Europe Boils Over Smart Card Terminals Pricing

  A controversial Visa program to offer low prices on smart card terminals in Europe has some manufacturers worried that their industry will face more price competition and, eventually, consolidation.
  The smart card industry is in flux. Big-name companies are in trouble or the subject of rumors about their commitment. One reason might be a collapse in card pricing. Now the price pressure is on the point-of-sale terminal industry, too.
  Some blame the tumble in card prices on Visa International's Smart Breakthrough program, which encourages the sale of smart cards meeting Eurocard/MasterCard/Visa (EMV) operational and security standards at just $2 per card, compared to $5 for a similar card a few years ago. Some card suppliers dropped their prices and grumbled in private. Others refused to play ball and grumbled in public.
  Extending its smart card efforts to the merchant side of the card business, Visa last Dec. 12 announced its Smart Breakthrough Acceptance Device program. As part of the program two manufacturers, Cybernet and Intellect, are offering special base prices of just over $200 for terminals that conform to the global EMV standard for chip credit and debit cards. The cost of the terminals covers hardware and full EMV software as well as support and service warranties. Additional fees will apply for shipping, customs, taxes and local customization, which may vary on a country-by-country basis.
  "The focus of these programs is to improve the overall business case for chip migration," says Denny Jensen, senior vice president of smart card readiness and implementation at Visa International.
  Cybernet is a four-year-old company based in South Korea, where it has the majority share of a market characterized by heavy price pressure. Cybernet's product, the Jade (for Java-Enabled Device) Breakthrough, was designed specially for the Visa deal, is only available to Visa members and carries Visa colors and branding.
  Founded in Australia, Intellect is now based in Belgium. Intellect's deal with Visa is not exclusive. The price of its product, the Presto 201P, was based on internal discussions almost 2 years ago and was not externally driven; Intellect says it would have offered a similar product at a similar price anyhow.
  "The strategy we have been focusing on in product development over the past year is quite similar to Visa's view of the world," says Jan de Smet, Intellect's chief executive.
  Neither Cybernet nor Intellect ranks among the five top players in the global POS terminal market ("Grasping for the Pot of Gold," August, 2002). However, Santa Clara, Calif.-based VeriFone Inc., number-three worldwide in 2001, also will offer its SC 5000 EMV programmable personal-identification-number pad for a base price of about $145 in most markets. The SC 5000 allows existing VeriFone magnetic-stripe terminals and electronic cash registers to read and process EMV-compliant smart cards.
  Even before Visa's announcement, pricing was a hot industry topic, with executives split over so-called commoditization and whether the terminal market is set to follow the personal-computer industry and deliver commodity products at low prices. The alternative is added-value applications and services at the point of sale for a higher price.
  "Yes, there is this polarization-and we have commodity terminals like the T7 Plus," says George Wallner, chairman and chief strategist at Phoenix-based Hypercom Corp. The approach Wallner favors is to "maintain selling price while adding features, like the PC industry, along with high performance and parallel processing architecture."
  Intellect's de Smet says manufacturers "should get ready for redefining their markets and strategy and their roadmap ahead for a few years."
  Intellect is moving into new payment areas such as mobile payments and into delivering added-value services over the installed base. "Within three years, 50% of our revenue at least will come from software and services," says de Smet.
  Visa resists the commoditization label. "I don't agree that that's a fair description at all," says Jensen. "Our goal is to have cost-effective terminals available for our Visa member banks and merchants, to help in the migration. We are not commoditizing in any way cards, terminals or back-office systems."
  But Mark McMurtrie, Europe/Middle East/Africa marketing director for VeriFone, says the question about "terminals being commodities is very topical. It's one that some people are trying to ignore or deny ... there may be an analogy to the PC industry a few years back."
  'Toughest Part'
  Others terminal makers disagree strongly. "I don't see commoditization happening yet. This is not a worldwide commodity market because the specifications in each of the markets are so dramatically different," says Jan-Erik Rottinghuis, director-general of Paris-based Thales e-Transactions.
  But Cybernet questions the need for added value. "I don't believe that people want extra applications-all people want to do is to swipe their card and get out of the shop," says Giuseppe Caltabiano, Cybernet's president of worldwide sales and marketing.
  So why is Visa stirring up this can of worms? "Getting the acquiring infrastructure into place is probably the toughest part of the implementation of chip," says Jensen. "Merchants are really looking at this from a cost perspective."
