Rising Consumer Preference for Cashless Purchasing Creates New Opportunities

The vending adage, "no cash, no purchase" is being replaced with "no cash, no problem!"

Accompanying the public's increased attraction to self-service technologies and online applications is a growing interest in the implementation of alternative payment options for traditionally cash-based transactions.

While some parts of the vending industry already accept card payment systems, widespread interest in expanded opportunities for cashless transactions are beginning to become more prevalent. Innovative payment technologies, designed to reshape vending transactions, have emerged and are being adopted at an unprecedented rate.

Customers prefer cashless

In the past, much of the slow rate of adoption of cashless vending can be attributed to customer reluctance to use cards for small dollar (i.e., low value) transactions, a lack of operator experience with new technology, and its perceived high costs.

Much of the customer concern however, is being dissipated by the trend toward frequent use of cashless transactions elsewhere. For example, such technologies as ATM machines for banking, pay-at-the-pump for gasoline, retail store self-checkout, speed pass purchasing, and most recently, the adoption of credit/debit card acceptance at quick-service restaurants.

From a vending operator's perspective, the cost of hardware, software, and transaction processing have declined to render cashless a much more appealing payment option. Such conditions have started to draw the attention of full-line vendors, beverage bottlers, and nontraditional vending suppliers as evidenced by the frequency of documented stories of success.

With more than 8 million machines, the vending industry can be described as the largest cash business in America and certainly the most pervasive retail channel in terms of number of locations.

Cashless transactions rising overall

Over the past decade, there has been a steady increase in the preference for credit cards as a method of payment. Economists point to the fact that credit card transaction volumes doubled between 1992 and 1998.

In 2003, credit and debit card payments exceeded cash payments for the first time, thereby rendering card purchasing the preferred payment method of U.S. consumers. This trend is predicted to accelerate, with credit purchasing growing at a rate of 7 percent annually and debit transactions expanding at the unprecedented rate of 21 percent annually.

To date, the vending industry, which is dependent on convenience and service, remains the only major retail channel that does not universally accept cashless forms of payment. It is estimated that 2 to 3 percent of U.S. vending machines offer a credit card payment option. This capability is projected to 50 percent by the year 2009.

Vending: the last cashless frontier

The movement from physical currency to cashless payments is becoming more prevalent as advancements in automated banking, account management, and innovative reconciliation systems gain in popularity.

Basically, a cashless payment system is dependent upon specific instructions governing the transference of funds from one account to another.

The instructions can be paper-based (e.g., personal check or voucher system), or electronic (e.g., credit and debit magnetic stripe or radio frequency identification -- RFID), or stored value (e.g., prepaid or stored value smart card).

It is important to note that these categories are not mutually exclusive. For example, the innovative MasterCard PayPass card features a contactless RFID payment option while also supporting a magnetic stripe for credit card settlement.

Cashless speeds up transactions

When adding cashless to a cash-centric payment environment, there are several critical metrics that need to be evaluated. Among the first consideration is a comparison of transaction speeds. How much slower or faster are vending cashless transactions than cash-based sales? What is an acceptable time for transaction processing?

In addition, an analysis of the number of transactions and average revenue per transaction are also important evaluative criteria, including incremental revenue and unit sales, and margin contribution.

Knowing the operational benefits of cashless transactions on total revenue, trade loss and accountability, and the like, is important when determining adoption of this technology.

In a recent study, a cold drink bottler placed two vending machines containing identical product offerings in the field. The difference between the two machines was that one machine accepted only cash transactions while the second accepted only credit card transactions.

Test proves cashless vending benefits

Other things assumed equal, the credit card transaction machine generated 15 percent more revenues and 47 percent of its transactions involved multiple product purchases.

Similarly, the quick-service restaurant industry announced great success with a recent addition of credit and debit card acceptance. Check averages for card-based payment transactions showed a 35 to 38 percent increase over cash purchases.

These gains were attributed to the enhanced customer payment convenience. Other success stories include significant growth in popularity of cashless transactions within the travel industry, higher vending prices and unit sales in the entertainment industry, and the elimination of vandalism and theft for vending in the hotel industry.

Cashless offers payment options

Cashless payment options vary from credit and debit cards, to smart cards, to magnetic stripe cards, to RFID devices, to cellular phones and related media.

Many system suppliers claim that the convenience of cashless payment options can increase the number of purchase transactions by an average of 15 percent while the average revenue per sale can increase by 20 to 50 percent over prior same machine transactions due to the ease of multiple product purchasing.

The fact that a vending machine handles less cash, coupled with the capability to track all transactions remotely, strengthens internal control by minimizing fraudulent cash shrinkage and the potential for vandalism. Properly engineered, a cashless system can substantially improve accountability of both cash and cashless activity by providing a platform for complete route settlement against actual sales.

