Acquirers are encouraging vending-machine operators to add card and mobile electronic-payment acceptance, which could represent a whole new category of transactions.

The ISOs, processors and gateway providers patient enough to handle the relationship-building process, willing to invest in the education necessary to understand the vending market and ready to devise the right tactics could reap financial rewards, insiders say.

There are challenges, however, as vending-machine operators are not like other retailers. Unlike retail POS terminals, for example, vending machines tend to move around a lot—up to 10 times each during their operational existence—thus requiring constant attention. Wireless and other connectivity issues and getting to know an assortment of new market players also pose potential complications, observers say.

Indeed, ISOs venturing into vending face considerable upfront and continuous work building and retaining relationships, said Stacey Finley Tappin, senior vice president of North America sales and marketing communications at Scottsdale, Ariz.-based Apriva, whose tokenized Apriva Vend product provides ePayments gateway services for vending operators. “It takes a lot of investment up front if an ISO wants to get into this,” she says. “It’s not an easy market; it’s complicated.”

Just as ISOs should build a knowledge of vending, vending operators should learn more about the payments industry. ISOs thus can serve not just as ePayment service providers, but also as advisors, much as they were when many traditional merchants still were accepting primarily cash and checks and knew little about card acceptance, not to mention interchange and discount rates.

The vending market essentially represents a new frontier for ePayments, as the vast majority of machines accept only cash, thus providing considerable opportunity for ISOs. In 2013, revenue from vending totaled $19.69 billion, according to the National Automated Merchandising Association (NAMA), citing annual research data from Automatic Merchandiser magazine. However, only 10% of the 4.85 million vending machines last year had cashless readers. That’s not many statistically but still a significant increase from the 4% that did only two years earlier.

To one observer, such growth in cashless-payment acceptance, including cards and contactless mobile transactions, represents progress. “The main thing is we really have moved that thing forward quite a bit,” Mike Kasavana, NAMA endowed professor at Michigan State University, told ISO&Agent. “But on the opportunity side, there’s still lots of machines that are not accepting electronic payments that should be.”

ISOs could find willing customers, as ePayment acceptance can generate potential growth in vending machine sales volume, according to NAMA, citing 2013-14 data from USA Technologies Inc.’s Cashless Knowledge Base. During a recent 12-month period after installing cashless vending, the company found total monthly vending transactions increased by 22.8%, with no decline in cash-sales volume.

“It’s not cannibalizing cash but actually represents new business because so many people don’t carry cash today,” Kasavana says. “It’s a lot easier to make sales with ePayments than with limited currency or coin.”

USA Technologies, whose chief competitors include San Francisco-based Cantaloupe Systems and Crane Payment Innovations of Malvern, Pa., represents an ISO that has succeeded in targeting the vending market. Though it considers itself a “payment services provider,” the company, which also is based in Malvern, primarily sells payment-processing services for Atlanta-based Elavon, Mike Lawlor, USA Technologies’ senior vice president for sales and business development, said in an ISO&Agent interview. Conversely, various ISOs are out selling USA Technologies’ products to vending machine, laundry and kiosk operators, including wireless services and card-acceptance hardware that connects back to the company for processing and reconciliation into the operators’ accounts.

“There is money to be made for them,” Lawlor said in reference to ISOs. “We’re just at the tip of the iceberg with these new market opportunities.”

As of June 30, USA Technologies’ ePort service connected to 266,000 machines, handling some 170 million transactions totaling $300 million during the fiscal year. Some 86% of the company’s connections come from traditional vending customers, Dave DeMedio, USA Technologies chief financial officer, noted during a recent fiscal fourth quarter earnings call with analysts.

Pricing plays an important role when targeting the vending market. Because many vending operators are not familiar with ePayment acceptance, they want pricing to be simple, industry insiders agreed.

USA Technologies, for example, charges a flat percentage rate, which equates to about 5.5% to 6% on an average $1.50 transaction. The rate varies by market, and it goes down as the debit or credit card transaction amount rises, Lawlor says, noting USA Technologies provides an aggregated processing service across customers’ multiple payment-acceptance locations, similar to the concept San Francisco-based Square Inc. has adopted.

The company expects its license and transaction-fee revenue to grow to $44 million to $47 million in the current fiscal year, which would represent 24% to 31% year-over-year growth, DeMedio said on the earnings call.

For its part, Apriva has negotiated a 2.2% plus 2 cents interchange rate with Visa, though what vending machine operators pay ISOs as their fee is somewhat higher, Tappin says. Her colleague, Rinaldo Spinella, Apriva executive vice president of strategic accounts, estimated the typical discount fee on an average $1.50 transaction is 9.6 cents.

ISOs will require considerable volume to make vending a viable target market, Tappin said, noting the low end in the range of machines such organizations are willing to take on initially can vary. “Some channels have 50 to 100 machines, and they’re happy because they’re making a little money there and learning the market,” she says. “Some say they don’t won’t want to touch the market with less than 1,000 machines.”

ISOs may choose to sell processing services only, or they also can sell hardware for ePayment-acceptance providers, many of which differ from retail POS terminal manufacturers. They also may support add-on services, such as loyalty and rewards programs.

USA Technologies, for example, supports payment acceptance and a rewards program through Softcard, the Near Field Communication-based mobile wallet backed by T-Mobile, Verizon and AT&T and formerly known as Isis. The company says its NFC footprint of 150,000 locations represents 70% of its installed vending-machine base.

An expanded version of this article is is scheduled to appear in the November-Decemeber print issue of ISO&Agent.

 

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