Trends & Tactics

Ammo for ISOs in the Tablet Wars

Independent sales organizations are starting to feel squeezed by technology companies selling tablet-based point-of-sale solutions to merchants, according to terminal kingpin VeriFone Systems Inc.

So VeriFone last month rolled out a tablet-based platform for its resellers that they can price and market to their merchants.

The product, called GlobalBay Merchant, is based on mobile in-store technology VeriFone acquired late in 2011 when it bought Global Bay Media Technologies. So far, more than a dozen VeriFone ISOs representing about 500,000 merchants have signed on to sell the platform, VeriFone says.

Meanwhile, the San Jose, Calif.-based company is in talks with other ISOs, acquirers, and processors serving collectively about 4 million merchants. “We have received positive feedback from every [channel] partner,” says Shan Ethridge, vice president and general manager for VeriFone’s channel business.

One of the largest of the partners that have signed up is EVO Payments International LLC, a Long Island, N.Y.-based ISO that alone accounts for about 300,000 of the merchants represented so far.

The new VeriFone product comes as processors like PayPal Inc. and technology firms like Square Inc. are pushing tablets as replacements for traditional electronic cash registers and terminals. It includes the GlobalBay Merchant app along with help-desk support from VeriFone. It links to VeriFone’s PAYware gateway and works with VeriFone card readers, PIN pads, and EMV chip readers.

Ethridge will not discuss pricing to ISOs in detail beyond saying it is “flexible,” allowing resellers to levy per-click or flat monthly fees or a traditional discount rate. “We will keep [pricing details] close to the vest,” Ethridge says, until VeriFone has signed on more resellers.

Ethridge says VeriFone began working on the new application about a year ago when it noticed what it says was a tendency among point-of-sale tablet vendors to bring in their own integrated processors, making it difficult if not impossible for ISOs to work with them. “We’ve watched what these disruptors have introduced,” says Ethridge. “A lot [of them] compete with the resellers. We felt we could do something that would suit the reseller channel better.”

Rick Oglesby, a senior analyst at Boston-based consultancy Aite Group LLC, says VeriFone’s timing may be right. The tablet POS trend, he says, is “a challenge that has gotten big enough that the average acquirer needs to answer it. They need to look to someone who can bring the product.”

In at least some cases, Oglesby says, providers will sell the tablet service with an integrated processing relationship. If a merchant wants to stick with an existing processor or go with a new one of its choice, the cost will be higher because of the need for a custom integration. That can lock out ISOs, Oglesby says.

Some tablet technology providers, however, insist they have made it a point to accommodate merchants’ choice in processing.

“Some [ShopKeep] partners are bundling payment processing and POS, some are providing the technology with a choice of processor, and some are providing the processing solution with a choice of technology,” Todd Lasher, general manager and head of strategic partnerships and alliances at ShopKeep POS, a New York City-based tablet POS vendor, says in an email message. “ShopKeep works with our partners to enable all three paths, so that the merchant ultimately chooses what’s best for his or her business.”

Adil Moussa, who follows small-business acquiring as principal of Omaha, Neb.-based Adil Consulting, agrees the new VeriFone platform is “a good solution that merchants actually want and that breaks with the new model of displacing merchants’ relationships through specialized software and hardware.”

But he warns that the program’s market advantage for ISOs may be short-lived. “I think the advantage will be to the first movers,” he says in an email message. “As these solutions proliferate, the advantage will disappear because some ISOs will be offering these solutions for free in order to compete for accounts as some ISOs are doing today with POS terminals.”

—John Stewart

Can ISOs Tap the Coming Boom in Acquiring?

Speaking of independent sales organizations getting into the tablet game, a report released last month warns that while the U.S. acquiring market will enjoy a nice 10.5% growth clip over the next five years, acquirers won’t get their share as long as they remain wedded to conventional terminals and conventional sales tactics.

Expect app-based devices like smart phones and tablets to claim an increasing portion of the market, the report says.

The research on this comes from a new payments research and consulting firm in Omaha, Neb., called Adil Consulting. The firm surveyed more than 800 small merchants in March and April to find out how they are processing transactions, what they are looking for in a processor, and what makes them switch processors.

