September 15, 2005
Amazon.com Wants Your Spare Change: All Of It
By Evan Schuman, Ziff Davis Internet
With an estimated $10.5 billion of idle spare change lying around American households, Amazon sees that found money as found money. And it will now accept it for purchases.
Pity the poor penny, the neglected nickel, the despondent dime and the queasy quarter. The times are changing and for change, it's for the worse.
Credit cards, debit cards and contactless payments are all making major inroads into what was once the solid territory of clanking pocket change. Tollbooths, parking meters and quick-serve restaurants are going either contactless or credit card. Even Las Vegas slot machines now only want paper money.
But Amazon.com has taken pity on those round metallic presidential pictures and is trying to make them feel welcome. And if it can bring in some of that $10.5 billion worth of idle change, so much the better.
In a deal announced this week with coin-counting leader Coinstar Inc., Amazon.com will allow consumers to bring their spare change to more than 12,000 locations across the U.S. and trade them in for an identically priced Amazon.com gift certificate.
Coinstar machines today charge consumers 8.9 percent of their coins for the service of counting it and giving it a receipt for the remaining 91.1 percent of the money.
In Amazon.com's case, though, Coinstar machines will charge nothing for the service as far as consumers are concerned. Amazon is selling Coinstar its gift cards at a sharp volume discount, allowing Coinstar to cover its costs and profit.
From Amazon's perspective, this is another way to bring in revenue that was literally lying around people's houses not being used for anything.
"Until now, using cash at Amazon.com has not been an option," said Craig Berman, Amazon's director of technology and platform communications. "We're really excited. There are lots of people who like to use cash."
Another dying form of money—paper checks—accounts for a very small and shrinking percentage of Amazon's revenue because it requires the customer to send the check in and wait for it to be received before seeing a credit on their account, Berman said.
Paula Rosenblum, the director of retail research with the Aberdeen Group, sees the move as an example of Amazon's creative and non-traditional thinking.
"Gift cards are clever, and Amazon is incredibly clever, and they are incredibly clever marketers. Amazon has fascinating ways of expanding its market. This is an interesting twist," Rosenblum said. "That's part of the reason why very, very few of the original pure-play dot-coms achieved the promise of their hype, and Amazon even makes money now. There's a host of interesting things Amazon has done."
From a technology perspective, here's how the system is supposed to work. The consumer goes to the Coinstar machine—typically located at a major retail location—and pours coins into an opening. The machine then counts and tallies up the coins, in a process that can take five to 10 minutes, depending on how many coins it needs to process, said Steve Verleye, the general manager of the Epayment division at Coinstar. The average transaction size is about $36.
Once the count is complete, the machine uses an analog modem to dial a toll-free number to connect with Coinstar's main systems. In a communication that Verleye estimated takes 15 to 20 seconds, the machine identifies itself, reports the transaction and updates its capacity and other details.
That exchange of data about how many coins it has is not only a good way to keep headquarters informed. It serves two practical purposes, Verleye said.
First, it allow for technicians to be dispatched if machines are close to running out of coin capacity. A full machine is one that can't make any more money.
Secondly, it is a nice security feature. The network at headquarters knows about every transaction and has a pretty good idea of what the coin count should be. If someone captured the communication between the machine and its headquarters, those details and that constant reconciliation process would make its fraud potential virtually nil.
"We've been in the business of moving money for a long time, so security in general is a big business for us," Verleye said. "This is just a new twist on an old paradigm for us."
After the server has authenticated the machine's request, it communicates with an Amazon server and obtains a gift card number for that transaction. The machine then prints out the number for the consumer.
Coinstar has struck deals with four retailers other than Amazon for this program, but Amazon is the only pure-play e-commerce company. The other retailers are Starbucks, Pier 1 Imports, Linens 'n Things and Hollywood Video.
With those brick-and-mortars, the output is generally a designed, barcode-bearing gift card that can be given to cashiers at those retailers. There are lots of security features possible in that kind of a card, but Amazon's anti-fraud hopes are limited to protecting the gift card number.
"That's also one of the advantages that Amazon has: No card is required. It's all facilitated through our existing network," said Peter Rowan, vice president of new business innovation at Coinstar.
Rowan said Coinstar wants to attract key leaders in various retail segments—both vertically and geographically—as partners. With brick-and-mortar retail partners, their cards are placed in machines near their stores. With Amazon, location is irrelevant as it poses "no geographic constraints."
Even with the ability to have different regional partners in different parts of the country, Rowan said that he wants to keep a cap on the number of partners the company works with and offers to consumers.
"There is a limit in terms of how many choices you want to give to a consumer in a self-service environment," Rowan said. "We don't need 30 retail partners in order to have a very compelling free offer. It's probably six or nine or something like that."
By replacing its consumer charge, Coinstar officials expect to see a lot more people bringing in bags of coins. And there are huge amounts of coins out there today, with an ever-increasing percentage of them lying dormant. Coinstar estimates that the typical American household has about $99 in loose change lying around.
That's only the tip of the half-dollar, as they say. The U.S. Mint estimates that there are 255.9 billion coins in circulation. ("That's a pretty close approximation," as some Trekkies out there are saying.)
Just last year, the Mint created another 13 billion coins and that's on top of the 12 billion coins crafted in 2003.
Is the Mint factoring in the reduced need for coins as credit/debit and contactless grow? Somewhat.
"The demands of commerce are monitored closely and Americans will still use coins for the foreseeable future. The United States Mint produces coins to the demand of commerce," said Becky Bailey, the Mint's director of public affairs. "That's why the number of coins produced each year differs. When the economy is active, more coinage is needed and when the economy slows, our production of coinage slows."
The Amazon offering is currently available at approximately 3,500 locations and is expected to reach 5,000 by the end of the year. "We started rolling out weeks ago as a beta," said Amazon's Berman.