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Issue 05:06:02
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Big Opportunities in Small Transactions

How many zeros are there in a trillion? If the answer doesn't spring immediately to mind, it's fine; all you really need to know is that a trillion is a really big number.

It's also roughly the total value of consumer transactions of less than $5 at the point of sale. In 2003, this number was $1.32 trillion, according to the latest data from industry research firm, MasterCard International-owned TowerGroup.

A lot of people in financial services would like a piece of that pie, and they've been working to find ways to tap into this vast cash only domain.

Any way you slice it, $1.32 trillion is a lot of transactions. Fast food meals, vending machine snacks, and downloaded songs, ringtones and comics from Web sites add up quickly.

Once again, micropayments are big. This time around, a number of companies offering a variety of solutions based on several business models are taking advantage of opportunities in commerce that didn't exist as recently as a year ago.

The Green Sheet reported on micropayments last year (see "Micropayments Making Their Move," The Green Sheet, Aug. 23, 2004, issue 04:08:02). At that time, we wondered whether ISOs/merchant level salespeople (MLSs) could depend on revenue from these transactions to add to their income potential.

Since then, micropayments have moved beyond the limits of use for online purchases like music downloads, making significant inroads into the physical POS. The solutions also offer sophisticated features for merchants and consumers.

The companies we spoke with this time present a range of micropayment solutions that integrate with the existing systems of credit card companies, banks, processors and acquirers. Their solutions aggregate tiny transactions for cost efficiency, let consumers pay as they go or offer subscription options.

According to these companies, regardless of how they process the transactions, the answer to the income-potential-in-micropayments question is definitely positive. Opportunities for ISOs/MLSs, including vendor relationships and reseller agreements, are expanding.

Micropayments'Scope Broadens

Card companies, banks, issuers, acquirers and processors, as well as the companies offering solutions to make accepting micropayments possible, are casting a new eye toward potential opportunities, and are eager to get in on the action.

As payments providers look for ways to tap into this huge market segment that, until now, they've had limited success in, they're finding an environment much more conducive to their interests than ever before.

Not only are they focusing efforts on enabling more types of low-value, online transactions, they're also venturing into the brick-and-mortar environment, where paying for low-ticket purchases with credit and debit cards grows more commonplace every day.

Look at what's happening in vending and kiosks: The types of products and services now available for purchase at self-service machines highlight the need for solutions that let consumers use the payment card of their choosing. Even parking meters and jukeboxes are now card-enabled.

"There's been a lot of attention over the last six months placed on the small payments market, because of its sheer size," said Mark Friedman, President and Chief Executive Officer of Peppercoin, a micropayment solutions provider.

"Because of the growth opportunities, the card Associations are beginning to understand that there are payment alternatives out there, and if they don't move first or move quickly, other alternatives could come in and become the cash replacement for small transactions," he said.

Other companies see the potential for growth, too. "The credit card companies need to find new market space and are very interested in QSRs [quick service restaurants] and micropayments," said Wendy Jenkins, Vice President of Marketing for USA Technologies, a company that provides solutions that enable cashless transactions for card acceptors at self-service locations. USA Technologies has processed 4 million microtransactions for customers.

"Vending and credit cards [are] a good match," Jenkins said. "Credit cards are all about making secure, convenient transactions and the whole idea of going to a vending machine is to make a convenient transaction. QSRs are also about convenience. It's an untapped market that's now getting a lot of attention."

Consumers like making tiny transactions in a big way, too. They use payment cards, including credit, debit, prepaid, gift and loyalty, along with newer mechanisms, including wireless phones, contactless devices and specialized micropayment tags preloaded with set values.

"It's what you clearly see in the market." Friedman said. Consumers want to use their cards everywhere for all sizes of transactions for convenience. A lot of initiatives coming out in the card industry are all based on getting the consumer to use their cards more frequently."

Historically, people have equated micropayments with online transactions. That's no longer the case. As consumers become more accustomed to using plastic to pay for fast food, bridge and road tolls, and at parking meters, self-service kiosks and vending machines, the types of solutions offered by small transaction vendors have become more complex and robust, taking holistic approaches to serve the needs of merchants.

The markets where purchases like these are common are growing. The key is in providing solutions that make it easy for everyone to participate without cash.

"Our everyday world is a world of micropayment," Friedman said. "Cups of coffee, tolls and trips to McDonald's are all excellent examples of what microtransactions are. "

Friedman, like many others in the industry, defined the low-value market as comprised of small transactions, or those under $20, and micropayments, or those under $5. "The physical POS is $1.3 trillion of cash transactions a year at price points of $5 and under," he said. "Less than 1% of those are card transactions, less than $13 billion.

"This really is a green field opportunity for the card Associations to get a much higher market share of these transactions, and I believe they will be looking at this market very closely for growth.

Micropayments Go Mainstream

A combination of factors in both market expansion and technological innovation has allowed companies to expand on previous offerings. Processing costs, including interchange and customer support have been a factor for many merchants in processing small transactions.

Micropayment providers are now taking clues from other areas of payments, and offer merchants and consumers the same types of loyalty building features, and the resulting benefits, available in larger payment markets.

