An Examination of Credit Card Acceptance, the Future of the Payment Industry – And What It Means for Your Laundry Business
The credit card industry processed an estimated $4 trillion in the United States last year, according to Business Insider. To put that in perspective, the total credit card volume in the U.S. in 2014 was enough to buy a 2015 Nissan Versa for every man, woman and child across the entire country.
In fact, seven of the largest card issuers – American Express, JP Morgan, Capital One, Bank of America, Citigroup, Discover and U.S. Bancorp – reported more than $490 billion in total credit card payments made in the fourth quarter of 2014 alone.
Consumer use of credit cards has been rising for years. The total number of credit card transactions in the U.S. was 26.2 billion in 2012, up from 21 billion in 2009, according to the 2013 Federal Reserve Payments Study. And the total number of new bank credit cards issued between January and July 2014 was 28.8 million, up 21.3 percent over the previous year.
In addition, as more self-service laundries provide credit card acceptance to their customers, the industry will reflect similar growth statistics.
“Laundry owners are still moving forward with adding alternative forms of payment, whether it’s credit/debit card, a store loyalty card or a combination of both,” said Wayne Lewis of ESD. “Many are looking to join the growing trend of businesses accepting credit/debit cards and striving to differentiate themselves from competition. The reports from some of those initial ‘pioneers’ of increased revenue and volume also are a contributing factor to some of the laundry owners looking to diversify.”
“We’re definitely seeing an upward trend in credit card usage among the laundromats where we’ve installed our card system,” said Oleg Stepanov of Laundroworks Card Systems.
In April 2013, credit/debit card sales represented 10 percent of all laundry purchases, according to Stepanov – however, in April 2015, that figure was up to 21 percent.
“Credit/debit card sales, as a percentage of total sales, more than doubled in just a couple of years,” he noted.
“At this point in our industry, it is becoming increasingly clear that the cost to do laundry has reached the tipping point, where using coins as a sole source of payment no longer makes any sense,” added Jeff North of Setomatic Systems. “In a world where credit cards are used for the smallest of purchases, such as buying a cup of coffee, consumers expect to be able to use their cards wherever they go. As more and more owners are adding credit card acceptance to their washers and dryers, it becomes a competitive advantage to be the first in any market.”
Steve Marcionetti of Card Concepts Inc. concurred.
“The future of paying by credit will continue to grow in the self-service laundry industry just as it will in all industries that accept credit cards,” he explained. “I see accepting credit cards as an opportunity for store owners to separate their business from their competitors. More and more employers are doing away with physical paychecks and replacing them with direct deposit – and consumers know that visiting an ATM will cost them money, and they will prefer to do their laundry where they aren’t forced to get cash first, but rather just swipe their debit card.
“Laundromat owners need to understand and accept this fact and embrace it like so many other retail businesses have. The laundromat business has always been about offering conveniences to its customers, accepting credit and debit cards is a convenience that customers will demand.”
Industry Trends
For laundry owners considering credit card acceptance, here are a few trends to keep an eye on:
Expanded credit access. Lenders tightened their standards during the recession, making it tough for many people with blemished credit to get approved for credit cards or other loans. But, as card issuers strive to expand their market share, they’ve loosened credit standards and made credit cards available to customers with scores below prime.
“I think it’s going to be a lot easier for people to be approved for a credit card,” said Nick Clements, a former banker and co-founder of MagnifyMoney.com, a comparison website for financial products. “Bad information tends to leave your credit report after about seven years, so a lot of bad stuff like foreclosures or other debts are now leaving people’s credit reports. People’s scores are improving, but also banks are continuing to expand their credit risk acceptance.”
Andrew Davidson, a senior vice president at Mintel Comperemedia, a market research firm that studies credit card offers, agreed: “As the economy strengthens and delinquency rates remain low, instead of targeting consumers with high FICO scores, they’re extending offers to consumers with less-than-stellar credit.”
Increased competition for rewards card holders. As card issuers compete for new customers, expect to see more competitive cash-back and mileage offers. “It’s a race to the top in headline cash-back rates,” Clements stated. “I think you’re going to continue to see more sign-on bonuses, and the airline credit card space is going to continue to get interesting.” According to Davidson, “cash back has been making a comeback, reversing a trend toward cards that promote flexibility of points.”
“Most credit cards today offer some sort of cash-back program that essentially gives consumers a discount on everything they buy with their card,” Marcionetti said. “This will continue to pressure retailers to accept credit cards and cause consumers to seek out businesses that accept them.”
