A Mixed Bag

  North American payment-terminal makers should be smiling these days. In 2005, rollouts of contactless card programs along with greater demand for wireless and Internet-connected terminals all helped create potential churn in the terminal market.
  A look at the region's top four terminal manufacturers, however, shows that, while Lipman and VeriFone relished in the added opportunity, others, particularly Hypercom and Ingenico, experienced minuscule growth in 2005 (see chart page 26).
  Eventually, says one analyst who asked not to be identified, the industry will be forced to consolidate further as pressures mount from investors wanting greater revenue growth. "You'll see the existence of four market leaders drop to three or two over the next three to five years," the analyst predicts. "It's a scale business. If you want to make money, you've got to be big."
  During a conference call March 2, Douglas Bergeron, VeriFone chairman and CEO, noted that the company looked at two potential acquisitions, which he did not identify, during the past quarter. However, it was not satisfied with what it saw.
  "We're constantly looking at businesses and making either a buy or build determination, and both of these didn't pass the final test at the end of the day," Bergeron said.
  Despite their inconsistent financial results, each of the leading terminal makers agrees that the current forces driving sales will continue this year. Down the road, they say, expansion of biometric-based payment services also may convince more merchants to give up their aging, though reliable, debit and credit card terminals.
  Here is a look at the latest market trends and how the leading terminal makers are reacting:
  Contactless
  The fact that some major retail chains are embracing contactless payments that use radio frequency identification chips to communicate with compatible payment terminals is creating considerable terminal-market buzz. But how long the market can sustain the momentum remains to be seen.
  The overriding question is, when the major card brands, particularly Visa, MasterCard and American Express, pull back on providing financial support to encourage big merchants and issuers to participate, will the smaller retailers join the fray? The consensus among terminal makers is they will.
  "I do see it coming, but there's a lot of work that needs to be done," says Michael English, director of marketing at Ingenico, a France-based terminal maker with North American headquarters in Toronto and Roswell, Ga. "There needs to be more cards issued and an increase in the number of national merchants that accept contactless. ... By 2007, we will see smaller merchants asking for contactless."
  Worldwide, Visa says its contactless products are accepted by at least 20,000 merchants, and MasterCard says 25,000 merchant locations accept its PayPass contactless cards and fobs. Domestically, there were about 120,000 terminals capable of reading contactless cards at 19,700 retail sites in the United States as of the end of 2005, according to Art Kranzley, MasterCard executive vice president of advanced payments.
  Among the locations are 12,000 McDonald's restaurants and 5,800 7-Eleven convenience stores.
  At least 4 million Visa-branded contactless cards have been issued worldwide, according to Visa USA. MasterCard says its members have issued about 5 million PayPass contactless cards and fobs.
  These numbers include the large-scale rollout of "blink" contactless cards by J.P. Morgan Chase & Co. and take into account rollouts outside the United States. Chase issues both MasterCard- and Visa-branded contactless credit cards and says it has issued 6.5 million such "blink" cards in the United States since launching the product last spring.
  American Express Co. has issued more than 2 million Blue cards with ExpressPay contactless technology since last June, according to Alfred F. Kelly Jr., AmEx group president for consumer, small business and merchant services. "Contactless payments-payments using radio frequency and secured by a computer chip-will continue to work their way into everyday spending merchant categories," he says.
  Discover Financial Services, issuer of the Discover card, is testing contactless payments via cell phones and expects a full roll out later this year ("Cell Phones Move into POS Payments," January).
  Each of the major terminal makers appears poised to meet the increased demand for devices that read the cards and other payment devices that hold the contactless chips.
  Ingenico offers a contactless payment expansion module that merchants can attach to existing EnTouch 1000, i6550 and i6770 terminals. By 2007-2008, the company plans to roll out devices with the contactless readers built in, says English.
  "For some merchants, it makes all the sense," he says. "But it all depends upon the [contactless card] issuance."
  Phoenix-based Hypercom in February announced that the San Francisco Giants will use its countertop Optimum T4100 terminal to accept contactless cards at AT&T Park concession stands (See Cover Story page 28). In the next few months, vendors in the stands will begin using the M2100 wireless terminal to accept contactless payments, says Neil Hudd, Hypercom senior vice president of product development and marketing.
  "Contactless is moving extremely fast," he says. "The adoption rate in the U.S. is better than anyone anticipated. It's a big winner for us."
  VeriFone, the San Jose, Calif.-based terminal maker, also has benefited from the contactless card trend. McDonald's is deploying the Omni 7000MPD terminal with an RFID module for the bulk of its stores, while CVS drug stores are using the module with VeriFone's T8810 color touch-screen device for contactless payment acceptance, says Paul Rasori, VeriFone vice president of marketing and product management.
  ISOs Watching
  Virtually all of the major contactless terminal rollouts thus far have involved the manufacturers directly. But the independent sales organizations and agents that resell terminals for processors and acquirers are watching the growth in contactless payments closely, Rasori says.
  "ISOs are aware of it and have asked for the technology from VeriFone and the processors," he says. "So we've worked with the processors to certify contactless technology with their merchants."
  Like Ingenico's English, Rasori is not yet ready to say contactless is a mass-market technology. "But as more cards are being issued, it is a promising area," he says.
  Another leading terminal maker, New York-based Lipman USA, similarly offers plug-and-play contactless capability for all of its terminals. But Lipman has not yet developed a built-in contactless reader.
