Cover Story: Targeting the Traditional POS

By Kevin Woodward

With the invasion of smart phones and tablets, the iconic payment terminal—and the entire point of sale—is getting a new look. Are the traditional terminal’s days numbered?

Perhaps no other device serves as an icon of the payments industry like the point-of-sale terminal. Sitting on a merchant’s countertop, the device with its magnetic-stripe reader is the conduit for billions of credit and debit card transactions and millions in transaction revenue funneled to card issuers, payment processors, and the independent sales organizations and acquirers that sold or leased the equipment to merchants.

Now, however, the payment terminal millions of merchants, consumers, and payment providers have long grown accustomed to is in the midst of a sweeping transformation, affected by a trend some label the consumerization of payments.

Stimulated by the advent, and ever-increasing adoption, of ultrabrainy mobile devices, this trend is manifested in the debut of scores of payment services based on tablets and smart phones. Some are replacements for the venerable POS terminal, while others have greater ambitions to be software-based business-management tools.

By 2017, Adil Consulting forecasts so-called app-based devices, which only began to emerge six years ago, will control a 5% share of acquiring-related dollar volume, up from a 2% share this year. Meanwhile, Omaha, Neb.-based Adil Consulting expects the conventional point-of-sale terminal to account for 57% of total acquiring volume in 2013, down sharply from 76% as recently as 2007.

The small-merchant market will generate more than $2.3 trillion in volume by 2017, again matching the growth rate of the overall market, the firm’s report says.

“We expect application-based terminals to keep grabbing more market share at the expense of POS terminals as Square Inc. and other players push out more solutions and move up the market in terms of merchant size,” says company founder Adil Moussa in the report, referring to Square Inc., the 4-year-old San Francisco company that has established a dominant position among app-based POS providers. The report estimates that Square accounts for a little more than two-thirds of all volume processed through tablets and smart phones.

“Terminal sales at First Data are still very robust,” a First Data spokeswoman says. “We do expect to see a decline over the next few years as merchants adopt more integrated offerings that can provide more services and business opportunities.” To hedge against that decline, the leading merchant processor this fall launched with considerable fanfare a tablet-based system from Clover Network Inc., a startup it bought last year.

‘A Huge Disruption’

The emergence of app-based point-of-sale products is fostering enormous change among merchants, and therefore among the payments companies that sell services to them. One manifestation of that is the deepening adoption of POS systems among smaller merchants.

Typically, larger merchants have been the primary POS-system buyers because they can afford to spend $5,000 or more per unit and can support the information-technology infrastructure that accompanies these systems. However, smaller and cheaper devices, along with the proliferation of cloud-based services, which access valuable data via the Web, are changing that equation.

“I rarely get asked about payment terminals,” says Chris Pace, owner and managing principal of Congruity Solutions LLC, a Gilbert, Ariz.-based business-services company that resells an iPad-based POS system made by ShopKeep.com Inc., New York. “The surge of Square has taken that away.” Square. offers a payment-acceptance app with no contract or monthly fees. Merchants pay 2.75% for swiped transactions.

Other emerging POS-system providers include Revel Systems Inc., which announced a partnership in October with Merchant Warehouse Inc., Clover, and Leaf, a startup that recently received $20 million in funding from Heartland Payment Systems Inc., a major ISO. NCR Corp. in November released an updated version of Silver, its POS service designed for the iPad.

Differences among these products abound, but they have in common mobility, ease of use, and an expectation of greater merchant adoption. Clover also boasts ease of setup, claiming a merchant can be up and running on its system, out of the box, in 15 minutes. Many of them use apps available from either Apple Inc.’s iTunes or Google Inc.’s Google Play store.

Just how popular are tablets and smart phones? Looking at just Apple products alone, 488 million iPhones have been sold since its 2007 debut, Apple says, and in fiscal 2013, ended Sept. 28, 71 million iPads had been sold.

