The ability to initiate payments with mobile phones has captured the imagination of many groups, including consumers, merchants, payment card brands and wireless carriers.
But as mobile payment presents new business opportunities for the acquiring industry, it also creates some potential hazards.
Indeed, technology innovation over the past two years has accelerated the mobile market in such a way that many observers predict mobile payments and acceptance will become more widespread this year. But how acquirers fit into the space remains to be seen.
Theoretically, products that support mobile-based card acceptance can help ISOs to secure business from merchants that traditionally have not accepted cards, such as flea market vendors, observers agree. Moreover, acquirers have an ally in terminal makers, with companies such as VeriFone Systems Inc. and Apriva having developed mobile card-acceptance services. Even a newcomer such as Square Inc., which sells a square-shaped card reader, has said it might be willing to work with ISOs at some point (see story).
Square, however, also could become a threat to terminal makers if the company decides to service larger merchants directly.
Also, the deal announced last year between Discover Financial Services, Barclays PLC’s Barclaycard US, and wireless carriers AT&T Inc., T-Mobile USA Inc. and Verizon Communications Inc. to provide consumers payment-enabled mobile phones could freeze out acquirers whose merchants choose not to activate the Discover portion of a card-acceptance package (see story).
Apple Inc.’s long-rumored plans to include Near Field Communication technology in a new iPhone could spark an alternative payments network in which the technology giant provides specialized contactless readers directly to merchants and charges transactions through iTunes, one observer says.
Regardless of all such possibilities, and probabilities, acquirers still face potential new sources of revenue as the mobile-payments market evolves, observers say.
Fit To Be Square
Square has managed to produce more buzz in the payments industry than many of the other fledgling alternative payment companies combined.
Started by Twitter Inc. co-founder Jack Dorsey, the company created a mobile point-of-sale payment-acceptance device that plugs into a smartphone’s audio jack. Square’s POS software operates on Apple Inc.’s iPhone, iPod Touch and iPad devices. It also has a version for smartphones that use Google Inc.’s Android operating system.
Square delayed the system’s rollout to address risk concerns and hardware shortages. With those issues settled, the device appears to be gaining traction with small merchants, at least according to Dorsey. “I think the biggest surprise for us was how people were using it as a point-of-sale replacement,” Dorsey told ISO&Agent sister publication American Banker in a December interview.
“Square is wisely going after a particular segment” of merchants, says Todd Ablowitz, president of Double Diamond Group LLC in Centennial, Colo. “They are very clearly crafting a business around the needs of that new sector.”
Those merchants could be art dealers or consultants who do a few transactions per month or food purveyors whose trucks drive to different locations within a specified area, observers say.
“Square found a segment of merchants that are underserved, and they are going to try to cater to them,” Ablowitz says.
As Square continues to push forward, industry insiders are sending mixed signals about the company’s potential threat to ISOs.
Square offers a nice service, “and I believe it will be successful within certain segments of the marketplace,” says Jamil Adair, president and CEO of Merchants First Choice Inc., an El Paso, Texas-based ISO.
Adair believes, however, acquirers and companies such as his have the advantage over Square based on what they bring to the merchant relationship in terms of additional service and products. “[Merchants] can appreciate the value that we offer in terms of decreased processing costs, exceptional customer service and innovative product offerings that will keep them well ahead of the competition,” he says.
Additionally, “having a direct sales force on the street that caters to a merchant’s individual needs is a priceless advantage ISOs enjoy over a company like Square,” Adair says.
Square is willing to talk to merchant-services sales agents and other distributors, but just not yet, according to Dorsey, who remains unsure how relationships between the company and resellers would work.
“We’re still trying to figure out distribution,” Dorsey told attendees this past summer at the Midwest Acquirers Association conference. “We want to see how [growth] happens organically. Right now, we’re focusing on the technology.”
Richard Crone, founder and CEO of Crone Consulting LLC, believes acquirers should monitor Square’s popularity and any approach that leverages the smartphone as a payment terminal.
Square “can provide a network connection without the need for a middle man,” Crone says. “You might see new networks emerging as a result of the mobile interface.”
Square’s problem at the moment is the lack of a profitable business model, Crone contends. Square’s rate is 2.9% of the sale plus 15 cents, “but they don’t have lower-cost tender options [such as PIN-debit or automated clearinghouse transactions] that they can manage around,” he says.
PayPal Inc. offers similar rates, but the default tender type consumers use in that system is ACH access to a checking account.
“Through that tender steering, PayPal is able to get a majority of their transactions to go through the automated clearinghouse,” Crone says. “If most of the transactions go through at a penny, we’ve estimated their gross margins to be as high as 80%.”
The Durbin amendment to the Dodd-Frank Act, however, could change everything for Square, Crone says. The Federal Reserve Board has proposed limiting debit card interchange at 12 cents per transaction, effective in July.
“If Square can do tender steering and still charge the merchant 2.9%, then suddenly Durbin is their friend,” Crone says.
NFC And Isis
The Isis mobile-payment joint venture AT&T, T-Mobile and Verizon announced in November that will route contactless transactions over Discover’s network will rely on NFC technology to enable consumers to use their mobile phones to pay at the point of sale.
The venture has indicated it will work within the system, Ablowitz says, referring to the merchant-acquiring process. Discover now has more acceptance points thanks to its third-party agreements with merchant acquirers.
