In early 2006, some industry analysts were predicting that North America's four major payment-terminal manufacturers would, in the next few years, merge into two or three companies. In fact, that prediction came true within months, when VeriFone Holdings Inc. announced the signing of a deal last April to acquire Lipman Electronic Engineering Ltd.
The acquisition, completed Nov. 1, was a slight surprise, says Robert Dodd, a senior analyst for the Memphis, Tenn.-based Morgan Keegan & Co. Inc. who studies the payments industry. But it was a sensible move that made VeriFone the dominant player in terminals, he says.
"It's very hard to get real data on the overall market share of these companies," Dodd adds, since they no longer release terminal-shipment numbers.
However, Dodd estimates the combined company will have revenues approaching $1 billion in 2007. That, he says, would compare with about $767 million in revenue for Ingenico, a France-based terminal maker with North American headquarters in Toronto and Roswell, Ga., and nearly $300 million for Phoenix-based Hypercom Corp., VeriFone's two largest rivals.
What makes the VeriFone/Lipman deal especially smart, Dodd says, is that Lipman, through its Nurit product line, has a dominant position in the North American market for wireless terminals. Its market share could range anywhere from 50% to 80%, he says.
Although VeriFone has its own suite of wireless products, Dodd says the company primarily has been selling them overseas. He expects VeriFone to continue rolling out its own wireless products but not push them very aggressively in the U.S., since "they would only be stealing from themselves."
These days, it seems VeriFone could use some competition, at least in North America. The firm continues to increase rev- enue on a quarterly basis, while its chief traditional rival continues to struggle.
Hypercom, once a dominant player domestically, has fallen on hard times in recent years. Analysts, meanwhile, are monitoring the demand for what "feisty" newcomers have to offer.
Indeed, Hypercom fell a bit behind the competition in 2006, experiencing smaller growth than its rivals (see chart page 26). Dodd says the reason for the stumble is difficult to pin down since Hypercom offers high-quality products.
But if Hypercom had a weakness, it is in distribution, Dodd says. "The products may be good, but you've got to sell them," he says.
Hypercom officials say they solved that problem by establishing a strategic partnership with Symbol Technologies in July. Symbol will discontinue building its own terminals and instead will direct its sales force to market Hypercom products.
Neil Hudd, Hypercom senior vice president of product development and marketing, points to the October purchase of 20,000 Optimum T4100 payment terminals by Total Merchant Services Inc., a Basalt, Colo.-based independent sales organization, as a sign of good things to come.
However, New York-based hedge fund RLR Capital Partners has called on Hypercom management to change its course from trying to buy companies that service terminals and instead begin a major stock-buyback. If Hypercom does not improve its profit margins this year, the fund called on the company to put itself up for sale.
RLR made its demands in a letter to Hypercom management that it attached to a Securities and Exchange Commission filing on March 16. In the filing RLR reported that it had acquired 5.1% of Hypercom's outstanding shares in trades since January.
Terminal speed may be becoming a commodity. Though more merchants are buying faster terminals that use Internet Protocol-based connectivity to processors, all the major manufacturers provide that capability for their countertop models, Dodd says. "There's not a competitive advantage to one company or the other," he says.
Here's a look at what the industry experts and observers say will be the primary trends and growth drivers for the payment-terminal industry overall this year:
WIRELESS DEVICES
In 2007, if any market sector has the potential to boost the fortunes of terminal makers, it may be wireless.
Countertop terminals will remain the bread-and-butter products for all the large vendors for the foreseeable future, Hudd says. But he and other manufacturing officials say the blanketing of the U.S with long-range wireless technologies, such as GPRS, that can transmit payment data has made it more attractive to market small, mobile terminals.
Such devices could be ideal for delivery drivers, tradespeople and others who have no countertops, or they could create more options for those that do, they say.
In 2006, Hypercom brought out its Optimum M4100, a mobile wireless terminal also known as the Blade. According to recent conference calls with investors, company officials hope to complete several Blade trials by mid-year.
This spring, Ingenico officials say they will release the i7910, a mobile wireless terminal to compete with the Blade.
"We see a big growth in the mobile wireless market," says Hudd. "It's "no longer [just] a niche."
The potential market is vast. According to a study Mercator Advisory Group published in December, only 12% of the payment terminals in use worldwide have wireless-transaction capability.
But experts agree that, while the wireless-terminal market will grow, expectations should remain modest. "The shift [toward wireless] has grown over time," says Melanie Broad, research analyst for emerging technology practice at the Waltham, Mass.-based Mercator.
But wireless still will comprise only a relatively small percentage of the number of terminals shipped. In 2006, roughly 12% to 15% of the terminals sold had wireless capabilities. In 2007, about 20% will, Broad estimates.
To sustain growth, Broad believes the manufacturers will have to continue showing retailers how wireless improves their bottom line. In the Boston area in 2006, for example, Legal Sea Foods, a restaurant chain, began using Ingenico's i7780 terminal in three of its 33 restaurants so its servers can do at-table transactions, hopefully speeding up customer checkout, Broad says.
And this year, "line-busting," or using hand-held wireless devices to check out customers stuck in line at retailers or restaurants, should become more popular. Manufacturers that convince major retailers, especially national chains, to launch "line-busting" trials could gain an advantage, Broad says.
One of the roadblocks to widespread wireless adoption by restaurant chains has been manufacturers' inability to integrate their terminals with popular order-management systems such as Micros Res 4.0 from Micros Systems Inc. But Paul Rasori, VeriFone vice president for global product marketing, says this year VeriFone can offer wireless customers a Web-based service, called "On The Spot," that works in conjunction with order-management systems. It can consolidate transactions and provide detailed transaction reports.
