By Rick Oglesby, Double Diamond Payments Research
Apple Pay was the talk of the Money20/20 trade show last month, but should it have been? Before Apple Pay can become a dominant payment vehicle, merchants need the ability to accept it (only about 2% of merchant locations can do so today), so it’s far more important to complete that prerequisite.
In a quest to be the solution to that problem, newly launched Poynt Inc. joined several other companies (First Data Corp., Heartland Payment Systems Inc., Merchant Warehouse Inc.) in launching cloud-based solutions that install merchant point-of-sale hardware and operating-system combinations that include an app store similar to the one that Apple popularized through iOS and iTunes. This enables independent software developers to create merchant-centric apps and market them directly to participating merchants, while enabling merchants to instantly activate new POS services such as Apple Pay and many others without disrupting pre-existing solutions.
The POS could soon become an open environment where any software developer can remotely market and deploy new and innovative solutions, and where merchants can seamlessly activate these services easily and without risking negative business impacts resulting from POS disruption.
The concept of a cloud-based, truly open POS is not new, yet it is far from being a reality. Traditional POS systems are deployed via local software and are locked down to only certain providers. The payment terminal is hard-coded to work with only one payment processor; the cash register/POS software is specific to one software provider and is deeply embedded in the merchant’s business processes, therefore very difficult to change. Exposure to the cloud and cloud-based services is limited to nonexistent.
Hence, deployment of new POS services requires local software disruption in an environment that is highly critical to effective merchant operation. This creates a huge barrier to entry for new POS services, making it nearly impossible for payment and other innovations to gain broad POS acceptance and coverage. This limits competition and innovation.
However, the locked-down POS may now be at the brink of a major transformation.
The app-store providers create application programming interfaces (APIs) that allow app developers to interact via the POS with merchants, consumers, and transaction data to facilitate demand generation, loyalty, payment, cross selling, and/or any other type of service that the app developers can dream up. The app-store provider takes a share of the revenue, typically 20% to 30%, for all of these services.
Why is this transformational? Innovators of any type (payment networks, payment facilitators, digital-wallet providers, loyalty providers, solutions for the automated clearing house, etc.) could obtain instant acceptance at a wide variety of POS locations. It also removes massive barriers to entry, which will create competition across the board.
Under this model, app-store providers can monetize their technology solutions and merchant footprint through a much broader set of software solutions that they would not be able to create on their own. The same is true of software developers. They can monetize their ideas and code in ways that were never before possible.
Last but not least, acquirers and independent sales organizations can monetize their distribution channels across an entirely new set of services (not just payment and POS), without needing to become experts in how merchants run their businesses. And, by creating a wide set of new, marketable services, app stores also reduce the dependency these providers have on the payment networks. The payment networks could soon be just another app within a store that includes thousands of apps. For example, banks or groups of banks could offer payment services directly to merchants via the app stores, cutting out the payment networks altogether.
Apple has proven the app-store model via its consumer app store and devices. Android/Google/Amazon have continued that model and have shown that it is truly scalable. Now merchant app stores are next, and if this takes off everything we know about the payments business could change.
Enablement of NFC payments to accept network-sanctioned solutions such as Apple Pay may cost a merchant from a few hundred to a few million dollars. For the same price, however, merchants could eliminate the need for networks altogether, and that could be priceless.
Rick Oglesby is senior analyst/consultant at Double Diamond Payments Research, Centennial, Colo.