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DT, January 2016

Do Merchants Know What They Want?
January 1, 2016

By Kevin Woodward

ISOs trying to figure out what kind of gear to sell small businesses are discovering the first step toward wisdom involves educating their merchants.

Until a couple of years ago, marketing messages for new point-of-sale equipment did not have to focus much on the technology, other than to say the devices were secure and speedy.

That has changed.

The dawn of EMV chip cards in the United States, alongside revived interest in contactless payments (spurred by the likes of the Apple Pay, Android Pay, and Samsung Pay mobile payment services), has got the payments industry, along with consumers and merchants, wondering about the expanded capabilities of POS equipment.

As independent sales organizations, acquirers, and POS-equipment providers contend with this awakening, they find themselves in the role of educator as well as that of marketer. Merchants now want to know, in detail, about mobile payments, chips, and loyalty programs.

Even though the United States is among the last of the industrialized nations to adopt the EMV chip standard—a liability shift that began Oct. 1 places the costs of fraud committed with counterfeit cards on the party least prepared to accept EMV transactions—the size of its payment-card market means hundreds of thousands of pieces of POS equipment will be purchased.

But what is it that merchants are looking for? How does an ISO or acquirer decipher merchants’ POS-equipment needs?

Beyond EMV-Ready

The first step is to understand that the EMV migration is a major factor, especially among small businesses, says Derek Webster, chief executive of CardFlight Inc., a New York City-based mobile-POS payments company that offers merchants a mobile card reader in addition to other services.

CardFlight’s EMV Migration Tracker, which analyzed more than 100,000 transactions made at merchants that use CardFlight’s gateway, found that 52% of the cards presented to merchants from Oct. 14 through Dec. 4 already bore an EMV chip.

As recently as six months ago, merchants were looking for POS equipment that was EMV-capable, meaning a software download would make the machine ready to take chip payments, Webster says. “But, since October has come and gone, EMV-ready isn’t good enough any more,” he says.

Now, merchants want EMV POS equipment that is ready to be used, he says. “EMV-certified solutions that can actually run a chip card today are becoming more and more important for merchants,” Webster says.

Meanwhile, consumers are walking into stores asking if they should use the chip or swipe their credit or debit cards the traditional way, along with asking if the merchant accepts chip cards. Couple that with high turnover among cashiers, and the potential for confusion at the checkout counter is rife. That’s where the educator role, for both merchant and equipment provider, is crucial.

Otherwise, consumers will get their information from sources like TV news, which may or may not be well-informed. In the weeks leading up to Oct. 1, general-media news reports discussed the upcoming change, trying to explain what chip cards are and how they work with payment terminals.

“It was on every morning news channel,” says Terri Harwood, chief operating officer at North American Bancard LLC, a Troy, Mich.-based payment processor. “Credit card terminals were being displayed all of the time.”

North American Bancard markets its own line of tablet and mobile POS devices, in addition to selling other companies’ POS terminals. Approximately 30% of North American Bancard’s merchants are EMV-compliant, the company says.

What Merchants Want

EMV is the most discussed subject when merchants talk about POS equipment, says Harwood. “That’s for the last four months easily. A lot want to understand the functionality.” Most merchants want POS equipment that is easy to use, can accept EMV cards, has a built-in printer, offers a frictionless process, and is speedy, she says.

But while merchants may seem to know what they want, acquirers are finding this constituency needs to be informed, as well.

“Most merchants are aware of general trends in payment technology, such as EMV or mobile payments, but do not fully understand the details of these new payment types or how they impact their business[es],” says Brian Jones, executive vice president of sales and marketing at Harbortouch Payments LLC, an Allentown, Pa.-based payments processor, which also sells its own line of POS-system equipment.

Payment providers play a role in helping educate merchants about these technologies, he says.

That happens all the time. A merchant, who as a consumer may use a particular piece of POS equipment not installed at her shop, often calls asking if North American Bancard offers the same or a similar device, Harwood says. That can be especially applicable in the case of mobile payments.

