Tablet-based point of sale and other integrated payment systems are advancing quickly, but there are some obstacles in the road to dominationparticularly for providers that didn't plan ahead for EMV-chip cards in the U.S.
Most mobile point of sale systems are like those popularized by Square: simple, inexpensive magnetic-stripe card readers designed to work with many kinds of smartphones and tablets. These vendors disrupted the merchant acquiring market by providing technology off the pegs of pharmacies and office supply stores. But the simple, cheap approach to sales may not last as the EMV-chip standard makes the less secure magnetic-stripe readers obsolete.
"For some of the earliest developers of tablet point of sale systems a few years ago, some did not fully believe that the EMV migration would stick," said Michael Misasi, a research analyst at Mercator Advisory Group.
A quick look at attitudes within the acquiring industry suggests ascendency for tablet point of sale systems. Citing merchant acquirer and ISO polling from the Electronic Transaction Association and Goldman Sachs, Mercator published a report this week stating that more than 72% of respondents believe tablet point of sale systems are the biggest risk to traditional point of sale providers a much larger threat than cloud-based point of sale systems, which came in at 23%, and smartphones at 21%.
Also, about 42% of respondents said the technology's ability to integrate payments with other services poses a risk to traditional point of sale terminals. Integration is seen as a much larger threat than overall value (23%) or better function (19%).
"It's really impressive with how quickly tablets have caught on," Misasi said, noting that among small to mid-sized businesses tablets are popular because the devices are easy to useand also because of the value added by internet connectivity. "The tablets can run software for things like electronic loyalty programs that replace punch cards. And if it's a restaurant or café they can have a menu system that tracks employees' time and can do a lot of things besides just taking payments."
The trend toward integrated points of sale has fueled a wave of M&A in the traditional acquirer industry, since incumbents are being forced to open their checkbooks to quickly build out integrated merchant services for tablets and other devices.
In the past year, First Data acquired marketing company Perka, which it added to Clover, a tablet point of sale system that First Data purchased in 2013. Also last year, Vantiv purchased Mercury Payments and Heartland acquired several companies that offer integrated and digital payment services, such as Leaf, MCS, TouchNet and Sapient.
The trend toward integrated point of sale technology has been particularly hard on ISOs, according to Mercator, noting ISOs are locked in a "downward spiral" of price competition because they are the most commoditized providers in the merchant acquiring value chain. The ISO sales and service business model no longer resonates with merchants, which are increasingly aware of the rapid pace of innovation in point of sale technology, Mercator reported.
The market for tablet payments is still relatively small. About 12% of merchants with between $100,000 and $10 million in annual revenue accept payments with a tablet, according to Javelin Strategy & Research.
But that's poised to expand, said Mary Monahan, executive vice president and director of mobile for Javelin. "Mobile point of sale systems have many advantages over traditional point of sale, such as lower cost of hardware, easier application, simple fast integration, no merchant account required, low turndown rates, low cost acceptance rates, portable access, improved user interface, consumer wallet integration, etc.," Monahan said.
But it's not all smooth sailing for point of sale technology developers. The EMV migration is accelerating in the U.S., boosted by the data breaches over the past year and the card networks' affirmation that the October 2015 EMV liability shift for companies outside of the petroleum industry was still in play, Misasi said.
"The biggest thing that has to be figured out by the tablet point of sale industry is the transition to EMV," he said. "Some of the providers have already come out with new models that support EMV, but for others it's going to be a change."
The EMV migration is splitting the mobile point of sale market. Relatively early players such as Square are now adding the technology, others such as PayPal only offer EMV acceptance outside the U.S., and newer entrants such as Poynt have touted EMV acceptance early on.
Many developers may also have to charge for EMV acceptance after offering magnetic-stripe payments for free. The good news for tablet point of sale developers is price does not seem to be major factor. Less than 12% of the Goldman survey respondents felt "competitive pricing" of new integrated point of sale technology was a threat to traditional point of sale providers, far behind other factors such as merchant services.
"For the micro merchants, where Square started, the blended processing rate will still be more competitive than what the merchants could get from traditional acquirers. But as you go up in merchant size, the EMV-compatible solutions will get more expensive," Misasi said.
EMV is a short-term hurdle that means slightly higher prices, but it will also bring better security Monahan noted. "There are other hurdles with tabletsthey can break and they easily 'walk away,' but these can be overcome," she said.