When will we see colour printers on payment terminals?

Verifone and Hypercom both offer high end payment terminals with sophisticated touch screens and colour video capabilities which they hope retailers will use to deliver promotional marketing and advertising messages to customers (see the brochures here and here). But I haven’t seen any colour printers yet. As the credit or debit card receipt becomes richer with targeted promotional offers, the same way that till receipts have become more sophisticated, it is unavoidable that payment terminals will also offer colour printers.

In the US, Catalina Marketing is one of the top providers of promotional marketing capabilities at the point of sale. They recently began upgrading their POS printers to colour, after twenty years of black and white coupons printed at the checkout. Advertisers like the colour printers because of the higher redemption rates, an average of 30% higher than Catalina's traditional black and white prints, which indicates that colour print promotions are more effective at driving customer behaviour. Catalina's targeted promotions delivered at the checkout already have much higher redemption rates than virtually all other mass-delivered coupons (7% versus an industry average of 2%). Another interesting angle is that about 30% of Catalina’s business is ads delivered at checkout, with no coupon or promotional incentive attached, simply an ad printed on a checkout receipt. That ad business has grown as Catalina completes its conversion to full-color printers on all its point-of-sale units.

It will be hard for payment terminal vendors to tap into this market on their own. They need to get their technology accepted by advertising and marketing organizations and actually create a new media, just as Catalina has done. And more than likely, the new media will need to be print based rather than video, which means that colour printers are more valuable than colour video monitors at the checkout. I know technologists will think I am totally insane for saying this, but hey, that's pragmatism. Sure, colour video screens are pretty and nice. But a print ad that the customer walks away with is much more effective in influencing customer behaviour. Notice that Catalina's business is entirely print based, with no video displays.

Welcome’s bank customers are in a way becoming advertising and marketing organizations within this niche, since they build credit card promotional marketing offers in partnership with merchants. This fills an important missing element that terminal vendors lack on their own. There could be an opportunity for a terminal vendor to offer a colour printer option which merchants can choose to upgrade to if they want to print higher quality offers on credit and debit card receipts.

Still, there is one very major barrier that remains. Each terminal vendor has persistently developed their own proprietary environment. If they add colour printers, you can be sure that the printers will function in quirky ways. Technology suppliers like Welcome would need to develop different drivers for each platform, which would necessarily drive the capabilities down to fit the platform that is the lowest common denominator. So the whole richness angle is defeated. Either the industry comes together and defines common standards (don’t hold your breath) or technology providers like Welcome choose one single platform for colour promotional offers. In that scenario, which I kind of like, merchants would be able to choose from lots of different terminal platforms for basic, traditional black and white receipts and promotions, but they would have a single choice of terminal provider for high end colour print promotions.

Interchange wars, premium card pricing abnormalities, and a radical vision of how things could be

Adam Levitin’s latest paper (Priceless? The Social Costs of Credit Card Merchant Restraints) describes how high-end premium credit cards are able to offer higher rewards points because merchants are charged higher interchange fees on those cards. He also describes how premium card usage has grown in the last few years, causing merchants to pay much more to accept plastic. "For example, Visa Signature cards, which carry the highest level of rewards and are available only to affluent consumers, comprise only 3.5% of all Visa cards, but account for 22.2% of all Visa purchases."

What? 3.5% of Visa cards account for 22.2% of purchases? Premium card usage is exploding, merchants pay the highest interchange fees when those cards are used … and yet they get little additional benefit. How long can that last?

As I was writing this post, the Wall Street Journal announced that Visa is launching a high-end Signature card with even higher interchange fees. Merchants will pay, on average, 14% more per transaction when cardholders pay with a "Signature Preferred" card compared with a regular Signature card, which already earns more interchange than basic credit cards. The higher interchange fees will allow Signature Preferred cardholders to enjoy more generous rewards rates.

Merchants pay more to finance the bank's premium card loyalty program, yet they cannot refuse to accept those cards. How long can that last? In most businesses, when you come up with a new and better and more expensive product, you pitch the new product’s special benefits to your customers and hope to get them excited enough to buy it. Why doesn’t that happen with product launches like this one?