  Not everyone agrees with this, either. "Visa is saying the reason that smart cards are not being adopted is that the price of terminals is so high," says Rottinghuis. "I'm basically saying that the price of the terminal is only a small element in the total equation. We manage in the U.K., for example, between 250,000 and 300,000 terminals for our banks. Banks are in the financial transactions business, not the terminals business. They ask us to deal with the dirty stuff of managing terminals, terminal applications and real estate and making sure that terminals are making money for them."
  As head of products and services for Barclaycard Merchant Services, one of the United Kingdom's biggest acquirers, James McDonald says terminal prices, given the relatively small-scale production and many diverse domestic standards that drive up development costs, are probably at about the correct level in the U.K.
  "A fair price for a terminal, including five-year warranty and full terminal management support, would range between ?150 and ?300 ($237 to $474) depending on the level of hardware and functionality required," he says.
  No Complaints
  Tim Allitt, head of acceptance solutions for MasterCard Europe, wonders whether anyone could "argue that terminal prices really are that expensive at the moment. I don't think the banks I've spoken to, or the retailers, are complaining about the price of technology."
  Fourteen manufacturers responded to Visa's initial invitation to bid, with only three significant players refusing to participate. Jensen won't say who, although one was Thales.
  "We abstained from submitting our final position although we did indicate interest initially. The reason we abstained is that we feel that this is getting pretty close to price fixing," says Rottinghuis. "This is for the simple reason that Visa is not a purchaser, not the actual customer. And, Visa is isolating a very small element in the total value chain of what we are providing to our customers. We have let Visa know how we feel about the program in no uncertain terms."
  McMurtrie says VeriFone declined to bid a terminal for the program, though it did bid its SC 5000 EMV PIN pad.
  "We already offer market-competitive pricing for our terminals so we didn't believe that there was anything extra the banks would gain from us participating with a terminal," he says. "We already have today a competitively priced EMV certified terminal, the Omni 3750."
  Visa knew its actions would be controversial. "The manufacturers will make statements that Visa is forcing them," says Jensen. "There is no force, there wasn't any pre-set number for manufacturers to hit from a pricing perspective. It was, 'Here's what we're looking for from a specification. Come on in and make us your best offer.'"
  McMurtrie claims there is a similarity between Visa's terminal initiative and the association's earlier program for getting low-cost smart cards out to market.
  "We do understand that that program has caused financial problems for some of the card manufacturers and as such we view that that has probably weakened some of the players in the industry," he says. "As such it has helped on one hand but caused other problems."
  There seem to be no similar pricing pressures from MasterCard, whose approach to promoting EMV stresses making it easier rather than cheaper.
  "Our view has always been to support the needs of the industry by country by working on the business case and taking a long-term view," says Allitt. "This is to find a quicker path to market to help these guys deploy and to reduce what can be very long-winded EMV testing. We don't have a short-term push because every party has to benefit from EMV."
  MasterCard initiatives include a quality-management program designed to ease the testing cycle, a reduction in interchange to encourage terminal deployments, introduction of MasterCard Secure Code to combat card-not-present fraud, and efforts to reduce transaction times with the new technology.
  So will anyone ever be willing to pay more for a terminal now? Thales insists that it will not match the Visa price.
  "There is going to be pressure and we have to deliver all these value-added services, including application development and very expensive certifications," Rottinghuis says. "It puts enormous pressure on our margins."
  He adds that lower prices will reduce investment in the industry, the result being "technology will not advance and there will be fewer competitors around and it will be less competitive."
  Implicitly supporting this point, Hypercom is looking increasingly at markets outside its traditional payment card sector that may offer higher margins. A long-time believer in biometrics, Wallner is eyeing post-Sept. 11 opportunities in U.S. homeland security. Hypercom estimates the market for identification at airports could be worth $200 million a year in terminals and terminal-to-host hardware over the next five years.
  "A lot of government-mandated programs will use smart cards and at least two biometrics," Wallner says. "Every gate at every airport needs to be secure."
  Consolidation
  Like Thales, VeriFone, North America's leading terminal supplier, believes industry consolidation could be at hand, though McMurtrie doesn't feel VeriFone itself is at risk.
  "We're profitable and we've already slimmed down the organization," he says. "We are looking to play an active role in the consolidation of the industry."
  So has Visa damaged the card and terminal industries? "If someone claims that (a smart card manufacturer) is going broke because of Visa, I do not agree," says Cybernet's Caltabiano. "If there is someone who can offer a $1 card regardless of Visa, they deserve to be successful."
  Visa rebuts the accusation too.
  "A number of the major card manufacturers came to us and said, 'Upset as we were about this (smart card) program, we're now really happy that Visa took this initiative because it stimulated the migration to chip and it created a marketplace for everybody out there,'" says Jensen. "We believe the same thing will be true on the terminal side."