Acquiring: How Acquirers Are Toting up Tablets

How Acquirers Are Toting up Tablets

With scores of tablet-based POS systems to choose from, processors, ISOs, and resellers must sort out which factors are most important for portfolio growth and profitability.

  

Sometimes, having too many options hampers the ability to make a decision. That may be the case for some merchant acquirers trying to determine how best to choose a tablet-based point-of-sale system to offer their merchants.

Consider this: In the last 12 months, monthly tablet-POS systems sales have tripled at Nxgen Payment Services, a Whitefish, Mont.-based independent sales organization, says Michael Jaffe, senior director of product development and marketing communications. “The increase is coming from both merchant requests as well as our sales team promoting [them],” Jaffe says.

Consider the breadth of choices: LevelUp, Clover, Revel, Leaf, ShopKeep, Powa, TransFirst, Groovv, and PayAnywhere are just a handful of the available systems. But, there are many other choices to make, too, before even deciding which brand to go with.

‘The Tablet Maze’

Tablet-based point-of-sale systems have boomed in popularity among merchants and acquirers because of their simplicity, ease of use, and affordability. At the same time, they offer business-management tools, such as customer relationship management and loyalty-program services, that otherwise would be out of reach to many small to mid-size businesses.

But, as with any new product type, it can be difficult to figure out just what are the most important factors in selecting a tablet-based POS system to sell. Taking the time to select the optimal tablet-based POS system, however, can have a significant impact on attracting new merchants and retaining those already in an ISO’s portfolio.

Myriad factors have to be considered when selecting a tablet-based POS system: whether to use a vendor or develop it in-house; how to price it to merchants; how to handle sales support; who should handle technical support; how to develop revenue-share models; who’s in charge of security and updates; which operating system to use; what equipment to offer and at what price; does it fill a need in the merchant portfolio; what are the upgrade options.

This is the situation Gary Peterson, president of independent sales organization Arlington Heights Merchant Banc, Mount Prospect, Ill. finds himself contending with. “I have not gone down the tablet maze yet,” he says. But Peterson has spent the past few months evaluating the options.

“Pricing is a factor, but it isn’t necessarily just looking for the cheapest,” he says. “For me, it has to do with competitive pricing and how much I will have to be involved with it.”

Peterson, who shopped for a third-party tablet POS system this summer with expectations of choosing one in August, says some of his merchants have asked about the systems. For those that haven’t, Peterson’s sales agents are asking merchants if they just have cash registers. Tablet-based POS systems easily could replace cash registers and provide the merchant with more information about their business, and, potentially, their customers.

‘A Big Leap’

That ability is a major reason ISOs and acquirers have taken such a keen interest in tablet-based POS systems. “Everyone is complaining about margin compression,” says Adil Moussa, principal of Adil Consulting, an Omaha, Neb.-based firm. Margin compression exists because so many merchant-service providers are selling the same type of product, he says. The key to alleviating that encumbrance is to offer products no other provider can, he says.

Moussa suggests specializing in a vertical market. “The problem in marketing and positioning is if you say it works for everybody, nobody buys it,” Moussa says. “But, if you say you have a specific solution for lawyers, lawyers will pay attention. It really has to be some type of differentiator.”

A tablet-based POS system with customer relationship management capabilities can be part of that differentiation. “The more the differentiation has to do with a CRM function, like how to keep track of customers and interact with customers, [the more] you really have a good solution you can charge for,” Moussa says.

Providing merchants a unique product was top-of-mind for Shelley Plomske, vice president of product at Total Merchant Services, a Woodland Hills, Calif.-based ISO. Under Plomske’s guidance, TMS launched Groovv, its own tablet-based POS system this spring at the Electronic Transactions Association annual conference.

Soon after beginning her review of tablet POS options, Plomske realized that TMS had the resources to develop this product in-house and was able to support it.

“It became apparent to me that we had to own the technology,” Plomske says. “We have 200 people who can support it.” That ability to support Groovv is vital because the ISO’s sales agents have come to rely on that support for traditional POS terminals used by TMS. “It was important to have that same experience with the tablet POS system,” she says.

There are advantages and disadvantages to choosing a third-party vendor. But the same is true of developing a tablet-based POS system in-house.

“Developing yourself provides complete control, enabling differentiation and specialization, thereby maximizing the opportunity to create a sustainable competitive advantage,” says analyst Rick Oglesby with Double Diamond Group, Centennial, Colo. “The downside is that you must become a software company to do this, which is a big leap for the average ISO.”

With a product developed in-house, the branding belongs to the ISO. A third-party system may not allow for white-label branding. Without the opportunity to use an ISO’s own brand, the product may lack differentiation within the market. “White-labeled products allow ISOs to stay focused on sales, but they also mean a lack of differentiation,” Oglesby says.

Another factor in the Groovv decision was cost, Plomske says. TMS, like many other large ISOs, has had a lot of success with free-terminal programs with its sales agents and merchants, she says. While Groovv is not free—TMS says on the Groovv Web site that “Groovv is affordable, but product pricing does vary based on the hardware and software components you use”—TMS wanted to keep the costs low.

