Fast Food Cooks up a Winning Card Recipe
Lauri Giesen
Faster tender times and lower acceptance costs have hiked the number of quick-service outlets
taking plastic to 54% of all stores from just 10% three years ago. And now gift cards and heavier
promotion could juice those numbers even more.
When it comes to quick-service restaurants accepting electronic payments, a lot of attention has been given
to the speed at which transactions can be completed at the checkout counter and whether card acceptance
can increase the traffic volume and ticket sizes enough to justify the cost of accepting cards.
Yet for at least one major QSR chain—Burger King—the decision to roll out credit and signature debit
card acceptance came down to one simple consideration: customers want to use their cards to pay for
purchases. “We did a lot of consumer testing and found that consumers made it clear that they wanted to be
able to use their credit and debit cards to pay for purchases at our restaurants,” says Julian Gomez, director
of operations, services, and programs for Miami-based Burger King. Even more important to the national
chain was that the consumers who most wanted to make electronic payments were individuals in the 18-to35 age group—a prized demographic profile for those in the quick-service business.
That’s not to say other factors are not important. For years, consumers may have wanted to use their
cards to pay for burgers and fries or buckets of chicken, but two obstacles held back electronic transactions:
the cost to the restaurant of accepting credit cards and the time it took to complete transactions. Now both of
those concerns have been mitigated enough so that 54% of QSR outlets in the U.S. today accept at least
some cards for payment, compared to only 10% three years ago, according to statistics from Visa USA. And
that percentage is expected to continue to grow in the next two years. Nearly all the corporate-owned QSR
outlets already accept credit cards, and there is a number of programs—often sponsored by the corporate
stores—to get franchisee-owned locations onboard as well.
The increasing transaction volume on cards is starting to pump significant volume through the networks.
Visa saw $11 billion in credit-related QSR sales in 2004, up 67% from 2003. Similarly, MasterCard saw a
60% gain in dollar transactions made on its cards in 2004 at QSR outlets.
’Convenience Rates’
On the cost side, there has been a two-pronged attack by proponents of card payments—getting the cost of
acceptance down and raising the benefits of card acceptance so that the benefits exceed the acceptance cost.
Both efforts appear to be successful.
There are two major components to the cost of card acceptance: the cost of installing terminals and the
discount rate retailers pay on each card-based transaction. The overall trend toward lower prices on terminals
has benefited the QSR market. Meanwhile, interchange rates were altered several years ago by Visa and
MasterCard to create a special category for merchants with low average ticket sales. As a result of this new
category, QSRs and several other retail groups that have average tickets of less than $25 pay so-called
convenience rates, which are typically lower than what other retailers pay.
That is not to say interchange rates do not remain a concern. Because these rates consist of a flat cost plus
a percentage of the transaction, the flat cost is a big issue to the QSR market. And while the convenience rate
on paper appears to be less than what other retailers pay, the total cost of card acceptance to the QSR industry
as a percentage of sales is still higher than in other retail industries, Burger King’s Gomez says. “Other
industries that we have studied are only paying about 1% to 1.5% of purchase price in card fees while we’re
playing more than 2% of the ticket size. It’s the fixed component of the interchange rate that causes us to pay
more,” says Burger King’s Gomez.
And like retailers in all industries, Burger King is concerned about recent increases in interchange rates.
“We can’t control this cost, and we have concerns about the cost in the future as interchange rates seem to be
going up,” Gomez notes.
Despite this concern, Burger King and other QSR chains are aggressively going ahead with plans to get
more locations accepting cards. And part of that enthusiasm for cards relates to benefits like higher average
tickets and heavier traffic. Gomez admits that the increase in sales on cards generally compensates for the
increased cost.
Visa and MasterCard studies show that the average ticket size of QSR purchases made with credit cards
exceeds that of cash transactions—about 30% more according to Visa. Furthermore, studies show that foot
traffic increases when a particular outlet begins to accept card payments. Cards boost traffic between 4% and
7% at each location that adds card payments to its offerings, according to statistics from MasterCard.
Some skeptics, however, question the proposition that customers with cards are actually purchasing more
food—upsizing an order or tacking on a dessert—than customers who are constrained by the cash in their
wallets. Rather than buying more, the chains say there is some anecdotal evidence that many customers are
just using their cards when paying for large group purchases and paying cash for individual purchases.
Nonetheless, there appears to be some evidence that the larger tickets on cards are indeed the result of
incremental sales. “Because there is a corresponding lift in total sales at those outlets that accept cards, we
have to conclude that at least some of the customers with higher tickets are actually buying more,” says
Anthony Gracia, vice president of retail small ticket markets for MasterCard. Additionally, a consumer study
conducted by First Data Corp. found that 36% of customers said they would purchase more with electronic
payments than they would with cash.