Greater innovation with regard to card security. Security breaches at several major retailers have made data security a top concern for banks, merchants and consumers. Many card issuers have already sent out safer chip- and PIN-based cards, which are the standard in other parts of the world. And, in October, fraud liability will shift away from the issuers, with merchants being required to upgrade payment terminals to accept these new cards.
Beyond chip and PIN cards, Davidson said issuers are looking at other ways to identify or avoid fraud. He cited Capital One Second Look, a new feature in a pilot phase that monitors customers’ credit cards for duplicate and recurring charges that are higher than normal. “Security will become a key component of the marketing message,” he said. “Issuers will look for ways to go above and beyond that with more innovative security features.”
Mobile payment adoption. Mobile payments, or payments made through a cell phone rather than a credit card or cash, are all the rage, especially with millennials who overwhelmingly say that mobile banking is “very important” to them, according to a study by the Independent Community Bankers of America.
What’s more, with the release of the iPhone 6, Apple included Apple Pay, which works with multiple issuers including American Express, Bank of America, Chase, Citi and Wells Fargo. Also, mobile payment devices like Loop have begun to hit the market.
“There is certainly a trend toward the younger generation becoming cashless,” said Brian Gill of PayRange. “Millennials don’t carry cash, and many don’t carry wallets either. The trend is for card payment to be replaced with mobile payment. They want to do everything with their phones. A clear indication of why payments will shift to mobile is, if people leave home without their wallets to run an errand, they will not come back home for it – but, if they leave without their phone, they will return to get it.”
Consider Your Costs
“I think the biggest issue regarding credit card acceptance revolves around the cost of accepting credit cards in a store,” Marcionetti said. “Many owners are on the fence, trying to decide if investing in credit card equipment is a good move for them, as well as how the fees associated with processing are going to affect their bottom line.”
Of course, all businesses that accept card payments encounter processing fees for purchase transactions. These fees seem insignificant, but they can certainly add up, especially if your business accepts a lot of small purchases on credit cards.
Credit card processing fees are extensive, complicated and somewhat overwhelming. Nevertheless, you have to pay them if you want to process credit cards through your laundry. Rather than paying these fees blindly, you may as well make an effort to understand them.
Here’s a quick breakdown of each fee, according to MerchantMaverick.com, to make these charges easier to identify on your monthly statement:
Interchange Reimbursement Fees and Assessments: These are the fees the card-issuing banks and the credit card associations charge for each transaction, and they represent the largest expense merchants pay per sale and per month. Interchange fees typically consist of a percentage of each transaction, accompanied by a flat per transaction fee. Assessments are typically based on a percentage of the total transaction volume for the month.
Terminal Fees: These are charged to merchants who have physical stores, where they directly swipe a customer’s card.
PCI Fees: These are fees paid to the Payment Card Industry, either for noncompliance or compliance. In the case of noncompliance, you have to pay because your business is not upholding PCI standards, which could cost you even more money in the long run. In the case of compliance, you have to pay the merchant account provider to make sure you remain in line with the regulations at all times.
Annual Fees: These are fees charged every year to cover the basic use of a provider’s services.
Early Termination Fees: This is self-explanatory. It is a fee that is charged if you cancel your contract early.
Monthly Fees: These are fees that are charged each month, usually for the purpose of covering call center costs.
Minimum Fees: These are fees charged to merchants who do not reach a certain transaction total for the month or year. The minimums will vary by provider, but most of them are around $50,000 a year.
Statement Fees: These are fees charged to cover printing and mailing costs for credit card statements. Some merchants can bypass these costs by using electronic bill statements.
IRS Report Fees: These are fees that merchant account providers charge in exchange for reporting transaction information to the IRS. Most of these charges range from $2 to $5, depending on the provider.
Online Reporting: These are alternatives to statement fees, charged to merchants who choose to view their statements online. Most providers won’t charge this kind of fee, and those that do often lump it together with others.
Network Fees: The card networks charge certain non-negotiable fees that are passed through to the merchant.
Every credit card and merchant account provider has a different set of costs associated with its services. Some of them are unavoidable, but others can be negotiated.
