Many acquirers and ISOs view smartphone-based wireless card-acceptance products as a means to reach yet-undiscovered legions of mobile merchants that do not yet take cards for payment. And judging from the discussions among peers at recent industry conferences and the spate of products and services entering the market, the topic is at the forefront of many business plans.
Smartphone-based transactions represent an opportunity to grow the U.S. card-acceptance market, which largely has become saturated and commoditized because many brick-and-mortar merchants already accept card payments.
As such, ISOs potentially could generate more revenue and sign new merchant accounts by offering smartphone-based hardware and software, observers say. And the introduction of such devices is unlikely to mean trouble for the traditional wireless-terminal market because the two types of devices largely serve separate merchant segments and are complementary, they contend.
"There is a bit of a gold rush" in the smartphone-based terminal market, says Nick Holland, a senior analyst at Aite Group LLC in Boston. "There are probably 20 or 30 different solutions that would plug into [smartphones] with various levels of robustness and encryption."
Though the marketing buzz and number of mobile products are growing, details on the market potential and on how many mobile merchants exist are scarce.
"I've seen numbers from 2 million to people quoting 20 million" potential mobile merchants that might purchase the technology, says Bill Ramsey, vice president of business development at Apriva, a Scottsdale, Ariz.-based wireless-payments provider. "We believe it is in the single-digit millions."
Apriva earlier this year introduced AprivaPay, a browser-based application that supports card transactions, and AprivaPay Professional, a downloadable transaction application merchants may combine with an optional printer and magnetic stripe card reader.
Though the exact market size for wireless terminals may be unknown, the potential for sales does exist, and it is "worthwhile to pursue," Ramsey says.
The challenge for many ISOs and other resellers of smartphone-based products is finding the mobile merchants, which typically are small, sole-proprietor businesses that may operate out of their homes.
Potentially millions of merchants could use smartphone-based technology for accepting payments, "but where are they?" asks Michelle McBride, CEO of Pay Bizness, a Baltimore-based ISO. "It's a new technology" that requires a different approach to finding merchants, she says.
COST CONCERNS
Many mobile merchants, which can include plumbers, landscapers, photographers and electricians, are interested in smartphone-based card-acceptance technology, says Jamil Adair, president and CEO of Merchants First Choice Inc., an El Paso, Texas-based ISO that sells VeriFone Holdings Inc.'s PayWare Mobile service.
Many of the smartphone-based products vendors have introduced include hardware and a downloadable software application that support consumer transactions. Typically, merchants can swipe consumers' cards using the machines, whose features vary by vendor, with some offering receipt printers or barcode scanners in addition to the card swipe.
The market is ripe because many mobile merchants either do not accept payment cards or they pay relatively high card-not-present rates to process card payments, says Ben Goretsky, CEO at USA ePay, a Los Angeles-based payment gateway. USA ePay in April introduced PaySaber, a portable card-acceptance machine that connects to Apple Inc.'s iPhone and iPod Touch products and combines with a downloadable software application to enable merchants to accept cards.
Many merchants contend it is too expensive to buy a dedicated wireless terminal, Adair notes. Indeed, many of the merchants with whom Adair has spoken "are looking for something more affordable in terms of monthly costs" than a traditional wireless device, he says.
Smartphone-based payment applications and devices are enabling a "much wider group of merchants, typically referred to as micromerchants, to accept electronic payments," says Paul Rasori, San Jose, Calif.-based VeriFone's senior vice president of marketing. "In the past, those merchants couldn't justify paying for electronic payments. By enabling the cell-phone technology they are carrying with them anyway [to accept card payments], the cost of entry into the payment system is much less costly for them."
Before smartphone-enabled payment card acceptance emerged in the market, merchants' only alternative was to buy a dedicated wireless-payment device, which typically includes a higher upfront cost, says Rasori.
A merchant may pay between $600 and $800, depending on the reseller, for a traditional wireless terminal, says Rasori. In addition, wireless devices typically need their own network connections, which may cost an additional $15 to $20 each month, he notes.
In contrast, VeriFone's PayWare Mobile service includes a free application merchants can download from Apple's online application store and a card reader available at Apple stores for $149. The reader is free for many merchants if they sign a long-term merchant-processing contract, according to VeriFone.
VeriFone's suggested pricing plan is a $15 monthly gateway fee and a one-time $49 sign-up fee for merchants with existing accounts. Merchants also pay VeriFone 17 cents per PayWare Mobile transaction. Resellers, including acquirers, set their own rates, VeriFone says. Merchants must purchase the iPhone, which ranges in price from $99 to $299, and an AT&T service contract separately.
COMPLEMENTARY MARKETS
Separate markets exist for both traditional and smartphone-based wireless products, contends Scott Holt, senior vice president of business development for ExaDigm Inc., a Santa Ana, Calif.-based terminal maker.
Some merchants, such as concert t-shirt vendors who process a large number of transactions over a short period of time, may find a smartphone-based product does not meet their needs, says Holt. Other mobile merchants that process fewer transactions, such as a plumber who may complete only one or two transactions daily, may find a smartphone-based product more helpful.
Mobile phones are "not designed to be treated in the same way as something built specifically" for conducting transactions, says Holt. Accepting payments is another business tool the phone can perform, but it is not the phone's sole purpose, he says, noting many mobile merchants use their smartphones' other applications and features frequently throughout the day and cannot have the phone tied up with constant transactions.
Traditional wireless terminals are a better fit for some merchants, agrees McBride. A bookseller client of McBride's wanted a wireless terminal and opted for a dedicated device over the smartphone-based option because having minimal steps in the transaction process was important, she says.
The client wanted to be able to print a receipt and did not want to go through the process of entering a consumer's e-mail address into a phone, says McBride, noting "the traditional [terminal] fit better for her."
