Accelerating Checkouts

Cash Alternatives

Retail payment technologies are undergoing radical change, as small fobs dangle off key chains to pay for everything from gas and tolls to books and coffee. Alternative online payments are soaring in popularity-especially among younger consumers-and cell phones across the world are being used in place of credit cards to pay for meals, bicycles and even automobiles.

The most exciting changes, though, are happening in Europe and Asia. In the U.S., radical changes in payment form factors are being stymied by a pair of payment prima donnas: the wireless carriers and the credit card companies.

Mobile payment efforts have been all but halted by U.S. wireless carriers who want to maintain control over the devices and healthy commissions on all mobile transactions. And the credit card companies-which already garner retailers’ wrath over processing fees-are proving adapt at blocking payment changes.

But that doesn’t stop retailers from trying to sidestep the dual obstructions. When the 141-store regional Pathmark supermarket chain unveiled its combination loyalty and payment card in October, it had two distinct goals. Pathmark wanted to accelerate the checkout process so it could process more purchases per hour. The biggest decelerator: customers paying by check. The supermarket also wanted to save money on credit card fees it paid to Visa, MasterCard and American Express. The credit card houses typically charge retailers a 2 percent to 3 percent fee per transaction.

The Pathmark Advantage Card combines the benefits of a conventional store loyalty card with a bank debit card. Because debit cards have lower transaction fees, the store card is designed to expedite customer checkouts at a lower cost than credit cards.

Retailers finding ways to dance around credit card fees is only one of the retail payment challenges holiday shoppers are likely to see this season. In much of Europe and Asia, chip-embedded cell phones are allowing mobile payments to a wide range of retailers. That’s partially because foreign governments and banks tend to control such payments. In the U.S., the carriers fiercely protect their territory. This forces U.S. mobile payments to sidestep the carriers, using cell phone numbers and Web interaction without having to get the cellular carriers to sign off.

The potential for mobile commerce in the U.S. will have to wait. For this year, pragmatism will rule the handset.

“Things like, ‘I’m going to take a picture of a barcode and match it against my database of 100 million SKUs’? It’s just not there yet,” says Dave Sikora, CEO of digital payment vendor Digby.

RFID in U.S. phones? “We’re not even close,” he says. “Who gets to control that decision? MasterCard? Visa? With such fragmentation in the industry, carriers all have special things they want to do with their devices. And device manufacturers are not going to line up behind that value proposition if it’s going to raise their cost of doing business.”

Last month, Google unveiled its Android initative, an open alliance for companies that want to create mobile content for cell phones. The initiative increased the possibility of payments via cell phone in the U.S., but the reality is still far off if it does happen.

There are ways to handle mobile payment without such advances. A McDonald’s franchise is working with mobile payment vendor Mocapay, which will let customers put money into a Mocapay account and get very short-term authorization-typically about 15 minutes-to use a transaction code. The code’s short duration is intended to make Mocapay accounts unattractive to thieves. For retailers, Mocapay’s pitch is that it’s much cheaper than other payment methods: 19 cents per transaction, regardless of the transaction’s dollar value. For a $20 transaction, that 19 cents would compare with about $1.10 for PayPal, 75 cents for card-not-present credit cards, 62 cents for card-present credit cards and about 45 cents for PIN debit transactions, according to Mocapay CEO Rod Stambaugh.

But Stambaugh argues another reason for the lack of creativity in retail payment systems beyond carrier and card company issues: To make the investment truly worthwhile, he says, an application would have to be integrated into the store’s point-of-sale (POS) and CRM packages. This kind of integration is often “nasty.”

“There’s a lot of hype about mobile couponing and how retailers can track it,” Stambaugh says. “The truth is that a lot of this is quite disjointed from the retailer’s back-end systems. That’s the challenge.” Working with POS-which retailers often outsource-“is really difficult. It’s a very messy, ugly business to do on the back end. It’s all proprietary stuff. Retailers don’t like to touch their POS front and back end.”

In another example of how Europe is ahead of the U.S. on payment, European retailers have been tracking customers’ shopping habits for years with technology similar to cookies. Every participating retailer has its own code, accessible to its stores but not to rivals.

“McDonald’s has a proprietary cookie and Burger King can’t read it,” says Aneace Haddad, chairman of global payment company Welcome Real-time. “We even have different cookies for corporate vs. franchisees. I am familiar with most of the contactless developments around the world and what I constantly hear from the payment associations is that none of them is truly a marketing platform for merchants. The problem that everyone has run into so far is that because the card doesn’t stay in the presence of the reader long enough, the lab solutions require two taps, one for the basic payment function and another for the more sophisticated marketing functions. Talking about things is very different from actually doing them.”

Consumers will see many more alternative payment options online this holiday season, with PayPal, Google Checkout and BillMeLater leading the charge. A February 2007 survey by research firm Brulant found a 267 percent increase in alternative payment acceptance online, compared with a pre-holiday season survey. There will also be a handful of brick-and-mortar locations accepting such alternative payments in the cashier lane.

Although there’s no indication of major e-tailers refusing to accept conventional credit cards, the alternative payment movement is likely motivated by demographics. Analysts point to a strong embrace of alternative payments by younger consumers, especially teenagers.