A Rude Awakening

Jolted by some shocking failures over the past several months, the mobile-acceptance market is fast shedding its early euphoria. What are the prospects for mPOS now?

As boardroom dramas go, it seldom gets more compelling than this. In February, news suddenly emerged that Powa Technologies Ltd., a high-flying London-based startup best known for its mobile point-of-sale gear, was rapidly running out of cash.

Top executives scrambled to find a buyer as the board moved to oust four directors, including the colorful founder and chief executive, Dan Wagner, and bring in administrators from the accounting firm Deloitte.

Meanwhile, the cash drain dragged on as suppliers and even some employees were reportedly not getting paid. On the same day he was booted from the board, Wagner announced he had found his buyer, a firm called Thompson Investments.

But soon it became apparent there was no deal after all. In announcing the tie-up with Thompson, Wagner had acted “prematurely,” in the words of the Deloitte administrators, who proceeded in early March to sell off two of Powa’s three divisions.

There was no news about the fate of the third unit, the one that sold hardware and software for tablet-based POS and maintained extensive operations in the U.S.

It was a sad and spectacular, not to say peculiar, end for Powa, which only weeks earlier boasted a $2.7 billion valuation—enough to rank among the so-called unicorns, or privately held tech startups worth $1 billion or more.

But Powa has company on the ash-heap of mPOS.

At just about the same time Powa’s troubles became known, Flint Mobile Inc. abruptly shut down and referred its merchants to Stripe, the San Francisco-based processor. Redwood City, Calif.-based Flint had been in business only since 2011 offering an app that let merchants process card transactions with a smart-phone camera.

In February 2015, Heartland Payment Systems Inc. shut down Leaf Holdings Inc., a vendor of mPOS tablets it had acquired only six months earlier. Leaf’s chief executive blamed the cost and complexity of converting to the EMV chip card standard.

Even the mighty have stumbled in mPOS. In February, Amazon.com Inc. shuttered its Register service, which offered merchants a card-reading dongle and transaction processing, six months after it stopped selling the reader and just 18 months after it launched the service with considerable fanfare.

Another struggling London firm is Monitise plc, a mobile-payments player that introduced an mPOS product in 2013. A spokesperson says the service has been discontinued, but offers no details. In the past year, Monitise’s share price has tanked, and its chief executive, former Visa Inc. executive Elizabeth Buse, left amid a difficult transition from software sales to a cloud-based platform.

Then there’s the storied tale of Square Inc., perhaps the best-known pioneer of mobile acceptance. Itself a former unicorn, Square shows no signs of going out of business. But when it went public last fall, the company saw its $6 billion private valuation shaved by one-third. As of early March, the public markets valued the 7-year-old company at $3.9 billion.

Are these isolated cases, or evidence of a shakeout, in a market that in recent years has seemingly attracted countless suppliers? Certainly, some of the troubles are unique to the companies involved and not much connected to mPOS. Representatives with Flint could not be reached for this story, and Powa and Square did not make executives available for comment.

But most sources contacted by Digital Transactions hear alarm bells among these failures and stumbles. They see some recurring patterns in the broader mPOS market, including a fixation on price discounting and dongle giveaways, that to them betoken a fatal misunderstanding both of what merchants want and of what mPOS technology can do for them.

“I’m almost getting to the point of despair with the industry with respect to getting the basics right,” says Adil Moussa, principal at Omaha, Neb.-based Adil Consulting.

Adds Derek Del Conte, founder and chief executive of mPOS pioneer Inner Fence LLC, Redmond, Wash.: “There’s some amount of shakeout. I think you’ll see some consolidation.”

To be sure, the mPOS market at its core is healthy and poised for growth, particularly as it adds services and moves into larger merchants with higher-end, app-based devices. Because there are so many providers, an mPOS market with fewer players will still be a vibrant market bristling with vendors.

A host of factors are conspiring to drive this “winnowing process,” in the words of Rod Hometh, North American senior vice president for strategic development at the French terminal maker Ingenico Group, which first invested in mPOS supplier Roam Data in 2009 and then took full ownership last year.

A big one is the industry’s early and lingering concentration in so-called micromerchants, the occasional sellers at farmers’ markets and the one-man-band tradesmen who fix the plumbing or clean the gutters. They stick a dongle in a smart-phone audio jack and they’re ready to take credit cards. But they require loads of handholding, generate a skimpy volume of transactions, and pose lots of risk, experts say.

Indeed, much of the early enthusiasm for mPOS stemmed from the seeming discovery of this underserved market and the potential that it held. Finally, with the emergence of smart phones, along with some software and attachable, bite-size card readers, this potential could be unlocked—particularly with Square and others famously giving the dongles away or rebating the price.

But the notion that micromerchants constituted an “undiscovered” field just waiting to be cultivated amuses many long-time observers. “There’s a very clear reason [this market] had never been served” until recently, says Mimi Hart, chief executive at MagTek Inc., a Seal Beach, Calif.-based supplier of mobile POS gear. “The squeeze isn’t worth the juice.”

