POS Terminals Have a Future, And It’s Looking Good

 

Mobile POS services, integrated software, and migration to the EMV standard are all influencing sales of terminals.

Cast aside any preconceptions about the imminent demise of the standalone point-of-sale terminal.

That venerable device, which symbolizes payments in the minds of consumers—and recurring revenue for payments professionals—is not going away any time soon, despite the seemingly burgeoning supply of mobile POS services and the adoption of integrated software.

The standalone POS terminal’s role in payments is not changing. It will remain the primary acceptance device for most merchants and consumers for many years. But how they use it will change, especially in light of three forces in motion now: the transition to chip cards; mobile POS devices; and the delivery of business data in addition to payments.

Both in spite of and because of these forces, the future of standalone POS terminals appears strong. After years of deployment, there are an estimated 8 million POS terminals in the United States, Javelin Strategy & Research estimates.

“There will be a place for the standalone terminal at scale for quite some time to come,” says Thad Peterson, senior analyst at Boston-based consulting firm Aite Group LLC. “When dealing with the volume of transactions that large retailers are doing, there is a need to have something that is effective and efficient.”

POS equipment makers have honed the functionality and features of the devices, with many now incorporating multiple communications technologies, advanced security measures, and consumer-friendly elements like large display screens.

The Big Dip

Perhaps the single most important factor spurring standalone POS terminal sales is the conversion to chip cards. The U.S. payment card industry is moving away from the magnetic-stripe card to one that employs a chip that adheres to the Europay-MasterCard-Visa (EMV) standard. The major payment networks have set a so-called liability shift for October 2015 in which the party in a card transaction that cannot support EMV payments—issuer or merchant—will be responsible for any resulting counterfeit card fraud. Fuel-pump operators have two years beyond that to convert.

Instead of swiping a credit or debit card and placing it back in a wallet or purse, both the consumer and the sales clerk will need to get accustomed to leaving the payment card in the reader long enough for the authorization process to complete. That means a lot of changes.

Not only does the POS terminal need to have a chip-card reader—most sold in the past few years have that technology—but it will have to be easily accessible to the consumer so she can dip her card into the reader without relinquishing control of the card to a cashier.

Though none of the larger POS terminal manufacturers—including VeriFone Systems Inc., Ingenico S.A., and Equinox Payments LLC—discloses annual terminal shipment volumes, they along with many other manufacturers, such as Pax US, a unit of Hong Kong-based Pax Technology Ltd., all say the volume is healthy and growing.

“There’s extremely strong demand for terminals in the United States and Canada,” says Scott Holt, vice president of marketing for Roam, a mobile POS company owned by Ingenico.

Retailers are making enormous investments in their POS systems, he says. That will lead to more integration of standalone devices into system-based ones, and even integrations with tablet POS services, Holt says. “That’s going to be something that continues to evolve,” he says.

Other POS terminal makers have similar perspectives.

“EMV migration continues to drive sales for VeriFone,” VeriFone chief executive Paul Galant said during the company’s earnings conference call for fiscal 2014’s third quarter ended July 31. Some 14 large retailers upgraded their payment systems to VeriFone’s EMV-capable MX 900 line of terminals, he said, including one global retailer that ordered 40,000 units. VeriFone wouldn’t identify the retailer. “More than 80% of products shipped in the U.S. were EMV capable, up from approximately 70% in the first quarter,” Galant said.

A primary attribute of EMV transactions is the ability to curtail counterfeit card transactions at the point of sale. EMV is key to reducing fraud, and that means change at the point of sale to accept more secure payment methods, says Andy Chau, president and chief executive at Jacksonville, Fla.-based Pax US. Pax terminals, like many others, contain a range of communication technology, including dial-up, Ethernet, contactless, magnetic stripe, and smart card.

“Our method allows that no matter if the merchant is running a cash register, a PC, or a tablet, our [terminal] gives them the ability to go with any processor in the United States,” Chau says. Because Pax maintains the software on the terminals, retailers and software developers don’t have to handle the payment, he says.

Playing Nice

Larger retailers have long benefited from the consumer data their POS systems are able to capture about their shoppers’ payment behavior. But for most small and mid-size merchants, those data have been off-limits because these POS systems cost multiple thousands of dollars. But with the dual advent of tablet computers and hosted—also known as cloud-based—data services, small and mid-size merchants now have the ability to capture that data and put it to use. Merchants using mobile POS devices and PC-based ones can take advantage of this capability.

Just how important is this segment becoming? It’s generated a couple of large acquisitions this year, with Atlanta-based payment processor Global Payments Inc. paying $420 million for integrated payments-software maker Payment Processing Inc. and Cincinnati-based Vantiv Inc. spending $1.65 billion to buy Mercury Payment Systems LLC (“Behind the Acquirers’ M&A Spree,” this issue).

Indeed, integrated software has strong appeal to merchants, especially ones with special needs, such as dry cleaners and health and beauty operators, which have specialized business-management needs. They want one system to accept payments and manage their businesses. For many, that means they use a POS terminal connected to a personal computer.

