Are You Taking Advantage of Your Debit Card System …Or Is It Taking Advantage of You?

The family entertainment center and amusement industries are not immune to “bad deals” even though we are mostly fun-loving people whose mission is basically to make people smile. It’s sad to say, but “buyer beware” also applies to us. Deals that are “2Good2BTrue” are in fact, too good to be true! Knowing how to sharpen your antenna to alert mode and spot the red flags is something we all need to be experts at, especially in our world full of “bogus buzz” and “fake news.” To stay competitive, every deal we enter into must be a fair deal for both parties, and every assumption we make needs to be “reality checked.”

When it comes to debit card systems, are you taking advantage of them or are “fake industry news” and false assumptions causing the system to take advantage of you?

There is a lot of accounting information available through debit card systems.

However, when reviewing a client’s game reports and POS/Card Statistics/Inventory Reports, I find –– more often than not –– that the data can be very misleading, mainly because as with computer systems, the old adage still applies: Garbage in = garbage out. Decisions made (or not made) based on flawed data are often bad decisions, and none of this is the fault of the debit card system!

As I often do, I’m going to relate two stories to help drive this home.

Story #1: “Who Should Own the Debit Card System If a Revenue-Share Games Operator Is Providing the Games?”

In this story, the revenue share games operator offers to purchase and pay for the debit card system. Wow! This deal sounds “2Good2BTrue!”

Negotiating the deal, the games vendor says to Bob, the FEC location owner: “My company will pay all of the costs for the debit card system and will pay you 50% of the game play “cash” shown on the system’s activity reports, after all of the costs for the prizes redeemed are first subtracted. We’ll also handle loading the debit cards into the kiosks and collecting the cash from the kiosks.” What a great deal for Bob, right? But is this deal “2Good2BTrue?”

Background: Bob wants to have 50 games in his FEC. He will purchase all of the prizes and be responsible for staffing the redemption prize center.

Bob has made a business decision to have his games vendor purchase and own the Brand X debit card system. His reasons are simple: The debit system cost is approximately $60,000, including one kiosk that alone costs $8,500, and his games vendor has offered to provide that debit card system for “FREE” as part of a five-year exclusive agreement. In addition, the games vendor will maintain the system and provide all the necessary reports to Bob and his staff on a weekly basis. That will save Bob from having anything to do with the system and will save him the labor cost of having his staff learn the system.

Year 1: The 50 games gross $500,000 (approx. $10,000/week or an average of $200/week/game) according to the debit card system’s cash column in the games activity report that Bob receives. Each week Bob loves to look at how much money the games are making. Bob feels he has a good handle on the games operation. Life is good.

Definition: “Float” (symbolized by the floating bills above) is the amount of money and redemption points that remain on all of the outstanding debit cards. Industry statistics show that 6%-9% of total money put on the cards is never used or redeemed.

 

What Bob Doesn’t Know

The actual ‘cash’ that is reported by the kiosks, POS at the front desk, and from preloaded cards for the birthday parties is averaging $10,800/week. The additional $800/week ($40,000/ year) is known as the “cash float” or “float.” The float is enough to pay for the debit card system in one-and-a-half years.

The float exists because not all of the money put onto the debit cards is spent. Customers take their cards home or throw them away. The ‘cash’ that is reported in the debit card system report that Bob receives is only based on game play. In Bob’s case, the float is 8%. Over the five-year term of the agreement, the float is $200,000.

Reality Check: 50% of that $200,000 –– or $100,000 –– actually belongs to Bob! But he never receives it and he does not know it exists.

Sacoa

And Now the Rest of the Story…

Four-and-a-half years pass and Bob is considering owning his own games and it comes time to inform the games vendor of his decision. Bob calls a few game suppliers and has them review his games list and game revenues to make recommendations. He discovers that his game vendor has indeed supplied him with decent games throughout the past years but, of course, missed a few of the workhorse games (according to The Redemption & FEC Report). No big deal here. Bob is the loyal type and would prefer to buy at least half of the games from his current games vendor, as these games are already on-site and he could get a good deal and also save shipping costs. And so starts the negotiation process….