Or, in the words of Jeff Stocki, vice president of operations at North American Bancard, which offers the PayAnywhere mPOS service: “These merchants have a very thin margin.”

If you’re charging a flat 2.75% on transactions and absorbing the interchange and network fees, which may total around 2%, that doesn’t leave much scratch to deal with expenses like customer service and fraud costs. Yet, this is the model most mPOS providers follow.

As it turns out, micromerchants are a needy lot, and that eats up a lot of capital. “Customer expectations have continued to rise, and it’s made it harder and harder to satisfy them,” says John Shapiro, director of product management for QuickBooks at Intuit Inc., whose mPOS service, GoPayment, rolled out early in 2009, ahead of Square.

“My gut tells me you could make it work at the right price point. I just don’t know what it is,” says Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based consultancy. “It could be pretty low as long as [you] don’t have to talk to [the merchants] a lot.” Yet, with payments a core and critical function, that’s not possible.

Another costly item is the risk of fraud, which is much higher among tiny merchants. It’s not hard for criminals to steal an identity and begin running bogus transactions. “We see fraud rates about 10 times what we see in our traditional merchant portfolio,” says NAB’s Stocki. “We spend a lot of resources and effort in combating that fraud.”

If providers can control service costs and fraud losses, they must still grow the business. That requires signing tons of micromerchants, since they don’t generate a steady flow of transactions. “Most people coming on board are doing $1,200 a year,” says Chris Ciabarra, chief technology officer at Revel Systems Inc., a San Francisco-based tablet POS provider. “The return on investment just isn’t there” for most mPOS players.

And, while there are exceptions like Square, “very few [mPOS providers] have been able to sign up merchants at scale,” notes Rick Oglesby, president of payments consultancy AZ Payments Group LLC and a senior analyst with Double Diamond Payments Research, Centennial, Colo.

With a typical micromerchant, it can take eight months to recover the cost of a simple $25 dongle, according to Aite Group. Add another month to make back the investment in a $45 EMV reader.

That has crippled players that were counting on volume to make up for gear giveaways. Observes Inner Fence’s Del Conte: “What we’re seeing now is the profitability [providers] thought would show up at volume didn’t show up as the market matured.”

Lately, too, the EMV chip card standard has posed a challenge. EMV requires a whole new card reader, and that comes with costs that prohibit the dongle giveaways players use to attract merchants.

“The EMV migration in the U.S. is separating the serious players from the also-rans,” notes Derek Webster, chief executive of CardFlight Inc., an mPOS startup in New York City, in an email message. “It’s no secret that getting solutions certified end-to-end for EMV chip card acceptance involves a lot of effort.”

CardFlight had a certified product in the market even before the Oct. 1 deadline by which liability for counterfeit card fraud losses shifted to merchants unprepared for EMV, Webster says. Now, “thousands” of merchants are running EMV transactions, he adds.

This is despite the stark fact that CardFlight can’t afford to offer free EMV readers. In fact, Webster says, clients are responding in higher numbers. “Even though these readers are more expensive, we’ve been adding more merchants than ever,” he says.

And these are more serious merchants, he adds, which means EMV might prove to be a way of sifting out the occasional, low-volume sellers that plague so many mPOS programs. “Ultimately, this will take a lot of noise out of the market as the merchants signing up will be more committed as they have some skin in the game,” Webster says.

Nobody is arguing that mPOS players must abandon micromerchants. The real problem is that too many have stuck with these sellers exclusively for too long.

The answer, and it’s one Square and a number of competitors recognized early on, is to move into small businesses, replacing the simple smart-phone setup with a tablet that can process payments but also manage loyalty and a range of other functions, as well.

In this way, Apple Inc.’s 2010 introduction of the iPad proved to be a timely development. Since then, the iPad has become a staple of tablet-based mPOS.

The small-business strategy is no secret in the world of mPOS. “It’s everyone’s ambition to move upstream with larger merchants, where there’s more longevity and more transactions,” notes Mitch Cobrin, founder and chief catalyst for Anywhere Commerce, a Montreal-based supplier of mPOS gear.

The allure of this strategy has attracted a number of startups, including Anywhere Commerce as well as the ill-fated Powa and Leaf ventures, that act on a different level from players like Square and NAB.

They supply software but also hardware specifically designed to accommodate tablets and peripherals at store checkouts, but they don’t get into the business of pricing transactions to merchants. This has put them into competition with established companies that have also pivoted to mPOS, from NCR Corp. to Infinite Peripherals Inc.

The latest outgrowth of this movement is the app-based terminal, which may not look like a tablet but is similarly versatile. Here, too, established companies like First Data Corp., with its Clover line of devices, compete with fresh-faced startups like Poynt Co., founded by payments veteran Osama Bedier, who launched the original Google Wallet venture.

“We’re seeing the evolution from the mPOS dongle solution to the smart terminal,” says Jared Drieling, business intelligence manager at The Strawhecker Group, an Omaha, