Cost-plus versus fixed
The NAMA program is one of several options vending operators have for expanding into “open cashless.”
The NAMA program uses a “cost-plus” business model, one of two business models available to vending operators. The “cost-plus” model separates the processing charges from the credit/debit card issuer’s transaction charges. The transaction charges vary based on vend price. The cost-plus model has the advantage of transparency, as there are no hidden costs.
The “fixed” business model, offered by USA Technologies Inc. and InOne Technology LLC, combines the processing charges with the credit/debit card issuer’s transaction charges into one monthly fee. The “fixed” model has the advantage of simplicity.
While the “cost-plus” model allows the operator to see the transaction charges in greater detail, both methods may require additional administrative work to reconcile machine-to-machine sales activities.
Industry observers not affiliated with either of these business models say that the difference in total cost (within a small range of average vend prices) may not be significant. The most significant cost involved in “open cashless” often is the interchange fees set by the card issuer (Visa, MasterCard, American Express and Discover) that the processor charges for each transaction.
The interchange fees may be significantly different if charged on an individual transaction basis. Operators can utilize the comparative rate charts available at the NAMA Website to analyze competitive offerings.
Brent Garson, president of Vendors Exchange International Inc., did a profit comparison using the fixed and cost-plus models. Garson, whose company does not market an “open” cashless product, considered all costs involved, as indicated in the illustration on page 14. Garson made certain assumptions regarding fixed route costs. He, like NAMA, assumes cashless will bring 20 percent incremental sales. Garson’s calculator, which is available at his company’s Website, allows the operator to do his own calculations by inputting his own cost and sales assumptions, similar to the NAMA calculator.
Garson calculated profit for 12 different vend prices using both the fixed and cost-plus models. He found that the fixed model indicates a slight profitable potential for price points under $1.50 than the cost-plus model. Thereafter, the cost-plus model is potentially more profitable.
Many operators may not regard the profit differentials between the two models in Garson’s analysis significant, depending upon the average vend price.
“The (interchange) rate is not the most important factor,” Garson said, regarding the profitability of a cashless vending transaction. “One percent here or there is not going to make or break this.”
More important to the operator’s profitability, he noted, is the sales lift and the amount of cannibalization of cash sales. “If there’s enough lift (and minimal cannibalization), it’s probably going to make sense,” Garson said.
Garson said the calculator is an important tool since it allows an operator to alter the numerous variables affecting profitability.
Interchange rate poses challenge
“The interchange rate (charged by the card issuers) is the biggest challenge to the rapid adoption of cashless vending,” said John Powell, a St. Louis, Mo.-based consultant who has worked to develop and implement a number of cashless vending systems. Given current interchange rates, Powell thinks the business case for cashless vending will be difficult to justify for machines with an average vend price below $1.75. This will be especially challenging for operators trying to implement cashless across a vend bank with different machine types and average vend prices.
Despite the fact that interchange fees have changed in recent years,
“I don’t think there’s been a substantial shift in the business case,” said Chris Mumford, a NAMA Knowledge Source Partner for Technology. “You can get too concerned about all the fee structures.”