Public Gaming July/August 2016

July/August 2016 // PUBLIC GAMING INTERNATIONAL //

So what does all of that mean? If enabling cashless results in

an 18% lift in sales, that is going to equate to another $630 in

sales per week from that individual machine—that delivers an

additional $189 in profit to the lottery and $38 in commis-

sion to the retailer. A 2.15% blended rate for banking fees on

both the incremental and the cannibalized sales means a cost of

around $29.

Were the Lottery to bear these fees, the investment of $29

will return $189 in additional profits to good causes—a very

compelling case for cashless. In sharp contrast to that, if retail-

ers have to pay the banking fees, they would lose the majority of

their commission earned on those incremental sales.

Of course, we are not limited to all-or-nothing in the distri-

bution of the fees between the lottery and the retailer—lotteries

could also introduce a model where the retailer earns a slightly

lower commission percentage on cashless sales and the lottery

covers the rest of the banking fees.

Regardless, lotteries are encouraged to view cashless costs as

an investment and embrace the expanded payment options,

driving incremental sales and higher profits to good causes.

Cashless card brand

(Visa/MasterCard) rules:

Lotteries should also be aware of the

rules in place by Visa and MasterCard.

Several lotteries have stated a prefer-

ence to shift the costs to consumers by

charging them a convenience fee. While

this is quite common across state gov-

ernments (for driver’s licenses, tuition,

tax payments, etc.), it is important to re-

member that those are mandatory gov-

ernment transactions—we are in the en-

tertainment business. And again, if the

goal is maximizing profits and engaging

players, lotteries will not benefit by rais-

ing barriers.

Setting aside the philosophical debate, there are also chal-

lenges within the card brand rules. The rules, as they stand now,

provide the ability to charge a fee for the convenience of a chan-

nel, but do not allow addition of a surcharge only to card trans-

actions. So, while you may impose a convenience fee on all pay-

ment methods through a specific channel, you may not assign a

surcharge to debit or credit cards when cash has no fee. Lottery

does not qualify for the right to impose a surcharge similar to

other areas of state government.

A second card rule that impacts the cashless business model

regards requiring minimum transaction amounts for card trans-

actions. While setting a minimum is an effective way for lotter-

ies to manage the all-important average transaction amount and

reduce the impact of the blended rate, this is quite limited un-

der Visa/MasterCard rules. A minimum is permitted for credit

cards; however, it can’t be any higher than $10. As for debit card

sales, lotteries are currently not permitted to enforce a mini-

mum transaction amount.

Public policy and the need for a lottery industry

cashless strategy.

Last, but not least, any discussion of cashless for lotteries must

include an honest discussion of the public policy implications of

accepting credit cards. Regardless of what a state statute allows,

each lottery needs to have a thoughtful conversation with its

stakeholders and decide whether the lottery should implement

debit-only sales or also accept credit cards for lottery purchases.

Conclusion:

While we still have much to learn and prove about the benefits

of cashless, it represents a significant opportunity for the lottery

industry to engage the next generation of players, support retail

partners, and drive incremental profits for good causes. This is

a shared need across all lotteries and their technology partners

which will benefit greatly from a concerted industry effort to

share learnings and best practices, and engage the payment net-

works to optimize the positive impacts of enabling cashless pay-

ments across lottery retail networks.

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EXHIBIT

When lottery is part of a larger shopping basket, only the variable fees apply when looking at the marginal

cost of accepting credit transactions

Clerk-Activated Transactions:

Incremental cost of lottery to an existing shopping basket

DEBIT Card:

$0.21 + 0.05%

The Rate:

Variable: ........................0.05%

Fixed:.............................$0.21

The Impact:

$1 purchase: ..................22.0%...............0.05%

$10 purchase:................2.2%.................0.05%

$25 purchase:................0.9% ................0.05%

CREDIT Card:

$0.05 + 1.43%

The Rate:

Variable: ........................1.43%

Fixed:.............................$0.05

The Impact:

$1 purchase: ..................6.4%.................1.43%

$10 purchase:................1.9% .................1.43%

$25 purchase:................1.6% .................1.43%

Debit card only

Weekly Sales:................................................$3,500

(self-service per unit)

Sales Lift:.......................................................18%

Cannibalization of Cash:............................. 20%

Average Ticket:............................................$15

Banking Fees: ............................................... 2.15%

Lottery Profit................................................30%

Retailer Commission ...................................6%

Incremental Sales

Profit / Commission

Banking Fees

Net

$630

$189

$38

($29)

$160

EXHIBIT

Hypothetical comparison of Return on Investment for lottery and retailer if banking fees are included

Self-Service:

Should lottery bear cost of banking fees?

LOTTERY

RETAILER

Self-Services Assumptions:

Exhibit 3: Hypothetical comparison of Return on Investment for lottery and retailer if

banking fees are included.