Small business payments are transforming and creating new opportunities for banks, merchant acquirers, and other service providers. Yet, the impact of mobile technology appears to be creating different opportunities than many expected for this strategically important segment. While many companies have focused intensely on consumer payments and mobile wallets, small businesses are being revolutionized on the other side of the counter their point of sale terminals and back-office systems.
Two main trends are driving the changes in small business payments. New technology is enabling a host of new services for small businesses, including tablet-based POS, new card-linked loyalty programs, and cloud-based technologies. That, in turn, drives shifts in the competitive landscape with new entrants disrupting the traditional acquiring base. Players like Square, ShopKeep POS, Level Up and others have become important new players as they deepen relationships with merchants
In response to these changes, small businesses are voicing perspectives on their needs and priorities. McKinseys annual Small Business Acquiring Panel shows major trends shaping the market and mobile commerce. Overall, satisfaction with merchant acquirers is declining as the average rating fell modestly for most acquirers, suggesting frustration with the status quo. In addition, pricing has spiked as a growing concern for small merchants. There is heighted focus on rates and fees for selecting POS and online acquirers over last year and pricing is the largest driver for switching providers.
For mobile payments, small businesses appear to be cooling on consumer-facing mobile wallets. While merchants continue to believe that consumer mobile payments will become mainstream at retail POS over the next three to five years, their own level of enthusiasm for key drivers is moderating. Small business interest for sending offers, increasing convenience, letting customers pay without wallets, and the like is fairly high, but noticeably lower than one year prior.
Increasing shopping convenience, for example, was very exciting for only about one-fifth of merchants in 2013, down from one-third the year before. Moreover, few merchants rate digital wallet acceptance as critical for their business. Notably, this shift in merchant sentiment mirrors a similar trend with consumers.
The real revolution in opportunity for small business payments is occurring not in consumer wallets, but on the other side of the counter. The potential for mobile POS disruption adopting tablet-based or smartphone-based payments in mainstream merchants is high. To start, roughly half of small businesses continue to express openness to trying tablet-based POS. The readiness for adoption in retail locations is also high, with roughly 60% of merchants having single terminal configurations in their stores.
These deployments are much easier to replace than large, integrated multiterminal systems at major retailers. Next, business owners themselves are increasingly managing their establishments with tablets. More than half of small business owners have a tablet and half of this group uses them for business purposes. In short, the leap from owners hands to counter top is not far.
Finally, merchants are clamoring for a range of back-office services to be connected to their payments technology. For most businesses, accounting software, customer management, and business analytics are major areas where they want integration between payment data flow and other business software. Tablet-based mobile POS offerings are greatly expanding the potential to link business software. Square and Intuit, typically seen as rivals, recently announced greater integration between Squares payment data and Intuits QuickBooks accounting software.
With these major trends changing the perspectives of small businesses, providers of small payments services need to recalibrate their strategies or risk losing valuable customers. In particular, four areas call for attention from providers.
First, review current strategy and the importance of small business for merchant services and the broader suite of small business financial services. For some, this is a "must-win" segment, while others can be more cautious. Second, evaluate pricing. With rising concern and margin pressure, a robust pricing framework is required for traditional payments acceptance and new services.
Third, determine an mobile POS go-to-market strategy. While, smartphone-based products are easier for traditional providers to sell, the new business platforms are not as they cover issues outside the typical merchant services sales discussion (e.g., accounting, customer management, inventory software).
Lastly, look for partners that compliment your strategy. For players with distribution strength, new entrants should exhibit a high willingness to partner and many alliances are already forming. For example, Global Payments is working closely with the Shopkeep POS recently announced a distribution partnerships.
Dan Ewing is a senior expert at the global consulting firm McKinsey & Co.