A cashless payment system can:

Increase sales. Customers tend to purchase more products and services when using cashless payments versus cash because there is no limit on cash resources (coins and bills) or exact change requirements; also important are consumers' tendencies to make impulsive purchases which also increase sales and revenue;
Increase profitability. Cashless transactions have been shown to allow for increased price points without negatively impacting sales volume; increasing price without affecting unit sales can improve a vending operator's bottom line;
Improve efficiency. Cashless transaction technology can be configured for rapid processing and increased services; reductions in cash handling processes, lower transaction handling fees, and improved settlement capability contribute to improved operational efficiency; transactions may be processed as fast (or faster) than cash purchases;
Enhance convenience. Cashless is an easy method of payment for products and services as the customer only needs to swipe an account card, wave a wand, wirelessly transmit information, or revalue transaction media; impulse buying is an important dimension; cashless is already the preferred payment method in other channels;
Support strategic marketing. Captured operational data carries an electronic trail that can be analyzed (perhaps through data mining) to enable increased price points, deliver loyalty reward programs, payroll deduction programming, customer relationship management, and product forecasting applications; in addition, promotional couponing and cash-value media can be used to subsidize and incentivize purchasing.

Reduced loss from vandalism

Other considerations related to cashless vending include potential reduction in machine vandalism and possible acquisition of a competitive advantage in contract negotiations. Adding a cashless payment option to vending can result in a decrease in vandalism (and fraud) since less cash is stored in the machine or handled by route service personnel. Cash management and auditing procedures are simplified through cashless settlement.

Many operators attribute the availability of a cashless solution as a significant contributor to acquiring new accounts or locations. Early adopters of cashless vending report success when emphasizing the technology to gain leverage in a competitive bid process.

Since the vending industry often features mature placements, cashless vending presents a point of differentiation that may be persuasive. While cashless processing might not be appropriate for every location, high volume and high traffic areas offer the best opportunity for initial implementation.

Cashless options draw consumers

Consumers appreciate convenience, and cashless vending is just that! In vending, like many other retail channels, cashless payments have been shown to increase customer spending and attract new customers -- without the complexity or costly security associated with cash transactions.

Current cashless vending settlement options include credit and debit cards, smart cards, magnetic stripe cards, radio transponders, and a variety of specialty solutions (including cellular transactions).

Cashless transactions enable patrons to spend more while creating an electronic trail of purchase detail unavailable through cash settlement. Cashless systems may also link to loyalty point rewards, prepaid gift cards, purchase incentive programs, and more.

Additional benefits of cashless vending include: 1) ability to offer higher priced products since the customer is not restricted to cash on hand; 2) ability to offer nontraditional products without coin or bill restrictions: and 3) ability to offer alternate settlement media to credit/debit cards.

For example, several operators have introduced cashless payment technology when vending books, DVDs, disposable cameras, clothing items, personal grooming products, office supplies, sunscreens and lotions, and other products selling at higher price points than traditionally vended products.

Vending machines can be equipped to accept credit and debit cards, smart cards, hotel room key cards, assorted RFID tags, magnetic stripe cards, and other formats. Such variety enhances the potential of cashless unattended points-of-sale.

Credit settlement options vary

Ideally, operators seek a cashless solution that can be completed in the same time (or faster) than a cash sale. Despite the fact that a cashless system may rely on telecommunications to obtain transaction approval, efficient settlement is an important concern.

With cashless vending, operators have the option of trying to secure an authorization for each sales transaction as it occurs (i.e., real-time) or transmitting transactional data at a predetermined, later point in time (i.e., batch processing).

Cards use different media

There is a variety of card products that can be used to complete cashless vending transactions. Nearly all cards contain a magnetic stripe (e.g., credit card, identification card, prepaid card, etc.) but some may also possess an embedded integrated circuit (IC) chip (e.g., smart card).

Credit cards, debit cards, prepayment cards, and smart cards are the more obvious media; but there are also hotel room key cards, employee ID cards, student ID cards, e-gift cards, and a variety of specialty account cards (e.g., corporate program cards, and loyalty program cards).

Different types of credit cards

From a cardholder perspective, a credit card account represents an established credit line against which payments are deferred through creation of a loan from a sponsoring financial institution.

There are three types of credit cards: bank cards, travel and entertainment cards and proprietary cards.

A bank card is issued by a bank based on the credit of the applicant. Bank cards include Visa, MasterCard, and Discover Card.

Travel and entertainment cards are issued by private companies and may not offer installment payment programs, like credit cards. Examples of travel and entertainment cards are American Express and Diners Club.