Peppercoin, responding to the widening scope of micropayments, set out to make its solution a comprehensive tool for merchants to expand and track their businesses. "We've redefined what we think of as the 'opportunity,'" Friedman said. "Our value proposition has broadened significantly.

"What we enable merchants to do is to accept the consumer's preferred and trusted payment device, which is their existing credit and debit card, in a variety of ways for small and micropayments.

"We're providing the solutions for merchants to make it worth their while to accept those cards," Friedman said. "We see our solution as an enabler for merchants to grow their businesses, and to be the catalyst for converting these $1.3 trillion in cash payments of under $5 to be card payments."

Even though the transactions are low-value, micropayments, solution providers still have issues including interchange, chargebacks and compliance with card Association rules to contend with.

Friedman said Peppercoin works closely with the card Associations to find the best way to deploy its solutions. The company has also been proactive in its efforts to partner with large payments companies, including acquiring banks, third-party processors and the Associations; its solutions are compliant with Visa U.S.A and MasterCard International data security standards. "We extend the rules the Associations have in place," he said.

Jenkins said USA Technologies has its own direct sales force, some reseller relationships and also distributes its products through its OEM vendors; the company works with one processor. Because the company's vending customers offer a range of items for sale through their machines, she said that the way in which transactions are processed is based on a per-merchant basis.

"Batching microtransactions depends on individual operators of vending machines, where purchases for traditional vending items like drinks and snacks cost about $1," she said.

Most choose to have their transactions batched daily for the sake of transaction speed; every once in a while, merchants do lose a dollar transaction, but most don't seem to mind this minor inconvenience.

Transactions are authorized locally; verification for card number retrieval and expiration date is standard, she said.

Some of USA Technologies' vending merchants offer non-traditional items like CDs, DVDs, flowers, cell phone accessories, underwear and T-shirts, sunglasses and sunscreen. For these, transaction verification is completed at the time of purchase because of the higher ticket value and are set up differently, Jenkins said.

What about interchange? Jenkins said the fees are slightly higher for microtransactions in some instances. "But we've brought it down to a palatable point for the operators, basically 5%, for transactions of less that $5," she said. "We do encourage our operators not to accept cards for items of less than $1." Jenkins said the company hold funds for each transaction and then transfers them electronically into the merchant accounts, typically on a weekly basis.

Big Sales Opportunities

Aaron Slominski, Director of Agent Services for Direct Technology Innovations LLC (DTI), a processor that focuses on the QSR market, said his company has user grids through which it determines where a particular merchant falls and assigns SIC codes based on those grids. DTI focuses its sales efforts on QSRs and what Slominski called "quick casual" restaurants, where ticket values are in the $15 - $20 range.

DTI has developed different schedules for the various restaurants it processes for to accommodate the range interchange rates and fees for card and transaction types; DTI makes these fees, and its merchant applications, available on its Web site for purposes of full disclosure, Slominski said.

DTI has been providing a no-signature-capture-required solution for transactions under $25 for all card brands for over five years, long before QSRs began accepting cards. (DTI increased its small-ticket threshold to accommodate the higher ticket values now common at QSRs.)

There is no signature required for transactions through DTI's Swipe 'N Go program, the brand name for its micropayment processing system; it also offers underwriting and liability coverage for a number of reasons not covered by other providers. "It's our brand, and a complete business solution," Slominski said.

DTI is an acquirer and member service provider for First Data Corp.'s Concord EFS Inc.; DTI is also registered through Best Payment Solutions, a subsidiary of National Processing Co. and Bank of America Corp. From the beginning, the company's goal was to serve low-ticket merchants in order to set itself apart from other payment companies. "We found our niche: QSRs," Slominski said.

DTI places a lot of emphasis on marketing; weight-loss celebrity Jared Fogle is the spokesperson for Swipe 'N Go. Sales agents use this brand awareness when they inform merchants how to speed up through-put in their restaurants. It's a known entity.

Slominski said that selling card processing to QSR owners is a different sale than to other types of merchants. When approaching one of these merchants, agents should be aware of such things as daily schedules, cultural considerations and their slim operating margins.

"In terms of QSRs, the one factor that sets it apart is that people just don't understand it," he said. "The sales cycle at these restaurants is a lot different."

Taking their concerns into consideration should be a priority for people in payment processing, according to Slominski. He cited the grocery industry as an example of how fee increases can generate bad feelings; he doesn't want that to happen in QSRs. "It's a new market just opening up to accepting credit cards," he said. "We've seen the number of QSRs now accepting cards increase from 25% to 37%, to 55% to 65%."

Despite the growth, it's essential that salespeople understand these merchants' particular needs. For instance, small footprint, high-speed terminals for fast transactions, and thermal printers that don't need toner frequently replaced, fill the bill for them nicely. Consider, too, wireless terminals for use at drive-through windows.

DTI works with agents and offices across the country, and Slominski said he's always interested in talking with MLSs about working with the company. "There's a QSR on every corner in every small town in this country, and I want every single one of them to be on Swipe 'N Go," he said. "I'm not greedy. I don't want all your business. I just want all your QSR business, because we know how to do it."

Look to make a card-based microtransaction at a parking meter or jukebox near you soon. The sky's the limit for the opportunities. As Jenkins said, "It's uncharted territory. From a marketing standpoint, it's been outstanding."

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