What the survey found was a gaping disconnect between what ISOs and other traditional acquirers are offering and what small merchants want.

“[The disconnect] has always existed, but it wasn’t a big problem until the new players and new technologies emerged,” says Adil Moussa, principal at Adil Consulting and a former analyst at Aite Group LLC. He’s referring to technology vendors offering payment and reporting applications to small businesses based on devices other than traditional terminals. “Now,” he says, “merchants are saying, ‘There are other solutions out there.’”

The overall acquiring market is looking pretty healthy, according to “Understanding Small Merchants And the Methodologies to Acquire Them.” Total processing volume will reach $4.71 trillion this year, up a healthy 12% from 2012, the report estimates.

Small merchants, the bread and butter of ISOs, value-added resellers, and other acquirer-related businesses, account for about a third of that volume but will mirror the growth rate of the total market.

By 2017, Adil Consulting forecasts processing volume will top $7 trillion, for a 10.5% average annual growth rate. 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 report says.

But for individual ISOs, it will take innovative technology, along with a fresh understanding of the mentality of small merchants, to claim an increasing share of this market, warns report author Moussa.

For one thing, PC-based terminals, e-commerce, and especially app-based tablets and smart phones, will carve out a rapidly increasing portion of the overall volume.

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

“We expect application-based terminals to keep grabbing more market share at the expense of POS terminals as Square and other players push out more solutions and move up the market in terms of merchant size,” says 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.

Two factors explain the fast rise of app-based POS platforms, Moussa says. One cause is the easy integration of loyalty and inventory-management capabilities. The other stems from the rush to convert merchants to POS gear that can handle chip cards on the Europay-MasterCard-Visa (EMV) standard. This effort is leading merchants to investigate alternative POS equipment and software.

But keeping current with POS technology is only half the battle for merchant processors looking to retain—and gain—market share.

According to the report, ISOs and other acquirers must refashion their approach to small businesses. Instead of using corporate-sounding language and talking about merchant acquiring, processors should think about ways to help the business automate routine but time-consuming functions. The idea is to help merchants increase customer count and make more money.

“What a majority of ISOs and acquirers fail to understand is that merchants are not in the business of merchant acquiring and they don’t care much about learning about the processor or the merchant-acquiring industry,” the report says.

Tech companies have responded to merchants’ thirst for innovation, Moussa says, but he’s not so sure acquirers have. Says he: “I haven’t seen any ISO or bank invent anything that helps merchants.”

—John Stewart

Ultra-Low ACS Estimates, Courtesy of the Fed

A quickly forgotten report from the Federal Reserve Board last March portends that the possible cuts in debit card interchange as a result of a far-reaching court decision this summer might be bigger than many observers initially thought.

In the report, the Fed said that authorization, clearing, and settlement (ACS) costs for debit card issuers subject to interchange price controls mandated by the Durbin Amendment in 2010’s Dodd-Frank Act averaged 5 cents per transaction in 2011, versus 7.6 cents in 2009. That 34% reduction could become a major point of contention as a retailer-led lawsuit against the Fed’s rule implementing the Durbin Amendment plows through the appeals process.

The new focus on ACS costs is a result of the July 31 decision by U.S. District Judge Richard J. Leon in Washington, D.C., to throw out the Fed’s Durbin rule. Leon said Federal Reserve governors did not follow the letter of the law in setting their price cap for affected issuers, those with $10 billion or more in assets, nor did their regulations for debit-transaction routing conform with the statute.

The cap in the Fed’s final rule, issued in June 2011, is 21 cents plus 0.05% of the sale plus another penny possible for fraud control. Leon said the Fed considered factors not permitted by the Dodd-Frank statute, which calls for regulated issuers to receive “reasonable and proportional” interchange, which is paid by merchants, relative to their ACS costs. The Fed is appealing Leon’s decision.

Leon did not spell out what the cap should have been. He indicated, however, that the Fed’s own “Alternative 1” that it floated during the Durbin rule-making process in late 2010 more closely jibed with Congress’s will than the approximately 24-cent cap it ultimately approved. Alternative 1 called for a 7-cent “safe harbor” with a cap that might have gone up to 12 cents.