Plomske says Groovv equipment typically costs between $700 and $1,000, with installation included.

Cost sensitivity led the ISO to use Android, the mobile operating system from Google Inc. Many Android-based tablets have USB ports, the ubiquitous technology that enables peripherals like receipt printers and PIN pads to be connected. The iPad and iPhone do not have USB ports.

“Although iOS [Apple Inc.’s mobile operating system] is fantastic, for our initial rollout having flexibility and the price point of Android was the choice,” she says. The next version of Groovv will eschew the audio jack-based card reader in favor of one that connects via USB because it’s a bit more reliable, Plomske says.

Peterson, however, as an ISO executive choosing a third-party vendor, will review both Android and iOS tablet-based POS systems, and is intent on choosing a system that can work with either operating system. “It would have to be both Android and iOS,” he says. While iOS’s popularity is well-known, Android is too popular to ignore, he says.

The Price Must Be Right

Other considerations, such as pricing for the merchant and the reseller, are important, too.

In addition to payment-processing fees, some tablet-based POS systems have monthly fees to cover additional marketing services, like email campaigns and offers. In many instances, agents may be able to set the sales prices to merchants, sharing the equipment and transaction revenue with the tablet-POS provider.

And whether to lease or sell the equipment may not matter much to some merchants, at least from the perspective of those canvassed for a report on tablet-POS systems published by The Strawhecker Group last year.

Twenty-seven percent of merchants said they would definitely purchase or probably purchase a tablet-based POS system costing $2,000, including warranty and support. That was the same percentage that said they would definitely lease or were somewhat likely to lease a system.

As for the price point for resellers, also known as a buy rate because they buy the product at a price and resell it with a markup, strategies vary. At TMS, the revenue share is 50%, Plomske says.

In many cases, ISOs using a third-party tablet system have to work with the scheme the vendor has in place. One tablet-POS developer, Zuza LLC, lets its resellers set the price, says David Evan, vice president of business development at the Scottsdale, Ariz.-based company.

Feeling Secure

Another factor is determining which organization, in instances where a third-party tablet POS is sold, is responsible for updates and security compliance. Security is critical because tablet POS systems are a fundamental change for merchants. Most devices are designed with the consumer in mind first, unlike POS terminals which are meant for business users.

That distinction makes tablets, and other mobile devices like smart phones, easier for the end-user to operate, but can complicate matters on the business side.

“Part of the challenge is that mobile devices were built with consumer ease of use in mind, not necessarily business grade,” says Jim Maloney, chief information security officer at Mercury Payment Systems, Durango, Colo.

Throw in wireless connectivity and consider that these devices mostly have built-in geolocation capabilities and motion sensors, which have their own vulnerabilities, and the duty of managing the security of the devices escalates, Maloney says.

Security responsibility for tablet-based POS systems isn’t just one party’s obligation, Maloney says. “There’s some responsibility the merchant, the acquirer, and the processor should take,” he says. “We all play a role. In most cases, the merchant is working directly with the agent or ISO, [so] it starts with the reseller.” From there the responsibility might flow upstream to the developer.

Security, however, is not solely a post-sale concern. “Processors, resellers, and dealers should make sure merchants are aware of what they need to do to ensure a secure implementation,” Maloney says.

But perhaps the most important decision to make regarding tablet-based POS systems is how to sell them.

“When putting together our tablet-based POS [sales] strategy, we wanted a solution that brought this technology into a business to not only make every employee’s daily duties simpler, but also, for the first time, to be more than just the vendor that gets them paid,” says Nxgen’s Jaffe. “We wanted to be looked at as the vendor that provides owners and managers with business management and assisting with success” by providing transaction data for revenue per time, best-selling products, and when sales are happening.

‘Limitless Differentiation’

Tablet-based systems, along with other mobile POS products, “can fundamentally change the historical price/value equation for payment acceptance while simultaneously de-commoditizing the acquiring industry,” analyst Oglesby says. “Other payment-centric products, such as encryption and tokenization, are destined to become commodities, while software and point of sale offer limitless differentiation opportunities.”

Whether they develop one themselves or buy from a third party, it behooves ISOs and acquirers to offer a tablet-based POS system if only because the market is not as saturated as that for traditional POS terminals. Tablet POS system sales will grow, says Moussa, “As smaller merchants are catching up and realizing some of the power of this software, that alone is pretty powerful,” he notes.

In addition to generating revenue from payment processing, tablet-based POS systems may yield other benefits for ISOs and acquirers.

“Revenue earned directly from a tablet-based POS setup isn’t what keeps our lights on and pays for operations,” says Jaffe. What they do, though, is add some longevity to the merchant portfolio. “Tablet-based POS sales reduce attrition on the merchant account, thus leading to year-over-year growth in our overall revenue,” he says. “Its value is a combination of merchant loyalty as well as profitability.”