A merchant inquiry, Harwood says, might go like this: “Nobody has asked me yet to do an Apple Pay transaction, but what do I need to do that?” It’s the same for EMV transactions, she adds.

EMV Frustration

So EMV and contactless payments have prompted merchant-initiated inquiries, which affords acquirers opportunities to talk to merchants. When a merchant calls and says it’s looking for just a countertop POS terminal, that’s often a good occasion to ask about the business and perhaps find a better-suited POS device or service, Harwood says.

“Each merchant is different, and they have different needs when it comes to POS equipment,” says Jones. “While a full-featured POS system is perfect for many merchants, some businesses may prefer a simpler solution such as a standalone terminal, cash register, or tablet solution.”

The challenge is to understand how the merchant would use the equipment and what it might want to do with the data. Those wanting to start or expand a customer-marketing program could benefit from a tablet POS service, which can capture customer data that merchants could use to create marketing campaigns.

“They’ll ask, if they don’t use the tablet, how they can still get the data analytics,” Harwood says. “Well, the tablet is the way to do it,” is the response.

As for those Apple Pay transactions that merchants may see at other locations, or even make themselves, these too have prompted a lot of discussion about new POS equipment.

“As [near-field communication] becomes more popular, the use of customer-facing EMV/NFC-capable devices will become increasingly important for merchants,” says Jones. NFC, the short-range, two-way connectivity technology that enables a smart phone and a contactless reader to send data back and forth, may also influence POS-equipment discussions when merchants notice the length of time it takes to complete an EMV transaction.

A contact EMV transaction requires the cardholder to dip her card in the terminal and leave it there for a number of seconds for authorization—very different from, and much slower than, the familiar card swipe.

Indeed, a Harbortouch survey released in November that canvassed 5,000 consumers found that 18.2% cited the amount of time to make an EMV transaction as a top concern. Mobile payments, which requires merely a tap against a contactless reader, often is quicker. “We believe this frustration [with EMV] will expedite the shift to NFC and will make customer-facing devices even more important for merchants,” Jones says.

Harbortouch offers a POS system that includes a merchant-facing terminal and customer-facing PIN pad that supports both EMV and NFC. Some all-in-one devices require the merchant to hand over the payment terminal so the consumer can complete a transaction, an action that Harbortouch tries to avoid, Jones says.

Another speed-related factor that may stimulate merchant POS-equipment purchases is that many still use dial-up technology to connect their terminals to a processor’s network. Some are reluctant to change, Harwood says, because of habit or concerns that using an Internet Protocol-based device may introduce security holes the merchant hasn’t had to contend with. “That’s an ongoing endeavor,” she says.

All devices North American Bancard deploys are capable of both connection types. As might be expected, a dial-up EMV transaction takes even longer than one made with an IP POS terminal. A dial-up EMV transaction might take 8 to 10 seconds more than one made with an IP terminal, Harwood says.

Harwood also says customer-facing devices are favored by merchants, a trend she expects will grow in coming months. “We’ll see that trend deepen into the small and mid-size merchant segment,” she says.

Contactless, too, will shape future merchant decisions, she says. “It’s fascinating that as soon as Samsung Pay came out, the number of inquiries [about contactless readers] increased exponentially,” she says. “I was surprised that merchants were a little skeptical or hadn’t been approached yet about Apple Pay,” but when they saw an Android mobile-payment service, they were interested.

Both Google Inc., developer of Android Pay, and Samsung Electronics Co. Ltd., backer of Samsung Pay, launched their services last September.

‘A Clear Trend’

But the immediate need for most merchants in the market for new POS equipment is how to accommodate EMV chip cards. “All merchants need to think about this,” says CardFlight’s Webster. “More than half the cards have chips in them.”

While merchants may have thought they could wait to update their POS equipment for EMV acceptance, that time has passed, Webster warns.

“There’s a clear trend here,” he says. “It’s not like this number [52%] will be 56% in April. It will probably be in the 60s or 70s. The cardholder side is ready. We know the merchant doesn’t have 50% capability in accepting EMV transactions.”

Looks like ISOs and other acquirers won’t shed that educator hat any time soon.

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