Proprietary credit cards are issued by a private entity and are limited in negotiability. For example, a chain store like Sears or a hospitality company like Holiday Inn may issue its own credit card and therefore also serve as its billing and collection agency.

To the vending operator, a credit card purchase represents a deferred payment process that involves processing and handling fees.

The reason for accepting credit cards is that customers tend to spend more when a credit card is tendered, as opposed to cash. Incremental increases in sales with credit cards are generally sufficient to offset the associated processing discount fees. No-signature-required credit card transactions do not require a customer receipt.

Cashless vending suppliers caution operators that receipt printers can be problematic and should be avoided wherever possible.

How credit information is transferred

From a technical perspective, there are three tracks on the magnetic stripe of a standard credit card. Each track is about one-tenth of an inch wide.

A credit card issuer typically uses tracks one and two, while the content of track three is not standardized. Proper processing requires electronic data capture (EDC) in that the card reader must be able to decipher and collect track data.

The different debit card functions

Basically there are three types of debit cards: ATM-cards, check-cards, and combination (ATM and check) cards. The word debit means to subtract. A debit card purchase thereby initiates a transaction in which the value of the transaction is subtracted from the cardholder's account balance and transferred to the retailer.

An ATM-card, which requires a personal identification number (PIN), initiates an online transaction that leads to immediate account posting and subsequent funds transfer while a check-card purchase is an off-line transaction with a deferred account debit and delayed funds transfer.

In contrast to a credit card, no loan is involved in the transaction. As a general rule, a PIN is required for debit card authorization; however, this is not the case for vending applications, as there typically is no PIN pad supported by the vending machine.

Smart cards offer dual uses

A smart card may be used as a credit/debit card or as a stored value card that features an embedded microchip laminated onto its surface.

A stored value smart card functions similar to a debit card in that the amount on the card is diminished as purchases are applied against the card's value.

Generally, a stored value smart card contains information necessary to identify the cardholder and its value, therefore eliminating the need for external authorization. PIN codes are typically used to access information stored on the chip. Some smart cards can be revalued at a vending machine, over the phone, at an ATM terminal, or via electronic banking. A combination card contains both an integrated circuit (IC) chip and a magnetic stripe for alternate processing. Combination cards are the most popular and useful.

Additional types of cards

Proprietary magnetic stripe cards are widely used; hotel room keys, student ID cards (access to meal plans), prepaid cards, e-gift cards, and related forms of settlement are also representative of cashless payment options.

Customized magnetic stripe cards, also called junk cards, can be developed on a proprietary basis and adopted for vending machine application. Hotel room keycards can likewise be adapted, although interfaces to hotel property management systems are complex and present a deferred cash flow as the hotel first collects payment from its guest and subsequently pays the vending operator.

Some prepaid cards are labeled single use and are discarded once their value is exhausted. This form of card typically does not have a PIN code and works no matter who has it in their possession.

More sophisticated cards are reloadable, meaning the card's value can be replenished or increased (i.e., reloaded) at cash-to-card terminals or through account transfer.

An e-gift card is replacing the traditional paper certificate with a magnetic stripe card or a stored value card. Cardweb.com estimated that nearly 60 percent of all consumers receive a gift card, and that most receive an average of 2.5 gift cards with a combined value of $106 per year.

RFID media emerges

RFID is an acronym for radio frequency identification, which is a combination of a computer chip and a tiny antenna that allows the chip to wirelessly communicate with a receiver.

As RFID technology continues to increase in popularity, the hospitality industry can expect an influx of innovative forms of cashless and wireless settlement.

RFID, which is expected to replace bar codes as an on-product identification tag, is quickly gaining traction as a favored form of settlement. Similar to the technology used to monitor prepaid toll roads, various hospitality firms are experimenting with linking an RFID device to a customer account for deferred settlement.

RFID creates Wi-Fi networks

In a cashless transaction scenario, the RFID transponder communicates a unique purchaser identifier code to a POS receiver. Basically, the hospitality business integrates an RFID system with its POS system to integrate credit and debit account transactions.

Radio frequency devices employ low-power radio waves to transmit signals. There are many standards for RF networks, but a popular format is IEEE 802.11b, commonly referred to as Wi-Fi. Wi-Fi networks transmit data using low-power microwaves.

Wi-Fi devices are capable of speeds of up to 11 mbps. A typical RF network contains one or more wireless access points and one or more devices that have an RF network adapter.

The wireless access point can be connected through a physical medium to an external network for eventual settlement. In an RFID scheme, the account holder creates a link between the transponder and a credit or debit card account to establish a payment plan.

