American Banker  |  Thursday, November 8, 2007

By Rob Garver

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Even as mobile banking systems are finally gaining traction — and wireless services of all sorts are on the rise — restaurant-goers in the United States still cannot pay at the table.

And Americans in most major cities have to check their pockets for cash before stepping into a taxicab, but in many countries around the globe it is quite common to swipe a card through a mobile card reader to pay the fare electronically.

Last year, the San Jose terminal company VeriFone Holdings Inc., realizing that the U.S. was ready for wireless payment options, acquired Lipman Electronic Engineering Ltd., the Israeli firm that held the global lead in portable payment devices.

VeriFone's chief executive officer, Douglas G. Bergeron, said that Lipman also had many behind-the-scenes attractions.

Its long history of innovation in wireless payments strengthened VeriFone's already-large research and development efforts.

Meanwhile, Lipman's manufacturing base has allowed VeriFone to use contract manufacturers on a more strategic basis, he said.

But the biggest benefit from the acquisition was the position it gave VeriFone in wireless payments, he said.

"The acquisition of Lipman made it possible to accelerate our rollout of wireless products and to increase our presence in key emerging markets where Lipman had gained a strategic footprint," Mr. Bergeron said.

"In addition, Lipman in the U.S. had developed a strong following in the important ISO channel and so we were able to expand our relationships in that channel," he noted.

The $795 million acquisition gave VeriFone, already a dominant player in the market for retail credit and debit payment terminals, a commanding lead in the wireless systems that are a key part of the evolution in U.S. payment habits that analysts say is overdue.

"Through that acquisition we've been able to get a stranglehold on that part of the market," said Paul Rasori, vice president of global product marketing for VeriFone.

Though the U.S. is late to the game in adopting wireless payments, Mr. Bergeron expects growth to surge once the devices are widely introduced here.

"I don't think the American consumer will need convincing," he said. "They want to use their cards anywhere, anytime. Wireless is inevitable, especially in areas where card acceptance is practically unavailable today."

The added security of wireless payments and the ability of wireless devices to process PIN debit payments are also attractive to cardholders, he said.

"Consumers are increasingly wary of letting their cards out of sight, plus many want the option of using PIN debit," Mr. Bergeron said.

"Merchants in some markets will be more progressive, while in other markets they may be more conservative with regard to adoption. But as we've seen with card acceptance at gas stations and fast-food restaurants, once the door is opened, merchants find the market force becomes irresistible as either they adapt or lose business to competitors."

Analysts who follow payment processing agree that the wireless market offers a lot of potential for growth in the U.S. "If the big picture is that we are changing our behavior and using less cash and more cards, then with the advances in wireless technology, it opens up a whole new set of payments options for transactions that were traditionally made by cash or check," said Gil B. Luria, an analyst with Wedbush Morgan Securities in Los Angeles.

Because the Lipman technology can be adapted to access the various payments networks in a several ways — by connecting through a WiFi network to a large retail store's computer system, or by connecting to directly to a processor through General Packet Radio Service, commonly used by cell phones — the possibilities for wireless payments are vast, observers say.

Applications as varied as using roving cashiers to break up long lines at department stores during the holidays and allowing a mechanic to collect payment for changing a tire by the roadside are all within the realm of possibility.

Many of the potential applications have a clear value proposition for VeriFone, according to analysts, but none have as much potential as letting diners use cards to pay for their meals at their tables.

"In ranking those opportunities, the really substantial one is pay-at-the-table," Mr. Luria said.

"Street fairs and taxis are nice, but those are opportunities in the tens of millions of dollars in sales. Pay-at-the-table could be a multi-hundred-million-dollar opportunity" he added.

William C. Nichols, a senior vice president at VeriFone and its head of global marketing and Asia-Pacific operations, said getting ready to take move into the restaurant market has been a major project.

Unlike their counterparts in Japan and in other countries, where pay-at-the-table technology is flourishing, U.S. restaurants often make use of electronic management systems sold by third-party vendors.

These systems, which manage order flow, billing, and payments, are such an integral part of the restaurants' operations that VeriFone decided to strike reseller agreements with some of them, such as Micros Systems.

Mr. Nichols said that VeriFone has worked to integrate its products with the systems of all the major restaurant management technology companies to be able to sell to the chains — think Applebee's or TGIFriday's — that make up much of the U.S. restaurant business.

Because wireless payments are new to the U.S. market, Mr. Nichols said that it was vital for the integration of VeriFone's products into restaurant management systems be flawless, to avoid creating any uncertainty about using the devices.

