The perennial question for ISOs these days is how to combat the squeeze on margins and profits in the merchant card processing business. After all, even though relationships, consultative selling and good service are powerful tools, leveraging them into real profits is an uphill battle unless you have a truly differentiated product. Yet card processing is increasingly a me-too type of commodity.
An emerging category of payment processing technologies will make a difference for savvy ISOs over the next two or three years. These technologies are based on biometrics — that is, positive identification of customers based on their unique characteristics, like the patterns of their irises, faces or fingerprints. Biometrics was once only the stuff of science fiction; now it is moving into the marketplace and offering merchants new weapons against fraud and inefficiency.
The way it works depends on the technology being used. With facial or iris recognition, the customer looks into a camera that takes a snapshot of the customer’s face or the iris of the customer’s eye. With fingerprint scanning, the customer puts a thumb or finger onto a small electronic fingerprint scanner. The customer registers once (supplying his or her name, account information and a sample biometric); when the customer returns to conduct a transaction, the point-of-sale system just compares the customer’s biometric against the one on file.
Here is an example using a check-cashing application. Many convenience store operators leverage their foot traffic with a lucrative side business in cashing payroll checks for a percentage fee. It’s a good business, but the retailers face big risks every time they cash a check. Color scanners and copiers make it easy to create replicas of bona fide checks. On the Internet, users can obtain software that will generate authentic-looking driver’s licenses and other IDs — and, of course, fake IDs were available on the street long before the Internet age.
What merchants need is positive identification of the customer and his or her check-cashing history. Fingerprint scanning devices offer low cost and small size together with reliability. Once a customer is registered, the merchant has a positive identification when the customer returns and presents his or her fingerprint. The system identifies the customer from among all registered customers in less than two seconds. In addition, the fingerprint data is stored in the vendor’s central database, so bad check history associated with a biometric is shared among merchants.
For the customer, there’s no more need to produce identification and there’s less time spent standing in line. For the merchant, the system dramatically reduces check fraud. Several merchants using biometric identification systems to cash third-party checks report the virtual elimination of check fraud. Jim Spiropoulos of Dumm’s Market in Riverdale, Maryland recalls a man who came in to cash a check, then turned tail and literally ran when he saw the store required a fingerprint scan. The man left the stolen check behind, enabling Spiropoulos to alert local officials. “We think this clearly shows the deterrent power of the system,” says Spiropoulos. “Prior to our implementing this system, we probably would have cashed the check and been burned.”
Even for merchants who already have a POS system in place for authorizing checks, the biometric system is a major advance. Existing systems are typically not set up to validate third-party checks — and in any case, with the rapid turnover of employees at many establishments, it can be hard to ensure that complex check authorization procedures are followed. The simplicity and expediency of the biometric system makes it a far more natural part of the cashier’s workflow.
Beyond fraud reduction, the system gives the merchants additional benefits:
- Faster transactions and thus faster throughput in the checkout lane
- Greater customer loyalty
- Less occasion to turn legitimate customers away
Where the biometric POS vendor sells through ISOs, the systems present compelling benefits for ISOs, as well — much like in the early days of merchant card processing. For each installation, ISOs collect a markup on the initial system cost, plus a portion of the monthly fees paid by the merchant. Because the systems have not saturated the retail market, an ISO can make the sale based on understanding and meeting the merchant’s needs, rather than competing mostly on the basis of price, as in the card market.
Perhaps equally important, the new generation of biometric products gives ISOs a new tool to reverse the attrition of merchants from their portfolios — and at the same time, an attractive “foot in the door” with new prospects. Moreover, becoming involved with biometric POS now will put the “early adopter” ISOs at the forefront as new capabilities emerge in the systems and as they become part of the retail mainstream.