Wednesday , December 12, 2018

Ditch That Terminal, Grab a Platform

With an abundance of smart-terminal options available, the question is, when will EMV-weary merchants be ready to deploy this newfangled technology?

Emerging from the haze surrounding U.S. EMV merchant adoption, vendor strategies are taking shape aimed at supplanting traditional payment terminals with flashy platforms that promise access to rich ecosystems of app stores and third-party services. These strategies mimic, to some extent, what Apple Inc. and Alphabet Inc. (Google) are doing in the world of smart phones.

It is uncertain, at best, how many merchants are ready to banish familiar, dowdy payment terminals from their countertops. What is certain is that the opportunity to transform the payment experience requires choosing from what may be a bewildering array of options.

“The point of sale is very quickly moving to the cloud and very quickly moving to mobile, and that’s particularly happening in the [small-and-medium-size business] space where we’re seeing the most momentum right now,” says Jordan McKee, senior analyst with 451 Research.

According to a 451 Research survey of SMB merchants in the U.S. and the U.K, 38% plan to implement technology upgrades at the point of sale over the next six to 12 months, and an additional 27% are planning an upgrade but without an immediate end date The survey, which did not ask specifically about EMV-driven upgrades, was fielded in July.

Digital Transformation

Once considered a technology backwater, point-of-sale payments technology is now a major focus of digital transformation. The intersection of cloud, mobile, and multichannel commerce is raising the stakes and increasing the risks of being late to market.

Incumbent and aspiring terminal providers want to capture the early lead for a new generation of purpose-built payment devices based on more standardized hardware and operating systems that they hope will provide a lure to third-party application developers.

But the incumbents aren’t going to turn their backs on cash-cow legacy product lines, which may make for some interesting product positioning challenges.

Meanwhile, scores of providers peddling cloud-based, tablet point-of-sale solutions that can be equipped with card readers are making their own claims on the new merchant-payment environment.

Certainly, nobody has more to lose in this race to the next-gen point of sale than the two big incumbents in the payment-terminal business: Ingenico Group and VeriFone Systems Inc., which have the largest U.S. market presence and distribution channels.

Each has introduced new product lines—Ingenico’s Telium Tetra and VeriFone’s Engage—that are based on versions of the Linux open operating system.

VeriFone has gone a step further by showcasing Carbon, a dual-screen system that incorporates a merchant-facing Android tablet with a consumer-facing Engage display. Tetra, Engage and Carbon are not yet generally available in the U.S., as each company carefully plots how to introduce its products without confusing customers or cannibalizing sales.

Carbon is visually similar to the dual-screen, Android-based device offered by Poynt Co., whose chief executive, Osama Bedier—former head of Google Wallet and longtime PayPal Holdings Inc. senior executive–launched the firm in late 2014 with $28 million in funding and subsequently disclosed preorders of 500,000 units for its Poynt Smart Terminal.

Ingenico, Poynt, and VeriFone are all promising rich eco-systems of applications and services similar to that introduced in early 2014 by Clover Network Inc., which had been acquired by processing giant First Data Corp. prior to introducing its first product, the Clover station. First Data has since updated its Android-based product line with Clover Mini and Clover Mobile versions that can provide an integrated customer-facing component.

Meanwhile, a subsidiary of the former European retail industry and retail banking solutions provider Wincor Nixdorf AG, which this year was acquired by U.S.-based Diebold Inc., plans a U.S. coming-out party this month at Money 20/20 in Las Vegas. AEVI’s ecosystem and Android-based Albert device were jointly developed with the Commonwealth Bank of Australia and design company IDEO.

Intense Focus

This new generation of purpose-built payment devices is intensely focused on the user experience, both merchant and consumer. They incorporate customer-facing options, touch-screen PIN entry, and some degree of mobility. But it is the combination of their distribution channels and application-store ecosystems, or marketplaces, they can bring online that is likely to determine the winners and losers in this race.

The small-merchant market represents millions of potential unit sales, but selling to individual merchants is a huge challenge that requires signing up acquirers and payments providers with the sales armies needed to reach those prospects.

“A lot of startups say they are going to bypass the banks and financial institutions entirely and say ‘I’m going to do it myself’ and compete on the same playing field,” says Rishi Taparia, vice president of business operations at Poynt, which does not sell direct to merchants. “It’s difficult if not impossible for one company to serve all the needs of all merchants and all merchant types.”

Yet, getting these new systems into the hands of merchants as quickly as possible is crucial for building up an installed base sufficient to lure third-party application developers.

“Solution providers need to attract the software developers, and they’re not going to do that unless they have a large footprint,” says industry analyst and consultant Rick Oglesby, president of AZ Payments Group, LLC.

But recruiting a sales force carries challenges of its own. Independent sales organizations and acquirers are accustomed to selling a one-size-fits-all product primarily focused on payments, not sophisticated multifunction platforms that incorporate vertical-specific store-management capabilities, Oglesby says. The brilliance of these new systems, he adds, lies in “how to take something capable of a lot more, but package it up as something that looks like a payment terminal that an ISO already knows how to sell.”

As an acquirer and processor, first-to-market First Data has the early advantage, claiming sales approaching 250,000 (though that number includes the Clover Go card-reader dongle) and an app market with almost 200 applications available, representing a mix of third-party and First Data’s own payment applications.