“There’s a lot more integration going down to the tier-three and -four merchants,” says Stuart Taylor, vice president of payment solutions at Scottsdale, Ariz.-based Equinox. The coming EMV migration is part of the driver for that, Taylor says, with demand for more business data also a factor. Tiers three and four are common terms for mid-size and small merchants.

Ensuring these POS systems work with EMV-capable terminals is a challenge because many of the systems have built-in magnetic-stripe readers. Developers will turn to standalone POS terminals, and, with a little bit of code, attach them to their POS equipment and accept chip-card payments.

Tablet-based POS companies like Leaf, owned by Heartland Payment Systems Inc., also face getting EMV acceptance onto their devices, says Sarah McCrary, chief executive of Boston-based Leaf. Because of Apple Inc.’s debut of Apple Pay, its mobile-payment service that relies on near-field communication technology (NFC), payment equipment is the subject of more discussions now, she says. “It got me really excited about the opportunities because we could talk about EMV and NFC in the same breath,” McCrary says. Leaf will have an EMV product for merchants, but McCrary could not say when it would be available.

Merchant adoption of integrated software products also is a signal to independent sales organizations and acquirers, Chau says, that there is demand for them. Organizations such as Mercury and Payment Processing were among the few high-profile ISOs and acquirers that courted these merchants and worked with developers to incorporate their payment technology in the software, he says. “I have seen a lot of other ISOs take notice of that,” Chau says.

Offering such integrated software to merchants has a couple of significant benefits for payments companies. One is that it can reduce attrition. Because the software is designed specifically for the merchant’s type of business, it makes it more difficult for the merchant to switch providers, Chau says. As the payment provider for the software, the ISO and acquirer benefit from that reluctance to switch.

Another perk for ISOs and acquirers offering a POS system is that it puts them in control of the relationship with the merchant, Chau says. In the past, the software developer was in charge of the merchant relationship, he says, enabling them to dictate terms to the ISO.

Accustomed to taking the consumer’s payment card and swiping it themselves, these merchants will have to get used to waiting for the consumer to dip the card and either enter a PIN or sign the receipt.

That shift presents an interesting challenge, says Aite’s Peterson, especially if the consumer wants to make a mobile payment.

“The first thing is the terminals will have to turn around and face the customer,” Peterson says. But, merchants may be able to go farther with a mobile POS device. They are able to move the point of sale to where the consumer is in the store rather than make the consumer queue in a checkout lane.

Mobile Onward

It is mobile POS devices, however, that have led some to suggest the standalone POS terminal’s days are numbered. That is not necessarily the case, Peterson says, at least not for quite a few years. Though merchants can bring their own devices to use with services such as Square Inc. or PayPal Here, that is not always the level of service many merchants need.

“Change doesn’t happen as quickly as you think it would,” Peterson says. The merchant cost to completely adopt mobile POS devices as their sole payment terminals would be massive, he says. And they would present a lot of difficulties for some merchant types. “I can’t envision a supermarket without checkout lanes,” Petersons says. It just takes time, too, for retailers to need to replace their POS equipment. Ordinarily, smaller retailers trade out their POS equipment about once every six years, Peterson says, with larger retailers taking even more time.

There are exceptions, of course. Though Target Corp. surely had plans in motion to adapt its POS systems to EMV prior to the disclosure last year of its massive data breach, that schedule was advanced. Minneapolis-based Target installed chip-compatible POS equipment at its nearly 1,800 U.S. stores by September, six months ahead of schedule.

At VeriFone, mobile POS acceptance has been growing, says Erik Vlugt, vice president of global products at the San Jose, Calif.-based company. “We have had very good success with a bunch of retailers who wanted to take payments in aisles,” Vlugt says. Just three to four years ago, such a shift would have prompted discussion about what this means for the checkout lane, he says. Now, with time and experience, the mobile POS devices are viewed as supplements to traditional POS equipment, he says.

“Now, we can say that hasn’t eliminated the traditional checkout,” Vlugt says. For example, retailers may reduce the number of checkout lanes from 10 to eight, but they buy multiple POS devices for each of their stores even as mobile POS services become a mainstay of shopping, he says.

Merchants will always need standalone POS terminals, says Gil Luria, analyst at Los Angeles-based Wedbush Securities. “These payment terminals may evolve in form factor and include more and more technologies, but will continue to be necessary,” Luria says. “Just like terminals went from accepting just magnetic stripe to including chip cards and contactless, there is no reason why they won’t be able to incorporate Bluetooth low energy, Quick Response code readers, and any other technology that merchants want to integrate.”

Even with the potential for broader use of mobile payments, and mobile POS usage by merchants, Luria sees a long life ahead for standalone POS devices.

“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,” Luria states in a research note. “While we continue to be very optimistic regarding the future success of mobile wallets, we don’t believe they will be able to capture 100% penetration and 100% usage at any merchant for at least a few decades.”

Indeed, even with multiple payment options, whether it’s a mobile payment made with a smart phone, an EMV transaction, or a magnetic-stripe one, merchants will continue to want one payment device that encompasses all payment technologies, Luria says. “We also believe it is unlikely that retailers will have dedicated lanes for one type of technology or another. They are far more likely to continue to accept all payment authentication types in every aisle in order to remain efficient.”