VeriFone’s Way Systems Deal Bolsters Its Strategy

With its acquisition of mobile-terminal maker Way Systems Inc., VeriFone Systems Inc. picked up a small, struggling company facing plenty of competition in the market for mobile point-of-sale hardware and services. But the San Jose, Calif.-based terminal kingpin also bolstered a linchpin strategy in its efforts to diversify beyond POS hardware. That strategy, which VeriFone has been pursuing lately with its own moves into mobile payments, involves offering services that can generate ongoing revenues.

In the light of that strategy, the 25,000 merchants linked to Way’s mobile-gateway appealed to VeriFone when the 8-year-old, Boston-based Way began knocking on the doors of potential buyers. “The attractive thing about Way is the 25,000 customers are services-based customers, so they pay a recurring gateway fee in addition to POS terminals,” Paul Rasori, senior vice president of marketing for VeriFone, tells Digital Transactions News. “It fits in well with our strategy.”

That strategy has started to pay dividends in a tough market for payments hardware. Services-based revenue totaled $41.2 million in the second quarter, up 47% from the year-ago period, and accounted for 17% of overall revenue. Key to that growth is PAYware Connect, a mobile-transactions gateway VeriFone uses to support its new PAYware product line, which includes an app and a card-acceptance sleeve for the Apple iPhone. VeriFone reported last month it now has more than 10,000 merchants linked to PAYware Connect. Gateway fees include a $49 enrollment fee and monthly fees of $15 plus 17 cents per transaction.

VeriFone announced on Wednesday that it had acquired Way for $6 million, plus another $3 million in earnouts that it could be liable for a year from now. Rasori says Way’s management and investors, which included Bessemer Venture Partners and Austin Ventures, concluded the company had reached its growth limits given current capital. “”They were looking for a return for the investors,” he says. “They were shopping the company.”

Besides Way’s gateway clients, the company also had forged relationships with about 100 independent sales organizations that Rasori says VeriFone also found attractive. These ISOs, he says, will make it easier to board merchants to the gateway. “It’s a pretty sticky business to get a merchant turned on,” he notes. Over time, he says, VeriFone will blend features of its own gateway with Way’s. “Most likely, 12, 18, or 24 months down the road, [the difference] will be imperceptible,” he says.

Way also holds a portfolio of patents, among them one that covers the connection of a mag-stripe card reader to a mobile device, including smart phones, and has applied for others. These include one covering PIN debit security on a mobile phone. Rasori says this intellectual property played a role in VeriFone’s decision but was not crucial. “That was icing on the cake,” he says. Nor has VeriFone given thought, at least yet, to how it might use the Way patents. “We’ve got no plans on if and now we would enforce them,” he says.

Ben Goretsky, chief executive of Way rival USAePay Inc., Los Angeles, agrees Way’s 25,000 gateway merchants are valuable. “That’s the golden ticket,” he tells Digital Transactions News. But he also argues VeriFone overpaid. The $6 million upfront price works out to $240 per merchant, a number Goretsky figures VeriFone will have a hard time recovering. “It gives VeriFone a good jump in terms of clientele for their gateway,” he says. “If they feel it’s worth it, fantastic, let’s see where it takes them.”

One problem Goretsky foresees is that VeriFone won’t be able to hold on to all of the Way clients. He estimates it will sustain a 30% attrition rate, and of that it might be able to woo back a quarter. “If I were VeriFone, what I’d worry about is attrition during conversion,” he says. “I guarantee they’ll lose 30%.”

Unlike VeriFone’s PAYware and USAePay’s PaySaber products, which let merchants use their existing smart phones, Way’s mobile system requires merchants to take on a second, specialized phone and another data plan. “Our philosophy is you use what you’ve got,” says Goretsky, who says USAePay’s own gateway now supports 70,000 merchants.