Seeding the Vending Market

Acquiring

Peter Lucas

The low margins earned on vending-machine sales have historically worked against card acceptance. But now, with evidence of a sales lift from cards, processors and gateways are pushing into vending harder than ever.

It’s a frequent scenario: A family is out for fun at an amusement park. Everyone is thirsty and the lines at the concession stand are long. Rather than wait in line, Dad opts to purchase drinks from a nearby machine selling soda and Gatorade.

Dad pulls out his wallet only to discover he does not have the cash to buy a drink for everyone. Since the vending machine does not accept payment cards, Dad and the family opt to brave the line because the concession stand does accept credit and debit cards.

In the end, Mom and Dad and the kids walk away happy with drinks and the concession-stand operator rings up another sale, but the vending-machine owner misses one because the machine accepts only cash.

There are an estimated 8 million vending machines in the United States, but industry experts figure only about 200,000 of them accept credit cards. That’s an extremely low penetration rate for a market segment that the card networks and merchant acquirers began pushing into more than a decade ago.

With adults under 30 relying more and more on cards to make purchases, even micro-purchases, gateways, acquirers, and the National Automated Merchandising Association (NAMA) are ramping up their efforts to extend the reach of credit and debit acceptance, more commonly referred to as cashless acceptance, among vending-machine operators.

“Without question card acceptance through vending machines can be dramatically expanded,” acknowledges Maeve Duska, vice president of marketing for USA Technologies Inc., a Malvern, Pa.-based provider of wireless, cashless, micro-transactions and networking services for the vending industry. “The business case is a lot stronger now for the small and mid-size vending operators, which are the key to expansion.”

Big-Ticket Vending

What’s strengthening the business case for cashless acceptance is that acquirers have enough historical data to back up claims that card acceptance delivers an incremental sales lift. Card acceptance can boost sales 15% on average, according to acquirers and gateway providers.

In addition, demand for card acceptance at vending machines is growing among college students and adults under age 30, who are less cash-oriented than older adults.

“Consumers in their late teens and 20s are the biggest users of vending machines, but they tend to rely more on cards for purchases, and for a large portion of that demographic, that habit starts in college,” says Ron Farmer, executive director of campus solutions and micropayments for Princeton, N.J.-based acquirer Heartland Payment Systems Inc.

Machine operators will welcome anything that can deliver a sales lift. Total sales through vending machines are projected to grow only about 1% annually through 2015, according to Los Angeles-based market-research firm IBISWorld Inc., which estimates total revenues in 2010 to have hit $11.3 billion, up from $11.1 billion in 2009. The sluggish growth can be traced to the uneven economy and younger consumers’ preferences for paying with plastic.

Further paving the way for greater card acceptance is the transformation the vending industry itself is undergoing. Vending is no longer just about dispensing soda and snacks, low-ticket items that make it hard for operators to justify paying interchange.

Today, vending operators are adding higher-ticket items ranging from prepackaged meals to brewed gourmet coffees and organic snacks. Adding these types of items, which can sell for several dollars on up, can make paying with cash impractical for consumers. Previously, vending operators were only able to charge several dollars an item when they had a captive audience with few alternatives for purchasing snacks and sodas, such as at amusement parks, military bases, or airports.

Department stores and big-box retailers also are getting in on the big-ticket vending act, deploying what they refer to as automated retail stores within their own stores or at remote locations, such as airports, hotels, and other high-traffic places. These machines carry such merchandise as Apple Inc.’s iPod, cellular phones, and other small handheld electronic devices and accessories.

‘Compelling’ Applications

Macy’s Inc., for example, deploys vending machines in its stores to sell items such as various iPod models. The machines, known as Macy’s eSpot and operated by San Francisco-based Zoom Systems Inc., serve as the retailer’s electronics department and are typically located in high-traffic areas near escalators and elevators. Purchases can be made using a Macy’s credit or gift card, general-purchase credit card, or PIN-debit card through an encrypting PIN pad.

According to Zoom Systems, which provides the hardware, software, connectivity and remote machine monitoring for automated retail stores, these machines generate 10 to 20 times more sales per square foot than conventional retail space. About 40% of transactions made on the more than 1,000 machines Zoom operates are PIN debit.

“A lot of consumers like the convenience of being able to purchase items from an automated retail store,” says Chris Hallenbeck, chief technology officer for Zoom. “How many times has a traveler forgotten their headphones once they get to the airport? Being able to purchase that item before they board the plane is a convenience travelers will pay for.”