"We knew it had to be ironclad on day one," he said. "That's one of the reasons it is so critical for us to work with the large players."

For small restaurants, VeriFone markets a stand-alone product that allows wireless payments but requires the owner to reconcile its card payments with cash receipts at the close of business.

When asked how the company expects to persuade restaurants to adopt wireless payments, VeriFone executives cited two major attractions: Its handheld devices can reduce fraud, and enable restaurants to handle PIN debit transactions, which are almost unheard of in the food-service industry.

Mr. Rasori said VeriFone's research indicates that between 50% and 70% of all meals at sit-down restaurants are paid through signature debit transactions, which are significantly more expensive to the merchant than PIN debit payments.

According to Mr. Luria of Wedbush Morgan, the difference in transaction costs, depending on the restaurant's arrangement with its acquirer, can be "an order of magnitude." The typical transaction fee is 2.5% for a signature debit transaction and 1% for a PIN debit transaction.

There is some dispute about what the evolution of wireless payments will mean for the banks that issue credit and debit cards.

According to Don Rhodes, policy manager for payments and technology at the American Bankers Association, the potential for fraud reduction makes the new technology a welcome change for banks.

"These transactions are priced differently because of the risk," he said. "A 'PIN card-present transaction' is the lowest-risk transaction you can do — that is why that is priced at the lowest level. For a signature debit or credit transaction, there is higher risk and higher pricing."

The introduction of wireless payments "is a win-win for the merchants, consumers, and the banks," he said.

However, Mr. Rhodes' position assumes that the difference in transaction fees is matched by the difference in risk. Some industry analysts doubt that this is really the case.

Avivah Litan, a vice president with Gartner Inc., said that despite consumers' stated preference for PIN transactions, banks have been creating incentives for signature debit ones.

"There are two reasons why banks like signature better," she said. "One is that they generate revenue through higher fees. Second, if a signature is forged, they can charge the amount of the transaction back to the merchant, but if a PIN is stolen, the bank is on the hook."

Mr. Bergeron says that in the long run he is not worried about efforts by banks to push signature debit over PIN debit.

"Banks realize that increasing the size of the overall market is more lucrative than trying to squeeze extra fees out of a fixed market that faces increasing numbers of competitors," Mr. Bergeron said.

"One thing you can be sure of: Banks will always find a way to make money from handling transactions. The biggest issue for them is market share, so the more creative they can be in expanding the use of their cards, or the number of transactions they process, the better off they will be."

VeriFone says restaurants most likely will value the wireless terminal technology because of the savings it offers, but it also will provide them a selling point for customers.

Mr. Rasori said that restaurants are virtually the only place where a customer still surrenders custody of a card during the payment process, typically giving it to a server who takes it to a reader in another part of the restaurant.

Not surprisingly, fraud experts have found that restaurants are the No. 1 spot for card fraud and "skimming," when a card is swiped through a second device during a transaction, capturing the account data for later use.

VeriFone says it is waiting for the sit-down dining industry to reach the sort of tipping point that fast-food chains hit about three years ago.

Analysts say that as little as five years ago it was nearly impossible to pay electronically at most fast-food restaurants.

However, when McDonald's Corp. adopted electronic payments, Burger King Holdings Inc. quickly followed. With the two industry heavyweights accepting card payments, the remainder of the industry quickly fell into line, and within three years virtually all fast-food chain franchises were taking cards.

Whether and when the snowball effect will hit the U.S. restaurant market is an open question, but it is clear that the move into wireless payments through the Lipman acquisition has already started to show benefits for VeriFone.

Since the acquisition closed in November of last year, VeriFone has doubled sales of Lipman's core product, according to Mr. Rasori. "Today between 25% and 30% of our U.S. revenue is related to wireless products," he said.

In a conference call with analysts in September, Mr. Bergeron toasted the Lipman acquisition, giving it much of the credit for his company's 9% third-quarter growth in North America from the second quarter, as well as strong sales in emerging markets.

"Given the outperformance in profitability that we have consistently enjoyed since the closing of the Lipman acquisition last November, we are now taking this opportunity to update our long term financial model," he said.

Sales growth since the Lipman acquisition has allowed VeriFone to increase its projected gross operating margin by 3%, he said.

Industry analysts are just as upbeat. "It is our opinion that VeriFone remains one of the most compelling vehicles for aggressive growth investors to participate in the burgeoning global electronic payments market," Andrew W. Jeffrey of SunTrust Robinson Humphrey wrote in a research note issued in September.

Mr. Garver, who covered regulatory issues as an American Banker reporter from 1999 to 2003, is a freelance writer in Springfield, Va.

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