Because smartphone-enabled devices are not the right fit for every merchant, the products may drive additional merchants to purchase traditional wireless terminals, says Tim McWeeney, vice president of North American sales at Way Systems Inc., a Woburn, Mass.-based provider of traditional mobile-payment terminals. "I predict there will be a tremendous fallout of people who are unhappy with the limitation of processing on a cell phone. It will give me a market I didn't have before," he says.
Overall, smartphone-enabled payment acceptance is "opening up the market for millions of people" and is helping to "expand the entire pool of merchants," says McWeeney.
The traditional U.S. terminal market is saturated, and many sellers of card- acceptance products say smartphone- enabled devices and the mobile- merchant market represent new sales opportunities, agrees Rasori.
HIDE AND SEEK
The challenge for ISOs and resellers of smartphone-based payment-acceptance products may be locating mobile-merchant clients, note observers.
"Our traditional-channel ISOs and processors are most adept at finding merchants with storefronts," says Rasori. "It is a very different approach to reach 'consumer' merchants," he says. Consumer merchants may include those that sell seasonally or from their residences and do not have a storefront.
Indeed, "finding and capturing merchants may be more difficult than it sounds," says McWeeney. "We know the merchants are out there," but finding them may be like "herding cats," he says.
Stuart Taylor, vice president of global solutions and marketing at Hypercom Corp., a Scottsdale, Ariz.-based payment-terminal maker, does not see "too much of a challenge" in locating mobile merchants. Small businesses have banking relationships, which makes them "not difficult to reach," he says.
Banks often have referral relationships with ISOs, and merchants that have banking relationships already have provided their business and contact information to the bank partners.
Moreover, marketplace buzz about smartphone-based payments likely will help reach businesses that may not have existing banking relationships, Taylor says.
Hypercom in April introduced card-acceptance products, known as SmartPayments Mobile, for use with the iPhone.
If ISOs have difficulty finding mobile merchants, that likely means they are ill-suited for the job, contends Holland. "I don't think ISOs are particularly well-equipped to go to these people," he says. "The way to market may not be through an ISO."
Some mobile merchants are casual sellers that operate out of their homes, and it could be cost prohibitive for ISOs to try and find such merchants, Holland contends. "Are you going to knock on every door?" he asks.
Ultimately, financial institutions may be the more likely sellers of smartphone-based card-acceptance products because they can sell them as part of a small-business package, says Holland. "It might be good for banks to offer as a package a card-swipe reader, check capture and mobile-banking services," he says. "As someone who is dabbling in small business, you are more likely to have a relationship with the banks" than with ISOs, says Holland.
SALES SUCCESS
Some ISOs, however, have had some success selling smartphone-based payments products to merchants.
"It's been working out very well," says Adair, who has received merchant referrals and leads from VeriFone. "The leads have generated a lot of merchant accounts we have been able to acquire through the program. That's how we've been able to bring the product to market."
McBride has encountered interest among brick-and-mortar merchants, including doctors, dentists and barbershops. "Traditional brick-and-mortar merchants are now moving outside" and going mobile, she says, noting she was surprised by the interest from such types of merchants.
For instance, the barbershop clients prefer the smartphone-based system because they can "take in more sales by using it" than by taking cash alone, says McBride. Additionally, "it makes them safer because they're not carrying a lot of cash," she says. "They love it. They're using it like gangbusters."
Some brick-and-mortar merchants may opt for a smartphone-based terminal because the costs typically are lower than for a standard point-of-sale system or a dedicated wireless system. Others may use the systems when transacting with clients away from the store location.
Some brick-and-mortar merchants, such as high-end retailers, also may want to use smartphone-enabled terminals for "line busting," says Taylor.
Line busting typically involves retail employees with handheld wireless devices scanning bar codes on merchandise and accepting card payments. With line busting, customers do not have to visit the traditional checkout area and can avoid waiting in line to pay for their merchandise.
MARKET POTENTIAL
Whether ISOs are working with mobile merchants or brick-and-mortar locations, they should offer a range of card-acceptance products from which clients may choose, says Christopher Justice, president of North America for Ingenico SA, a France-based payment-terminal maker. "If I am looking at this from the ISO point of view, the most critical thing I want to do is make sure I have the arsenal of services required so that everyone I talk to I can do business with," he says.
Ingenico in March introduced a suite of mobile-commerce applications, including RoamPay, which enables merchants to accept payment cards using their mobile devices.
The market for wireless is "about to explode," contends McBride, noting many of her merchant clients in the past two years have abandoned their brick-and-mortar locations in favor of mobile or online businesses.
"They're not getting the foot traffic to sustain the rent and lighting and all that," she says. "A lot of smaller merchants are not able to hold on to the real estate."
By switching to a mobile-based business, the merchants "can go where the customers are," says McBride.
In McWeeney's view, mobility represents the future for card acceptance. "People don't have the money to invest in brick-and-mortar environments," he says, noting the industry's ability to find mobile merchants and market to them effectively are crucial factors for success.
While some companies new to the payment terminals, such as Square Inc., have created smartphone-based POS products, it is likely the existing large terminal makers will be most successful with smartphone-based terminals, notes Holland.
Square, led by Twitter founder Jack Dorsey, has developed a device that enables merchants and even consumers to use mobile phones to accept cards.
Indeed, "recognized brands are better placed than some of the smaller players," says Taylor, who is "not concerned" about Square entering the market despite the industry buzz the company has generated.
Smartphone-based wireless card-acceptance products may help reach new merchants. But they may not be the right fit for all merchants, and providers of traditional wireless terminals should be prepared to step in.
From the May/June 2010 issue of ISO&Agent magazine.