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The games vendor, in this case, does not want to lose this account and is naturally pushing for an agreement extension of three to five more years. The negotiation shortly gets out of hand as tensions increase between the parties.

Bob soon discovers that he does not have any ownership rights to the debit card system. Of course, the games vendor knows this and uses this for leverage. Negotiations cease and eventually the games vendor winds up picking up his games along with the debit card system servers and absolutely refuses to give any of the data on the servers to Bob. Bob is not in a good position; his only recourse is to initiate a lawsuit to get his data along with how many points and credits are outstanding on each of the tens of thousands of debit cards.

Let’s face it, lawsuits take years so Bob must find a way to start all over with a new debit card system, hopefully from the same provider, to make the transition a bit easier.

Bob also soon discovers that there are kiosk cash reports and card statistics reports that show the float amounts. Bob was also shocked to learn that his FEC is legally responsible for honoring any customer that returns to play the outstanding credits on their debit cards and to redeem their outstanding points! This total liability comes to $200,000 in cash plus $40,000 in prize points. This is known in accounting as an “accumulated future obligation” or on the street as “the double whammy.” In reality, the games vendor has the float and hopefully, Bob will prevail in his lawsuit – maybe.

So in reality, Bob did not get a “free” debit card system, but in fact had paid for it twice over without even knowing it. And it gets even worse: Bob is 100% responsible for all of the outstanding points that will be redeemed over the next several months and he needs to figure out a way to account for them.

It puts a knot in my stomach when I’m hired to calculate the damages that Bob has suffered by losing all of his revenue and customer data, as well as the chaos it will cause over the next several months after the games vendor picked up all of their games and debit card system equipment.

Note that the Brand X debit card system supplier cannot legally provide Bob with any confidential data without a court order.

Conclusion Story #1:

There is no such thing as ‘free’ on Planet Earth. There are always strings attached to the word ‘free’. Bob now has learned this the hard way. I’ve always been a proponent of having a games vendor and FEC owner like Bob “equally share” in the ownership of the debit card system and both parties learn and utilize the system to market the entire FEC and have every transaction ‘transparent’.

Note that Bob’s FEC did not use the debit card system as a marketing tool for his entire facility or create multi-tier loyalty programs. Bob also didn’t have access to the dozens of reports he and his staff did not know existed, because, of course, his games vendor didn’t offer this information.

Advice to Bob and his accountant: After many years of operation, I recommend putting legal language on the back of each debit card that states that if the card is not used for a period of two years, it will be deactivated from the system. In many cases, this benefits the FEC as it does not have to claim the float as income for that 2-year period, but put it on its books under future liability. Then starting two years after opening, take the cash float as income and continue doing so for each month thereafter. In reality, the FEC is “deferring” the float income for two years. Check with your accountant if this is appropriate for your particular tax situation.

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Story #2: “Knowledge Is Power — Bad Knowledge Is 2Bad4U!”

Steve and Dave, owners of S&D Family Fun Center are the proud owners of a Brand X debit card system that handles a games zone consisting of 70 games which S&D owns. The games gross $500,000 annually. (Not a very strong games average.) Steve is an accountant and his life revolves around numbers. Dave has an operations background and, as the general manager also focuses on promoting S&D and having great customer service. He relies on Steve to make most of the business and financial decisions, but Dave also loves marketing and has put together some fantastic birthday party packages. (Note that owners can pretty much have any background.)

Steve has gone to several industry seminars and knows a little about ticket payouts. He knows that a ticket or point is worth a penny or 1 cent. Steve is sure that the cost of sales in his redemption and games operation is good at 20% of gross game revenues and the debit system reports prove him correct. He was told by his debit card system sales person that the game revenue reported by the Brand X system is always higher than his actual cash because there are a lot of party discounts and bonus and service credits.

