When iPhones become card readers, how will terminal makers respond?

Point of sale companies were pressured to diversify even before Apple's decision to allow iPhones to accept payments from contactless cards. But Ingenico's Peter Stewart contends the move will draw more interest in the innovations his own company can add on.

"We welcome any development that accelerates the reach and adoption of digital payments acceptance," said Stewart, president of the North America region at Ingenico, a unit of Worldline. "Fundamentally this is our business. So it creates demand and opportunity for a broader set of use cases."

Apple last week said it would support payments between consumers' contactless cards or mobile wallets by allowing them to be tapped against an iPhone, but that it would require a third-party app for the function to work. This stipulation keeps payment processors in the loop, but potentially sidelines any company that makes point-of-sale hardware.

"For the terminal makers it's a chance to grow beyond payments," said consultant Sara Elinson, Americas fintech and payments M&A Leader for EY in New York. The Apple announcement has pushed point-of-sale payments innovation "into the background" in favor of other value-adds for merchants and consumers, she added.

Ingenico has been building for this moment, according to Stewart, and other payment hardware makers such as NCR, Verifone and Diebold Nixdorf have also attempted to move beyond static in-store terminals as mobile technology has gained a bigger role in retail stores.

Ingenico merged with Worldline in early 2020, an $8.6 billion deal between two French companies that aimed to de-emphasize in-store payment terminals as a main business line for both companies. "There's a convergence of payment tech and consumer tech," said Stewart, who works in Atlanta. "And there's also a trend toward using off-the-shelf devices for payments."

Ingenico's Axium product line, which uses the Android operating system to support payments and business services, is live in Europe and is in pilot testing in North America. Axium's products include a point-of-sale card reader, but future updates will move much of the technology to the cloud, according to Stewart. The goal is to make payments, business services and buy now/pay later accessible through an application programming interface for a wider range of computing devices.

Ingenico also recently introduced PIN on mobile, or technology that allows payments via a chip card reader and a paired mobile app. PIN on mobile is designed to make card readers smaller and less expensive for micro-merchants. Ingenico is in pilot in Europe with PIN on mobile, which it has branded Tap on Phone.

Ingenico's products are geared toward Android devices largely because Apple typically does not allow third parties to develop for the Near Field Communication chip that powers Apple Pay and would play a role in the upcoming Tap to Pay on iPhone.

While details of Apple's products and pricing aren't yet known, Stewart said he's open to supporting iOS.

"We are happy to collaborate with any new players that are coming into the industry," Stewart said. "Apple has made no secret about its ambition around payments and we look forward to seeing what innovation they come up with."

Other terminal makers have spent recent years developing digital technology to complement point-of-sale terminals, and expanding into new lines of business.

Diebold Nixdorf in early 2021 launched a platform that supports remote access for self checkout and the ability to customize technology for individual merchants.

Diebold Nixdorf more recently appointed Octavio Marquez as president and CEO, effective March 11. Marquez, who will replace CEO Gerrad Schmid, is Diebold Nixdorf's executive vice president of global banking, and has been responsible for working with clients to digitize banking. Marquez was managing director for Mexico operations for IT management and cloud computing firm EMC earlier in his career. Diebold Nixdorf would not comment for this article.

NCR in 2021 acquired Cardtronics, allowing NCR to offer cloud-based services to banks and credit unions via the Allpoint ATM network, which Cardtronics operates. NCR, which is based in Atlanta, also offers cloud-based services for merchants on top of its point-of-sale devices.

Verifone's website emphasizes an "omnichannel" experience that spans online and offline retail. NCR and Verifone, which is based in San Jose, California, did not return requests for comment.

Apple sweetens the deal

While Apple is adding to its range of payment products, at this point it's not offering merchant acquiring. As such, companies that provide point-of-sale technology have a window to offer an app that can support other services bundled with payment acceptance, Elinson said.

The static POS terminal was already fading, Elinson said. "These providers can push into new areas, logistics, cash management, and the POS terminal can be a gateway for new business," she said.

Apple is creating an opportunity for terminal makers and other payment technology companies to start a payment facilitator business, according to Richard Crone, a payments consultant based in San Mateo, California. Payment facilitators simplify account enrollment for merchants that wish to accept multiple payment types by aggregating payment technologies. It's a strategy that independent sales organizations, another type of business associated with traditional hardware-focused payment models, are using to respond to the dramatic emergence of digital payment options over the past several years.

"'Payment facilitators stand to gain from Apple's move," Crone said. "There's no longer a need for hardware and you can materially reduce fraud by leveraging the multi-factor authentication that comes with two phones being tapped."

Payment facilitators' prevailing pricing model — most charge about 2.9% plus 30-35 cents per transaction — leaves room to share fees with Apple while still gaining payment revenue and a stream of new small business clients, Crone said.

"There's enough margin," Crone said. "This is 'bring your own payment terminal to work.'"

Hip to be Square

iPhones have long been treated as portable payment terminals — it's the concept upon which Square (now called Block) built its business back in 2009 by offering a magstripe card reader that plugs into the headphone jack of a mobile device.

That product was threatened once before — when Apple stopped building phones with headphone jacks starting with the iPhone 7 in 2016 — and the industry adapted by using standalone or Bluetooth card readers. For a time, Apple also included an adapter that let people plug a headphone connector into the device's lightning port.

This time around, the mobile point of sale market may do more than adapt to Apple's changes; it could expand.

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Even larger merchants would benefit from the reduction of "considerable expense" that banks, merchants and retailers incur to deploy payment terminals, according to Zil Bareisis, a senior analyst for Celent in London.

The PCI Security Standards Council, a payment company-supported association that publishes guidance for data protection, has written new standards in recent years to cover security for software-based PIN entry for commercial devices, or technology purchased off the shelf.

These standards allow contactless card-based payment acceptance by simply tapping a card or mobile wallet against a phone with a built-in NFC reader, Bareisis said.

"Although of course, the existing terminals won’t disappear overnight," Bareisis said.

The global point-of-sale terminal market was valued at about $72 billion in 2021 and is projected to reach $117 billion by 2026, according to Mordor Intelligence. The point-of-sale software market is also growing quickly, expected to expand from about $17 billion in 2021 to more than $42 billion in 2027, according to Statista. This suggests merchants will need to support both point fixed terminals and mobile systems, at least for the next few years.

That prediction indicates that merchants will need both older and newer payment devices, to cover as many bases as possible.

"Merchants are no longer going to be able to rely on single-purpose, card-centric point of sale terminals for accepting digital payments," said Andrew Edem, global head of innovation for PPRO, a London-based firm that aggregates different payment methods for clients such as Citigroup.

The growth of contactless payments, and the proliferation of payment-adjacent products such as buy now/pay later loans, Request to Pay, real-time processing and order-ahead are more amenable to modern mobile devices, according to Edem.

Mobile technology has existed alongside payments for years; Apple Pay is eight years old and Amazon's Go checkout-free concept store debuted four years ago. But Apple's latest announcement is a tipping point that "obviates" the need for a separate dedicated device for reading cards. "We expect the next terminal upgrade cycle to shift even further toward mobile solutions," Edem said.