Let your fingers do the paying
Wal-Mart, Costco weigh merits of allowing customers to pay by scanning fingerprints: report
By Matthew Boyle, FORTUNE writer


NEW YORK (FORTUNE) - Buying groceries with the touch of a finger could be closer than you think, if new research touting the benefits of biometric payment for retail giants like Wal-Mart, Target, and Costco is anything to go by.

The report, by Sanford Bernstein analyst Emme Kozloff, found that the use of so-called "electronic wallets" reduces the potential for fraud and identity theft, speeds up the checkout process, and most importantly, lowers transaction processing fees for retailers, improving their bottom line. A 20% reduction in processing costs at big-box discounters like Wal-Mart over the next several years could result in a 3% to 4% increase in earnings per share by 2009, the report estimated. "We believe both Wal-Mart (Research) and Costco (Research) are looking at it closely," Kozloff wrote. (Both companies declined to comment.)

Already in use at supermarket chains like Albertsons (Research) (which yesterday agreed to be sold to a group that includes CVS and Supervalu), Cub Foods (part of Supervalu), and privately held Piggly Wiggly, biometric systems are just one of several emerging payment technologies that retailers are currently experimenting with. Others include self-checkout (widely deployed at Home Depot), contactless cards like J.P Morgan Chase's "blink," and so-called "near field communication," which involves waving your cell phone, say, near a reader.

Here's how biometric payment works: To set up an account, customers scan their fingerprint at an in-store kiosk, enter their phone number, and then submit checking and credit card account information. To make a purchase, they place their finger on a scanner at the register, enter their phone number, and choose how they want to pay (credit, debit, or checking.)

The mere mention of bio-anything raises the hackles of privacy advocates, and this process is no exception. Vendors like San Francisco-based Pay By Touch, however, which recently acquired BioPay, its main rival in this space, insist that the fingerprint image itself is not stored. Instead, tiny measurements from the print are encrypted and stored, making it impossible to recreate a full fingerprint.

The benefits to customers are twofold. First, it offers a speedier checkoutó70% faster than traditional forms of payment (unless the reader can't identify your finger, so keep those hands clean.) Second, it enhances security. Of the nearly 10 million cases of identity theft annually, according to a 2003 Federal Trade Commission survey, 13% occurred during a purchase transaction. "Biometric payment systems make conducting transactions safer for consumers," writes Kozloff.

But it's the benefit to retailers that could really drive adoption. Transaction fees paid by retailers for credit and debit card payments have soared of late, and can account for about 20% of pretax profits for a low margin retailer like Costco, Kozloff estimates. Retailers hate these fees (also called "intercharge fees") and have filed numerous lawsuits against Visa and MasterCard, some of which have attained class action status.

Paying by fingerprint is one way to lower these costs. With a biometric system, retailers can "steer" customers towards using their checking account, which incurs much lower transaction costs than credit and debit cards do. AMR Research's Scott Langdoc estimates that switching from credit cards to checking accounts could shave the net cost of a transaction by anywhere from 40 cents to 70 cents. "That's big money," he says.

Within three months of a pilot program at four Piggly Wiggly grocery stores, 15% of its customers who normally did not pay by cash enrolled in the Pay By Touch system. Those users increased their store visits by 15%, which translates into an additional 7,350 transactions a year. Not only did they come more often, those shoppers also spent 12% more on groceries.

"Grocery stores operate on such low margins that this makes sense for them," says Don Delzell, a partner at consultancy Retail Advantage.

But biometric is not without its concerns, chief among them privacy. The privacy issue "remains a deep bone of contention and will mitigate against pervasive usage," says David Robertson, publisher of The Nilson Report, an industry newsletter. One industry source calls biometric readers "clunky." And if enrollment is confusing or time-consuming, few shoppers will even bother.

"It's a leap of faith when retailers install the system," says industry consultant Ron Margulis. "But once shoppers are used to it, it can really take off." And it might even take retailers' sluggish stock prices along for the ride. Top of page

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