“We’re really pleased with the diversity we’ve seen in the app market,” says Jim Allen, First Data’s vice president of SMB products. “We’re solving very specific needs for customers in vertical areas but also solving broad needs such as inventory management and even accounting solutions.”

This is where the apps come in. Developer Homebase began offering its employee-scheduling and time-tracking application for Clover in 2014 and subsequently has also integrated it with payment solutions from Poynt, Square, Lightspeed, Talech, and Tap Portal. “I don’t know if there’s been any better time to be a local businessman because of the software that’s available,” says John Waldman, founder and chief executive of the company.

“If you think about all the power and capabilities that large businesses have had for 10 to 15 years in terms of POS software, they had a lot of tools but paid a lot of money for it,” Waldman adds. “We’re giving away for free software that was previously only available for tens of thousands of dollars.”

Homebase provides its core functionality for no charge, but also offers premium plans with additional features for $9.99 and $29.99 a month per location.

Poynt launched with just a handful of high-profile apps, including POS and store management (Vend), back-office functions (Intuit), online storefronts (BigCommerce), and SMB lines of credit (Kabbage), and has subsequently highlighted additions such as Homebase and Lightning Register.

Taparia says the company has “an incredible number of app developers building on our platform both in the U.S. and overseas” and will soon be revealing more of them.

AEVI, the Diebold Nixdorf entity, which launched its Albert product and marketplace in Australia in 2015, earlier this year launched a business-to-business marketplace in Europe in partnership with EVO Payments, the U.S. and European acquirer and payments processor.

Unlike others, it is pursuing a strategy of creating walled-in marketplaces for specific processors and banks, though those marketplaces will accommodate other vendors’ devices. “Our platform is open to anybody,” says Peter Spee, director of the company’s platform business. “We could connect a VeriFone Carbon terminal with NCR software, for example.”

Early Days

It’s still early days for VeriFone’s Carbon, which is expected to go into its first pilot shortly. According to Vin D’Agostino, the company’s executive vice president of Verifone Services, it will be introduced in specific regions between now and the end of 2017, with U.S. introduction “early on” in that period, he says.

But VeriFone had previously begun developing its own app marketplace with apps for Engage, “as well as enhanced versions of select” earlier-generation MX and VX devices. In addition, the company has conducted two Carbon hackathons for developers and says it will announce three winners from among 22 apps around the time of Money 20/20. It plans to share a developer kit by the end of the year and expects the app marketplace to go live at the beginning of 2017.

Ingenico has conducted several hackathons in Europe, according to Rod Hometh, senior vice president, strategic development at Ingenico Group North America. But while Tetra has been introduced in Asia Pacific and Latin America, it’s still “a year or two” away from a U.S. introduction.

“We’re in the midst of the EMV migration and the platform for that has been Telium-based,” explains Hometh. “We had to consider that when planning the launch of a new terminal platform and make sure we are meeting the market needs both during the migration effort and as we move into the post-migration era.”

Mobile, Cloud, EMV

As with smart phones, the keys to a rich application marketplace are mobile and cloud technologies. “The mobile platform is becoming the agent that enables business to understand the consumers’ context in great detail and will increasingly be responsible for providing consumers with incredible conveniences,” says Tim Sloane, an analyst and vice president of payments innovation with the Mercator Advisory Group, a Maynard, Mass.-based consulting firm.

At the point of sale, Sloane adds, “The ability to plug in applications, update software, and have it integrated into multiple backend systems in the cloud expands merchant capabilities seamlessly and makes that device so much easier to upgrade.”

Many payment innovations have stumbled over merchant resistance to paying for new technologies. But venture-capital investment in payments technology—an estimated $3.5 billion was raised in this space in 2015—provides funding for startups to gamble on innovation without having to worry as much about incrementally increasing sales to pay for market development and expansion.

Vendors are also providing new pricing models to ease merchant resistance. None of the device vendors volunteered pricing information. But, indicative of the sizable pricing range at this early stage of the market, First Data’s top-of-the-line system with included cash drawer is advertised by resellers from $999 up. Meanwhile, “Poynt is going out there selling at cost essentially,” says Oglesby, who adds that it will reap a percentage of application-store revenue and share that with ISOs.

Many see the EMV liability shift opening the door to SMB merchant sales. “There is a big upgrade opportunity at hand and these tablet cloud-based solutions are positioned very attractively,” says McKee. “They go beyond just the transaction. The payment piece is sort of table stakes and where all of these providers are looking to differentiate themselves is on the services and the integrations that are built on top of that.”

That EMV upgrade opportunity, not surprisingly, is drawing in solutions providers from all sides that want to provide POS software and services based on off-the-shelf Apple iOS and Android devices. Many of those solutions may rely on card-reader peripherals to handle payment transactions.

Although relatively few solutions based on general-purpose tablets are likely to be ready with processor EMV certifications, payment gateways may offer some relief.

PayPal, for example, is providing its EMV card reader and payment processing in combination with Vend Register, and Square provides an application programming interface for Android and iOS apps to open the Square Register app for processing in-person payments with Square hardware.

When merchants are ready to bring new technologies to the point of sale, lack of options will not be a problem. In fact, it’s apparent there are too many vendors competing for merchants, so a consolidation is only a matter of time. Deciding which approach and vendor to bet on is the dicey issue.

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