Franchise Update Magazine Issue II, 2011 | Page 34

Grow Market Lead

Consumer
data

What’s ahead

By Tom Epstein

Cash or Credit?
Tracking the changes in how consumers pay

F

ranchise Payments Network
processes payments for more
than 120 franchise chains
across the retail, restaurant,
service, and lodging sectors. This makes
us uniquely positioned to provide a snapshot of the economy in franchising. Over
the next few issues we are going to drill
down and decipher what we are seeing
in payment trends in the franchise space,
with the goal helping you make better
operational and marketing decisions.
Let’s begin with a 30,000-foot look at
how consumers pay for transactions in
franchise businesses.
Payments Accepted
Type

2005

2010

Cash
21%
19%
Checks
28%
18%
Credit cards
25%
24%
Debit cards
13%
21%
Other*
13%
18%
*Other: ACH, prepaid gift cards, and EBT; gift card
volume for 2010 was 10% higher than 2009; EBT
doubled in 5 years.

Here’s what consumers typically
spent in franchise businesses last year,
by type of payment. In general, the
forms of payments with lower average
ticket size are increasing, and those with
higher average tickets are decreasing.
Payment types, 2010
Type

Cash
Checks
Credit cards
Debit cards
ACH
Gift cards
EBT

Ticket size (avg.)

$32
$82
$75
$37
$110
$32
$29

Drilling down

• Same-store sales. In 2010, same-store
sales were up 6.7% over 2009, in contrast to 2009’s 8.1% dip from 2008. The

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to grow—PayPal, Google, and Bling. You
will likely even see Apple get in the game.

Franchiseupdate Iss u e II, 2 0 1 1

increase in 2010 was driven primarily
by two verticals: healthcare and service
industries (handyman, plumbing, etc.).
Same-Store Sales, by Vertical
(2010 vs. 2009)
Healthcare
Hair salons
Services
Lodging
Spa (tanning, gyms, etc.)
Restaurants (all)

+32%
+4%
+23%
–7.5%
–15%
–2%

Types of payments

Overall, we have seen a shift away from
credit use to other, more economical
payment types over the past few years.
• Credit card processing volume in
2010 was down about 0.5% from the previous year—the first time that credit card
processing volume in the U.S. declined.
Banks tightened credit limits of cardholders in the last half of 2009 and 2010 as a
result of the Credit Card Accountability,
Responsibility, and Disclosure (CARD)
Act of 2009. This has driven consumers
to more of a cash mindset.
• Debit use (both PIN and signature)
increased over this same period by 8.9%.
ACH use by our customers increased
over this same period by 35%, as more
merchants are relying on recurring payments to reduce their processing costs.
• Checks. Traditional check usage is
pretty much nonexistent in our portfolio
since most prefer to accept only signature or PIN-based debit at the point of
sale. Check use is still widespread as a
means to pay bills and for B2B invoicing.
• Mobile payments will continue
to explode, and service companies will
continue to adopt this tech nology. Restaurants will finally begin to go mobile
to take advantage of the swiped rates.
• Alternative payments will continue

Sen. Dick Durbin (D, Ill.) has introduced a bill that would limit debit fees
to merchants (capping transaction costs
at 12 cents, versus today’s average of 56
cents for signature and 23 cents for PIN).
This should be good for merchants, who
should be able to push more transactions
into the debit buckets and save processing fees, right? I don’t think so.
Remember what happened with the
CARD Act? This was one of the worst
things to pass during a down-turning
economy as it slowed commerce even
further. Banks immediately reduced the
“open to buy” on pretty much all cardholders (less credit = less sales). Card issuers
are also the card acquirers, so they lost
money on the consumer side and raised
interchange on the merchant side by the
most in history (higher cost of goods and
services to consumers = less sales).
That’s why I think the Durbin bill
will actually have a reverse effect than
intended and create more credit and fewer
debit transactions. Why? The banks that
issue free debit cards with each account
are the ones making the lion’s share of
the debit interchange today. Under this
bill, those banks will be losing around
70 percent of the revenue they enjoy
today. I think the days of “everyone gets
a free debit card” are over. Banks will
not be giving these out any more, and
the ones that do will attach some pretty
substantial consumer fees. So while the
merchants would like to take them because of their lower transaction cost, the
fact is there will be fewer debit cards in
the marketplace and consumers will be
less likely to use them since it might be
cheaper for them to use their credit card
(which the banks will be pushing because
of their higher revenue). n
Tom Epstein is CEO and founder of
Franchise Payments Network, an electronic
payments processing company dedicated exclusively to helping franchisors and their franchisees improve system performance, increase
revenue, and reduce expenses. Contact him
at 866-420-4613 x1103 or tomepstein@
franchisepayments.net.