In addition to Macy’s, Zoom provides automated retail machines for leading electronics chain Best Buy Co. Inc. The machines, labeled Best Buy Express, accept only general-purpose credit cards as well as debit cards. Zoom also operates automated vending machines in other department stores, malls, airports, transit centers, hotels and resorts, military bases, and college campuses. Products carried in Zoom-operated machines include cosmetics (Clinique), bath and body-care products (The Body Shop), skin care (Proactiv Solution), and apparel (Reebok Retro Sport).

Besides delivering a sales lift and making it possible for vending-machine operators to offer costlier items, card acceptance is helping to usher in technical advances that can lead to greater operating efficiencies.

USA Technologies, for example, has developed a reporting application that tracks daily card and cash sales. The application makes it possible for vending operators to reconcile sales on a daily basis, rather than send an employee once a week or so to gather cash. Automated reconciliation reduces the risk of shrinkage, which occurs when employees steal cash before reconciliation.

Other advances are making it possible for vending operators to track machine performance and immediately troubleshoot problems that can lead to lost sales.

Scottsdale, Ariz.-based wireless gateway provider Apriva Inc., for example, has developed an application that notifies operators when a malfunction occurs, such as the machine overheating or not being able to accept currency or credit cards.

Previously, when a machine malfunctioned it could be days before service people discovered the problem.

Inventory-management applications that track in real time which items have been sold and when an item needs to be restocked also are bringing greater efficiency to machine management.

With such tracking systems, route drivers can better manage their schedules, servicing machines that need to be restocked sooner. Vending operators can also track which items do not sell well and replace them with more popular items, thereby increasing sales.

“These types of applications are compelling and provide a value-added component to card acceptance that strengthens the business case,” says George Peabody, director of emerging technologies for Maynard, Mass.-based Mercator Advisory Group Inc.

Interchange Incentives

Providing applications that can help vending operators lower their overall operating costs is important because most earn margins of 2% to 3% per sale. By contrast, card-based transactions can easily run vending operators north of 5% per transaction, even 9% on very small sales .

“The more that can be done to improve a vending operator’s margin, [the more it] will help make card acceptance more palatable,” says Chuck Reed, director of vending- channel marketing for West Chester, Pa.-based MEI Group, which provides card readers for vending machines. “It will really help if the acceptance costs can come down closer to 4%.”

Vending operators paying 5% per transaction can earn enough on items priced $1.50 or higher to justify card acceptance, according to USA Technologies’ Duska.

“A dollar fifty is where we see cashless sales start to increase significantly in vending,” she says. “A lot of vending operators that add card acceptance will raise prices to at least $1.50 per item. Many consumers will pay the higher price if they can use a credit card.”

In the past year, USA Technologies has added 700 new customers, 80% of which are small to mid-size vending operators. Overall, the company connects 109,000 unattended, self-service point-of-sale terminals in the U.S. that generate 250,000 card transactions a day. In March, USA Technologies announced it processed 6.4 million small-ticket cashless transactions in February, representing $10.3 million, up 24% from September 2010. At its current pace, the company is on track to handle more than $120 million in annualized transactions, up 20% from the $100 million annualized rate it announced last September.

Still, raising prices is not necessarily a sure-fire way for vending operators to offset the higher cost of card acceptance. Monthly per-machine connectivity and communication fees, which average $9.95, are still too high, contends MEI Group’s Reed. “If connectivity and communication fees get down to around $5 that will dramatically change the business model, especially for operators that sell lower-ticket items,” he says.

Payment experts also point out that some sort of interchange incentive, such as a flat rate per transaction regardless of the type of card used, would help kickstart card acceptance. NAMA, which offers its members processing services through Bank of America Merchant Services, has taken a lead role on this issue, negotiating a 1.5-cent authorization fee for any card used.

“It would help if the card companies were more flexible on interchange rates for this market, because the fees on rewards cards can really eat into a vending operator’s margins,” says Heartland’s Farmer.

About 70% of all card transactions through machines operated by NAMA members are on Visa cards. Of those transactions, 75% are debit. “Debit is popular with consumers and has lower interchange fees, and that is something that our members notice,” says Michael Kasavana, a NAMA-endowed professor in Hospitality Business at Michigan State University.

Tamper Proofing

As vending operators raise prices to offset the cost of card acceptance, many are retrofitting their machines to allow consumers to purchase multiple items in a single transaction to raise the overall ticket and reduce the hit they take on interchange, particlarly if the interchange rate has a flat fee in addition to percentage-based pricing.

