Cashless Customers

Cashless customers hold riches for retailers

Elizabeth A. Harris and David Gelles

Monday, 19 May 2014 | 9:32 AM ETThe New York Times

Standing in line at Starbucks, customers are presented with an array of options beyond just flavors and foam: They can pay with cash, credit, debit, a Starbucks card or with their mobile phone in two different ways.

That list is expected to grow in the coming years, not only at Starbucks but also at retailers around the country, and an enormous hacking of customer data at Target that was revealed five months ago has only intensified the pace of change in the way Americans pay for goods.

Usually, the conversation about where to go from here is presented narrowly, either in terms of the security of new cards or perhaps the convenience of paying by phone. But behind the scenes, there are other issues in play, including the jealous guarding of customer data. And there is an enormous amount of money to be made, especially for businesses catering to the cash-free consumer.

SeongJoon Cho | Bloomberg | Getty Images

A barista scans a barcode on a customer's smartphone at a Starbucks.

"There is money at stake all around the room, whether it's the banks and payment processors or the retailers," said Suzanne Martindale, a staff lawyer at Consumers Union who specializes in payments. "It's a battle between the two parties." Every time a customer pays with a credit or debit card, the retailer pays a fee to have the payment processed. According to the Nilson Report, a payment card trade publication, merchants in the United States spent $71.7 billion on these fees last year. 

The most immediate change will occur with EMV, the technology that uses an embedded chip to protect against counterfeit cards and can also require a PIN to keep thieves from using stolen cards. Widely used in Europe and elsewhere, EMV is considered more secure than magnetic strip cards mostly used in the United States. At the end of April, Target said it would speed up its introduction of chip-and-PIN technology on all its branded credit and debit cards and would be fully equipped by early next year.

For their part, Visa and MasterCard are pushing EMV technology, and have instituted new rules that say retailers will bear more fraud liability by the end of next year if they do not have the capability to process such cards. Some retailers are hoping that the move to EMV cards would reduce interchange and other processing fees, with more competitive and potentially cheaper networks that process PINs instead of signatures, or eventually from savings if fraud rates declined."Banks and networks for years have claimed that a significant component of interchange is the cost of fraud," said Mike Cook, assistant treasurer atWalmart. "So one would hope with the investment merchants are making to implement EMV or chip technology, as fraud goes down, that interchange would go down."

Retailers have higher hopes for savings that might come with mobile payment. In some places, those savings are already a reality.

Take Starbucks. There, customers can use their phone to pay for a latte or biscotti by loading money via the company's app onto a Starbucks rewards card. The app entices customers to return with free drinks, and it keeps the lines moving quickly, all of which is good for business. It also saves Starbucks money, a spokeswoman said. Instead of paying for 10 cups of coffee individually, say at $1.75 each, customers can put $17.50 on their phone just once — which means Starbucks has to pay only one transaction fee, not 10.