“As the use of credit cards on washers and dryers becomes more commonplace, operators are realizing that credit card rates are just a part of doing business,” North explained. “These expenses have to be absorbed, and then the cost of a machine cycle may need to be adjusted accordingly. We are, however, finding less concern over rates than ever before. Operators are realizing that the benefits of accepting credit cards far outweigh the processing fees. It’s not uncommon to see revenues increase substantially after adding credit/debit acceptance, especially when the system is well marketed and there are readers on every machine.”
Maximum Security
A major factor impacting the types of cards in circulation – as well as, and more importantly, the types card readers in your laundry – is security. Credit cards in the U.S. have traditionally used a magnetic stripe. However, as mentioned earlier, card issuers are switching to EMV – which stands for Europay, MasterCard and Visa, and is a global standard for cards equipped with computer chips and the technology used to authenticate chip-card transactions. In the wake of numerous large-scale data breaches and increasing rates of counterfeit card fraud, U.S. card issuers are migrating to this new technology to protect consumers and reduce the costs of fraud.
Although chip cards have been popular internationally for years, only 74 out of every 100,000 card-present, general purpose credit card transactions in the U.S. were made with chip-based cards in 2012.
But that’s about to change. Nearly 600 million EMV chip-enabled cards will be in circulation in the U.S. by the end of 2015, according to Smart Card Alliance estimates.
“These new and improved cards are being deployed to improve payment security, making it more difficult for fraudsters to successfully counterfeit cards,” said Julie Conroy, research director for retail banking at Aite Group, a financial industry research company. “It’s an important step forward.”
“If someone copies a mag stripe, they can easily replicate that data over and over again because it doesn’t change,” explained Dave Witts, president of U.S. payment systems for Creditcall, a payment gateway and EMV software developer.
Unlike magnetic-stripe cards, every time an EMV card is used for payment, the card chip creates a unique transaction code that cannot be used again. Of course, for laundry owners, this switch to EMV means adding new in-store technology and internal processing systems, and complying with new liability rules.
“This change is a great thing for merchants who have high-dollar ticket averages, but what about those with low-dollar ticket averages?” asked Nicholas Tylenda, director of strategic business development at Innovative Control Systems, a leading manufacturer serving the car wash industry. “The costs associated with upgrading equipment to process EMV payments need to be weighed against the benefits, of course. However, the benefits may come in unexpected forms.”
For example, Tylenda pointed out, upgrading to an EMV terminal is an ideal time for laundry owners to consider accepting mobile payments, such as Apple Pay and Google Wallet. It’s also good to keep in mind that customers may have a more positive perception of businesses that offer hardware with new services and visible security enhancements.
Today, if an in-store transaction is conducted using a counterfeit, stolen or otherwise compromised card, consumer losses from that transaction fall back on the payment processor or issuing bank, depending on the card’s terms and conditions.
After an October 1, 2015, deadline – set by major U.S. credit card issuers MasterCard, Visa, Discover and American Express – the liability for card-present fraud will shift to whichever party is the least EMV-compliant in a fraudulent transaction.
“The cost of the fraud will fall back on the merchant,” said Martin Ferenczi, president of Oberthur Technologies, a global EMV product and service provider.
The major credit card issuers each have published detailed schedules about the upcoming shift in liability. The change is intended to help bring the entire payment industry up to speed with EMV by encouraging compliance to avoid liability costs.
However, although the upcoming deadline is strong encouragement for all parties to become EMV-compliant as soon as possible, experts don’t believe everyone will on board by the suggested date.
“Don’t expect a big bang in October of 2015,” said Doug Johnson, vice president of risk management policy for the American Bankers Association. “In terms of rollout, we expect about 50 percent of banks and retailers to be completely transitioned over. It’s going to take a little time to adapt.”
Aite Group estimates that, by the end of 2015, approximately 70 percent of credit cards and 40 percent of debit cards in the U.S. – 1.1 billion cards total – will support EMV.
“We are the most fragmented and the largest market that has ever gone to the EMV standard,” Conroy noted. “There’s going to be varied customer experiences over the first year to year-and-a-half of this transition.”
“The U.S is finally catching up to the rest of the world, where chip and PIN is in the finishing stages of adoption,” Stepanov noted. “For our Canadian customers, we have been deploying EMV, PIN pad-based systems for a couple of years.
“This doesn’t mean that magnetic-stripe payments will cease to exist on October 1. But it does mark the first major milestone for the industry and sets up the next one, where it is possible that magnetic stripe will actually not be accepted. The recommendation for laundry owners is to plan for EMV. If the owner is considering a credit card system that is not EMV-compliant today, that owner would be wise to ask questions about how the system might be upgraded in the future.”
