VeriFone Hangs Up on Micro Merchants

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VeriFone (PAY) is backing away from the direct-to-merchant sales strategy of its Square-competitor SAIL — proof that sometimes being first to market holds a special advantage.

From the start, this spring, it was clear that VeriFone was playing catch-up. 

"Being first, early and efficient has created a big advantage" for Square, says Wedbush analyst Gil B. Luria. "And certainly late entrants, like VeriFone, didn't have a chance."

He explained that VeriFone simply did not have the right distribution plan to make this work, and at one point was even accused of lifting much of its terms and service agreement from its rival.

"[SAIL] was a total copycat, quick to market imitation," says Luria. "And plus they have very, very little business there so it's not really material."

The company will continue selling SAIL through other distributors, such as banks and independent sales organizations, but will stop going after casual card acceptors. VeriFone will spin off assets developed for that business around customer acquisition, risk management and customer billing.

A VeriFone spokesman said existing SAIL merchant accounts will continue to be supported. The number of those casual card acceptors is not disclosed.

Indeed, the news marks an end to a very public tiff between the two competitors.

In the spring of 2011, VeriFone chief executive Doug Bergeron took to YouTube to bash Square for security issues. Most recently, Bergeron called Square "Pets.com" after a recent round of funding for the Silicon Valley startup.

In the end, it seems that Square has won. Bergeron did not respond to a request for comment, but in a fourth-quarter earnings call, the San Jose terminal maker chief did say the SAIL business was not sustainable.

"Customer acquisition costs either through research engines or TV advertising cannot and will never justify the razor-thin margins produced by merchants with infrequent volume and extremely high attrition," he said on the call.

A VeriFone spokesman was emphatic that the decision will have no impact on the terminal maker's other plans for mobile commerce — specifically VeriFone's GlobalBay and PayWare Mobile products, which both focus on larger retailers. 

That might not be a bad thing for VeriFone, though.

"At least I admire VeriFone's honesty here," says Philip Philliou, a payments consultant. "They are saying it costs too much. Which quite honestly, when you think about the Square business model, it does make you wonder about the economics of their solution, and even the long term viability of their [product]."

Square has recently made inroads into mobile payments with a $25 million investment from Starbucks (SBUX) and news that it is providing its users gift cards that will be redeemable at the point of sale through smartphone-displayed QR codes.

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