There are several reasons these devices, and their competitors from Google, Microsoft Corp., Samsung, and others, are becoming popular among merchants. One reason is that they simply are familiar from personal use, says Gil Luria, managing director for Los Angeles-based Wedbush Securities. “The owner-operator already has the iPhone or iPad for whatever reason, and they don’t need to spend anything else on an acceptance device,” Luria says.

Small and mid-size merchants are clearly looking for these devices, says Henry Helgeson, chief executive of Merchant Warehouse, a Boston-based merchant processor that has invested heavily in a platform called Genius to enable mobile forms of payment and rewards processing for merchants. San Francisco-based Revel is incorporating Genius into its tablet POS system.

In contrast to a conventional payment terminal, a tablet’s touch interface, and its almost universal interactive gestures, make it easy for most people to learn how to use it. Many merchant employees likely are already familiar with the interface of app-based mobile devices.

Tablets are consumer devices meshing with the business world, says Lisa Falzone, Revel’s chief executive. “Because of that it’s created a huge disruption,” Falzone says.

“When I set up a ShopKeep POS system, I’ll train a shift leader, and because so many are familiar with [Apple] iOS devices, especially the 18-24-year-old group, they’re comfortable using it,” says Pace. “They know how to connect it to a Wi-Fi network and reboot the iPad.”

That interface, of course, is a major difference from conventional payment devices, with their myriad push buttons. But it also means a difference in function. Apps on a tablet or smart phone can provide more features, including business-oriented ones that many merchants yearn for but may not have been able to afford with conventional POS systems.

Other differences abound between app-based POS systems and traditional payment terminals. POS systems can provide more data about a store and its customers. A tablet or smart phone can be used to complete a transaction in a store aisle, affording the merchant greater customer interaction. They are cheaper than conventional POS systems often used by larger merchants, and they can take less time for employees to be trained on them.

Big-ticket POS systems, especially ones made for larger merchants, long have been able to tie together payment information along with other business data concerning inventory and employee productivity. But these systems have cost several thousand dollars, placing them out of reach of many small and mid-size businesses.

For example, the cost could run between $3,000 and $5,000 for the electronic cash register alone, with another $5,000 to $15,000 for the cash wrap, says Nikki Baird, managing partner at Miami-based research and advisory firm Retail Systems Research LLC.

By contrast, an app-based POS system might cost as little as $1,000, including the tablet, stand, receipt printer, and cash drawer. “They’re cheap enough that I’ve heard chief information officers say they could buy things like [Apple’s] iPod Touches and throw them away every year forever—whether they needed to or not—and still have them cost less than your typical retail-hardened device,” Baird says.

Data collected by app-based POS systems also can be more comprehensive than what a traditional payment terminal can deliver. Merchants can view sales per hour, measure employee productivity and timesheets, and monitor inventory with simple taps to generate reports. And, in instances where consumers share their personal data, such as email addresses or mobile-phone numbers, merchants can electronically send offers and coupons directly to consumers via the apps’ built-in features.

But ISOs, acquirers, and other resellers of these app-based POS systems may find themselves developing new sales methods and assessing how to generate revenue from them.

New Sales Strategies

Indeed, ISOs and other acquirers essentially are at a crossroads now, Merchant Warehouse’s Helgeson says. “There are two paths ISOs and acquirers can go,” he says. One is to become an independent software vendor (an ISV, in industry parlance) and act as a distributor, and the other is to become a technology partner with a software developer. Choosing the latter could be a much greater change for some than the former, Helgeson says.

The deciding factor, as Helgeson sees it, is differentiation. “At this point, there’s so much change in the industry, you have to differentiate yourself. You have to have your own path,” he says. “Just being a sales organization distributing others’ technology may not be the best play any more.”

Following this line of thinking, Merchant Warehouse decided to develop a technology platform, called Genius, that handles multiple payment types and aims to drive traffic to the ISO’s merchants through promotions and loyalty programs.

