Merchants and financial-services companies have always been uneasy allies. In 2004 alone, U.S. merchants paid finance companies almost $40 billion in credit- and debit-card transaction fees, accounting for nearly 20% of the banks' payment revenue. Because many merchants operate on thin margins, they're fed up with the high cost of relying on banks to process customer transactions. For a retail warehouse like Costco, total payment-transaction fees can run as high as 22% of pretax profits, according to a recent report by Bernstein Research, a consulting firm for institutional investors.
Currently, merchants pay a fixed fee plus a percentage of the transaction amountalso known as interchange feesfor accepting a card as payment. Credit- and debit-card transaction fees constitute the third-largest expense convenience stores face after rent and labor costs, says the National Association of Convenience Stores.
Because of these high transaction costs, merchants are constantly seeking technology innovations to level the playing field with their banking brethren. For some merchants, migrating to fingerprint biometric payment options is a good solution.
Biometrics refers to the measurement of unique human characteristics, such as a person's fingerprint, voice, iris, or hand geometry. Fingerprint payments let retail customers simply place a finger on a specialized scanner, register the transaction with their bank account, and walk out of the store with their purchase.
For merchants, pay-by-finger can lower costs and boost revenue by circumventing higher credit-card transaction fees, speeding up checkout times, promoting customer loyalty, and reducing fraud. For consumers, fingerprint biometric payments offer safety and convenience.
Financial-services companies are closely watching merchants that are adopting these payment systems. Moves by merchants to alternate forms of payment could cut into their revenue stream.
Despite the financial benefits, biometric payments add another level of complexity for merchant CIOs that will ripple from the storefront to the corporate data center. Business-technology leaders considering biometric payments must acquaint themselves with the costs, implementation challenges, and concerns about security and privacy. Executives need to assess the organizational and operational impact of the fingerprint-payment system technology.
Fingerprint-payment transactions in the United States can now be found at many gas stations, as well as liquor and convenience stores. For example, the Express Mart in Arnold, Mo.part of privately held Home Service Oil Co.recently introduced a gas-price promotion to entice customers into using biometric payments.
But the most visible early adopters have been retail grocery merchants, including Albertson's, the second-largest U.S. supermarket retail chain; Minnesota-based Hornbacher's; Missouri-based IGA stores; and Piggly Wiggly Carolina.
In mid-2005, Piggly Wiggly began enrolling customers in a pilot implementation of fingerprint payments at 85 stores. The service grew to include more than 25,000 shoppers. "The primary justification was to provide our customers with a payment alternative that was fast and easy," says Rich Farrell, VP of information services at Piggly Wiggly.
Customers enroll by providing their fingerprint and bank-account number to the merchant, who can link an individual's fingerprint to a credit-card or checking-account number. Merchants prefer linking the fingerprint to checking accounts because it facilitates automated clearinghouse (ACH) transactions that lower payment-processing costs. This is a critical feature: ACH and personal identification number (PIN) debit transactions are far less costly for merchants than credit-card and signature-debit transactions (see chart). To finish enrolling, customers must also select a search code. Once enrolled, customers simply place their finger on the scanner and enter their search code at checkout.
"We're enrolling customers every day and launch occasional promotions to motivate more customers to enroll," Farrell says.
Both customers and merchants find fingerprint-based payment convenient. For starters, card clutter or forgetting the wallet altogether is no longer a problem for the customer. Merchants will benefit from improved sales due to easier and faster checkout, improved loyalty tracking, and reduced fraud risk.
"We conducted a three-month pilot installation to validate the benefits and determine an acceptable ROI," Farrell says. "Lower transaction fees, improved checkout speed, and customers' excitement about the service were the primary reasons the service was rolled out." Piggly Wiggly found the fingerprint-payment option increased customer store visits by 15% and total spending per customer by 12%.
"Each customer using the service saves us at least 25 cents for that transaction, "Farrell says. "On large transactions, we can [save up to] several dollars in fees compared with credit-card transactions."
CIOs charged with exploring biometric-payment alternatives must take an analytical and holistic view of cost, however. First, the infrastructure will require the upgrade and replacement of the point-of-sale (POS) communication infrastructure, as well as the supporting systems. In addition, back-end integration with CRM and inventory-management systems may be needed. For example, in 2004, most major grocery and department stores began implementing large-scale, customer-centric CRM integration projects.