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Steve goes by the “cash” column in the reports and Dave is also on board with this.

Steve has been reading about this new game called Knishbowl and he recommends it to Dave as a game they should get. Dave is excited about how he can market this new game on social media. Steve takes a look at his monthly reports and determines that he will trade in Matzoh Ball, a seasonal game whose revenues have been sinking for the past several months. Both are in agreement.

So far so good. Now let’s take a look at how the S&D Redemption Prize Center (RPC) operates. Steve has trained the RPC manager to take a prize’s line item cost and add 7% for sales tax plus 8% for shipping to the number and then multiply the result by three times. As an example, a prize that costs $1.00 would be put on display to be redeemed for 115 x 3 = 345 points.

The Brand X debit card system is using 1 cent as the ticket value in the formula cells because Steve told the system installer that the ticket value is 1 cent. Steve also told ABC Distributing, the company he buys his games from, that his ticket value is 1 cent so when they set the games up each game was left on “factory settings.” (Note that many game manuals also focus on settings based on a 1-cent ticket value.) The stage is now set for the “perfect storm.” (Those of us who have attended Foundations Entertainment University know that marking up the prizes as S&D does produces a ticket value of $0.033 or a third of a cent).

The Big Bass Wheel shows a ticket payout of 30% (as it should) on the debit system’s activity report, but this game really has a ticket payout of 10%. At $1.00 per play, this Big Bass Wheel on average awards 30 tickets. Steve always thought this was proper. He just didn’t know that his ticket value was one-third of what he thought it was. (Steve followed the industry myth that says it is okay to mark up the prize points.)

Steve checked to make sure his invoices for prizes each month came out to be about 20% of his game cash revenues and he always “smiled” as he paid them, assuming he had everything under such great control. Of course, the Brand X system report also showed this to be true. All is well. Steve brags to his fellow FEC owners at trade shows that he is a true veteran and is even ready to present a seminar on how to manage the finances of an FEC.

Okay, but we the readers know better, don’t we?

Manager Mike (seen
here lugging his loot) helps himself to prizes every day –– LOTS of prizes –– severely cutting into profits, but no one notices.

Mike, the Redemption Prize Center (RPC) Manager, that person who checks in the prize orders and looks over the inventory, also has everything under control. Mike has been siphoning off approximately two-thirds of the prizes for the past few years and taking them home in his car each night. No one has caught on…not Dave and especially not Steve.

Not even the games technician, Paul, has a clue because he is consumed with fixing games (and Steve and Dave never taught him anything about ticket value). All Paul is concerned about is how many tickets on average are won per play on each game.

Let’s investigate and see if we can figure it out as I did in about five minutes: 20% of $500,000 is $100,000. The customers are, at most, redeeming only one-third of that or $33,333. We also know from experience that some points are saved and not redeemed or are on inactive cards, so bring that down to $30,000 (the card statistics report will show us that information). That means that $70,000 in prizes are “disappearing” annually (that’s $1,400 per week) right under Steve and Dave’s noses!

And it is much worse than that. Perhaps $300,000 in game revenues are not being realized because the customers are not receiving anywhere near the perceived value they deserve. And remember the Matzoh Ball game? If that game was programmed to have a ticket payout of 30% instead of 10%, it would have generated more money and certainly not been a game that Steve would consider trading in when he did. (By the way, the Knishbowl did not turn out to be a great game. It was a knockoff of another very good game.)

Conclusion Story #2:

Mike needs to be fired and prosecuted. Actually, he needs to be led out in handcuffs right in front of all of the other employees. The right hand always has to know what the left hand is doing. The redemption prize center must be an integral part of closing the loop on all points awarded by the games and all points redeemed. The ticket value is established by one standard formula that is applied to each line item prize cost and must be checked on a weekly basis to make sure it is being followed. The ticket value must be checked that is entered correctly into the debit card system and confirmed from time to time.

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Word of caution: Every time you hear that the ticket value is a penny (1 cent), beware! It rarely ever is!

