hen was the last time you picked up a payments industry trade publication that didn't include stories about applications that expand consumers' choices beyond credit?

Many value-added applications are still in their infancy and haven't yet reached critical mass among retailers of all sizes. Once the large retailers begin to adopt new payment solutions, these methods quickly gain momentum of implementation and move down the entire retail chain.

There are a few payment options that have broken through and appear to be on their way to becoming standard methods used at the POS.

The payments road is littered with initiatives that were driven by technologies looking for practical applications, but failed to deliver true value and a strong ROI. But widgets alone don't sell new ideas. Any new application or technology must make good business sense in order to gain widespread adoption—and to actually be used by consumers.

Less than 10 years ago, the buzz was all about "electronic cash"—stored value cards backed by Visa or Mondex that stored cash on a chip card. However, merchant pilots in Atlanta, New York and San Francisco were ultimately abandoned. This wasn't because the technology didn't work, but rather consumers simply didn't need yet another way to pay and merchants didn't need to upgrade their POS terminals for another fee-based payment system. Good ol' greenbacks worked just fine.

In conjunction with research and consulting firm Gartner, RIS News, a publication focused on retail technology, recently published its 14th Annual Retail Technology Study, which looked at business drivers and technology trends for Tier 1 and 2 retailers. (Tier 1 retailers are those with annual revenues of over $1 billion a year; Tier 2 retailers are those with annual revenues of $500 million or more.)

The report explores how new payment methods use technology to help retailers achieve core business objectives and showed that the pace of adoption is building momentum. MLSs, acquirers and merchants that get in early will benefit, seizing the opportunity to succeed.

The Aging POS

POS systems, and peripherals including payment terminals, are built to last. And last they do—electronic cash registers have a life span of seven to 10 years, and you know that when it comes to payment terminals, you just can't "kill" a Tranz 330.

However, the POS is aging. Our industry cycles with upgrade opportunities about every eight to 12 years, and it looks like we're currently on the leading edge of the curve: A full 58% of RIS News survey respondents reported upgrades to their POS in the past three years, and within two years that number is projected to grow to over 80%. Merchants of all sizes understand the benefits of new payment terminals. Take advantage of contract renewals by upgrading terminals; you certainly don't want to wait until 2010 on the growth curve's downturn.

Debit Cards Create Upgrade Opportunities

When it comes to debit, the choice is whether to sign or enter a PIN. According to the Retail Technology Survey, 87% of respondents are involved or planning to be involved with debit card projects over the next two years. During the first quarter of 2003, consumers initiated 2.64 billion signature-based (offline) debit card purchases, up 21.1% from 2.18 billion during the same period last year. Total value of the purchases was $104.6 billion, up 22.5% from $85.4 billion during the previous year's first quarter.

When given the option, consumers seem to choose the security and cash-back features of PIN-based debit over its rival signature debit option. Another survey by Edgar, Dunn & Co., a financial services consulting firm, titled "PaymentDynamics 2004 Preferred Card Study," reported that 69% of 6,500 consumers prefer using a PIN, compared with 31% who prefer signing for a purchase.

The study also found that debit cards are preferred by 38% of consumers; that they use their debit card as a replacement for cash and check in 80% of transactions; and in place of their credit card in the remaining 20%.

Despite gains in the PIN-accepting merchant base—primarily in Tier 1 and 2—as few as 25% of all U.S. merchants accept online debit. Compare that with the over five million locations that accept signature-based (offline) debit cards. PIN debit remains a strong performer in supermarkets, drug stores, gas stations, top-tier discount retailers, and other sectors where cash and checks have dominated.

The major hurdle for increased PIN debit use has been convincing smaller merchants to buy and install PIN pads. However, the opportunity looks good here, too. Merchants, feeling the sting of recent interchange hikes, are ripe for lower-cost alternatives; ISOs/MLSs can easily position the benefits of online debit, including added security, showing that it is a viable payment method. There's also an opportunity to sell a new PIN pad that meets Visa's PIN Entry Device (PED) standards, or even to replace an aging terminal with an all-in-one unit featuring an internal PIN pad.

The Ubiquitous Gift Card

Electronic gift cards are here to stay. Statistics don't lie:

• The National Retail Federation reported that gift cards accounted for over $17 billion, or 8%, of retail sales during the 2003 holiday season. It's been estimated that 45% of U.S. consumers bought a gift card in the months leading up to the holidays.
• Mercator Advisory Group calculated $40 billion in gift cards were sold in 2003 and estimates the market could be worth $220 billion.
• Research and advisory firm TowerGroup reported the average value-per-card also increased from $50 in 2002 to $64 in 2003.
• A full 52% of all respondents to the 14th Annual Retail Technology Survey have gift card programs in place. The future looks strong as well, with another 23% planning programs within the next two years.

Gift card programs have permeated the market in a variety of segments, even well below the Top Tier merchants. ISOs/MLSs can offer turnkey programs to even the smallest of merchants, offering customized card fulfillment as a standard option. But get ready now. In order to be prepared for the 2004 holiday season, merchants will need systems in place and cards ordered by August, so that they can start merchandising them in October.

Check Conversion with Imaging Rides the Check 21 Wave

In the area of check imaging, the RIS News study showed another area of opportunity for adoption among respondents. Though far from critical mass, 17% of respondents are currently deploying imaging systems, and 31% more plan to deploy within two years, which is a strong indicator of interest for future adoption.

NACHA-The Electronic Payments Association found that there was significant growth in the conversion of checks to ACH transactions in retail stores and other points of purchase in 2003, indicating a trend to truncate checks as early as possible in the acceptance process.

About 204 million consumer checks were converted at the point-of-purchase last year, up 22% from 2002. The average amount of each check was $70. And Visa's POS Check program currently has access to more than 22 million consumer DDA's, with aggressive penetration rates expected.

Check 21 becomes law in October, giving credibility to digital images of checks. While check conversion can be performed using MICR technology alone, full check images will be required to achieve solid collections results.

The ability to image a check, access a direct DDA account, and collect on returned items all result in lower risk, which then results in competitive rates. Forward-thinking ISOs/MLSs that sell solutions from acquirer-partners can compete with the big third-party providers.

It's an exciting time of growth in the electronic payments industry. The convergence of POS upgrades with real value-oriented applications promises to be lucrative for acquirers and ISOs/MLSs prepared for the future. Expand your portfolio of payment options, and you'll be sure to expand your wallet.

Michelle Graff is Vice President of Marketing for NOVA Information Systems. You can e-mail her at michelle.graff@novainfo.com .