The Payment Card Market
Since their introduction to the market in the 1960s, payment cards have revolutionized the way we engage in financial transactions. Whether we use them to buy online, make a purchase at a retail outlet or use them to gain free air mileage or merchandise, they bring convenience and increased benefits to financial transactions.
Because of the numerous advantages they offer, payment cards have become a leading payment method and continue to experience significant growth throughout the world. According to CardWeb.Com, the average American household has 13 payment cards, including credit cards, debit cards and store cards. It also states there are 1.3 billion payment cards in circulation in the United States. In Canada, the number is approximately 102 million.
Using these payment cards, North American consumers are making a lot of purchases. In 2000, Canadian Visa cardholders used their cards to pay for a record $93.6 billion in purchases. This was an increase of more than 15 percent over 1999. Overall, Canada does approximately $220 billion in card payments per year at about 12 percent growth. What is even more astounding is that Americans made $1.1 trillion worth of credit card purchases in 1999, according to WebCard.Com.
With these large purchase amounts, it is obvious there are benefits for merchants who can accept card payments. Today, many customers use a variety of cards. Whether they choose to pay with their credit card, debit card, smart card or store-value card, they expect businesses to be able to accept any payment choice they make. Likewise, merchants are introducing various payment alternatives to their customers such as loyalty card-based programs to improve customer satisfaction, enhance convenience, increase sales, reduce costs and gain a competitive edge.
POS and Virtual Terminals
In real-time processing - which is often called a ‘card-not present’ transaction - the credit card is automatically processed when the customer submits an order. Once the credit card is verified and approved (authorized), the customer receives immediate notification that the order is accepted and the funds are transferred from the customer’s bank account to the merchant’s account. For instance, a customer visits an online store, submits an order and then provides his or her credit card number to pay for the purchase. The purchase is authorized and the product is delivered. The entire process is supported through software on the merchant’s storefront or shopping cart solution. See Accepting Credit Cards Online for the authorization process.
In contrast, manual (deferred or batch) processing means the order is received with the credit card number in person, through a phone call, fax, or online form, and given to the merchant who then processes the order manually, either by using a physical point-of-sale (POS) terminal to swipe the card or keying it in using a virtual software-based terminal. We’ve all seen the POS terminal at our local grocery store or retail outlet. These terminals work with phone lines, but can also be operated using wireless technologies. A virtual software-based terminal is installed on a PC with a modem and available through any web browser. Credit card information is added to an online form and then submitted. The information is either stored on the merchant’s server or on the server of a service provider, and securely protected using SSL or other security programs.
There are two phases involved in manual processing authorization and settlement.
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Authorization is a process whereby the merchant verifies the card being presented by the customer is not a stolen card and that it has enough credit available to complete the purchase. The process begins when the merchant receives the credit card number, which is obtained by swiping the card through the POS terminal or by keying the card number into the virtual terminal.
If the card is a Visa card or MasterCard, the card data is transferred to the merchant’s (acquiring) bank, which channels the information to the credit card company. The credit card company requests authorization from the cardholder's (issuing) bank to ensure the card is actually owned by the cardholder. Once authorized, approval is sent from the issuing bank to the credit card company and back to the acquiring bank and merchant. The data that passes through to each player in the authorization process is encrypted using the latest SSL technology.
Settlement is the process merchants follow to ensure they receive payment for products and services sold. At the end of the day, the merchant will transmit the receipts from sales for that day and send them electronically from the card terminal in a batch. The acquiring and issuing banks then communicate with the card companies in the manner outlined above in the authorization process.
POS Solution Costs
The cost of a POS solution is as follows:
As competition between merchants intensifies, so does the evolution of payment options to attract new customers and retain existing ones. The changing e-payment landscape has created a need for a versatile, multi-purpose device that can support the full spectrum of applications needed by the competitive retail environment.
What was initially a single purpose device, the POS terminal is becoming a more sophisticated tool that supports smart cards, loyalty programs, advertising and the operation of company legacy systems.
A smart card is a credit-card sized plastic card embedded with a chip that enables a large amount of information to be stored, accessed and processed. The information stored on the card is accessible through a terminal or card reader. Smart cards are becoming a popular method for payment by consumers, with millions in circulation around the world.
Smart cards provide a number of advantages that credit cards and other magnetic strip cards may not provide. For instance, they are multi-functional in that they can be processor-based or memory-based. Processor cards offer many functions such as encryption, advanced security features, data processing and other interactive processes. As an example, value cards used in retail outlets enable customers to store particular value amounts on their card to make purchases. A memory card is a simpler card that stores information, such as a phone card.
Smart cards also support a wide range of applications including banking, healthcare, transportation and communications. In addition they incorporate various degrees of security and authentication, and offer increased convenience to customers by enabling them to use them for identification, ATMs, copier machines, and pay phones.
Loyalty programs provide merchants with a means to deliver highly targeted, relevant incentives to customers to lure them to participate in marketing initiatives and purchase products and services. One of the most popular loyalty programs is the frequent-flyer program offered by various credit card companies. Customers make purchases using the card, which enables them to accumulate points and redeem them towards airline ticket purchases.
Many retailers have jumped on the loyalty program bandwagon to encourage repeat purchases by customers. Bookstores Chapters/Indigo and Coles have teamed up to offer a bookstore card that provides customers with discounts and coupons on future purchases once they have accumulated a particular number of points. This partnership between the bookstores illustrates that loyalty programs have other outcomes besides attracting customers. They also provide strategic alliance opportunities for businesses that wish to run joint loyalty programs.
The technology behind loyalty-based cards is becoming more sophisticated, enabling merchants to attain detailed information from these cards, such as customer purchase behavior, which assists them in developing targeted marketing campaigns to their client-base.
Gaining customers at the point-of-sale is a high-value outlet because it gives merchants access to a captive audience. As a result, the point-of-sale terminal represents a valuable advertising medium for targeted marketing and promotion activities. For example, perhaps you are visiting your favorite sports store, in the process of paying for your new roller blades. During the payment process, a graphics screen on the terminal displays coupons for knee and elbow pads, and a helmet. This personalized message is more likely to encourage a customer to buy compared to a general message intended for all consumers. Interacting directly with the payment device increases the chances that the consumer will retain the advertising message, particularly if it is targeted towards their needs.
Legacy System Support:
Many stores today operate with a store-based database providing a picture of one store and its purchases over a particular time period. Now with better access to broadband and connectivity at lower costs merchants can take advantage of lower priced hardware and more robust software solutions for their POS systems. The Internet and browser-based technology are opening doors for merchants who want to integrate their selling channels so they have one view of the customer, no matter where they shop. Now, instead of a store-based database, merchants can integrate their POS solution with a central database that provides access to merchandising, planning, distribution and financial systems at all store outlets.