payment for their electronic transactions (e.g., credit card or debit card transactions).
The success of any new payment technology, Williams asserted, depends on its ability to provide merchants with incremental sales and lower transaction processing costs. Electronic check conversion, smart cards, prepaid debit cards, radio-frequency identification, fingerprint scans, and iris scans are some of the technologies that Williams described as competing for acceptance in merchants' real and virtual checkout lanes. "Bleeding edge" technology, he believes, does not have a chance at mass adoption by merchants unless it can present a strong business case based on incremental sales.
After Williams's introduction, representatives from three payments innovators described their alternative check-based payment solutions. Teri Hoehn from NACHA The Electronic Payments Association; Dante Terrana of Visa POS Check Service; and Ronald Congemi of Star Systems, a Concord EFS Company (an owner-partner in SafeCHECK), participated in a panel discussion of check electronification at the point of sale.
Despite advances in card-based payments and the declining use of cash, the value of consumer purchases made by check at the point of sale is larger than the value of purchases made by card and other electronic means combined. For this reason, Visa, SafeCHECK, and NACHA are investing in technologies that "electronify" check-based transactions. Using a terminal that reads the magnetic ink on the bottom of customers' checks, the technology allows merchants to convert checks presented at the point of sale into electronic payment messages. This "conversion" may make it possible for merchants to confirm the availability of a customer's funds, decrease check float, and reduce fraud exposure. In describing their processes, the three panelists agreed that, despite dwindling check volumes, conversion provides check-accepting merchants with savings that more than offset the costs associated with purchasing the technology.
A second panel examined point-of-sale innovations from the perspective of an important but often overlooked party-the merchant. Donald Roddy of Sonic, a quick-service restaurant (QSR) chain that operates in south-central states; Henry Bray of ExxonMobil; and Daniel Olstad of Best Buy discussed how payment systems have become an integral part of their consumer marketing strategies and how merchants evaluate new payment technologies. All three merchants agreed that the most successful payment technologies can increase customer loyalty, customer traffic, the average amount a customer spends, and overall sales. It is also important to merchants that the technologies reduce costs, make checkout easier and faster, and be easily understood by customers.
Roddy explained how Sonic's adoption of credit cards increased transaction amounts more than 50 percent. Best Buy's Olstad argued that PIN-based debit represents a huge opportunity for merchants. At one-third the cost of credit and one-half the cost of check, debit is the payment medium that Best Buy wants its customers to use the most. Bray indicated that the ExxonMobil Speedpass, a payment form that incorporates radio-frequency identification technology, is a comparatively expensive payment option. ExxonMobil, however, has been aggressive in marketing the technology because of its ability to simplify buying and build customer loyalty.
From the merchants' perspective, innovators need to be mindful of the substantial investments that new payment technologies require and make certain that new technologies offer merchants a compelling value proposition.
The conference closed with a brief discussion of the importance of bringing all participants in the payments chain, including merchants, together to discuss emerging issues. The interdependencies inherent in consumer payments systems require that any successful payment-facilitating or payment-accepting entity understand how technologies benefit and burden others in the chain.
For a more detailed summary of the day's discussion, please see the conference summary entitled "Innovation at the Point of Sale" on the Center's web site.