(June 16, 2006) Transaction Network Services Inc., which is routing wireless card transactions for Pepsi Co. at 500 vending machines, plans to boost that count to 10,000 machines across the country in 2007. TNS executives tell Digital Transactions in a story for the upcoming July-August issue that higher transactions tickets are helping to make the case for expansion.

While card interchange on micropayments—transactions that typically run $5 or less—makes it hard for processors to make money, certain venues such as amusement parks and destination resorts support higher prices. Machines in Las Vegas, for example, typically dispense soft drinks for $2.75 or more. “It’s expensive to settle these types of transactions, but when the item is sold for $1.25 or higher the business case starts to make sense,” says Thomas McCole, vice president of POS channel development for the Reston, Va.-based specialist in transaction routing. “Resorts and amusement parks are places where prices can be set high enough to cover the cost of the transaction and where consumers expect to pay higher-than-normal prices.” TNS and Pepsi are part of a general movement toward payment electronificaton in the vending market, according to experts. Currently, no more than 3% of the 8 million vending machines deployed in the U.S. accept credit cards, according to Michael L. Kasavana, a professor in hospitality business at Michigan State University. That figure is expected to reach 50% in 2009, says Kasavana. “There has been a positive movement to cashless transactions in vending and the real opportunity for growth exists in vending machines that dispense higher-priced items and services, like phone cards or DVDs,” says Kasavana. “In terms of the soft-drink market, there is still a price threshold for the item sold that has to be passed to make cashless-payment feasible, but that is starting to happen in some segments of the market.”

About 25% of the vending machines in the U.S. sell items for $1 or more, according to USA Technologies Inc., a Malvern, Pa.-based provider of wireless-networking solutions for vending machines that competes with TNS. Overall, U.S. vending machines dispensing hot and cold drinks, cigarettes, candy, snacks and confectionery items, food and meal items, sanitary-protection products, and condoms generate about $45 billion in sales annually, according to London-based Research firm Mintel International Group Ltd.

Transaction fees on small tickets remain a major concern for vending-machine operators, however. TNS and USA Technologies both charge a flat 5% transaction fee. At the same time, card acceptance is seen as one way to increase overall sales and the size of individual tickets. “As vending prices rise over a dollar, consumers are less inclined to use cash, so card acceptance is a way to retain some of the cash sales that might be lost,” explains Jim Turner, vice president of intelligent vending for USA Technologies, which has connections to about 5,000 vending machines. “A 5% transaction fee is not perfect, but it is more economical than the traditional variable fee of a percentage of the transaction plus a few cents.”

Retrofitting a vending machine for card acceptance costs about $400, which is on par with installing a dollar bill reader/coin receptacle. That is a considerable drop in cost from a few years ago, according to Kasavana. Other advances in technology, such as plug-and-play card readers and modems, have removed the last cost barriers to card acceptance and even made PIN debit feasible. “There is no longer a need to cut a new hole to accommodate card readers and PIN pads, which was a huge deterrent,” says Kasavana.

To some observers, soda and snack machines are just the start for electronic payments in the self-service market. Machines that sell travel tickets, metro fare cards, and postage stamps are considered growth markets. The list can be expanded to include amusement and arcade games, video games, pool tables, gambling slots, change dispensers, gumball machines, and jukeboxes.

USA Technologies is even exploring opportunities with driving ranges, where machines that dispense golf balls can generate $1 million in annual sales. With these machines, which typically accept tokens, card acceptance lifts sales by as much one-third, the company says.