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Changing Actions in Point of Sale Transactions

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October 25, 2006
Point of Sale | Technology
Michael Kasavana - kasavana@msu.edu

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© 2006 Hospitality Upgrade. No reproduction without written permission.

Electronic payments—including online commerce—now account for 50.4 percent of spending among consumers 18 to 24 years old, with cash and checks contributing 41.1 percent of the spending. Consumers 25 to 34 years old spend about 45 percent either way, while those older than 34 years of age continue to use cash and checks about half the time.

These findings were derived from a comprehensive consumer behavior study conducted by Visa, the nation's largest payment network. Are these same trends being observed throughout the hospitality industry? If so, what impact will such trends have on payment technology across the industry?

Two years ago the number of consumers using credit and debit card payments in the U.S. surpassed cash and checks for the first time. Last year, the share of consumers who used an electronic form of payment was more than twice that of five years earlier with both debit and credit cards experiencing strong growth. According to Federal Reserve reports, from 2000 to 2005 the use of electronic payments in the U.S. increased 12 percentage points while cash and checks declined 8 percentage points each. As young consumers consistently reach for debit and credit cards in place of cash and checks, they are becoming known as generation plastic or more simply Gen-P.

While economists have historically concentrated research efforts on large dollar transactions, significant shifts in alternative forms of payment for small dollar value items (defined as less than $25) have gone somewhat unnoticed. For example, the National Restaurant Association (NRA) estimates that currently more than 80 percent of fast food operations accept credit or debit card settlement; a substantial increase experienced during the past 24 months. The NRA credits the growth in electronic payments to the changing purchase habits of consumers (especially Gen-P) as well as innovations in payment technology (including mobile tableside settlement devices and contactless POS readers).

Card Usage
Numerous studies by the banking community confirm debit card usage is the fastest growing form of settlement in the U.S. For the past decade, debit cards have displayed year-over-year growth, reached record highs in both ownership and usage; culminating in a 15 percent share of current spending nationwide. Although debit payment substitution has led to an across the board decline in credit card usage, credit cards continue to be the most popular form of payment. While only one in five credit cards rewarded customers for loyalty usage in 2001, now half of all credit cards earn cardholders rewards. As a result of shifts in consumer payment preferences, the hospitality industry would be wise to consider consumer behavior trends to ensure desired payment options are available at industry venues. Additionally, in the 2006 Ipsos-Insights Contactless Survey, more than 50 percent of respondents said they would use a contactless credit/debit card to make purchases at gasoline stations, fast food restaurants, corporate cafeterias or grocery stores. Interestingly, Gen-P participants claim a higher propensity for contactless payments (RFID-based media) than any other demographic group.

Industry Adoption
Similar to spending in other industries, electronic payments have begun dominating the transaction landscape of the hospitality industry. Until recently, the industry’s expanded acceptance of credit and debit cards has not been impressive as practitioners feared electronic payments would slow settlement and lead to service bottlenecking. Competitive pressures, however, coupled with the realization that technology actually hastens purchase transactions, appears to be fueling the industry’s accelerated movement toward cashless payment acceptance. In fact, each of the largest quick-service restaurant chains—McDonald's, Burger King and Wendy's—readily accepts card payments at POS counters and drive-through locations and report gains in both service time and increased sales. In its annual consumer survey, STAR, the leading debit network company, found that consumers tend to spend as much as 30 percent more when paying with plastic than when settling with cash.

QSR and Mid-Range Restaurants
Despite lower average checks at quick service restaurants, cash settlement has shown a steady decline over the past few years. Simultaneously, debit and credit card usage has consistently increased. Despite the fact small dollar transactions have traditionally been paid in cash, the benefits of increased speed and convenience created by innovative payment formats, like contactless (swipe and go) technology, are expected to significantly reduce cash usage even further. The 2006 Visa Consumer Payment Study reports payment method by share of dollar volume at quick service restaurants to be: 66 percent cash; 17 percent debit card; 12 percent credit card; 3 percent check; and 1 percent other (including private label and gift card) payment. A similar analysis for mid-priced restaurants found: 36 percent credit card; 36 percent cash; 23 percent debit card; 2 percent check; and 3 percent other forms of payment. Highlighted in the report is the movement toward debit card transactions and its impact on alternate forms of payment. 

