Get Smart

So-called smart devices are invading the point of sale at an increasing pace. They bring undoubted advantages, but also a few complications.

Judging by the number of times Fiserv Inc. chief executive Jeffery Yabuki and First Data Corp. CEO Frank Bisignano mentioned Clover last month during their joint announcement of Fiserv’s proposed acquisition of First Data, you would think there’s little more to First Data than the line of sleek, smart point-of-sale devices Clover sells. 

Of course there is much more, but if the $22 billion all-stock deal closes on schedule in the third quarter, Fiserv will at a stroke join a rapidly growing smart POS market that didn’t exist a few years ago and now bids to reshape the way consumers pay and merchants track their business.

So-called smart devices—little computers that sit on countertops with Internet connections and cloud-based libraries of software—are now the focus not just of traditional terminal makers like Ingenico and Verifone but also of major processors like Total System Services Inc. (TSYS) and the aforementioned First Data. 

Sales of the devices have accelerated at a breakneck pace. Shipment totals are hard to come by. But where a provider might have installed them in 3% to 4% of its clients’ locations a couple of years ago, that proportion is now more like 20% “for those who are better at it,” notes Alfred “Chip” Kahn, who runs Boomtown Inc., a Tiburon, Calif.-based company that helps merchants and resellers iron out POS issues.

He doesn’t see that trend slowing down any time soon. “I don’t see why it wouldn’t be 50% in a couple of years,” he says.

‘Scaling Pretty Nicely’

It’s already taking on outsize importance for Boomtown. The company has 190,000 merchant locations on software called Relay that allows the company to help proprietors with terminal problems. Of these, Kahn estimates 25,000 are using smart terminals.

Startups that have been created specifically to supply smart terminals also report rapid growth. Palo Alto, Calif.-based Poynt Co., for example, only began shipping devices less than two years ago but has already shipped more than 200,000, according to founder Osama Bedier, a former PayPal and Google executive.

Founded more than four years ago, the company now works with 15 acquirers around the world to distribute its double-facing (customer as well as cashier) terminals. “It took us our first year to scale, and now we’re expanding to multiple countries,” he says. “Things are scaling pretty nicely.”

Meanwhile, Clover is seeing $70 billion in annual processing volume, a number that’s growing at a 46% annual rate. That’s up from zero five years ago. 

“We see strong demand from all sectors,” says Mark Schulze, a co-founder. Now, it’s keeping upwards of 500 developers so busy on apps that “the line between a Clover developer and an ISV [integrated software vendor] is rapidly blurring,” he says.

Democratizing Payment

Fast growth hasn’t come because the devices are cheap. They can sell for prices up to $500 apiece. Some sophisticated systems, like Square Inc.’s Square Register, list for $1,000, though the company’s recently launched Square Terminal sells for $399.

But the devices appeal to merchants of various sizes and in various industries because they can solve business problems fast, run loyalty programs, and integrate updates, all with a very small footprint at the counter. And their large screens make it easy to see the solutions the machines are coming up with. 

With typical payment terminals, “you see these beige-gray boxes where you can barely read the screen,” says Thomas Templeton, a member of Square’s Hardware Team who helped design Square Terminal. “We saw an opportunity to redesign the product and make it more user-friendly.”

Even aesthetic considerations matter. “We put a lot emphasis on how do we bring beautiful design,” says Templeton.

The rise of the smart terminal hasn’t gone unnoticed at the two traditional giants in the countertop-terminal business, Ingenico Group and Verifone Holdings Inc. 

“We’ve been looking at this class of product for quite some time,” says Mark Bunney, director of go-to-market strategy for Ingenico, which last year announced its Axium smart terminal, a device that relies on ISVs for apps and can operate as either a mobile or stationary terminal.

What Ingenico is seeing, says Bunney, is a trend toward cash-register and processor sophistication combined in a small box with a big screen. And even small merchants, he says, are keen to get this. 

“We’ve been seeing that for a number of years,” he says. “They need something more. The smart terminal democratizes payment. Now, mom and pop can have as much power as a Tier One merchant.” 

It also hasn’t escaped Ingenico’s notice that the smart-device segment of the terminal business is “the fastest-growing,” says Bunney. Axium is set to begin shipping before June.

For its part, Verifone has introduced its Carbon line of devices to meet much the same market demand. The company declined to speak to Digital Transactions for this story.