Upwardly Mobile
“The world of credit cards is rapidly changing,” North said. “And the hottest development right now is mobile payment done via NFC, or near field communication.”
Near field communication is a form of contactless communication between devices such as smartphones or tablets. Contactless communication enables users to simply wave their phones over an NFC-compatible device to send information without needing to touch the devices together or go through multiple steps setting up a connection. This technology is popular in parts of Europe and Asia, and is quickly spreading throughout the U.S.
“When Apple deployed NFC on the iPhone 6 and introduced Apple Pay, the entire payment industry changed at a critical time when new terminals were being deployed nationwide in hundreds of thousands of merchant locations,” North explained. “These terminals are being deployed to meet the October deadline for EMV implementation. The benefit of this deployment for mobile wallets is that it’s putting the infrastructure into place to enable these convenient ‘wallets’ to be used.”
Currently, there are two predominant NFC mobile wallets on the market – Google Wallet, which is soon to become Android Pay, and Apple Pay. Under development are mobile wallets by PayPal, Samsung and others.
“Laundromat owners are realizing they need to not only look at the current state of the payment industry but also the future state,” North said.
“The trend seems to point to the mobile wallet as the future trend, especially with the upcoming EMV regulations,” Lewis agreed. “The younger generations embrace the new technology with open arms and will continue to drive this technology in the future.”
By the end of this year, 5 percent of the world’s 600 million to 650 million NFC-enabled phones will be used at least once every month to make “contactless in-store payments at retail outlets,” according to consulting firm Deloitte’s annual “Technology, Media & Telecommunications Predictions” report.
While five percent is not a staggering number, it represents a considerable increase over last year’s mobile payment usage rate. As of mid-2014, less than 0.5 percent of the 450 million to 500 million NFC-enabled phone owners used their mobile devices for in-store purchases, Deloitte said.
Although contactless mobile payments won’t go mainstream this year, “niche adoption” will continue to grow, according to the report.
“Mobile payment in the U.S. is very small right now, but it’s going to change very quickly,” said Steve Riegel of Greenwald Industries. “If my brother were opening a laundry, I would say, ‘Don’t put in the terminal unless it has NFC. Period.’ I wouldn’t spend the money without NFC. You’ve got to accept credit cards, and that’s really got to be part of what you’re doing.”
Parting Shots
For Marcionetti, it’s important the store owners understand the “cost” of accepting credit cards, and take it as an opportunity to evaluate their vend prices.
“If the costs to add this feature to their store sound too high, they may not be charging enough for their service,” he reasoned. “The feedback from our customers has been extremely positive with regard to customer acceptance and increased sales. We are finding that consumers are not only demanding credit card acceptance in the laundromat, but are willing to pay more for the convenience.”
“Laundry owners need to compare costs, but that’s just the beginning,” Gill added. “They also need to consider security. And they should consider whether the investment they are making is something that will be sound in five to eight years. Or will it be out-of-date before they are able to recoup their investment?”
All in all, the process of accepting credit cards is a simple one – install the equipment and let your customers swipe their cards to start the machines. The hard part, according to North, is marketing those newly installed systems.
“It is imperative that operators let their customers know that they now accept credit cards or that they can buy an optional loyalty card,” he explained. “Have the attendants get out on the floor and engage with the customers. Once laundry customers use a credit card one time, they rarely use coins again, and credit card acceptance drives machine usage volume and, thus, revenue. The marketing takes time and effort, but it’s critical to success.”
Stepanov pointed out that, while allowing payment by credit card is a great feature in and of itself, the future will be friendlier to those who leverage credit cards for more than just payment.
“Unlike coin-based payments, credit card or any electronic payments – including those made with loyalty cards – provide a link to the customer,” he said. “This opens a door to a host of new services that stores, equipped with the right technology, will be able to exploit. For instance, a store can offer to send a text message when a customer’s laundry is done, or email a customer a payment receipt. And, in the process, the store owner obtains the customer’s email address, creating an opportunity for targeted promotions.”
The bottom line is that accepting card payments as well as contactless mobile payments will, at least initially, cost your laundry business money and add extra processes to your daily operations. However, many of today’s successful laundry operators look at these costs as a necessary operating expense.
And, as alternative payments become more popular, your customers likely will begin to expect these options as a rule, rather than a courtesy.
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