Smartphone-based transactions represent an opportunity to grow the U.S. card-acceptance market, which largely has become saturated and commoditized because many brick-and-mortar merchants already accept card payments.

As such, ISOs potentially could increase revenue and sign more new merchant accounts by offering smartphone-based hardware and software, observers say. And the introduction of such devices is unlikely to mean trouble for the traditional wireless-terminal market because the two types of devices largely serve separate merchant segments and are complementary, they contend.

“There is a bit of a gold rush” in the smartphone-based terminal market, says Nick Holland, a senior analyst at Aite Group LLC in Boston.

Though the marketing buzz and number of mobile products are growing, details on the market potential and on how many mobile merchants exist are scarce. 

“I’ve seen numbers from 2 million to people quoting 20 million” potential mobile merchants that might purchase the technology, says Bill Ramsey, vice president of business development at Apriva, a Scottsdale, Ariz.-based wireless-payments provider. “We believe it is in the single-digit millions.”

Though the exact market size for wireless terminals may be unknown, the potential for sales does exist, and it is “worthwhile to pursue,” Ramsey says.

The challenge for many ISOs and other resellers of smartphone-based products is finding the mobile merchants.

Potentially millions of merchants could use smartphone-based technology for accepting payments, “but where are they?” asks Michelle McBride, CEO of Pay Bizness, a Baltimore-based ISO. “It’s a new technology” that requires a different approach to finding merchants, she says. 

Cost Concerns

Many mobile merchants, which can include plumbers, landscapers, photographers and electricians, are interested in smartphone-based card-acceptance technology, says Jamil Adair, president and CEO of Merchants First Choice Inc., an El Paso, Texas-based ISO that sells VeriFone Holdings Inc.’s PayWare Mobile service.

Many of the smartphone-based products vendors have introduced include hardware and a downloadable software application that support consumer transactions. Typically, merchants can swipe consumers’ cards using the machines, whose features vary by vendor, with some offering receipt printers or barcode scanners in addition to the card swipe.

The market is ripe because many mobile merchants either do not accept payment cards or they pay relatively high card-not-present rates to process card payments, says Ben Goretsky, CEO at USA ePay, a Los Angeles-based payment gateway. USA ePay in April introduced PaySaber, a portable card-acceptance machine that connects to Apple Inc.’s iPhone and iPod Touch products and combines with a downloadable software application to enable merchants to accept cards.

Many merchants contend it is too expensive to buy a dedicated wireless terminal, Adair notes.

Smartphone-based payment applications and devices are enabling a “much wider group of merchants, typically referred to as micromerchants, to accept electronic payments,” says Paul Rasori, San Jose, Calif.-based VeriFone’s senior vice president of marketing. “In the past, those merchants couldn’t

justify paying for electronic payments. By enabling the cell-phone technology they are carrying with them anyway [to accept card payments], the cost of entry into the payment system is much less costly for them.”

Before smartphone-enabled payment card acceptance emerged in the market, merchants’ only alternative was to buy a dedicated wireless-payment device, which typically includes a higher upfront cost, says Rasori.

A merchant may pay between $600 and $800, depending on the reseller, for a traditional wireless terminal, says Rasori. In addition, wireless devices typically need their own network connections, which may cost an additional $15 to $20 each month, he notes.

In contrast, VeriFone’s PayWare Mobile service includes a free application merchants can download from Apple’s online application store and a card reader available at Apple stores for $149. The reader is free for many merchants if they sign a long-term merchant-processing contract, according to VeriFone.

VeriFone’s suggested pricing plan is a $15 monthly gateway fee and a one-time $49 sign-up fee for merchants with existing accounts. Merchants also pay VeriFone 17 cents per PayWare Mobile transaction. Resellers, including acquirers, set their own rates, VeriFone says. Merchants must purchase the iPhone, which ranges in price from $99 to $299, and an AT&T service contract separately.

Complimentary Markets

Separate markets exist for both traditional and smartphone-based wireless products, contends Scott Holt, senior vice president of business development for ExaDigm Inc., a Santa Ana, Calif.-based terminal maker.

Some merchants, such as concert t-shirt vendors who process a large number of transactions over a short period of time, may find a smartphone-based product does not meet their needs, says Holt. Other mobile merchants that process fewer transactions, such as a plumber who may complete only one or two transactions daily, may find a smartphone-based product more helpful.

Mobile phones are “not designed to be treated in the same way as something built specifically” for conducting transactions, says Holt. Accepting payments is another business tool the phone can perform, but it is not the phone’s sole purpose, he says, noting many mobile merchants use their smartphones’ other applications and features frequently throughout the day and cannot have the phone tied up with constant transactions.

Excerpted from the May/June 2010 issue of ISO&Agent magazine.

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