Another Way to Pay?

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Another Way to Pay?

Looking to reduce their credit and debit transactions fees, while continuing to give customers a variety of payment options, retailers are exploring new ways to leverage less-expensive Automated Clearing House (ACH) transactions.

Last year, when Flash Foods Inc. enhanced its Reward$ in a Flash loyalty card to allow customers to use it as an ACH debit card, the pairing was a match made in heaven for the Waycross, Ga.-based chain. Early results from the union have been downright celestial.

Go Blue, the chain's loyalty/ ACH card, available for use in all 177 stores, has capitalized on the popularity of Flash Foods' 2-year-old loyalty program. The result: lower credit card transaction fees as customers make less costly ACH transactions.

"In 2006, our credit card fees were greater than our bottom line [number]," said Jenny Bullard, CIO for the Waycross, Ga.-based retailer at Convenience Store News' 2008 CIO Roundtable. "In 2007, as the price of gasoline increased and more people used credit cards to buy gasoline, the fees grew by $2 million."

Enter Go Blue. Customers may apply for the Go Blue card online at Flash Foods' Web site, and when requesting the Go Blue card, are forwarded to a secure site run by National Payment Card (NPC), where they enter their checking account information. After NPC verifies the information, a Go Blue card is mailed to the customer. As a service to cardholders and a way to reduce fraud, Go Blue customers may track their purchases via the NPC site. They receive an e-mail detailing each transaction just after it is made.

To encourage Go Blue use, cardholders receive 3 cents off a gallon of gasoline at the pump. (Reward$ In A Flash cardholders receive 2 cents off per gallon inside only and 1 percent back on most other purchases. They also are enrolled in hot and cold beverage clubs and benefit from other discounts and promotions.) Go Blue cards may be used as a payment card at the pumps and/or inside the store, depending on the location.

"The more Go Blue transactions, the more we save. As a company, we would rather pass some of that savings on to our customers, than pay the credit card fees to MasterCard and Visa," Bullard said. "Even considering the discount, on purchases of more than $40, our fee for the Go Blue ACH is on average half of what we pay for a credit card transaction.

"We can't count on attracting customers who live on credit," Bullard noted. "But if they are used to using debit or use credit for just the convenience of paying at the pump, we are going to go after them."

The company is working on adding a fleet-fueling component to the card. "We will be responsible for any bad transactions for the fleet, but we will be paying NPC a lower transaction fee on those purchases, compared to the ACH transactions made by Go Blue customers now."

There are approximately 1,000 Go Blue cardholders now. The chain's goal for the first year is to convert 5 percent of credit/debit purchases to Go Blue.

In the meantime, the company will save approximately $100,000 in transaction fees, simply by having its corporate employees use the Go Blue card, rather than a credit card, to purchase gasoline.

Flash Food's loyalty card also acts as a pump start card, reducing drive-off losses. Unfortunately, the loyalty cards may not be used to start pumps at the chain's 29 Shell- and Chevron-branded locations.

"Since we've been using these cards as pump starts, we've been able to collect on all but one drive-off," Bullard noted.

One challenge to retailers looking to push an ACH payment alternative is luring consumers to change from their current, preferred payment methods, noted Drew Mize, vice president of product management and marketing for The Pinnacle Corp., based in Arlington, Texas, and one of the roundtable sponsors. "Although ACH payment alternatives help the retailer by lowering their transaction fees, they must provide an incentive for the consumers to use it. They will want their airline miles or cash-back incentives offered by credit card companies."

Because ACH offers a compelling savings to the retailer compared to credit card or traditional debit transaction fees -- a typical ACH debit transaction fee would be 15 to 18 cents per transaction -- retailers can afford to give consumers a 2, 3 or even 4 cents per gallon discount to consumers and still come out ahead.

"The other way to attract customers is to leverage a traditional loyalty card with ACH, like the Go Blue program," Mize explained. "A consumer rarely forgets to use a loyalty card to earn points or get that free cup of coffee. If that loyalty card also is the payment card, the adoption rate increases dramatically."

While some c-store shoppers won't use ACH payment because they "flat out don't have the money until their check comes at the end of the month," retailers who offer a desirable enough discount, especially on gasoline, will pick up consumers who prefer to pay for the transaction then, rather than wait until the credit card bill comes, Mize said.

"If retailers are offering the discount only to ACH/loyalty card holders, the consumers will come find them and use those cards," he said, adding a growing number of consumers are no longer eligible for credit, forcing them to use either cash or debit.

When implementing ACH payment options, however, it's important for retailers to select a point-of-sale system that integrates with the ACH/loyalty program, Mize said. "In many retail segments, operators can have a separate device on the counter," he said. "In the petroleum market, where ACH adoption by the consumer is closely tied with the ability to roll back the price of fuel, you need a system that seamlessly integrates with the point-of-sale."

Not every retailer, however, is convinced a loyalty/ACH card is the way to go to increase transactions and reduce fees.

"We don't have a loyalty card yet because we don't know what we want out of one," said Chris Truesdell, CIO of QuikTrip Corp., which offers customers no annual fees (and no finance charges if the balance is paid within 25 days of the billing date) for QuikTrip credit and pump-start cards.

"Our customers are typically pretty loyal to our brand," he noted. "We don't want to give something away that they are buying from us now.We want to see what the customers are purchasing on the fly and then try to encourage them to purchase something they haven't purchased in the past, or have them come back to the store at a different time of day than they normally shop."

Kym Howe, vice president of information technology for West Des Moines, Iowa-based Kum & Go LC, also has doubts about the value of a loyalty/ACH debit combination card. "Unless the majority of loyalty/ACH purchases are made by customers who would otherwise use a credit card, there wouldn't be any benefit to us [offering one]."

If a retailer chooses to give a 3 cents off per gallon discount in order to entice customers to sign up for the ACH card, and the average fill is 10 gallons, that equals 30 cents for the gas discount, Howe explained. Add the 15-cent processing fee that goes to the ACH provider, and in some cases, a couple cents for the switch fee, and it totals 47 cents. "So, if a customer who previously paid cash, check or debit were to sign up for this card, we would pay more in gas discounts and processing fees for this ACH card than we would have previously," Howe said. "Because a typical c-store averages around 70 percent in cash transactions, there is reason to believe that many of your ACH customers will come out of those cash customers. Credit customers will be harder to switch to ACH because they enjoy the float and the benefits -- points, air miles, etc. -- offered by their bank. Therefore, this type of program looks like it could end up costing us more in fees, not less."

KwikTrip Inc., based in LaCrosse, Wis., is adding an ACH function to its Kwik Card credit card, which will allow customers to chose to pay with either credit or debit at the time of the transaction.

"We want to continue to offer the customer more advantages to use the Kwik Card versus a major credit card," Ed Strahs, Kwik Trip's director of information technology said. The retailer now offers Kwik Card users 5 percent off inside sales and a 3 cents per gallon discount. "We're also considering enhancing these incentives and offering others for new signups."

Kwik Trip has its own credit department, which processes the receivables, saving the company substantial sums otherwise paid as interchange and bank fees.

The enhanced Kwik Cards will be linked to the cardholder's checking or savings account. "This will be a PIN-based transaction," Strahs explained. "The only differences between traditional debit transactions and ours will be we won't verify there are sufficient funds in the account or put a hold on the funds in the account."