That’s an industry myth! It takes a lot of effort to actually attempt to have a ticket value of 1 cent. And every time you read a game manual setting page, remember to recalculate all of the manufacturers recommended settings to reflect your actual ticket value.

Amusement Entertainment Management, LLC, we offer a full range of consulting services, including early-stage feasibility analysis, business plan development, funding assistance, and conceptual design and layout services.

What Did We Learn from These Two Stories?

There are many areas within an FEC operation where losses of both revenues and theft of products can occur. These two stories are written to get your attention and alert you to areas that always need to be carefully looked into. A debit card system is a great tool and labor saver when utilized properly.

Hopefully, you all can now truthfully answer the initial question: “Are you taking advantage of your debit card system or is it taking advantage of you?”

Disclaimer: The above stories can and do happen, but hopefully very infrequently. In full disclosure, my company does have one revenue-share location where we own the debit card system. We did this because the location insisted and we wanted to study how this could work. This particular agreement is written to favor the FEC when it comes to birthday party and discount unit credits. The location does not use the debit card system as a tool to market its FEC. The game revenues from this location are well below our industry average.

The language below explains my beliefs and reasons why both parties should jointly own the debit card system when a game revenue-share operator is involved. I have also included a sample of the legal language my company Alpha-Omega Amusements uses in our revenue-share agreements that detail the process for either party to buy out the other’s 50% interest in the debit card system. My company has been using this language (or similar language) since we first got involved with debit card systems more than 20 years ago.

Reasons for the Parties to Jointly Own the Debit Card System

  • The FEC can use the System to operate the entire Facility and not just the games.
  • The games vendor will have an additional $25,000 in its game investment budget if Location pays for 50% of the debit card system) to initially purchase 3-4 additional top quality games and be in good financial condition to guarantee an additional minimum investment in game rotations annually of $6,000.00 on average (one more game per year).
  • Both parties can best use the Debit Card System jointly for promotions, tournaments, and a 3-Tier loyalty marketing program aimed at the entire Facility.
  • Both parties have access to the entire data and both parties take greater pride and care in keeping the System in top operating condition.

AEM’s Legal Language for Buy-Out Of the Debit Card System at the End Of the Agreement (Texas Style)

At the end of the term of this Agreement or any extensions thereof or upon a termination of the Agreement, Games Vendor shall within ten (10) days of such date, provide ______ FEC with a written notice of an offer to ‘purchase’ ______ FEC’s then current interest in the Debit Card System (hardware, software, licenses, wiring/enclosures) based on its respective share of the costs at the time of the original purchase.

______ FEC shall either accept Games Vendor’s offer and pay Games Vendor this amount by certified funds within ten (10) days of receipt of Games Vendor’s written offer or “require” that Games Vendor sell to ______ FEC, Games Vendor’s then current interest in the Debit Card System at the exact ‘same’ prorated amount and that Games Vendor pay this amount to ______ FEC by certified funds within ten (10) days of Games Vendor’s receipt of ______ FEC’s written notice. The maximum time period to complete the transfer of ownership should ______ FEC be the purchasing party, shall not exceed thirty (30) days.

In either case, the selling party shall promptly (after receiving its certified fund payment) provide the purchasing party with a paid invoice showing clear title to the Debit Card System. If ______ FEC shall be the purchasing party and ______ FEC is not purchasing Games Vendor’s games, Games Vendor shall remove from each of the Games Vendor’s machines, the card reader, power supply, harnesses, and circuitry and return said items to ______ FEC prior to the removal of the Games Vendor’s games and related equipment from the Premises. If Games Vendor is the purchasing party, both parties shall cooperate so that ______ FEC receives any and all available collected data stored on the debit system servers that ______ FEC may require to continue the operation of its business. Games Vendor shall also assist ______ FEC in transferring any and all data from the servers to another server owned by ______ FEC or by another games vendor.

RePlay Magazine, March 2017

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