June 7, 2005

Look, Ma, No Coins!

By Evan Schuman, Ziff Davis Internet

A Pennsylvania payment vendor is preparing conversion equipment to create contactless vending machines, aimed as much at addressing the finite supply of coins and facilitating price increases as shortening lines.

The vendor, USA Technologies, said it has had contactless vending machine technology ready for some time, but waited to introduce it until the market seemed ready for widespread contactless deployment.

Contactless payment is any type of exchange, such as the EZPass automatic toll payment system, which uses a token or transponder to identify the customer and a credit or debit account to which the cost of the purchase should be applied.

The company cited last month's announcement from JPMorgan Chase & Co. that it would embed contactless capabilities in all of its credit cards as an indication that the market was ready.

An announcement this week that 7-Eleven Inc.—a $41 billion convenience store giant with about 27,100 stores—will formally embrace contactless payment at all locations suggests that the stage is set for a major retail move to contactless technology this year.

In many ways, vending machines would seem unlikely choices to break new payment ground by using RFID interfaces to encourage micro-transactions.

The typical argument for contactless systems—best exemplified by Exxon Mobil Corp.'s SpeedPass and the EZPass toll service—is that they shave crucial seconds off a purchase, theoretically resulting in shorter lines and greater revenue per hour.

In some cases, the argument goes, this can be a competitive differentiator, as for a gas station that will lose customers to the competing station down the street if customers see long lines of cars and drive past.

Another popular contactless payment return-on-investment argument is consumer convenience. A customer carrying heavy bags, for example, might find it awkward to reach into a wallet and present a credit card. Beach resorts, where customers may not want to carry anything beyond their hotel room keys, form another segment where contactless benefits are often touted.

Vending machines would seem to not be ideal examples of any of the above issues. Rarely do they create long lines, and the time needed to deposit a few coins would not be materially shortened by flashing a contactless payment device.

USA Technologies officials state that many vending machines at high-traffic locations, such as amusement parks or airport terminals, often do have lengthy lines. And the speed of a contactless flash transaction should not be compared to the speed of coin dropping, they argue, but to the time it takes for a customer to put together exact change.

Many vending machine customers don't even bother using exact change, relying instead on the bill changers commonly attached to the machines. But dollar bill changers have a finite number of coins to give out. When the machines run out, they flash a "Please Use Exact Change" light, which causes as many as 50 percent of consumers to go elsewhere, according to USA Technologies Vice President Jim Turner.

USA Technologies' Chief Operating Officer and President, Stephen Herbert, said the cost of vending machine attachments for either contactless payment systems or credit cards (magstripe) is about $400 for either approach and "in the $600s" for both, which he said would be popular until the adoption of contactless payment sharply increases.

Greg Buzek, the president of IHL Consulting Group Inc., agreed that consumers "will buy more and use it more" if vending machines go contactless, but he questioned whether the business model would support it.

Whether this approach is going to be widely used "has to do with the discount rate on vending machines. If you buy something for a dollar on a card, with standard transaction rates today for an unattended transaction, they're taking a quarter for the transaction plus two to three percent of it," Buzek said. "So that's 28 cents on the dollar. Is it worth it to pay 28 cents for a dollar? If you stay with cash, you're not paying for anything except for the guy to take away the money."

Buzek concludes that contactless payment is a tempting proposition, but that it may not pass the spreadsheet test. "The advantage of this is that you open up sales to people who don't have cash or change on them," he said. "There's a compelling reason to do this, but there are underlying economic reasons not to."