From an acquirer’s point of view the move toward multiple-item purchases does not pose any settlement problems. “We handle multi-item purchases like a pay-at-the-pump transaction, where the card is preauthorized for a specific amount based on the cost of the merchandise and then we settle for actual amount sold,” explains Brett Narlinger, executive vice president for Bank of America Merchant Services (BAMS), Spokane, Wash.

To make a multi-item purchase for food and beverages, consumers swipe their card for an authorization. For higher-end items, such as electronics, consumers swipe their card, then enter the items they want to purchase. A sales total is displayed along with a request to proceed with the transaction or decline it. If the consumer elects to proceed, an authorization request is sent to the merchant processor.

In the event an item selected for purchase is not dispensed, Zoom Technologies has programmed its machines adjust the amount billed to a consumer’s card to show only what items were received.

“If for some reason an item jams, our machines will track that information and adjust the amount billed to the consumer’s credit card,” says Hallenbeck, who adds that Zoom’s typical sale is for 1.1 to 1.6 items, depending on the machine’s location and items stocked.

One risk that vending operators and retailers face with card acceptance is the machine being tampered with to capture card data as they pass through the card reader or are transmitted to the processor. Zoom has programmed its machines to automatically shut down if the machine senses any form of tampering.

Zoom also installs cameras in its machines, as with ATMs, to photograph users. Hallenbeck says the cameras helped identify criminals who tried to use stolen cards during the 2010 holiday-shopping season.

Seeds And Fertilizer

Despite all the advantages of card acceptance, gateways and acquirers still face a formidable hurdle when it comes to education. Vending operators are not used to paying interchange and connectivity and communications fees or dealing with such issues as chargebacks.

“From an education standpoint, the curriculum is card acceptance 101,” says Robin Houston, director of marketing at Apriva. “Most small and mid-size vending operators know nothing about card acceptance from a merchant standpoint.”

To help speed the learning curve, NAMA is working with BAMS, Cantaloupe Systems, a San Francisco-based provider of wireless vending solutions, Coca-Cola, and Visa Inc. to conduct seminars at its annual trade show. The seminars will include case studies.

“We are also working toward a trial program that allows vending operators to test card acceptance before they actually commit to it,” says Kasavana. “The goal is to seed the market through education and pilots so cashless vending can grow faster.”

While the seeds for growth are being planted, payments experts acknowledge that lower acceptance costs would act as fertilizer.

“Cashless has a lot of costs for many vending operators,” says MEI’s Reed. “Technology and acceptance costs are coming down, but for the industry to reach a tipping point as far as adoption, acceptance costs need to go lower.”

 

Taking the Cash Out of Parking

As merchant acquirers look to expand card acceptance in the vending space, one market segment they may want to consider is street-level parking kiosks. While parking may seem like a stretch when it comes to the traditional definition of vending, acquirers need only look at Redbox DVD-rental kiosks to see how unattended terminals are expanding beyond their traditional, cash-based boundaries.

Moorestown, N.J.-based Parkeon Inc., which provides urban parking and transit payment solutions, is one player in this new, increasingly cashless niche. As municipalities strive to replace street parking meters with pay stations that account for each parking space per city block, they are moving away from coins in favor of credit and debit card acceptance.

The advantage of card acceptance to consumers is that they do not have to keep feeding coins into the meter every hour. The advantage for cities is they can charge more per hour to park, knowing consumers will pay for the convenience of purchasing several hours of parking from the get-go.

“Consumers without adequate coinage in their pockets will use a credit card to purchase parking time on the street because they don’t want to keep feeding the meter to avoid a parking ticket,” says Peter Burrows, vice president of product development for Parkeon.

Parkeon recently surveyed eight cities that offer a prepaid smart card for parking and found that 58% of transactions were still with coins, but card usage was increasing and accounted for 25% of transaction volume. Smart cards commanded 8% of payments while other systems had a 9% share.

Parkeon, whose kiosks also accept dollar bills, has 14,000 multispace pay stations in such major cities as New York City, Seattle, Chicago, New Orleans, Miami, Austin, and Washington D.C. Smaller municipalities include Savannah, Ga., Park City, Utah, and Santa Fe, N.M.

Some municipalities report card usage as high as 80%, says Burrows. “Higher card usage is tied to higher per-hour parking rates,” he says. “When the hourly rate reaches $1 or more, most consumers don’t have the coinage, because most street-level parking meters take quarters. How many consumers are carrying a pocket of quarters?”