Want to offer cashless? Closed systems are easy

July 11, 2008
Cashless transaction capability continues to expand in vending.

Cashless transaction capability continues to expand in vending, and there is a good chance that every operator will find himself (or herself) competing against a player who is offering some type of cashless system, if he or she hasn't already.

The conventional wisdom today is that cashless is not yet cost efficient for most operators. I am not going to open this debate except to note that it usually refers to "open" cashless systems, as opposed to closed systems.

At this point, it's appropriate to once again review the distinction between these two types of systems.

My contention is that "closed" systems, which have been available for decades, are more economical than ever and are cost effective for many locations. So let us begin by first reviewing what we mean when we discuss a "closed" cashless system.


Closed cashless systems require users or the location to prepay for the purchases. Such systems work best where an account is pre-authorized for debit-like payroll deduction. The cards are recognized by a computer and purchases are credited to the individual account. These systems are suitable for closed environments like factories, universities, prisons, or hotels where the consumers are known in advance and have cards, ID badges, or door keys.


Closed cashless systems come in two categories.

"Offline" closed cashless systems store the value of money in a chip on a card or keyfob that is read when swiped or inserted into the vending machine. For closed "offline" systems, the value must be prepaid, either by the card holder or the employer, on magnetic stripes or imbedded electronic chips.

"Online" closed cashless systems only need to identify the consumer somehow (i.e., thumb print, PIN, employee ID badge, school ID, etc.) during a purchase. The system then contacts a central computer over a network to authorize payment. The value of the money in a user's account is stored on the central computer rather than with the consumer.

"Open" cashless, as distinct from closed cashless, refers to systems in which the cards are issued by an entity that essentially loans the user the money when they make a purchase. These are the traditional credit and bank debit card systems (Visa, Mastercard, American Express and Discover Card) that most consumers use nowadays.

"Open" cashless systems are similar to the "online" closed cashless systems, but the card issuer's bank initially pays for the purchase. With an "online" closed cashless system, the account that the purchase is credited to is managed by the employer or a related party.


From the end user's viewpoint, there might not be much difference between any of these systems. In all cases, the consumer is using a card to purchase a product. It is fast and easy.

From the account manager's viewpoint, there may be more differences. With a closed system, it is usually necessary to preload the system with a certain amount of purchase value. This usually requires the customer to invest a certain amount of funds upfront.

Each employee or student is then allowed to access an account from which their purchases are credited. This is how the account recovers its upfront investment.

From the account's point of view, it might seem easier to have an "open" cashless system since there is no need to invest the location's or the employees' funds upfront.

However, many locations are willing to make this investment because it allows them to provide their employees or students with an added benefit. The employer can use the system to offer bonuses to reward good performance or to offer special gifts at holidays.


More closed cashless systems have come on the market in recent years, and many operators have found great success with them. Operators have used them as selling tools to win business.
The amount of cashless purchasing varies in the accounts using these systems. Some vending operators report that as much as 75 percent of the purchases are cashless.

Cashless purchases usually vary between 15 and 50 percent of total vending purchases, and it is difficult to say how many sales are being made solely on account of the cashless option.

Many operators like such a system because it allows them to offer something new. Many have been able to deduct the cost of installing the systems from the account's commission.

From the vending operator's viewpoint, there are more differences between "closed" and "open" cashless systems. The closed system requires more onsite software programming in the actual reader than an "open" system.

But there are certainly some advantages to closed cashless systems over "open" ones from the operator's point of view. The installation is faster and easier. And there is no credit processing fee for purchases, which the vending operator typically pays for.


If the account already has an electronic or magnetic ID system for its employees or students, the infrastructure for the existing system can be used to support a closed cashless system. This will require some additional time on both the operator's and customer's parts, but it will not require much additional hardware.

The cashless system must integrate with other software systems, such as a hotel system with billing to the room, or a factory where an ID card is used for automatic payroll deduction.


Cashless systems, closed and open alike, can be installed in any modern vending machine that supports the Data Exchange (DEX) and Multi Drop Bus (MDB) protocols. MDB allows the cashless system to communicate with the vending machine controller and credit the system with cash value
during a purchase.