Furthermore, FDC also found that 63% of customers said they would visit a QSR that accepts cards more
often than those that accept cash only.
Time Is Money
Besides the cost of card acceptance, speed of transaction has been a big issue for the QSR market. In an
industry where speed is its biggest asset, shaving a few seconds off each payment is critical. “QSR magazine
did a study that showed for every 10 seconds that an outlet can cut from the process of serving a customer,
there is a gain of $1,000 per month in revenue,” says Paul Rasori, vice president of marketing for VeriFone
Inc.
And while in the past, card acceptance was believed to increase the time it would take for a purchase to
be completed, some argue that today card acceptance can be even faster than cash. Card transactions that
once took 20 seconds or more just to get an authorization and then needed a few more seconds to get a
signature now can be completed in their entirety in less than five seconds.
Two developments in recent years have gone a long way to speed up customer card payments at QSRs—
faster authorization technology, especially as it relates to the use of Internet Protocol technology, and the
elimination of the need for consumers to sign a receipt.
In a concession partially to the QSR industry, the major card companies have all dispensed with the need
for retailers to get signature authorizations on small transactions. For AmEx, Discover and MasterCard, the
limit is $25. For Visa, it is $15. For the QSR industry, that automatically reduces transaction times on most
sales by a few seconds—even more at the drive-through window where QSRs do 65% of their business.
“Without the need for a signature, card payments can be even faster than cash,” says Bruce McElhinney,,
senior vice president of merchant relations for Visa.
Also improving the speed of payment is the technology behind the authorization, and IP has been a big
factor here. VeriFone’s Rasori says that QSR outlets using IP connections are getting authorization times of
between two and three seconds, compared to 20 seconds or more on traditional dial-up terminals. “Most of
the top 20 QSRs are looking to replace existing dial-up equipment with IP equipment,” he says. “These
decisions are coming from the top corporate level.”
And many chains are moving toward IP technology anyway, especially at franchisee-owned locations
that use the IP connections for other purposes. “A lot of franchisees are not installing IP just to facilitate
payments. They find they can use the systems to communicate with the corporate headquarters on a number
of issues, including ordering and sales-data flow,” says Visa’s McElhinney.
Even without IP, newer terminals have been able to reduce payment times. Just using dial-up terminals,
Burger King has reduced its authorization times from an average of 23 seconds to between 10 and 13
seconds, Gomez says. “We’re looking at the opportunity to reduce those times even more by going to
Internet technology,” he adds.
Dancing on PINs
Despite all the talk about credit cards, in actuality the vast majority of fast-food card payments are made on
debit cards, especially signature-based debit cards. For example, Visa numbers show that 74% of its card
payments at QSRs are on its check cards. This consumer preference for debit over credit has typically been
attributed to the fact that debit cards overall are more commonly used on small-ticket purchases. But Burger
King’s Gomez also points out that many of the consumers using cards for payments are in that prized 18-to35 demographic profile. Many of the younger members of that group don’t have credit cards, but do have
debit cards. Somewhat in line with the Visa numbers, Burger King reports that a little more than 60% of its
card transactions are on debit.
But when debit cards are accepted, it is often only signature cards, those debit cards with the Visa and
MasterCard logo that are often treated like credit cards. While the card associations can no longer force
retailers that take credit cards to also take signature debit, the two products are still typically sold together.
PIN-based debit is usually an add-on and requires the additional expense and time associated with using a pad
for personal identification numbers. Indeed, FDC estimates that only 1.5% of total payments made at QSRs
are on PIN-debit cards, compared to 6.7% made on Visa and MasterCard (both signature debit and credit
cards combined) and 1.6% made on AmEx and Discover cards.
Some payments experts, however, believe that PIN debit will take off in the QSR market soon. Gregory
Holmes, senior vice president, enterprise customer development for First Data, notes that Star System, a
major electronic funds transfer network owned by FDC, was set to implement May 1 a new interchange rate
for the low-ticket market that is likely to spur PIN debit acceptance in QSRs.
“PIN debit does not slow down the transaction, and in many cases, it is still faster than cash. Restaurants
that do not accept PIN debit may be turning away a significant portion of their customer base that wants to
use these cards,” Holmes says.
However, just offering a lower discount rate may not be enough. Burger King’s Gomez says his chain is
talking to First Data about a PIN debit test, but it has concerns about the time it takes for customers in a
drive-through lane to enter PINs.
