Emerging Technologies Help Perk up POS Terminal Industry

  The news is good for the point-of-sale terminal market. In fact, Mountain View, Calif.-based research firm Frost & Sullivan says the global terminal market will grow at a healthy 16.4% compound annual rate over the next three years.
  Worldwide estimates of the global installed base of card-accepting terminals vary widely. But Don McArthur of St. Louis-based investment firm Stifel, Nicolaus & Co. estimates the numbers of terminals at 40 million. A majority, he says, are in the United States.
  Demand is up, but prices are falling because of stiff competition. Average prices have dropped by 5% to 8% in recent years, says Peter Swanson, an analyst with Minneapolis-based Piper Jaffray.
  To keep from competing just on price, terminal vendors are offering a variety of new features. These include the ability to connect terminals via the Internet protocol at a lower cost than dial-up telephone lines, contactless readers so consumers can pay by tapping a card on a reader, and wireless devices where landline phone service is unreliable or unavailable.
  The new features, and particularly the underlying growth in demand, are combining to result in steady revenue growth for terminal vendors. In fact, 10 of the major terminal vendors reported total revenue of $1.65 billion in 2004, up 18.7% from $1.39 billion the prior year.
  Ingenico, VeriFone Inc., Hypercom Corp. and Lipman Electronic Engineering Ltd. accounted for 82.7% of the revenue among those suppliers last year, a slight increase from 81.8% in 2003.
  The fastest mover in the pack was Israel-based Lipman, thanks in part to its acquisition of United Kingdom-based terminal maker Dione Plc. In 2004, Lipman reported revenue of $180.6 million, up 53.4% from $117.7 million the previous year.
  For most of the major players, higher revenue meant more profits. For instance, Ingenico swung from a $15.7 million loss in 2003 to a profit of more than $6.5 million last year, VeriFone boosted profits from $241,000 to $5.6 million and Lipman's profits rose slightly from $29.4 million to $30.7 million.
  The one exception was Phoenix-based Hypercom, which swung from a profit of $11.2 million in 2003 to a loss of nearly $8.7 million last year. The company also had to restate its earnings because of accounting errors. Following those disclosures, Hypercom's CEO and chief financial officer stepped down in March.
  Ranking the vendors in terms of units shipped has become more difficult in recent years as one major vendor after another has declined to report unit sales. Each one claims the other is inflating its figures to move up in the rankings.
  That is a sign of a hotly contested marketplace, says Nick Holland, director of emerging technologies at Shrewsbury, Mass.-based research firm Mercator Advisory Group. The market is a lot more competitive than it was in previous years, Holland says. There is a defensiveness out there at the moment.
  Whatever the actual ranking of the major players, all of them face big opportunities. Among the biggest is the conversion to smart cards by banks in many nations, a move that requires terminal upgrades. In most cases, banks are requiring the use of personal identification numbers with their smart cards. That way, individuals who find or steal a smart card will not be able to use it for purchases unless they also know the PIN.
  Fraud Effects
  The move to smart cards often is known in the industry as EMV, after the international standard for chip-based payment cards developed by Europay International (now part of MasterCard International), MasterCard and Visa International. MasterCard and Visa have played a significant role in encouraging merchants to deploy terminals that conform to the EMV standard so that cardholders will have someplace to use the new cards that banks in some countries are issuing.
  A major strategy has been changing the fraud-liability rules so that, after a certain date, an acquiring bank or its merchant will only be guaranteed payment if its payment terminal can handle EMV-compliant smart cards. That liability-shift deadline passed in January of this year in Western Europe and in South Africa. It will be reached in January 2006 in Asia-Pacific and the Middle East, and in 2010 for Visa members in Canada.
  Merchants are not required to upgrade their terminals, but the threat of more fraud is an incentive, especially in tourist areas that accept cards from many foreign cardholders, the type of transaction most likely to be fraudulent.
  In some cases, merchants have been given incentives. For instance, in the United Kingdom large merchants were offered a discount of 0.1% off the fees they pay when they accept cards if they upgrade to EMV.
  Besides upgrading existing terminals, vendors face many opportunities to sell terminals to merchants that do not now accept cards. Nowhere is the opportunity bigger than in China, where only 3.49% of merchants accepted payment cards at the end of 2003, according to China Unionpay, the national card-acceptance network. In all, there were just more than 350,000 POS terminals in the country at the end of 2003, Unionpay estimates.