Most new vending equipment supports modern MDB protocols that allow the consumer to recharge stored value at any vending machine that
accepts currency.

DEX allows the vending machine controller to communicate the cashless and cash data to the operator's software system via a handheld computer or remote monitoring system for cash accountability purposes.


Operators should plan on spending $250 to $650 per machine for the hardware, for both closed and open systems. For closed systems, additional costs are generally required for programming equipment, cards and keys, and recharge stations.

For closed, "online" systems, a software-based server is generally required and some type of networking is needed for communication between the machines and the server. These systems vary; in some cases, the cards are revalued with credit cards. In others, the system is wired to a central database.


In selecting hardware, the first goal is to make sure the hardware in question is compatible with the company's vending machine controllers. Not all closed cashless systems are compatible with all vending machines.

Some vending machines do not have a separate window for a cashless reader. In these cases, it is necessary to cut a hole in the door, or replace the validator with a combination validator/card reader. There are combination validator/card readers available.

Cutting a hole in the door isn't a huge cost, but it needs to be considered.


The cost of the cards or keyfobs also has to be considered. The costs vary from supplier to supplier.

Who will cover the cost of the cards or keyfobs for the employees or students? If the account is not going to assume the cost for the cards or keyfobs, this cost becomes part of the operator's investment.

How will the cards or keyfobs be distributed? The route driver can provide them to the account manager to distribute, the account can take responsibility for this, or the cards/keyfobs can be sold in the machines. The latter scenario has worked well in many accounts.

Compatibility of the credit accounting and the cash accounting must be considered. Vending machines that have DEX will be able
to separate the credit sales from the cash sales easily.

Machines that are not "DEXed" will require the two accounts to be reported separately.


Closed cashless systems have been available much longer than "open" systems and they are presently more common in the vending industry. They offer operators some advantages:

• Installation is usually simple.
• Investment is oftentimes less than "open" cashless.
• There is no processing fee for purchases.
• The system can utilize existing security ID infrastructure.


How will cards/keyfobs be revalued? If the employees or students are responsible for doing this themselves, they need to know where they can do this. Some systems have a dedicated revalue station. This represents an additional cost, and it requires additional space.

Some card readers include revalue functions within the readers themselves. This minimizes the system's cost and eliminates the need for additional space in the vending environment, but it does create another consideration.

If the revalue function will take place at the machine, this will prevent other customers from using the machine while it is revaluing a card. This will not be a consideration in all locations at all times, but in busy locations, it can affect both sales and customer satisfaction. It might only take a few minutes to revalue a card, but that few minutes can easily cost a sale.

The solution that one company came up with was to restrict the revalue activity to the machines that experienced the least amount of traffic: the food machines, both frozen and refrigerated. They designated these machines as revalue machines using signs on the machine.


• Captive locations.
• Locations with more hourly employees.
• Locations with more older consumers.
• Locations with people who don't carry credit cards.


The "online" systems have become more economical in recent years and are usually more versatile than the "offline" systems.

"Online" or "offline," observers have noted that closed systems work better for more traditional vending locations: captive locations with more blue collar consumers. Consumers in these locations typically are less likely to carry credit cards to begin with, and a closed environment is necessary for a closed system.

The versatility of the "online" closed systems referenced above has enabled the providers of many of today's "open" cashless systems to offer both "open" and "closed" options. Contactless technologies are replacing the magnetic stripe cards. Since the contactless chip can store value, funds can be added to the chip via debit transactions or direct transfer from bank account to bank account. The funds then reside on a network/server in case the card is lost or stolen.


What this means is that vending operators interested in a "closed" system might benefit from investing in one that can double as an "open" system. In the future, the operator might want to allow customers to use credit and/or debit cards.

All operators should realize that cashless is growing and at some point, most operators will need to consider offering it to customers. The closed system might be an easier option for some operators to start with.

About the Author: Erich Markee is an area general manager for Sodexo Vending Services. He is based in Foxboro, Mass.