Adam Levitin’s paper and other rumblings in the market, suggest that the interchange battle is focusing more and more on breaking down the no surcharge rule, so that merchants can pass the cost of plastic on to the customer. For simplicity, they will probably charge a single rate, the highest interchange rate that they themselves are charged by banks for premium cards. Imagine the impact on card usage.

But here’s a radical vision of how things COULD be. Imagine that premium cards offered merchants new features that solved real problems for merchants, in new and unique ways that other solutions cannot. Imagine that these new premium card features got merchants genuinely excited about accepting the cards. Imagine that the no surcharge rule had been abolished long ago and a growing number of merchants have decided to charge customers for card usage. If premium cards gave merchants true value which other cards did not offer, merchants would want to encourage use of those cards over others, even cards that are cheaper. You could see merchants charging for all cards EXCEPT premium cards. Imagine this sign at the checkout: “2% surcharge on all Visa purchases (except Visa Signature)” rather than the current surcharge signs like this one and this one.

Sound way too radical? If you look at the way most businesses work, what I just described is not nearly as radical as the current interchange pricing model.

Priceless? The cost of credit card merchant restraints

I have never met Adam Levitin, but he keeps coming up with new papers that fit exactly the thought process that Welcome is going through. I stumbled on what appears to be his latest paper while doing a Google search (Priceless? The Social Costs of Credit Card Merchant Restraints). I hadn’t noticed anywhere that the paper had been published.

Who pays for credit card rewards? Merchants of course, through interchange fees. Rewards cards have risen from less than 25% of new card offers in 2001 to nearly 60% in 2005. Two-thirds of all cardholders now have a reward card, up from half in 2002. Rewards cards also make up a disproportionate amount of credit card spending. Eighty percent of credit card transactions in 2005 were made on rewards cards. Because rewards programs are a major component of interchange costs, as rewards programs have grown, so too have interchange fees and hence merchant discount fees.

So far, nothing new for regular readers of my blog, other than lots of facts and figures that add colour and detail to the story that we are familiar with. But Adam now takes the concept further than he has in the past, in an area that coincides exactly with where Welcome is going with our new product, which we haven’t announced yet. I’ll save that for tomorrow’s blog post.

If you're interested in Adam's work, do a search on my blog to see the prior posts.

Mobile Phone: The New Way to Pay?

I have been reading a paper from the Federal Reserve Bank of Boston, titled “Mobile Phone: The New Way to Pay?” It provides a good general overview of mobile payments. There are a few things that I would have liked to see in more depth, and several assumptions which need to be looked at more critically. All in all though, it's a good introduction to the subject.

One area that deserves a more critical outlook is the assumption that mobile payments are already very common in other parts of the world:

“In some areas of the world, particularly Asia, mobile payments are prevalent. Japan’s NTT DoCoMo, for example, implemented the largest and most sophisticated wireless system in the world. Introduced in July 2004, the company’s service, known as FeliCa, sold five million wallet phones in its first year. The phone can be used to pay for goods in retail stores, to buy items from vending machines, and to pay for transit fares after January 2006. Technology-friendly consumers in Singapore and Malaysia can use one service, TeleMoney, to pay for transit fares, top off their prepaid wireless phones, buy concert tickets, and make retail Purchases.”

Unfortunately, these types of claims rarely include figures on actual transactions performed with mobile phones. I haven't actually seen anybody in Asia use their phone to pay. I have seen RFID readers in taxi cabs in some places (Korea comes to mind) but when I asked the cab driver how often people use their mobile phone to pay, he told me that he had only had a few transactions over the past year. I didn't check, but maybe Korean cabs add a surcharge like they do in Singapore, which would kill any desire a customer might have to pay with a mobile phone.

An important section in the document is titled Challenges to the Adoption of Mobile Payments, and examines all kinds of barriers, with a special emphasis on the infrastructure players, wireless carriers, financial institutions, card associations, mobile handset manufacturers. A much smaller part addresses merchants acceptance, and concludes essentially that since contactless is already successful, merchants automatically have what it takes to accept mobile payments. Unfortunately, the paper doesn't address the challenge of interchange. The most disturbing part of the document is the very small section which looks at challenges related to consumer adoption.

