A Cloudy Future for the Point of Sale

Backed by cloud-based networks, tablet POS systems scramble to find the preferred configuration for merchants.

Eight years on, the notion of tablets as the future of point-of-sale systems can be dispelled. Specifically, the form factor is not the critical element in the ascendancy of POS systems and how they connect disparate business functions, including payment processing, into a single interface for the merchant.

No, the critical element is what connects the software on the tablet and the payment transaction to everything else the merchant cares about. It’s the cloud, a network.

The tablet-POS system providers that emerged over the years—abetted greatly by the debut of Apple Inc.’s iPad in 2010—haven’t fallen short because of a device, in most instances. Rather, it’s because of a failure to understand the value of this connectivity for merchants, especially smaller ones, observers say.

“I’m not so sure it’s about tablets, but about extensible software,” says Thad Peterson, senior analyst at Aite Group, a Boston-based payments research firm. “It doesn’t necessarily need to be a tablet.”

Indeed, software is the real winner of the tablet-POS system battle. It is what separates the current field of contenders from those with diminished competitiveness. It will be what distinguishes those still winning merchants in the future.

‘A Delivery System’

At first, creating software that could accept payments on the iPad was enough to get market share. The iPad was novel in design, and was cheaper and smaller than conventional PC-based POS systems. “Just say you’re Revel [Systems Inc.] and you have this very cool POS that runs on the iPad,” Peterson says, referring to one of a number of entrants that emerged to exploit tablet hardware. “They got a lot of interest.”

Then, as cloud connectivity evolved and merchants demanded more capabilities, the opportunity to add more features came along. “All the tablet is is a delivery vehicle,” he says. “It’s not the tool. The tool is in the cloud.”

At San Francisco-based Revel, the importance of the cloud and what it enabled was realized early, says Erick Kobres, chief technology officer. He likens the evolution of tablet POS systems and their connectivity to that of a portable automotive GPS device. “Think back 10 to 15 years ago,” Kobres says. “A satellite navigation system was only as good as the version of the map purchased and loaded onto the device.”

It’s different today. GPS devices can easily be updated, and many consumers use mapping apps in their smart phones. “Today, you see significantly more information on your GPS, such as more traffic indicators and your estimated time to work,” says Kobres. And today, cloud-based POS systems are capable of much more than payments.

At the heart of this connectivity is the cloud. “Starting with [small-and-medium-size] customers, because they are innovators and entrepreneurs, the ability to manage their businesses from anywhere is very important to them,” Kobres says. “It’s becoming increasingly important for enterprise customers as well.”

It’s a phenomenon experienced across the industry. “The conversion to what I call the cloud-connected POS is starting to accelerate,” says Michael DeSimone, president and chief executive of ShopKeep Inc.

When he started at New York City-based ShopKeep three years ago, DeSimone noted a new competitor announcement almost every week, he says. That’s not the case now. “The market is starting to rationalize,” DeSimone says. “The ones at the top of the stack are the most likely to stay around. It’s not going to be a winner-take-all market, but it won’t stay as fragmented.”

To be sure, the tablet’s form factor still matters, DeSimone says. “It takes up less space and can be deployed to more places to pay,” he says. “[Employees] can be moving around the store. They take up less room.” Plus, employees and customers are familiar with the touch-screen interface and how apps work on tablets and smart phones.

While the cloud is central to modern POS systems, most merchants will continue to rely on the tablet as their device to access services hosted in the cloud.

“Wherever we’ve been investing is making it easier for our merchants and their customers to interact with their businesses,” DeSimone says. “It’s the whole connectivity piece that’s a big deal for our merchants.”

Indeed, Peterson likens the connected approach to a POS system to a delivery system. Just selling POS hardware is not very profitable, he says, and the value-add it offers merchants is limited.

With services like Square Inc. and First Data Corp.’s Clover, both strong competitors that mirror what others aspire to, the goal is to solve problems for merchants, he says. “They didn’t look at it as hardware. It’s much more about a delivery system that would meet merchant needs beyond payments,” Peterson says.

Square clearly views it as such. “Square’s job is to make sure sellers of all sizes have equal access to the tools they need to grow,” a Square spokesperson says. “A few years ago, local business’s only options for accepting credit card payments set them back hundreds of dollars, overwhelmed their countertops with bulky hardware, and required stringent, binding contracts.”

‘The Complete Platform’

The appeal of cloud-connected software is its ability to network disparate business functions into a centralized control center for merchants.

