Components: Ticket Sales Get Pumped

Elizabeth Whalen

Sales of lottery tickets at ATMs and gas pumps open up new opportunities for states and retailers.

Several years ago, while walking through the lobby of a Florida hotel, Daniel Cage noticed an ATM set up next to a lottery kiosk. He had just finished a conversation about how businesses often focus on finding the next big thing rather than creating value in existing networks.

“And I thought, what a perfect example of a network that could be utilized. And soon after, I had the same thought when I was filling up my car with gas,” he says.

Since then, Cage’s firm, New York-based Linq3, has developed a way to sell lottery tickets at ATMs and gas pumps. Two states, Minnesota and Missouri, are piloting the system, and Cage says other states are looking into it.

The pilots offer consumers the option to buy Powerball and Mega Millions tickets with their debit cards, and the purchase options could lead to increased sales.

Gary Gonder, chief branding officer for the Missouri Lottery, says that slightly more than half of the state’s lottery retailers are convenience stores that sell gas, and he cites National Association of Convenience Stores (NACS) data that indicate 73% of fuel customers pay at the pump and 54% never go inside for any reason.

“We don’t have those customers, and our retailers don’t have those customers,” says Gonder. “Play-at-the-pump will help increase sales for the lottery, and we believe it will help increase sales for the retailers. We also believe their sales will go up in the stores as well.”

Gonder adds that ATMs make lottery tickets available in places they usually aren’t, at locations such as airports and hotels. The purpose of entering these new sales channels is to address what he calls one of the lottery’s biggest challenges: player acquisition.

That challenge stems from the difficulty in growing the number of distribution outlets for lottery tickets, says Michael Tyler, senior director for petroleum marketing for San Jose, Calif.-based VeriFone Systems Inc., which is one of Linq3’s industry partners. The wide range of places that consumers now make financial transactions—from ATMs to taxi cabs—means lotteries have an expanded set of possible ticket-sales points, he says.

‘Key Risks’

Selling lottery tickets at those places, though, requires a set of technologies to work together, including the customer interface, the age-verification system, the payments system, and the lottery’s gaming systems.

“Developing the ability for all those systems to communicate simultaneously was critical,” says Ed Van Petten, executive director of the Minnesota State Lottery. “All this has to be done in a matter of three or four seconds.”

Both Minnesota and Missouri are partnering with Linq3, which operates the customer-facing system and the age-verification system and interfaces with the payments system and the lottery system, says Cage.

“We are certified to generate the Powerball and Mega Millions numbers as well. So we’re taking payment, we are generating the numbers, and we’re communicating that to a lottery infrastructure,” he says.

States can choose how to verify a purchaser’s age, Cage says.

“One of the ways we do it is a driver’s license swipe, but that’s only applicable in states that have magnetic stripe driver’s licenses,” says Cage. “We also have a database solution.”

Depending on the state, that option asks customers to enter their birth date, zip code, and potentially other data that, when matched with their debit card information and checked against a set of databases, determine whether they’re old enough to purchase a ticket. Cage says the system returns a very high rate of positive verification for people 18 and over.

Bernard G. Collier, director of risk management for the Missouri Lottery, says age verification is one of the key risks lotteries need to address when considering selling tickets through these automated channels. The other is ensuring all the transactions are properly recorded and processed.

“You have to make sure you have the connectivity between that system and our gaming system,” he says. “You don’t want the person to play and see the ticket is a winner and we don’t have a record of that transaction. We have to be very careful and have backup systems for everything we do. We can’t have a one-point failure system.”

‘Street Fight’

Once the technological hurdles are cleared, retailers will need to be convinced selling tickets this way is worthwhile. Retailers don’t make much money from customers who exclusively pay at the pump: fuel retailers make about three cents a gallon selling gas, says Jeff Lenard, vice president of strategic and industry initiatives for NACS. They make most of their money selling items inside the store. Lottery tickets, which typically pay the retailer a 5% commission, drive traffic into the store.

“And somebody that’s inside your store buying a lottery ticket is probably going to buy something else and is probably a regular, a good customer,” he says. Lottery at the pump “may present some opportunities when there’s a street fight, and there always is, for gas prices. If one retailer is selling lottery at the pump and the other guy isn’t, it may take some pressure off the gas price that day because of the value of convenience.”

Missouri was planning to start its pilot early this fall, Gonder says. It will probably last a year and will include 100 total ATMs, half on the east side of the state and half on the west side, and about 150 gas pumps spread over 15 convenience stores. Each pump has two sides for a total of 300 individual fueling positions.

The Linq3 system doesn’t produce physical lottery tickets in the traditional sense. Instead, they’re stored electronically. The buyer receives a receipt for the ticket, rather than the ticket itself, from the ATM or fuel pump, says Van Petten. Minnesota began selling tickets at ATMs in October last year and at gas pumps in November. The pilot includes nine retail locations with a total of 60 gas pumps and about 200 ATMs.

