Article

Finally, more functionality

Though 7-Eleven's Vcom project has yielded the biggest impact to date in the effort to add advanced functionality to an ATM/kiosk platform, a total of fewer than 100 terminals in three-and-a-half years hasn't exactly set the industry aflame. Now, however, the convenience store retailer is preparing to turn up the heat, with plans to launch another 1,000 Vcoms in the next six to seven months.

August 5, 2002

Though 7-Eleven's Vcom project has yielded the biggest impact to date in the effort to add advanced functionality to an ATM/kiosk platform, a total of fewer than 100 terminals in three-and-a-half years hasn't exactly set the industry aflame.

Now, however, the convenience store retailer is preparing to turn up the heat, with plans to launch another 1,000 Vcoms in the next six to seven months. If successful, that deployment could grow to 3,500 terminals by the end of 2003. 

Early Vcom partners American Express (which provides ATM services) and Western Union (money orders and money transfer) were joined in 2001 by Certegy Check Services (check cashing) and Verizon Communications (long distance and prepaid) and earlier this year by Cyphermint (e-commerce).

In addition, some of the Vcom partners say they are close to finalizing agreements with other deployers to offer their services through ATMs or, as in Western Union's case, are launching deployment programs of their own.

Money, money

The partner strategy has been a key to the Vcom program, with 7-Eleven recruiting partners to help defray some of its upfront investment. By signing long-term agreements with 7-Eleven, partner companies get the exclusive rights to offer their services through Vcom kiosks. In exchange, they pay placement fees, a percentage of transaction fees and additional reimbursements. The retailer said last month that it had received more than $220 million in placement-fee commitments from its partners.

The total cost of the Vcom program is not known, but the price of a single terminal -- which is outfitted with such extras as a bunch note acceptor, check scanner and second thermal printer -- is at least $40,000, according to NCR, which supplies the hardware as well as its APTRA software and related services to 7-Eleven. Though the retailer will likely receive generous volume discounts, as is typical with any large-scale deployment, the deal is still widely believed to be one of the most expensive ATM contracts ever.

Yet Brady Giddens, 7-Eleven's director of new business development and e-commerce, said the Vcom program will pay for itself by generating incremental fee revenue as well as, perhaps more significantly, by helping 7-Eleven attract new customers and differentiate itself from the rest of the c-store pack.

Intended audience

The retailer is making a bid for the business of both the banked and the unbanked -- those who lack traditional banking relationships.

"These customers without bank accounts are all currently being serviced somewhere else. We think if we can get them into our store by providing something they want, such as check cashing, it's likely they'll also buy a fresh sandwich, soft drink or beer," Giddens said.

While the unbanked population, which the Federal Reserve has estimated at 13 percent of American households, was the initial target for Vcom, Giddens said those with banking relationships are also using the kiosks. Of those cashing checks at Vcoms, for instance, about half have bank accounts.

Of sites and selling

Noting that the average value of checks cashed through Vcom is about $280 and fees charged for the service average about 2 percent, Giddens called check cashing Vcom's "killer incremental application."

Yet John Gillies, general manager of Certegy Transaction Services, said that check cashing volumes at the 94 pilot Vcom locations in Florida and Texas did not meet Certegy's original expectations, which were based upon strong numbers from the original Austin, Texas Vcom location.

The past year's pilot has proven the importance of both marketing and site selection, said Gillies, who noted that volumes improved after marketing campaigns were bolstered in the past three months.

Giddens said that 7-Eleven's advertising of the Vcoms includes broadcast and radio spots, fliers and other in-store materials, direct mail pieces sent to targeted demographic areas and customer incentives such as waiving the transaction fee for the first check cashed. The retailer also used in-store "greeters" to walk customers through unfamiliar transactions for the first month or so, borrowing an idea from the early days of ATMs when many financial institutions had employees demonstrate how the new machines worked.

The retailer is also tweaking its Vcom site selection criteria, Giddens said, largely by focusing on the broader demographic profiles of areas in which stores are located rather than individual store performances.

While Certegy and 7-Eleven have agreed that check cashing will not be offered at Vcom locations where transaction volumes do not support it, Gillies said, he believes there's a bright market for automated check cashing and other advanced ATM functionality.

Certegy is in discussions with several financial institutions and at least one large supermarket chain, Gillies said, and expects to be involved in beta tests of automated check cashing by year's end. Banks were emboldened by 7-Eleven's announcement of the Vcom expansion, he said, and those who want to maintain their retail ATM locations are looking to add more transactions to their machines in order to pay the higher rental fees that many retailers are now demanding.

Behavior modification

Neil Katkov, an analyst for Celent Communications and one of the authors of Celent's research report "Advanced-Functionality ATMs: The Next Generation," said that 7-Eleven's bid to serve both the banked and underbanked populations with advanced financial services makes sense. However, he said, it remains to be seen whether customers will change their behavior patterns to use the Vcoms.

"Customers aren't used to walking into a 7-Eleven to do transactions like bill payment, money transfer and check cashing," Katkov said. "The thing about advanced functionality and ATMs in the U.S. in general is there are a lot of interesting applications out there, but it's a matter of getting people to use them."

Katkov said he believes that large supermarket chains have an edge over 7-Eleven and other c-stores because customers are already accustomed to being able to perform financial transactions such as money transfers at their customer service counters.