Other Segments
Unlike other industries, according to the Visa study, consumer preference for method of payment at high-priced restaurants as well as hotels appears to have experienced little fluctuation over the past six years. For these industry segments, credit cards continue to dominate method of payment. At fine dining restaurants, for example, consumers have actually shown a slight increase in use of credit cards. Researchers attribute this to card convenience as well as associated reward points earned. For these industry segments, debit card usage has also risen while cash payments have declined. The published study reported payment method by share of dollar volume for high-priced restaurants as: 59 percent credit card; 20 percent cash; 12 percent debit card; 6 percent other forms of payment; and 3 percent check payment. For the lodging industry the payment volumes were: 73 percent credit card; 10 percent debit card; 9 percent check; 5 percent cash; and 3 percent other forms of payment. 

Debit Cards
While many of the benefits of accepting electronic payments are obvious, the differences between payment options are not always as well understood. For example, there are two types of debit cards; PIN-secured and signature-secured. According to a study by the American Bankers Association (ABA), debit is the fastest-growing consumer payment format and is generally preferred to credit card settlement. While both PIN-secured and signature-secured debit card transactions deduct balances from a cardholder's checking account, each is processed differently. PIN-secured debit transactions require entry of a personal identification number (PIN) to initiate the transaction. This requirement necessitates that a merchant have a PIN-pad equipped POS terminal for data entry. The cardholder enters the PIN code to authenticate card and account ownership and thereby authorizes the transaction. A signature-secured debit card transaction requires the cardholder sign the purchase invoice, similar to credit card settlement, to authorize the transaction.

A personal identification number-secured debit transaction, is described as an online debit transaction as it authorizes the transfer of funds from the cardholder's account to the merchant’s account, almost immediately. It is for this reason that PIN-debit transactions do not have a risk of chargeback fees resulting from insufficient funds on account. PIN-secured debit transactions are processed over an electronic fund transfer (EFT) network, the same as an ATM transaction; not like a credit card transaction. Despite the fact PIN-debit transactions are growing at an unprecedented rate, future developments cloud their popularity according to the Mercator Advisory Group of Boston. The Group notes the three key emerging transaction markets—online commerce, recurring electronic bill payment, and contactless payments—do not provide PIN pad access and therefore will lead to lost market share to signature-based debit transactions. Such a shift may have a negative impact on the hospitality industry as PIN-debit transactions carry a lower interchange fee (are less costly to the merchant) than credit card or signature-debit transactions and move monies more quickly between accounts. [Note: lower interchange fees represent less income to issuing banks and therefore banks are disinclined to support their expanded use.]

A signature-debit transaction closely mirrors a credit card transaction in that the payment process is initiated by cardholder signature and then is processed through the Automated Clearinghouse (ACH). Unlike PIN-debit, a signature-debit transaction does not impact the cardholder’s funds for two to three days  following the transaction. It is for this reason that signature-debit transactions are subject to chargeback fees arising if the account holder does not have sufficient funds on deposit at the time the transaction is cleared. Recent changes by major card companies (including Visa and MasterCard) eliminate the need for signature capture when processing a signature-debit or credit card transaction of less than $25. This change, along with making a transaction receipt optional, has helped speed signature-based transactions at low-average check operations like QSRs.

When asked to name their preferred form of debit payment, respondents to the First Data Star survey overwhelmingly identified PIN-debit given its higher level of security (48 percent of respondents). Also, 57 percent of PIN-debit users reported that since PIN-debit also provides the opportunity to receive cash back at the POS, this also contributed to its status as a preferred form of payment. (The survey summary indicated that 6 percent of PIN-debit transactions involved receiving cash back at the POS.)

The majority of debit cards in circulation have combined signature and PIN functionality (combo-debit card) as compared to the original PIN-based card that was designed primarily for use at an ATM. Consumers who use both the PIN and signature functions accounted for 75 percent of all debit POS transactions last year. Combo-card users complete an average of 22.7 debit transactions per month compared to 14.4 transactions for those who use only signature-debit and 10 for those using only PIN-debit.

Future Applications
Internet merchants are increasingly looking to embrace alternatives to credit cards as transaction volume online increases, creating higher and higher acceptance costs. At the same time, online volume is likely soon to begin migrating to mobile handsets, opening an entirely new platform for transactions. Also, contactless payment at the point of sale has spread rapidly in the past year, with an estimated 25,000 locations now accepting bank-issued contactless cards and fobs largely for low-value goods in high-throughput environments—though again these are limited to credit card and signature-debit accounts. Left unchecked, the increased growth in Internet and mobile payments and cash replacement will occur primarily at the expense of growth in electronic funds transfer transactions.

Michael Kasavana, Ph.D., NCE, CHTP, is a NAMA Professor in Hospitality Business, for the School of Hospitality Business at Michigan State University. He can be reached at kasavana@msu.edu.

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