Later this year, several large restaurant chains will adopt On The Spot, including the Vx 670 Portable Payment Platform, although VeriFone has not announced any names. A key to expanding sales is finding enthusiastic distributors, Rasori adds, and the ability to offer merchants Web-based reporting "really appeals to the ISO channel."
Analysts also keep an eye on innovative products, however small the vendors, in case they catch on, Broad says.
For example, she points to Way Systems Inc., a Woburn, Mass.-based manufacturer of small wireless point-of-sale terminals. Each Way Systems Mobile Transaction Terminal device, which measures about four inches by two inches, uses GPRS wireless technology.
First unveiled in early 2005, the terminals do not support as many features as the mobile terminals built by the bigger companies. But the devices are smaller and about two-thirds the cost.
Way Systems sold less than 10,000 terminals in 2005, Broad believes, but that number probably greatly increased in 2006. A Way Systems official says the company does not release shipment data.
"This number is very small compared to [the big three], but Way Systems remains a small but feisty contributor to the [wireless] market," Broad says.
CONTACTLESS
The demand for contactless terminals certainly has grown. But, Dodd says, Visa USA and MasterCard Worldwide, which helped many merchants buy the devices, drove much of that demand. So with it unclear whether that support will continue, it similarly is not clear whether merchants will pay to accept contactless payments.
The number of payment terminals that accept contactless payments continues to grow, however. Worldwide, Visa says its contactless products are accepted at roughly 40,000 merchant locations, double what it was a year ago. MasterCard says 46,000 merchants accept its PayPass contactless cards, an increase of more than 20,000 over the past year.
But instead of predicting a revolution in how consumers pay for goods, once again experts strike a cautionary note. While the increase in contactless locations is impressive, they say, millions of locations still use less-advanced terminals. And Visa and MasterCard might curtail subsidizing contactless terminals.
"They haven't exactly been explicit on what their intentions are," says Dodd. And if underlying demand from retailers does not materialize in 2007, "to keep up the rapid growth, you have to keep up the subsidies."
However, manufacturers say that, while they do not expect contactless to turn into a gold mine, they do foresee steady growth.
Ingenico, for example, will unveil its i3070, a hand-held terminal that accepts both swiped cards and contactless payments, at the April 17 Electronic Transaction Association Annual Meeting & Expo in Las Vegas.
An Ingenico spokesperson admits many retailers are not ready to buy new terminals just so they can offer consumers a contactless-payment option. So, as a stopgap measure, Ingenico sells a small add-on contactless reader that fits onto its i6000 line of terminals. "They can put on a $50 [add-on] reader instead of a $200 terminal," says Grant Drummond, Ingenico's director of marketing and communication.
Many retailers "would much rather add a low-cost module than replace the whole terminal," he contends. "Once contactless becomes more mainstream, then retailers might want to switch."
And other insiders say that, in the past year or so, they have seen more interest in contactless from distributors who have seen continued contactless card rollouts. MasterCard says there are 13 million PayPass contactless cards in circulation worldwide, while Visa says it has some 6.5 million. Most of the contactless cards from both brands have been issued in the U.S.
"As more and more [contactless] cards have been issued in the U.S.," the ISO channel has pushed contactless harder, says Rasori. "With any new type of technology, it's going to take awhile" for it to become standard.
VeriFone also markets an add-on peripheral device, known as the Qx 120, that allows existing terminals to accept contactless payments. Merchants can expect to pay between $120 and $150 for the peripheral, although a company spokesperson says the price should come down as volume increases.
SECURITY
The major terminal manufacturers generally agree that if anything can drive American merchants to begin purchasing new terminals in earnest, it is security concerns.
Ingenico's Drummond points out that Canadian processors have made a commitment to move to the Europay/MasterCard/Visa smart card standard by 2010, and merchants in that country have gone on a buying spree.
According to Broad, since the new standard requires customers to enter a PIN, it makes portable wireless terminals especially attractive in pay-at-the-table environments such as restaurants.
In the U.S., a series of scandals has focused consumers and retailers on the gaps in card security. In the next few years, that will drive many merchants to revamp their terminal systems, even if U.S. card issuers don't require a European-style smart card system, says Rasori.
Rasori cites an incident earlier this year at a Rhode Island Stop & Shop store, where several individuals were arrested for allegedly stealing PIN pads and the personal information they contained, as only the latest example of the holes in the U.S. payment industry's infrastructure. Although he touts the convenience of contactless and wireless payments, those advantages "pale in comparison to merchants not wanting to be the next headline" in driving equipment upgrades.
The card associations also have stepped in, mandating that terminals with minimal security standards, mostly manufactured before 2004, be replaced by July 10, 2010. And after December 2007, all payment devices sold must conform to the strict Payment Card Industry PIN Entry Device security standard.
Many of the payment terminals in use today were built in the 1990s, Rasori points out. And even though none of the notorious recent security breaches has involved VeriFone devices, he says, "that doesn't mean we're all not susceptible."
The North American payment terminal market seems rife with possibilities to grow revenue. The question is whether terminal makers supplying devices can reverse the course and level the distribution of that revenue so most does not go to one company.
(c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
http://www.cardforum.com http://www.sourcemedia.com
VeriFone Dominates Now, But Opportunities Open to All
April 01, 2007, 7:54 p.m. EDT 11 Min Read