Costs for biometric-payment systems vary depending on the size and scope of the project, but "initial setup costs can be budgeted at approximately $1,000 per shopping lane and include equipment, software, and installation," says Shannon Riordan, director of marketing at Pay By Touch, a provider of fingerprint-based payment technology based in San Francisco. "Depending on merchant transaction volumes, recurring costs range from 8 to 16 cents per transaction."
Additional challenges involve integrating the biometric scanners with front-end readers, PIN pads, and POS systems. For us, "the solution design and implementation were fairly easy," Farrell says. "We wrote software for our POS systems to integrate with the Pay By Touch finger scan and our payment terminal. The biggest challenge was training the store personnel."
CIOs must also consider that consumers worry more than ever about identity theft. In 2005, the Federal Trade Commission attributed 37% of all fraud-related complaints to identity theft. Privacy critics fear that unlike a compromised PIN, which can be reset, a stolen fingerprint could result in permanent loss of identity.
These concerns have both business and technology implications. Business requirements such as re-enrollment will warrant maintaining a copy of a consumer's fingerprint image to authenticate the re-enrollment request. The resulting solution architecture must therefore incorporate encryption and stringent access control to protect the private information.
Biometric systems typically don't store an actual image of a fingerprint. Instead, they store the minutiae templatea mathematical representation of the data points unique to the fingerprint. It's impossible to generate the fingerprint image from the minutiae. Generally, the merchant performs customer enrollment at the store, but the minutiae are stored at the biometric payment provider.
Fears remain that determined criminals could obtain fingerprints from an object such as a glass, compute their minutiae, and use them illegally. Even more committed criminals might generate a prosthetic fingerprint, however unlikely. To protect against such fraud, merchants should require shoppers to provide a second authentication factor such as a PIN. Additionally, imposing spending limits could help reduce fraud. CIOs should take the lead in weighing the benefits of the security measures against the risks.
Because fears of identity theft and loss of privacy continue to undermine customer trust, security-conscious customers will likely hold out from enrolling. To attract these customers, CIOs must address their concerns through the use of secure systems, as well as contribute to ongoing customer education.
"Companies that are considering a biometric payment system will need to work at enrolling," Farrell says. "Customers need to be coached and informed about the service and its benefits. We've used a $5 reward for customers who performed five fingerprint-based transactions. Also, we've given dollar incentives to cashiers who referred customers to the enrollment station."
Biometric payments represent a shift from traditional forms of payment. CIOs adopting fingerprint payments must carefully examine the customer perspective, the technology, and the new way of conducting business. Here are key considerations when implementing a biometric payment solution:
Most businesses are enticing customers with promotions such as a one-time gift, weekly drawings, and discounts. For example, Mid-Towne IGA in St. Charles, Mo., offered a complimentary carton of eggs to customers who enrolled in the biometric-payment program. Similarly, United Package Liquors in Indiana entered biometric-payment customers in biweekly drawings for a $25 gift card.
Retail business-technology executives have the responsibility to evaluate the potential upsides and challenges of biometrics to confirm whether or not this new payment system has a place in their company. To help the business achieve its objectives, the CIO should get involved at the earliest stage of the planning process.
CIOs will get the biggest bang for their buck by initially targeting stores where the infrastructure is obsolete and where the store location and demographics favor early adoption of fingerprint payments. Success will ultimately depend on customer acceptance and perception of the fingerprint-payment solution. That puts the challenge squarely on IT executives' shoulders to ensure the highest levels of security, create a customer experience that garners broad acceptance, and deliver the expected business value.
Nalneesh Gaur is a principal, and William Gilliland is a partner, at DiamondCluster International.
Is your company exploring biometrics? Tell us.
Optimizing point-of-sale transactions with a biometric-payment solution can transform any retail business. But building an integrated biometric system will require concerted planning and execution. Here's how to get started.
Month 1 > Conduct a feasibility study
Month 2 > Adopt an enrollment strategy
Month 3 > Launch the pilot and tweak your plan