As merchants prepared to swap out their aging magstripe terminals for modern EMV card readers, some acquirers hoped that this widespread demand for equipment would flood ISOs with revenue from terminal sales.
But with the Oct. 1 deadline for EMV adoption well behind them, ISOs report that they have yet to see the glut of business that some had predicted. What's more, some acquirers say the new equipment has proven to be an added expense, as opposed to a profit center.
In the two years leading up to the EMV deadline, Steve Eazell, who at the time was working as a senior-level payments industry executive, predicted that EMV hardware upgrades would be a boon for the marketplace.
Eazell, the president emeritus of the Western States Acquirers Association, says that ISOs have experienced at least an uptick in equipment sales, as the deadline motivated several retailers to switch over their terminals, although not as much as expected. And it's still too early to measure just how much of a revenue bump has occurred so far.
"Yes, we have seen it. But the downside is I don't think it's quite what we hoped," says Eazell.
Eazell chalks up the limited gains to several factors, including margins that continue to shrink and because retention is based on what niche an ISO serves and how well that ISO is taking care of merchants. "The fact is that most of these ISOs have had to deliver these terminals to merchants for free," he says.
For a long time, larger ISOs have given free terminals to merchants as an incentive for them to sign up for or keep a merchant account. They continued that practice when it came time to replace EMV terminals. But the result was that small and medium-sized ISOs felt compelled to do the same.
"Competition has created an environment that requires them to do that to maintain the status quo," Eazell says.
Some acquirers decided from the get-go not to pin their hopes on a big payday from EMV terminal sales.
Jeff Marcous, president and CEO of Dharma Merchant Services in San Francisco, says he didn't really expect to see a windfall from the nation's switch to EMV.
"We've never looked at this as a new revenue opportunity for us," he says.
Dharma doesn't provide free terminals, nor does the company lease equipment. Rather, the company offers terminals to merchants at discounted prices.
However, any additional equipment sales were offset by the costs Dharma incurred to buy the equipment wholesale, as well as the need to provide additional product support. The company spent about $40,000 to purchase and encrypt new terminals.
"When you factor in all the costs, it's probably a break-even proposition," Marcous says.
The first three months after last year's deadline proved to be hectic for Dharma, and there was a lot of misinformation among merchants who were not accustomed to the new technology.
"October, November and December tied up our customer service department like we've never seen in the history of our company. It's pretty much been a boondoggle," Marcous says.
One bright spot, Marcous says, is that the industry's switch to EMV gave merchants one more reason to shop around for a new merchant service provider. "We definitely have had new prospective merchants mention EMV when they contact us. So in that respect, it's been a positive," he says.
Banking on loyalty
Ken Musante, president of Eureka Payments, says the company has approached terminal replacement as more of a long-term investment and retention tool than a moneymaker.
"It's certainly a significant cash flow hit. And we're really not seeing any significant increase in revenues because of it," Musante says.
Eureka Payments has always relied on the free terminal model, and that continued to be the case when merchants needed EMV terminals. Eureka spent about $60,000 on new equipment for the EMV upgrade, and most of this cost was to maintain new clients. The company went out and replaced merchants' terminals at no cost to them, as long as those merchants agreed to sign a document saying that the terminal belongs to Eureka.
"What we are doing is getting terms from them, so that they do need to stay with us," Musante says. "But there's no additional monthly revenue."
Eureka Payments is betting that by providing its customers with free terminals, merchants will return the favor by keeping their accounts with the company. Time will tell whether that turns out to be the case, Musante says.
"This is what we were expecting, which was a big cash outlay in exchange for loyalty down the road," Musante says.
What the company didn't expect, though, was how few new merchant accounts they've signed since the EMV deadline. There have been some incremental gains, but nothing substantial as of yet, Musante says.
"We actually thought we would have seen a bigger lift from new customers, and we're surprised we haven't seen that," he says. "Maybe it's still coming, but it hasn't been a huge number."
The good news, Musante says, is that this year the company has noticed an uptick in clients who are reaching out to them for additional accounts.
Following the money
Even though EMV might not be the gravy train some ISOs had hoped for, analysts still see moneymaking opportunities for ISOs.
Payments consultant Linda Perry says acquirers still have a shot at some added revenue from smaller merchants who are more likely to pay retail prices for terminals, as opposed to large retailers who will buy their terminals wholesale.
"They're the ones who are going to have to upgrade, and there's yet to be enough volume in the small merchant category to make money," she says. "The smaller guy is going to pay $400 for a $200 terminal."
Amidst the industry's excitement over equipment sales, analysts continue to beat on the drum of differentiation.
ISOs shouldn't overlook the importance of offering products and services that go beyond price, as the margins continue to expand for ISOs that adopted a diverse strategy, says industry analyst Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group LLC. "The ones just carrying a Verifone terminal in their backpack are not going to pick up a big win, in my view. It's the ones that have something that excites the merchant at a deeper level."
ISOs should consider which niche services and offerings, such as back-office integration, they can offer to help merchants overcome their day-to-day problems, Ablowitz says.
"That's how it's really being solved," he says. "And EMV is just a compelling event to make a change."