“With cloud POS systems you can process payments through the Internet—without clunky and expensive services, or pricey software that makes you buy a new version to upgrade,” the Square representative says.

First Data, which bought Clover in 2012 and shepherded the launch of the original Clover Station in 2013, is about to mark a milestone this year as it expects to ship its 1-millionth Clover device, said Guy Chiarello, First Data’s president, during an investor event in June. Annualized processing volume is nearly $60 billion, “which has been growing over 50% recently,” Chiarello said.

One of Clover’s key advantages is that it offers merchants more than 350 apps produced by more than 1,000 developers. To date, there have been more than 2 million app downloads, First Data says.

It expects more, especially with anticipated launches of Clover in Germany, Canada, Argentina, and Austria this year. The Atlanta-based processor also will launch a bank partner-branded online signup process for Clover, and it will expand integration opportunities for independent software vendors.

Efforts like what First Data is doing with Clover, Square with its Square for Restaurants, Revel Systems’ customized setups for different verticals, and ShopKeep’s introduction this year of an Android version of its software set to debut on Clover directly address the versatility of a cloud-based POS system.

The ShopKeep-Clover cooperation is part of ShopKeep’s plan to ensure it can operate on multiple platforms, DeSimone says. While it may seem counterintuitive for Clover to make ShopKeep’s POS app available to its users, the logic is compelling, he adds. “It turns out the app market in the POS space doesn’t pan out,” DeSimone argues. “Merchants don’t want to configure their POS systems.”

He says First Data partnered with ShopKeep for the quick-service restaurant and retail verticals. “We sell Clover devices as a hardware option, and they have begun to sell Clover with ShopKeep in agreed-upon segments,” DeSimone says. The move is indicative of the future of POS systems, he says. “In reality, it’s coming down to the complete platform,” he says. “It’s a combination of hardware, software, and connectivity.”

‘Pricey And Tedious’

Square is another provider that is attuned to the shifting needs of merchants, says Aite’s Peterson. “Square segments their business on the necessary functionality for the merchant,” he says. “There’s a whole standalone marketing effort for Square Capital, a separate one for Square Cash, a separate one for Square as a payment terminal.”

Peterson recalls a conversation with a POS terminal maker (whose name he will not disclose) that wanted to transform itself into a platform. “I looked at those guys and said, ‘You’re sitting right next to First Data. You can call yourself a platform, but if I’m a merchant I’m going with someone who can meet all of my needs.’”

Small merchants finally have access to detailed analytics about their businesses thanks to the availability and adoption of cloud-based POS systems.

“Having access to analytics is a crucial business tool for sellers in order for them to make informed and accurate business decisions,” the Square spokesperson says. “Most products on the market are pricey and tedious to set up, which is not the best option for small businesses. With Square Analytics, sellers see real-time charts that shows exactly which items are flying off the shelf, so they can adjust their inventory accordingly.”

While powerhouse tablet POS systems have emerged, new entrants are not dismayed, says Jody Muehlegger, chief operating officer at Handpoint, an Iceland-based POS platform with a U.S. office in Palo Alto, Calif.

“Everybody is still trying to get into this space,” Muehlegger says. “Handpoint has been saying for a long time that the tablet is to the cash register what the computer is to the typewriter,” she says. “People are still buying cash registers and people are still using countertop terminals, but the POS will consume all of that.”

There is a lot of inertia surrounding conventional countertop POS terminals, ShopKeep’s DeSimone acknowledges. “People don’t like to change their payment terminals,” he says. That tends to be the case until they are persuaded by the benefits of a cloud-based POS system, he says, such as the ability to manage various business needs from a consolidated site, even remotely.

DeSimone estimates that between 15% and 20% of U.S. merchants have made the move to a cloud-based POS system. The remainder are using conventional technology, he says. As the market progresses, the tablet form factor will win out, he says, and the differentiating piece is the quality of the software running on it.

‘The Differentiator Is the Cloud’

Smart phones might even be a more preferred device, especially as PIN-on-glass evolves, says Peterson. With PIN-on-glass—in which the PIN is entered directly on the mobile device instead of on a dedicated PIN pad—a smart phone could be the POS terminal, he says (“Get Ready for Mobile PINs,” March). It’ll depend on what merchants want.

“Those who listen to the merchants are the ones that are going to win,” Peterson says. The quality of the applications will win out, he says.

“Experience is you end up with three or four major players in every separate merchant segment,” Peterson says. “A lot of people will bail on the business or move into specific segments they know they can be competitive in. The differentiator is the cloud, not the device.”