  "Our discussions with MasterCard and our customers have indicated that the contactless card reader has to face the consumer," says Bulent Ozayaz, Lipman vice president of marketing. "Currently, all of our terminals face the clerk."
  Ozayaz would not say whether Lipman is developing terminals with built-in contactless readers. However, he says the company is working with the leading contactless vendors-Vivotech Inc. and On Track Innovations Ltd.-to make its terminals compatible with their peripheral readers.
  Wireless
  While contactless payments may be creating the market buzz, Lipman says most of its sales growth is coming from heightened merchant interest in wireless terminals. Last year, nearly 30% of the terminals Lipman sold were wireless devices, Ozayaz says. As with VeriFone, Hypercom and Ingenico, Lipman would not reveal 2005 North American terminal-shipment data, though the four traditionally have been the biggest terminal shippers in the United States.
  In a report released last June, Mercator Advisory Group noted that, despite an 18.9% compound annual growth rate for wireless-terminal sales in the United States, sales forecasts represent only a fraction of the potentially $1 billion-and-growing market. But Michael Friedman, principal analyst at Mercator and the report's author, sees a parallel between the contactless and wireless markets.
  "We'll definitely see a pickup in contactless and wireless (terminals) as more people become comfortable with the technologies," he says, noting that Mercator plans to release an updated report on the U.S. wireless-terminal market this summer.
  The leading areas where wireless terminals would prove most useful include restaurants for pay-at-the-table purposes, home-service providers such as plumbers, and taxis/limos, Friedman says.
  At Lipman, the chief terminals driving the wireless sales growth are the GPRS 8000 M-11 and Mobitex 8000 M-13 devices. "The terminals are identical but use different telecom options," Ozayaz says. "We're seeing people moving away from dial-up terminals to wireless terminals to minimize the investment capital for installation costs."
  Each business landline phone can cost $50 to $60 per month, while a wireless data plan can cost $20 to $25 per month, Ozayaz says. Wireless terminals, however, incur more up-front expense, about $800 versus $300 on the low end for a land-line terminal, he says, noting that actual prices vary based on the functions the terminals support.
  Hypercom, meanwhile, also is seeing more merchants interested in wireless terminals, though the U.S. market has been slow to catch on, Hudd says. "Europe has had pay at the table for five years," he says. "We're only now starting to see those types of payments starting to play here."
  Hudd expects the M2100 terminal, already available in Europe and South America, to play a large U.S. role for Hypercom as it works to help ISOs meet domestic wireless needs once the terminal is introduced domestically "very soon."
  VeriFone similarly is working to meet the market's needs for wireless devices by touting its Vx 610 terminal, which supports processor connectivity via cellular links provided by Verizon and Cingular, Rasori says. This summer, he says, VeriFone will roll out the Vx 670, which is designed to accommodate payments at restaurant tables. The terminal will have a built-in PIN pad and a roll printer for receipts, he says.
  Ingenico's English also sees the U.S. wireless market starting to take hold, both for short-range-in which multiple terminals link to a central base unit on site-and for long-range cellular used on the road. Ingenico's current pay-at-the-table lines are the i7770 and i7780 terminals that use short-range communications. The company this year plans to introduce two GPRS long-range terminals, the i7910 and the i8560, English says.
  Like Hypercom, English sees an eventual pairing of both contactless and wireless terminals, particularly for vendors selling in stadium aisles. "Three beers can cost $15 to $20 right there," he says. "It's good business."
  TCP/IP Connectivity
  Looking back at 2005, VeriFone's Rasori says one of the most important factors that affected sales was the transition by more merchants to high-speed terminals that use Transmission Control Protocol/Internet Protocol Web links to processors. While so-called IP-based terminals are not new, the way they are being promoted to and used by merchants is, he says.
  "Previous attempts to use IP were for value-added browser stuff," Rasori says. "What we did was focus on making the current process more efficient. We use the existing solutions for dial-up and get them into an IP environment."
  Rasori says merchants connected one-third of the terminals VeriFone shipped last year to processors via TCP/IP links, which can cut transaction times from 15 seconds to a couple seconds or less. Terminal-software downloads similarly are much faster.
  VeriFone's competitors agree that the IP trend is growing domestically. "IP is moving extremely fast," says Hudd, noting that all Hypercom terminals sold today are IP capable. "People see that as a major benefit."
  Ingenico's English calls the conversion from dial-up to IP connectivity the next big growth area. "Transactions are much faster, and we're seeing a significant increase in the number of small businesses that have broadband or DSL lines installed," he says.
  Merchants that use a single broadband connection such as a DSL line, perhaps to communicate with other offices, can tie multiple terminals into it to link with processors via an IP address and reduce their monthly costs to support phone lines that link to individual terminals. A single DSL connection for multiple terminals may cost $30 per month, or about half the cost to install each dial-up business phone line, experts say.
  For years only the largest merchants could capitalize on technologies developed to improve consumers' transaction experience. As prices have fallen, relatively small merchants have become able to explore the benefits of advanced terminal technology. Some vendors, though, appear better prepared than others to meet the demand.
  REVENUE PERFORMANCE OF TOP 4 VENDORS
  Company 2005 2004 Change
  Ingenico $526.3 $514.3 2.3%
  VeriFone* $485.4 $390.1 24.4%
  Hypercom $245.2 $241.3 1.6%
  Lipman $235.4 $180.6 30.3%
  *Fiscal year ended Oct. 31. Data reflect global performance for each company.
  SOURCE: Company earnings reports, Cards&Payments. Revenue in millions.
  (c) 2006 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com