The Coming Shakeout

Some of the providers point out that the swiftly developing demand for these devices also stems from a need to combat what Erick Kobres, chief technology officer at Revel Systems, a San Francisco-based maker, calls a “digital channel shift” that especially threatens restaurants, a key market.

The shift involves delivery services that take over “branding” from the eatery, so that the user is “no longer a Joe’s Pizza customer, they’re an Uber Eats customer,” Kobres says. “It’s ratcheting up every year, and tech integration has not kept up with that.” 

Extending the restaurant’s brand is important for Revel, which gets 60% of its sales from the segment. “It’s what we’re working on,” he says, though he admits “there are a lot of variables—we don’t have it settled yet.”

Revel isn’t the only player that doesn’t yet have all the answers. Despite the industry’s rapid development, observers are wondering how long it can support so many players. The big question, they say, is not when a shakeout among providers will happen, but how soon. 

“Terminals are going to be around for decades, but the winnowing of the smart terminals” will happen much sooner, says Rod Hometh, a former Ingenico executive who is now a partner with the payments-advisory service RPY Innovations. “I’d put that at less than five years.”

The complicating factor for providers, Hometh argues, is the requirement to certify devices with the card networks, an expensive and lengthy process that could be a crushing burden for a new player operating on thin capital or without alliances with established processors. “If you try to go it alone, you don’t have a chance,” Hometh warns.

‘The Hardest Part’

The relatively quick popularity of smart terminals has attracted merchant-processing companies that have either started up their own device operations or signed agreements to work with existing ones. But this development also shelters fledgling device operations under the aegis of much larger organizations with more resources and more industry connections.

The most recent example of this trend emerged early this year when TSYS dusted off a brand name it hadn’t used in 13 years and applied it to a spanking-new line of smart terminals.

The Vital line depends on technology Total picked up last year when it laid out $13.4 million in cash to buy iMobile3, a Jacksonville, Fla.-based vendor of POS products and an app marketplace for mobile phones and tablets. Total had last used the Vital name in 2006 for a processing venture it rechristened TSYS Acquiring Solutions.

“Vital wasn’t created from whole cloth,” observes Hometh. “TSYS is assembling the right pieces and parts with iMobile3 and Cayan.” The latter “piece” refers to a processing-technology company TSYS acquired in January 2018.

But TSYS is hardly alone. Last month, the big processor Worldpay Inc. announced a tie-up with Revel that will include a wider selection of software and a single point of contact for support. In November, Elavon, a processing subsidiary of U.S. Bancorp, announced it had taken a minority stake in Poynt. 

Years earlier, First Data snatched up Clover. And payments providers like North American Bancard and Shift4 Payments LLC have introduced their own lines of smart devices rather than rely on startup suppliers.

Poynt’s Bedier admits certifications, and the struggle to keep pricing affordable as costs pile up, are major hurdles that can take years to surmount. “Getting 18 different certifications was the hardest part,” he says. “Three years in, we had [them].”

‘Folks Need Help’

Other complications hover on the horizon of this business. Boomtown’s Kahn, for example, says the devices are not quite as easy to use and maintain as their makers claim.

“They’re not complicated to set up, but Silicon Valley oversimplifies how easy it is,” he says. “Folks need help. It’s not just plug it in and it works.” 

Recalling those 25,000 merchant locations with smart terminals that Boomtown supports on its Relay software, Kahn says that while they represent 13% of the total terminal base on Relay, they account for almost as many service tickets as the total of the other 87%.

Not all of the problems have to do with the terminals themselves. One-third, Kahn says, concern Internet connectivity, particularly WiFi links. “It’s a lot of external issues as opposed to the complexity of the product,” he says.

Some of the smart-device players have offset complications like this with offerings that have strong appeal for merchants and tend to tie them closer to the product. Business finance, for example, is a popular product. 

Square has offered its Square Capital loans for years, and Revel’s recent deal with Worldpay will allow it to offer merchants funding support through Worldpay’s FastAccess Funding service. This option allows clients to settle their batch and get same-day access to their money.

‘Tons of Ideas’

Still, the problems of smart devices have to be seen in the light of the advantages the technology offers, advocates argue. In this regard, the technology has few more ardent evangelists than Square’s Templeton.

“Terminals at the point of sale will continue to get smarter and more powerful,” he promises. “We have tons of ideas we want to add for our sellers. It’s just going to get better and better over time.” 

Best of all, he promises, Square sellers won’t have to buy new hardware. Instead, he says, “You’ll just get a software update.”