How acquirers are adapting to the mobile threat

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As trends in payments technology take hold or taper off, it's safe to say that one is firmly entrenched: The shift to mobile and integrated point of sale devices.

Square kicked off the mobile POS trend about seven years ago by targeting micro merchants with a card-swiping dongle attached to a smartphone, a model that by today's standards seems much more bare-bones. But Square's real influence wasn't its technology; it was its sales model, which cut out independent sales organizations and agents in favor of selling payment technology through convenience stores.

Other companies iterated on this model. Groupon, for example, chose to use its internal sales force to sell its Breadcrumb POS devices rather than partner with ISOs. The implication was obvious: As more merchants favored mobile devices, fewer would see a need to work with an ISO.

Traditional acquirers and terminal makers responded to this threat by looking ahead, envisioning a market where off-the-shelf card readers would no longer satisfy small-business owners. That vision is becoming a reality.

In 2017, merchants are demanding more robust technology, providing another opening for terminal makers and ISOs to defend and reclaim their turf. Paul Galant, CEO of terminal manufacturer Verifone, put it this way during the company's first-quarter earnings call: "Next generation devices are the company's future, and those devices will have significant need in the North American market."

While acknowledging that First Data with its Clover series of mobile terminals and Square with its readers and tablet-based POS stations "have done a phenomenal job of creating a new category," Galant echoes the thoughts of the traditional POS providers in making it clear they never had any intention of letting this particular trend fly by them.

"This is a category with global implications," Galant said. "And Verifone's position in this space is that we are a scale player and we will be using that scale to really accelerate the third-party development community interaction with our platform and devices."

A technology driven industry

The common definition of a "mobile POS" device has two major components. One is the dongle attached to a smartphone; the other is a smaller tablet-based or handheld terminal that employees can move around a business showroom, warehouse, outdoor displays, markets, kiosks or at drive-through lines of quick-service restaurants.

"Tablet POS solutions started as higher-end system candidates, but they are now gravitating toward more sophisticated, integrated POS environments," said Ian Stuttard, head of product and innovation at Elavon, the payments unit of U.S. Bank. "These terminals handle business, inventory and employee time management, data analytics and marketing solutions."

Prior to Square introducing its mobile POS system, merchants were using NCR cash registers or standard tabletop legacy terminals from IBM, Verifone, Ingenico or Hypercom [Verifone acquired Hypercom in 2011 and sold its U.S. assets to Ingenico]. The turnover in terminals was accelerated with the EMV liability shift in the U.S. in 2015.

"It's a reflection of how payments have evolved from being a sales driven industry to a technology driven industry," Stuttard added.

Shift in sales

Even with enticing developments in technology, old habits are hard to break.

"Acquirers are still selling the standard tabletop models because they know that equipment works, and many of them are selling the same equipment they have for years," said Paul Martaus, a merchant acquirer consultant and industry researcher.

Sometimes technology stubs its own toe and slows down a process. Many processors aren't up to speed on EMV chip technology, let alone integrated payments, which slows down acquirers looking to equip merchants with "future-proof" terminals capable of EMV and mobile payments, Martaus said.

"A pretty big segment of acquirers is going to the iPad-based devices because merchants want to take advantage of that mobility, but in those I talk to, that would still be a minority," Martaus added.

However, terminal makers are seeing a broader shift. Scott Holt, vice president of marketing and product at Ingenico, says his company has seen sales shift to 60% of device sales attributed to next-generation devices used by small merchants, and 40% for the larger terminals and retailers.

The trend has really taken hold in the last couple of years, with more mobile POS providers entering the field, Holt said.

"From our perspective, in 2015, we were shipping 1.3 million terminals in traditional form factors," he added. "The customers still wanted reliability and security, which is always top of mind."

But as iPad-based POS systems attracted more merchants, the lines between the small and large clients' needs became more blurred and number of mobile devices sold has risen, Holt said.

It was becoming increasingly clear that a terminal able to add software for services above and beyond payment acceptance was finding willing buyers.

NCR introduced its NCR Silver mobile- and cloud-based POS during this transition, falling into a marketplace that was primed for innovation.

"Just like locusts, the average innovation and replacement cycle for a POS is seven years," said Chris Poelma, president and general manager of NCR Silver. "When you look at all of the new technology being developed, plus that seven-year cycle on POS replacement and the EMV liability shift in 2015, those three things created a perfect storm for change."

And how did the landscape look after the storm cleared?

"Merchants are absolutely embracing it and they are running to it," Poelma said of the smaller, mobile POS units. "The reason is that mobile devices are everywhere, and in some countries you are more likely to see people who have a mobile phone than they are to have a permanent residence."

It's a pretty straightforward process for a small business owner to begin using a mobile POS system that is likely to be similar to the mobile devices he personally uses, Poelma added. "It lowers the complexity and the cost is palatable because it is part of an ongoing revenue model."

What comes next

The effort to lure and service small merchants may never be more apparent than with Verifone's new e285 mobile POS designed to connect with phone data, WiFi or Bluetooth.

"This product is an example of how we're innovating to support the cashless evolution in many regions of the world and provide another option for merchants … that can do it all-in-one without dongles, smart device pairings or cards," said Glen Robson, executive vice president and global head of solutions at Verifone.

It represents another shift in the mPOS market, one in which the terminal maker's device simply looks, feels and acts like another smartphone in the user's hands.

Merchants in advanced markets are seeking deeper customer experiences while replacing their traditional terminals with something designed to look and operate more like consumer products, Robson said.

A role for ISOs

It wasn't that long ago that independent sales organizations and resellers were being warned that their business model would become obsolete as mPOS makers like Square and Groupon sold their products through retailers or their own in-house sales staff.

The message had an underlying meaning: If the ISOs and acquirers didn't understand the technology, the traditional payments ecosystem could sputter and leave the door open for third-party providers.

For the most part, the same acquirers and ISOs hearing those warnings are still around. They've adjusted quite nicely.

"ISOs in many cases are embracing it faster than some of the long tail of the primary payment processors that are not," said NCR's Poelma. "The big 10 processors in this country are all over it, but after that, some are not as quick to embrace the new technology."

ISOs are essentially sales-driven and customer-focused organizations, so they had much at stake if they let payments technology pass them by. Essentially, they took a look at integrated payments and liked what they saw.

"ISOs have been very adaptable and had much success in this environment," Elavon's Stuttard said. "They understood that it was going to be a very technology-driven marketplace and customers were going to be more demanding. And they have reacted accordingly."

Ingenico doesn't service small merchants directly, instead using the ISO and acquirer channels to offer services and products through Ingenico Mobile.

"All of the acquirers and largest and midsize ISOs have focused on the need to become true technology providers and not just the people who start merchant accounts and roll out a terminal," Ingenico's Holt said.

Ultimately, all of the latest trends have resulted in terminal providers, software developers, ISOs and acquirers moving in the same direction.

"As dynamics change, our partners are telling us they want technology added on the front end and technology added to the POS," Holt said. "It's more about being a technology provider now than ever before."

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