Whichever path is chosen, new sales strategies will have to be adopted, Helgeson warns. Selling a POS system, even an app-based one, requires more support than a traditional payment terminal, he says. Support staff has to know the broad features and capabilities of such systems, instead of just the payment functions of a traditional payment terminal.

Another issue is that many merchant-services companies are moving to a staff-based model for their sales teams, Helgeson says. That could mean no upfront revenue, which is common when a merchant signs a processing agreement to use a traditional payment terminal.

But some don’t see a huge threat to the revenue stream. “Acquirers rarely made money on terminals to begin with,” says Wedbush’s Luria. “As long as they adapt to what their customers want, they will still be able to generate fees.”

The types of fees, however, also may be different with app-based POS systems. Some of the new POS-system companies eschew making a profit from transactions, instead assessing fees for services, such as mobile coupons and email campaigns.

In fact, the set-up fee, a hallmark for many resellers of traditional payment terminals, is best avoided with merchants seeking an app-based POS system. In the Adil Consulting survey in April, 80% of respondents cited the importance of no set-up fee for a POS terminal when selecting a new processor, compared with 94% of those choosing an app-based POS system.

Compounding the matter is that some of the app-based POS-system companies are backed by investors, and don’t have to worry about making profits just yet because they have investor funds to use until they are profitable, says Helgeson.

Where does this leave merchant-service providers? A number of the embryonic POS systems do not interfere with the merchant-processing agreement. Some, like ShopKeep and Leaf, maker of LeafPresenter, charge a monthly fee for their services, but do not intervene in the merchant-processing agreement. ShopKeep charges $49 per month for up to three of its systems, and Leaf charges $50 per month.

ShopKeep offers a revenue share in its contracts with resellers, but each amount is different, says Todd Lasher, ShopKeep vice president and general manager of its channel business. At Leaf, resellers that join its membership program receive $300 per signed merchant. They get access to training and a support desk, says Aaron Schwarzkopf, chief executive and co-founder. “The membership program gives them a coach. We can help with their sales pitch,” Schwarzkopf says.

Other mobile device-based POS system providers include Clover, Revel, and devices and software from payment terminal-makers VeriFone Systems Inc. and Ingenico S.A. Wireless payment provider Apriva released in October an app for smart phones and tablets for Android and iOS devices. “Traditional ISOs who are out there selling traditional payment terminals are realizing that model is further and further compressed and squeezed for growth,” says Brian Sadowski, Apriva senior vice president of information technology.

Clover resellers set the sales price, and therefore their profit margins, says Leonard Speiser, Clover president and co-founder. Clover and First Data add nothing to the hardware cost, he says. Generally, a complete Clover system, with a stand, custom tablet, printer, and cash drawer, is about half the cost if the components were purchased separately, Speiser says. The least expensive iPad Air—the larger of the two iPads—starts at $499. A Nexus 10 tablet from Google Inc. starts at $399.

Clover says the typical installation costs a merchant about one-eighth to one-twelfth the price of a full-scale POS system from a company like Micros Systems Inc.

But even that may be changing.

‘A Deeper Relationship’

The advent of tablets and smart phones has been a boon to Micros, says Michael L. Russo, senior vice president and chief technology officer of the Columbia, Md.-based company. “Because we have software that runs on those devices, it just makes it easier for our customers to buy devices, which in turn, has them use more capabilities in our software,” Russo says.

Micros in May released its mTablet, which has a suggested price of $999, an integrated card reader, and an accompanying stand called the mStation that lists for $499. An iPad adapter is available if the merchant wants to use his own device, Russo says. “The Micros strategy is we’ve embraced cross-platform deployment of our software. We’ve embraced consumer devices into our ecosystem.”

And payment terminal makers are entering the fray with their own app-based devices. Earlier this year, VeriFone created the GlobalBay Merchant POS system for resellers. This iPad-based product is designed for ISOs and acquirers to sell, says Shan Ethridge, vice president and general manager for VeriFone’s North America financial services business. “It’s complementary to what we offer,” Ethridge says.