When a purchase transaction takes place, the amount of the transaction is applied to the account. In addition, some RFID transponders are being developed with the capability to also have a built-in microchip for stored value transaction settlement as an alternative to linking to credit and debit card accounts.

RFID can work with prepaid accounts

An RFID transponder allows a customer to pay by waving an electronic wand or embedded card near a target spot right above the bill acceptor. RFID systems can be programmed to automatically deduct money for purchases from a prepaid account or charge the sale to a linked credit card account, and can sometimes be used in nonvending foodservice.

For example, RFID transponders imbedded into key chains have been tested by Canteen Vending Services Inc. in Boise, Idaho. In addition to Canteen sites, the key chains were accepted at local McDonald's restaurants.

Overall, most operators have found that RFID settlement increases sales since payment procedures are greatly simplified.

Cellular media and m-commerce

M-commerce involves a customer activating a vending machine using a mobile phone. Part of the challenge facing m-commerce for vending in the U.S. is the fact that there are a plethora of wireless carriers, each with different hardware protocols.

When m-commerce is invoked, the vending operator will experience a deferred payment scheme as monies will be collected by the phone company and subsequently transferred to the vending operator.

Noncash collections might well necessitate changes in route accountability and revenue tracking. The first rollout of m-commerce in vending is under way in Sydney, Australia by Coca-Cola Amatil.

'Open' versus 'closed' systems

The term "open system" in relation to a cashless payment plan refers to a scheme in which a purchase transaction can be recorded, processed and reconciled without proprietary settlement technology.

An example of an open system transaction is a credit card purchase. When a credit card is used as payment, the card is swiped, authorized and processed without the use of in-house application software.

The term "closed system" describes a situation in which unique application software is required to process a non-cash transaction; a closed system is usually defined by its environment (e.g., prison, institution, factory, etc.).

A closed system may be used to monitor and track internal transactions. In addition, with a closed system it is possible to restrict transactions, account balances, and purchase frequency through a central authority or account.

It is important to note that an operator can participate in both open and closed systems simultaneously -- in other words, to accept a major credit card that also happens to have an embedded chip (smart card) or RFID settlement option available. Cashless has and continues to be successful in closed environments.

Closed systems, aside from providing fast transactions and enhanced security, also allow vending operators to offer employee bonuses in the form of purchase discounts.

Remote data transfer affects cashless Advances in telemetry hardware and software provide a basis for innovative cashless vending applications.

Where cashless systems were once confined to "closed" networks that utilize magnetic strip cards that transfer stored value, new telemetry technology allows "open" networks, whereby consumers charge their purchase to a bank debit or credit card.

Growth in cashless is also being driven by remote data polling. Some industry observers have commented that because telemetry is important to the development of cashless vending, it is difficult to discuss cashless transactions without including "intelligent vending."

Cashless vending is expected to drive intelligent vending and to lead vending operators to discover benefits of telemetry, including polling line item sales and machine malfunctions via a remote computer.

"Online systems" require an always 'on' communication network. "Off-line systems" that handle credit and debit cards need only connect on an occasional basis, typically once per day, usually during the night time.

Both types of systems have benefits

An off-line system may involve an account balance residing in the reader or payment media. With this type of system, the transaction is completed entirely inside the reader and does not require external communication linkage.

It is for this reason that an off-line system is often referred to as a stored value system. In an online system, the account balance is contained outside the reader in a central database. The transaction is completed between the reader and the database.

Since an off-line system requires some form of payment media to be distributed to the user, it is almost exclusively used in a closed environment. By contrast, an online system only needs to identify the user, and the database engine will determine the appropriate settlement mechanism. Hence, an online system can support both open and closed environments at a single location.

From a customer perspective, either open or closed systems can support a frequent purchaser, reward or affinity program.

With individual customer accounts, it is possible to create a data warehouse integrated to frequent purchaser software to form a loyalty program.

In addition to analyzing the properties of all transactions, companies are able to apply data mining to generate many important findings (e.g., peak sales periods, effective staffing, product bundling, etc.).

For operators, in addition to revenue enhancement, there can be much gained from captured transactional data (sales by product, preference data, day part data, etc.).

The opportunity has arrived

Payment technologies continue to become more innovative. At the same time, vending equipment manufacturers have made it easier for vending operators to incorporate cashless systems, and cashless system providers are offering new hardware and software to facilitate cashless vending.

Cashless vending systems have emerged and are being adopted at an unprecedented rate.

Michael L. Kasavana, Ph.D., is the NAMA endowed professor in hospitality business at Michigan State University. Portions of this article are excerpted from his 2004 NAMA White Paper,"Cashless Vending."

Cashless benefits at a glance