  Now is definitely the time for POS growth in China, says Jerome Janin, vice president of marketing at Ingenico. He says his company recently signed an agreement with a Chinese firm to import Ingenico terminals into China.
  Add Japan and South Korea, and that is where Visa sees its major sales occurring in the next three to four years, says Trevor Lawton, head of Visa's global acceptance infrastructure.
  Another angle to the Asian story is the growing use of contactless technology, allowing consumers to pay by waving a contactless chip card-or a mobile phone embedded with a contactless smart card chip-near a reader. The chip and reader communicate via radio signals, technology that is often referred to as RFID, for radio frequency identification.
  Among the leaders in contactless payments are Japan, Malaysia and the U.S., where two big issuers-J.P. Morgan Chase & Co. and American Express Co.-have announced plans to issue pay-with-a-wave cards, and more are expected to follow suit (see story page 8). This will require upgrades of existing terminals to read contactless cards, or the introduction of new terminals in some locations that traditionally have accepted only cash.
  The penetration of terminals into retail locations where the average ticket is low points to another phenomenon unfolding in the U.S. and other markets: Consumers are using cards more often in place of cash and checks. According to Mercator's Holland, 65% of U.S. consumer transactions were in cash or checks in 2000, and 35% with cards. By 2010, he forecasts the numbers largely will be reversed, with 62% of transactions made with plastic.
  That means more POS terminals, and that trend already is visible in the big fast-food market. McDonald's, for example, has equipped 10,000 of its U.S. stores to accept payment cards in recent years, and it expects nearly all of its 13,700 U.S. stores to accept cards by the end of this year.
  In fact, the deployment of POS terminals and networks for routing those electronic transactions is prompting U.S. fast-food restaurants to start issuing their own prepaid cards, which consumers can buy as a gift or for their own use in the store that sells them the card. McDonald's is one fast-food chain that has begun issuing its own prepaid card. All of its competitors will follow suit this year, says Karen Larsen, vice president of global marketing and business development at ValueLink, the prepaid unit of First Data Corp.
  Wireless Options
  Spending on retailer gift cards jumped from $40 billion in 2003 to $48.4 billion in 2004 in the United States, Mercator estimates.
  Virtually all card-accepting stores in the U.S. connect to transaction processors via reliable phone lines. But card acceptance also is growing in nations that lack a fully developed wired telecom infrastructure, prompting greater use of wireless networks to connect POS terminals.
  Way Systems, a Woburn, Mass.-based wireless terminal maker, is working with Visa in the U.S. and in Asia to deploy a phone that has a built-in card swipe and smart card reader. Will Graylin, Way Systems CEO, says some Asian markets are ideal for this type of terminal because cell-phone networks are more developed than traditional wired telephone systems. Delivery services, limousine drivers and independent contractors are among the potential users of this technology.
  Janin says Ingenico is pushing the pay-at-the-table terminal-long used in France-in other markets. That type of terminal is aided by wireless communications technologies such as infrared or, more recently, Bluetooth, which allows devices to talk to one another over short distances.
  Another technology changing terminals is the Internet protocol, the technical standard that allows POS devices to send and receive data via the Internet. IP terminals complete transactions faster than their dial-up counterparts, says Guilherme Blumenthal, Hypercom executive vice president of sales and operations. Additionally, he says, the terminal's Internet connection means a dedicated phone line can be eliminated.
  Merchants of all sizes are interested in this technology, says Paul Rasori, VeriFone's vice president of marketing for North America. He likens the growth of broadband Internet access in homes and businesses to a revolution.
  Speed Advantage
  POS terminals just now are getting to the point where they can take advantage of that, Rasori says. The advantages are faster speed, lower cost because of the elimination of dedicated phone lines, and the ability to share a single communication feed among multiple checkout lanes in a store.
  VeriFone is doing transactions in the sub-two-second range, Rasori says, compared with 15 seconds on a dial-up modem. IP offers more than enough security, since the Secure Socket Layer technology standard for Web transactions encrypts data sent over the Internet, he says.
  Such technology advances are prompting more merchants, small and large, to consider new card-accepting equipment. And the requirements are growing to include acceptance of contact and contactless chip cards in some markets, as well as wireless and Internet-based features. All these changes in how consumers pay figure to create new opportunities for POS vendors.
  (c) 2005 Cards & Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com