“Perhaps more research needs to be conducted to determine the ‘compelling’ reasons why a consumer would want or need to substitute mobile payments for traditional or other electronic payment methods.”

But that’s the key to the whole thing! It's unfortunate to see the consumer value proposition treated pretty much as an afterthought.

Google apps and the perennial debate over on-line versus off-line and distributed versus centralized processing

A recent article in Wired (Google Apps: Should You Switch?) is relevant to the payments world as more and more computing power is made available at the edge, within POS terminals and even cards themselves. The article compares the centralized approach of Google Apps with the distributed approach of Microsoft Office. There is no clear winner. “There are many reasons to get excited about Google's new plan, but there are just as many reasons to stick with the status quo.”

The centralized versus distributed processing debate of course goes back to much earlier times (as many philosophical debates do) when DEC came out with the first minicomputers that gave processing power to departments and divisions within large corporations, and avoided the need for everything to be done at the central mainframe. The debate will probably go on for a long time to come.

From Welcome’s point of view, and many others in our industry, the debate is irrelevant. We take a simple pragmatic approach. Computing power is available in lots of places, so let’s get the most use out of it. Some payment features work best centralized, others are very valuable at the edge. The question becomes an architectural design issue for each individual feature, rather than a philosophical debate.

Welcome's technology creates little customer behaviour data packets that are in some ways similar to cookies that a web site leaves on your PC to make it easier for you to go back to the web site again later. When a smart card is used, like an EMV card or a contactless card, we drop the customer behaviour data cookie onto the card, the easiest and cheapest place to store it. When a magstripe card is used, we store it on a server that is available for real-time access at the moment of payment. Then, the next time you go back to that merchant, the information in the cookie helps the merchant target promotions better and give you more than you would have gotten otherwise.

We've spent years working on the technology to get a tiny footprint. Right now we can fit hundreds of these cookies into the lowest cost cards on the market, in just a couple kilobytes of card space.

Are US banks thinking about chip technology to fight fraud?

An article in the Boston Globe suggests that rising credit and debit card fraud and identity theft could be causing US financial institutions to move towards the same highly secure chip technology that is being roled out everywhere else.

The article quotes TowerGroup's Managing Director, Ted Iacobuzio, who says there has never been a business case for using chips in the US before, but the business case that's emerging is fraud.

Another reason why US companies are moving toward a more secure card are recent federal guidelines that encourage banks to use biometric factors like fingerprints or voice patterns to improve the security of customers shopping online or using automated teller machines. Chips would be needed for their capacity to store the biometric information.

Weird credit card marketing ideas

This sign is on the window of taxis in Singapore. Earn 1% cash rebate when you use your POSB MasterCard credit card to pay for the cab fare. Sounds good, until you remember that if you pay with pastic in a Singapore taxi, you get charged a 10% administration fee, or surcharge.

It doesn't make any sense at all. Pay an extra 10% for using plastic, and get all happy because you get 1% back at the end of the year? Did the person that designed the POSB 1% cash back promotion not know that customers get charged 10%?

Here's a revolutionary idea: find a way to get the cab company to waive the administration fee when a POSB MasterCard is used. The promotion would be much more powerful. Of course I'm sure the bank tried that, but the cab company probably rejected the idea. "What's in it for me?" says the cab company. "Your card just doesn't bring enough value for me to swallow the cost of accepting it."

Aha! That's the real key. Make the card much more attractive to the cab company, so they want to accept it and agree to pay the fees without passing them on to customers.

What do merchants think of credit card rewards programs?

In this article, the journalist asks retailers what they think of credit card rewards programs.

Here's what the owner of a music store says:

"Cards are able to offer 1% cash back and other perks to their customers for one simple reason, that money is coming straight from the coffers of businesses where the transactions take place. My store is paying that 1% back to you. I think that's unfair to me, that I have to pay you that 1% back for something the card is offering."

Higher fees for customer reward programs caused another retailer interviewed to make the decision to stop accepting American Express or Discover Cards:

"We are basically paying for their perks. What I'm charged to process these cards is absolutely ridiculous."