Ablowitz expects Isis transactions to involve the traditional transaction trail, which involves merchant acquirers, banks, processors and card brands. That, in turn, would give ISOs an opportunity to include themselves in an emerging market and differentiate themselves from the competition.
“That happens if Isis helps to make this possible and the phones are out there,” Ablowitz says. “This is a chicken-and-egg thing as it is with everything else.”
Ablowitz and Crone both have some doubts about Isis’ potential adoption based on contactless technology’s slow progress.
Lots Of Mouths
“Contactless acceptance stalled at a certain number of merchants because there weren’t enough users using the cards, and not enough merchants signed up,” Ablowitz says.
In turn, ISOs lost interest in contactless because they no longer were adding something of value, Ablowitz adds. “I’m expecting Isis to re-energize that discussion,” he says.
Various entities are trumpeting an NFC revolution, but Crone doubts the technology will win in the end mainly because a business model has yet to be established.
NFC’s primary setback has been how the card brands, issuers, mobile operators and handset manufacturers divvy up transaction revenues, Crone says. “There are a lot of mouths to feed in that model,” he adds.
Crone believes barcode technology will jump ahead of NFC because merchants would not need new hardware at the point of sale.
“Several very well-funded mobile-payment startups have been working in stealth mode for some time now to provide mobile payments at the physical POS with no new hardware required by merchants and financial institutions,” Crone says.
Those systems do not use NFC, he says.
“There will be barcode approaches that are device-independent, [wireless] carrier-independent and bank-independent,” Crone says. “That’s the opportunity, and merchant acquirers should keep on eye on that.”
Crone pointed to successful barcode initiatives from Starbucks Corp. and Target Corp.
Starbucks’ payment application, which works with Apple Inc.’s iPhone and iPod Touch and some Research in Motion Ltd. BlackBerry devices, enables users to pay for purchases by displaying a bar code on their phone’s screen at checkout. The cashier scans the bar code, deducting funds from the customer’s prepaid Starbucks Card account (see story).
Target has a similar system within its mobile app that enables consumers to pay using the store’s closed-loop gift cards. “The barcode is more ubiquitous and easier to get into consumers’ hand and has the advantage [over NFC and microSD cards] in that regard,” says Paul Tomasofsky, president of Two Sparrows Consulting.
Apple could determine NFC’s success. The Cupertino, Calif.-based company long has been rumored to have plans to include NFC functionality in the iPhone, maybe as early as this year (see story).
Crone and others believe Apple has the capability to create its own payments network using the iTunes music service as a way for consumers to pay for goods at the point of sale. Apple could supply merchants with terminals if it decides to use NFC in its phones, Crone says. “That would eliminate the need for an acquirer in that situation,” he adds.
Point-of-sale terminals designed to work with smartphones have helped ISOs gain additional business that likely was not possible without the devices.
Merchants First Choice’s Adair says VeriFone’s PayWare Mobile helped to open “previously closed doors with small mobile merchants” such as flea market vendors.
“The high costs associated with traditional [card-not-present] mobile-payment applications often played a significant role in deterring these merchants from accepting payments,” Adair says.
PayWare Mobile includes a card-encryption sleeve that attaches to iPhones for use in swiping magnetic-stripe payment cards. Users also may perform card-not-present transactions with the mobile PayWare app.
ISOs that do not resell VeriFone’s product, or those from Hypercom Corp. or Apriva, are servicing mobile merchants with their own systems.
Schaumburg, Ill.-based ISO Nelix Transax LLC, for example, developed its own iPhone app and plans to release one for Android-powered devices, according to Matthew Schwartz, the company’s president.
Merchants using Nelix’s app include artists who travel to art shows and sell work. The app also works well for merchants that offer personal services such as landscapers and handymen.
Schwartz anticipates the app will continue to gain traction this year. “It’s clear with the way processing is going, it’s becoming easier and easier for money to change hands with all these devices that are out there,” he says.
John Mayleben, vice president of technology and product development at the Michigan Retailers Association, believes certain merchants still prefer wireless terminals designed solely for card acceptance. “We have more success with the made-for-purpose terminals that happen to be wireless versus devices that marry to your smartphone,” Mayleben says.
The perception among merchants might be that made-for-purpose terminals are more durable, Mayleben says.
Such devices represent a form factor “that is more ergonomically appropriate, maybe faster and more secure in the sense you are going to drop it on the floor and kick across the room on accident” compared with a smartphone device, Mayleben says. “There is still a value proposition to that format.”
Schwartz agrees. “There are still environments like a doctor’s office where you still need a made-for-purpose terminal,” he says.
Despite the buzz mobile payments has generated, observers do not anticipate mobile devices to replace cards in the near feature.
“The world is used to using plastic,” Nelix’s Schwartz says. “It’ll be a long time before that goes away, maybe the next generation.”
No payment type in history has completely gone away, Ablowitz says. “You still have coins and even the barter system,” he says.
Plastic’s demise is difficult to predict, Ablowitz says. “I think what’s more likely at some point is that phones will have so much utility that you’ll see less value in accepting a card for payment,” he says.
Crone views the conversion from plastic to mobile devices as more likely because “mobile payments are disruptive technology, meaning you can go from cards to phones very quickly,” he says. Mobile devices also have the capability to continuously engage the consumer “any time, any where and for any thing.”
As such, observers believe ISOs should explore any opportunity related to mobile payments and acceptance. “The market is at the cusp of explosion,” Schwartz says.
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