Article

Vcom = more units, more functionality

7-Eleven's Vcom project, the highest-profile effort to date to add advanced functionality in a kiosk-ATM convergence setting, is about to seriously ramp up, with the convenience store chain preparing to launch another 1,000 Vcoms in the next six to seven months.

August 5, 2002

Though 7-Eleven's (NYSE:SE) 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 Corp. (NYSE:NCR), which supplies the hardware as well as its APTRA software and related services to 7-Eleven.

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 Vcom kiosks 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.

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 kiosk 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 traditional ATMs and ATM-kiosk convergence terminals, he said.