Retailers can print a promotion on the back of the receipt that encourages people to come into the store, Gonder says.

Play-at-the-pump may also encourage more retailers to sell lottery tickets. Some retailers don’t sell lottery tickets in their stores because the time required to make the sale slows down the line for other customers, says Lenard.

“So if you’re able to take advantage of some of that idle time at the pump and have the customer do the lottery transaction, then you make it faster for everybody inside. You make it faster for the customer, and if the customer doesn’t want to go inside and get a lottery ticket or anything else, you’re not necessarily cannibalizing those sales,” he says.

The retailer earns a smaller commission for selling tickets at the pump rather than inside the store, says Van Petten. In Minnesota, retailers normally receive 5.5% of the purchase price of lottery tickets, but they receive 3% of the purchase price of tickets sold at gas pumps.

“But obviously, the retailer has nothing to do,” says Van Petten. “No inventory, no handling, no time taken or anything.”

Linq3 receives the other 2.5% plus a $1 per-transaction fee paid by the customer, he says. Out of that, Linq3 covers all payments-related costs, including interchange and processing, Cage says. Missouri’s pilot has almost the same commission and fee structure, says Gonder.

In addition to retaining a portion of their typical commission, retailers also receive a portion of any selling bonus.

“So if somebody wins the jackpot, we certainly want the brick-and-mortar retailer to participate in that,” Cage says.

If players win less than $600, the retailer also doesn’t have to pay them.

“On the low-tier wins, anything under $600, those are credited back to that debit card that purchased the ticket, so it makes it a lot easier for the player,” says Wes Harms, information systems manager for the Minnesota State Lottery.

No Visibility

Making those payments presented another technical challenge. The payments system collects a relatively limited amount of data from the player’s debit card, Harms says, all of which is encrypted.

“We had to put controls in place. We don’t have a great deal of visibility into those transactions, and we’re dealing with all encrypted values, so we had to come up with a way to make sure the right people are getting paid.”

Collier doesn’t expect the transition to Europay-MasterCard-Visa (EMV) chip-based cards, which fuel retailers are required to make by October 2017, to have a significant impact on lotteries selling tickets at ATMs or gas pumps. Instead, he expects the EMV switch to mostly affect retailers.

And those retailers could face high costs to make that switch, says VeriFone’s Tyler.

“The cost to upgrade a pump from a non-EMV set of payment attributes to an EMV set of payment attributes can be $4,000 to $6,000 a pump,” he says. “A brand-new pump is anywhere from $12,000 to $20,000, depending on the feature functionality.”

Lottery ticket sales and advertising and media-delivery services can help offset those costs, he says. VeriFone’s Paymedia system can connect with Linq3’s system to sell lottery tickets where available.

Long-Term View

If play-at-the-pump becomes popular, Lenard suggests retailers consider the lower commission, the equipment investment, the potential changes to in-store sales and the potential savings of staff and customer time when determining whether to offer the option.

“Ideas are always interesting, and seeing if they stick or not,” he says. “It’s what does the execution look like and what do the customers think of it? That ultimately determines whether ideas are successful or not.”

One of the reasons Missouri is piloting ATM and gas-pump sales is to keep up with changing payment habits, Collier says.

“We’re moving into an era right now where everybody’s using their debit cards. We have to be responsive to that. We’re also very responsive to who’s going to be our market 10 years or 20 years from now,” he says.

The lottery pays attention to how young people buy not just lottery tickets but also everything else, Collier says. As a result, the lottery is always evaluating new sales channels.

“Is there a potential to do something online? On mobile apps? We’re constantly looking at it.”

The lottery also takes a long-term view of developing these channels.

“We’re hoping that five or 10 years from now, people will be used to getting these at the gas pumps,” Collier says.

Minnesota hasn’t advertised the purchase option because of its pilot-program status; it’s focusing on proving the technology rather than generating or tracking specific sales numbers, Van Petten says.

Lottery ticket sales at gas pumps may be new, but the idea of selling things besides gas at the pump is not entirely novel.

Collier notes that consumers have had the option to buy a car wash at the gas pump for many years, and Lenard cites examples of convenience stores experimenting with selling sandwiches and drinks at the pump.

Finding new sales channels is part of meeting customers where they are, says Michael Lightman, vice president of business development for Sciplay at Scientific Games, a New York-based provider of technology and services to the government authorized lottery. Scientific Games is one of Minnesota’s partners in implementing ATM and gas-pump sales.“People don’t shop the way they used to,” says Lightman. “You have to be where the consumer is. If the consumer is filling up with gas and doesn’t have a plan to walk into the store, you need to be at the pump.”