"I think it's much more logical for supermarkets to create a kind of synergy with their customers," Katkov said. "The already banked customers are accustomed to using ATMs in supermarkets, and they may pick up on some of the additional functionalities. The underbanked go there to buy food, so they aren't making a special trip to take advantage of these services."

Moving those transactions from behind the counters to ATM/kiosks also provides a more compelling business case for supermarkets, Katkov added. While 7-Eleven sells money orders behind the counter (more than $4.5 billion's worth a year, according to the retailer), it does not offer any of the other services available via the Vcom.

A logical move, Katkov said, would be for 7-Eleven to partner with large regional financial institutions looking to expand their footprints outside of their traditional geographies.

Giddens hinted that such a strategy may be in the works. Noting that 7-Eleven plans to announce several new Vcom partners in the next four to eight weeks, he said that bill payment, automobile insurance and bank services such as deposit taking are among the applications being considered.

New kind of impulse buy

The newest and perhaps most unusual Vcom application to date, set to launch before year's end, is e-commerce functionality that will allow customers to purchase goods and services online. This will allow 7-Eleven to leverage what is already a mainstay of its business, the impulse buy, in the Vcom world.

"We don't envision people leaving home and coming to 7-Eleven expressly to buy a book," said Giddens. "But if they cash a check and receive money, maybe they'll want to buy a book while they're there."

While the retailer's original plans involved using its existing distribution infrastructure to deliver products to 7-Eleven stores where customers could pick them up, Giddens said that idea has been temporarily tabled because of its undue complexity.

"That's still part of our long-term vision," he said. "But in the short-term reality, we'll be running our program as a standard e-merchant would do it," delivering goods to customers' homes.

Perhaps the most significant twist to the e-commerce part of the program is technology created by partner Cyphermint that allows customers to pay with cash, an option heretofore unavailable to online shoppers. In addition to those without bank accounts or credit cards, Giddens said the cash option will appeal to those consumers who prefer not to reveal financial information online.

Pat Lally, Cyphermint's president and chief executive officer, expects that eventually about 40 to 50 companies in perhaps a dozen broad categories such as "airlines" and "florists" will be part of the Vcom program. Participating companies will pay a commission on products sold through the Vcom, and in some cases customers will also pay transaction fees.

Lally said that Cyphermint has spoken to parties as diverse as American Airlines, which is interested in allowing its customers print e-tickets at the Vcoms, and the state of Florida, which is interested in selling fishing licenses.

Giddens said that in most cases Vcoms will ultimately displace the traditional ATMs located at 7-Eleven's 5,300 U.S. stores. The most notable exceptions will be stores where transaction volumes are high enough to support both kinds of terminals, he said.

New entry

While Vcom has become the standard by which all advanced functionality projects are measured, Western Union has introduced its own ATM/kiosk hybrid which it calls ACMs, or automated cashier machines. Western Union, which is owned by First Data Corporation, last December partnered with Global Cash Access (GCA), another First Data subsidiary, to introduce five of the terminals, which offer check cashing, money transfer and money orders in addition to standard ATM transactions.

Jay Giesen, Western Union's senior vice president of alternative distribution, said initial results from these machines, which are located at four HEB grocery stores and one Kmart in south Texas, have been "extremely positive," so much so that the two companies will roll out at an additional 20 locations in Phoenix and Las Vegas next month. New services such as bill payment also will be added, Giesen said.

The business case

Like the Vcoms, the ACMs feature cash acceptors so that transactions can be conducted with or without bank cards.

For users who pay for transactions with cash, any change is issued as a money order. "We spent a lot of time trying to come up with the right solution" for change, Giesen said, noting that eventually change may be placed either on a stored value card or in a "virtual account" that users could access later.

GCA owns and manages the terminals and provides the check cashing and back-office support, while Western Union provides the money transfer and money order services. The two companies pay rental fees and/or share transaction revenues with retailers, Giesen said.

All of the functionalities are linked, Giesen said, so that users can cash a check, purchase a money order and transfer funds, all in a single transaction.

Giesen said Western Union believes the ACMs will serve as both complements to its existing agent locations and as new distribution points at sites that cannot support traditional Western Union outlets. The ACMs are a "natural evolution" for many of Western Union's retail partners who want to streamline and automate these transactions, he said.

Exit interviews with users showed that many of them preferred the privacy and added convenience of conducting the transactions at the kiosk, Giesen said. In addition, all of the transactions are currently available in English and Spanish, with the capability of adding other languages.

The technical side

Transaction software developer Infonox provides a platform that supplies switching, routing, monitoring, reconciliation and settlement capabilities for the ACMs. Infonox CEO Safwan Shah said the use of the inclusive platform makes it quicker and easier to add new functionality by eliminating some of the challenges associated with working with multiple vendors and software licenses.

"The value proposition is extraordinarily simple," Shah said. "You don't have to go to three different vendors and talk about integration."

Infonox also provides a feature called Active Verifier that is used during the check cashing enrollment process to help identify users, Shah said. The user's driver's license or other photo ID is scanned and uploaded into the back-end system where it is compared with a real-time photograph taken by a camera at the machine.

"We are simulating a bank teller environment where the teller can look at the person's face and their ID at the same time," Shah said, thus reducing the potential for fraud.