Offering tablet-based merchant processing services is a change for many ISOs and acquirers, Ethridge says, but it is one with opportunities. “They position the ISO to be more of a business partner because the services have more feature functionality, whether it’s employee tracking, customer loyalty programs, or inventory tracking,” he says. “It creates a deeper relationship and answers some of those challenges they’ve had managing attrition.”

Yet for all of the discussion and attention paid to mobile device-based payment systems, they are not likely to supplant the venerable payment terminal.

“Merchants will continue to choose one payment device that encompasses all payment technologies, rather than multiple devices for each payment method,” Luria notes. VeriFone and Ingenico will continue to lead that market, he says. “Until 100% of customers pay with mobile devices 100% of the time, merchants and restaurants will continue to also use VeriFone and Ingenico payment terminals that accept plastic cards.”

Of course, the notion of offering multiple types of products will not disappear. Switching completely over to selling only app-based payment services may be extreme. The essential understanding is how to use these new services to strengthen the merchant relationship, says Congruity Solutions’ Pace. “You have to think strategically about how you want to extend your business and use it as a gateway to other lines of work,” Pace says. “Don’t worry about the upfront margins so much because the downstream is where it’s at.”

When EMV Meets the Tablet POS

As it stands now, emerging point-of-sale services relying on tablets and smart phones enable card-present transactions when a payment card is run through an attached card reader. But, in a few years, how those cards work is very likely to change as the U.S. payments system migrates to a chip card standard.

Visa got the EMV ball rolling in the summer of 2011 when it announced plans to migrate the U.S. to the more secure chip cards with a package of incentives and deadlines—a package largely adopted by the other major general-purpose networks. A key deadline is looming in October 2015, when liability for counterfeit fraud will shift to U.S. merchants if they cannot process EMV card transactions.

The impact of EMV on tablet and smart-phone point-of-sale systems is not wholly known now. But some predict it may be a boon for mobile-payment services. “In and of itself, it will drive a mobility movement because it’s somewhat impractical to expect the cardholder to get in line in some sort of centralized POS console to execute their EMV-based transactions,” says Brian Sadowski, senior vice president of information technology at Apriva, a Scottsdale, Ariz.-based wireless payments provider. “EMV will drive a technology refresh for small and mid-size businesses. Folks who have been hanging on to legacy systems will be motivated or forced to do an upgrade or swap.”

EMV requires a card reader that can interface with the chip on the payment card. That may be an issue for tablet and smart phone-based payment services that now use a conventional magnetic-stripe card reader. Rather than swipe the card through a slot on the reader, chip cards must be inserted into a reader.

Shopkeep.com Inc., maker of the iPad-based ShopKeep POS, is monitoring EMV’s U.S. progress. “We’re staying in touch with our partners in processing and making sure we understand what their requirements are going to be,” says Todd Lasher, vice president and general manager of ShopKeep’s channel business.

San Francisco-based Revel Systems Inc. is prepared for EMV, says Lisa Falzone, chief executive. It already has a chip card reader available. Revel has several United Kingdom clients, which already accept chip cards.

But EMV certification for tablet and smart phone payment services may be arduous, suggests Mike English, executive director of product development at processor Heartland Payment Systems Inc., Princeton, N.J. These providers may have to get separate EMV certifications from each processor, English says. One way to mitigate some of that work and cost is to work with processors, he says.

Point-of-sale system maker Micros Systems Inc., Columbia, Md., echoes the concern about the cost of EMV certification. Micros does not make EMV-acceptance devices, says Michael L. Russo, senior vice president and chief technology officer. “Our strategy on this is we have to enable our ecosystem,” Russo says. “We’re working with acquirers to leverage this technology in order to be prepared for EMV when it comes.”

Vital to this strategy is ensuring the merchant cost is kept as low as possible, he says. Therefore, Micros products sold now are made EMV ready, he says.