That original 7-to-12-cent proposal received many mentions in the tide of press coverage after Leon issued his decision. Few, however, noted that the Fed itself had already found that the ACS costs that undergirded its 2010 deliberations had declined considerably since then.

The new numbers may have received little attention because the Fed issued them at the same time it announced its decision not to change its Durbin regulations. Dodd-Frank requires the Fed to assess the debit market every two years and adjust its rule if it determines there is a need.

“The world dismissed the study … because the Fed wasn’t going to act,” says payments consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures.

A 34% drop in ACS costs in just two years is notable, but part of it might be explained by the fact that the respondent bases for the two surveys were not identical. The Fed’s March findings are based on a survey that asked companies to provide data for 2011, and that study included more companies (including all 131 issuers subject to the price cap) than the first survey, which asked industry companies to provide data for 2009.

In any case, other studies confirm that computing, telecommunications, and most related transaction expenses in the payment card industry have been declining for decades. Grover, in fact, says he would be surprised if average ACS costs for the top debit card issuers—Bank of America, Wells Fargo, Chase, and a few others—even approach 5 cents. While not claiming inside knowledge, he says: “Their costs could be 2 cents, close to zero.”

The Fed’s survey results are more nuanced than a straight nickel might suggest because the report breaks down ACS costs by debit card type —signature, PIN, and prepaid—as well as by volume tiers. A few big banks with $10 billion or more in assets but small debit card portfolios had blended ACS costs of as much as 74.6 cents, versus only 4.7 cents for issuers with big debit portfolios.

Should the Fed lose on appeal, Grover expects the cap might be sliced to the low end of Alternative 1 or even lower.

“If the Fed is forced to do what Leon has instructed it to do, the best that banks could possibly hope for is the Fed could rationalize 7 cents,” he says. “At the bottom end, it wouldn’t be surprising at all to see a number of a couple of cents.”

—Jim Daly

Mobile Climbs to 10% of Online Sales

While tablets and smart phones steadily encroach on brick-and-mortar volume, they’re taking an even bigger slice of the online market and rapidly becoming a factor in the U.S. economy.

Researcher comScore Inc. reported recently that remote m-commerce sales totaled $10.6 billion in the first half of the year, or about 10% of total online volume, including all of desktop e-commerce.

ComScore forecasts that online spending on mobile devices could eclipse $25 billion for the year, given the expected swelling of volume during the holiday period in the fourth quarter. This would surpass last year’s total of $20.1 billion by at least 24%.

For the second quarter alone, m-commerce sales came to $4.7 billion, up 24% over the $3.8 billion recorded in the year-ago quarter. First-half sales jumped 28% over the first six months of 2012, which yielded $8.3 billion in volume.

“While mobile devices are already extremely influential in the overall buying process, they are also beginning to drive a meaningful percentage of digital commerce,” said Gian Fulgoni, chairman of Reston, Va.-based comScore, in a statement. “One out of every ten consumer e-commerce dollars is now spent using either a smart phone or a tablet, and growth in this segment of the market is outpacing that of traditional e-commerce by a factor of 2x, which itself is growing at rates in the mid-teens.”

New with the August report was a breakdown of m-commerce activity by product category and device. While accounting for less volume than smart phones, tablets yield higher average tickets, comScore’s data show. With desktop commerce controlling 90.4% of digital sales, smart phones account for a 6% share and tablets for 3.5%.

“While smart phone users outnumber tablet users by a factor greater than 2x, the average spending per device owner is actually 20% higher on tablets,” says a commentary accompanying the data. “This is likely a function of the platform’s higher income demographics and its greater similarity to the desktop experience due to its larger screen size.”

Event tickets accounted for the most m-commerce volume in the first half, with a 15.4% share of overall digital commerce. Here, sales on smart phones claimed 10.9%, with tablets yielding a 4.5% share. Apparel came in second, with an overall m-commerce share of 9.7%—6.2% on smart phones and 3.5% on tablets.

—John Stewart