“It’s not a problem in the stores, but we’re concerned it could really slow things down in the drive-through
if the server has to hand over to the customer a PIN pad and then have the customer enter a PIN and hand the
device back,” Gomez says.
Indeed, drive-through windows create special challenges for card acceptance. One way that has been
suggested to speed up payment at the drive-through is to install self-service card swipe devices near the order
board instead of having customers turn their cards over to a clerk when they pick up their food. That way,
customers can swipe their cards after they place their order and the authorization would be completed by the
time they got to the pick-up window.
But not everyone is a big fan of placing the terminal at the order board. VeriFone’s Rasori says these
terminals certainly work well, but there are other logistical issues that need to be resolved. For example,
customers often change their order by the time they get to the pick-up window or there is confusion about
what was ordered. Most customers prefer having the clerk help them with the payment, he says.
Burger King even tested the device, and while Gomez says the technology worked, the chain is holding
off on rolling out the systems. “We’ve found that accepting credit cards at the pick-up window today has not
slowed things down enough to justify a rollout. We’re looking, however, at how PIN debit might change
that,” Gomez says.
Another technology being considered by many franchisees is radio-frequency cards (page 26).
MasterCard, Visa, and AmEx are pushing a payment method that allows customers to carry cards, or even in
some cases cellular telephones, that use radio signals to transmit payment data. That way, the customers
never have to hand the card over to a clerk; they just wave it near the POS terminal.
While many of the big chains are piloting the cards in a few locations as part of MasterCard and AmEx
tests, the McDonald’s chain recently went so far as to announce its intentions to roll out MasterCard’s
PayPass program nationally. “Paypass is ideally positioned for the QSR market,” says MasterCard’s Gracia.
“And it especially suits the drive-through market because customers need only wave their cards near the
checkout window.”
Wired And Ready
Much of the emphasis today is on getting the franchisees onboard. That is an important step as FDC’s
Holmes notes that 85% of the 135,000 QSR outlets in the U.S. are owned by franchisees. They can range in
size from families that own one to two outlets to publicly traded companies with hundreds of outlets.
The corporate parents can encourage, but not force, the franchisees to accept card payment. One way
many of them are encouraging the franchisees is to set up national deals with terminal vendors and
processors so that even the smallest franchisees can get the same pricing as the corporate-owned locations.
Burger King, for example, has an agreement with Chase Merchant Services and FDC for North American
stores. As a result, 90% of the Burger King outlets in the U.S. now accept credit and signature debit cards.
Besides offering the franchisees a turnkey system to install, Burger King is presenting them with a strong
business case. “When we show the franchisees the incremental business we’ve been able to generate from
accepting cards at our own stores, they’re generally interested,” Gomez says.
And despite the growth in credit and debit card acceptance, most payments experts don’t expect the
trend to end here. “Now that we have a significant portion of the point of sale terminals at QSRs in this
country wired for card acceptance, the outlets are going to look at what else they can do with these
terminals,” Holmes says. “Now that they’re wired, they’re looking at accepting [electronic benefits], gift
cards, and a host of other electronic payments.”
The most popular of those electronic payments may be gift cards. Holmes says a number of QSR chains
are looking closely at the gift card program at Starbucks, a national coffee chain. There, the chain has found
that many of its gift cards are being purchased not just as gifts, but by regular customers who use the gift
cards as spending cards. In these situations, the purchasers of the cards put value into cards and then use the
cards to pay for their own purchases.
Holmes notes that an FDC subsidiary, Value Link, which specializes in gift card programs, announced
last fall a national gift card rollout with the Jack-In-The Box chain. Other QSR chains are likely to follow, he
says.
Beyond additional payments, many believe a future development associated with card acceptance will be
greater promotion. Many of the big chains have held back promoting card acceptance because they didn’t
want to promote the feature and then have customers go into locations that didn’t accept the cards and become
disappointed.
“Before most of the promotions were driven by a handful of franchisees,” says Holmes. “The
corporations did not have large enough penetrations to be able to engage in national promotions. But as we
see penetration numbers get over 85%, we’ll start to see some national advertising of the fact that they accept
cards.”
Indeed, one chain, Wendy’s, has already begun a national promotion of its card acceptance.
And others are expected to follow. “While we have put out promotional materials in individual stores, we
have yet to communicate on a national level that we accept credit cards. Once we get to full compliance,
we’re likely to incorporate the message into our national advertising campaigns,” Burger King’s Gomez
says. Without advertising, acceptance levels typically begin at about 3% and grow after a few months to an
average of between 10% and 15% of sales, he says. With advertising? It’s hard to say, but it looks like some
fast-food chains are about to test the upper limits of usage.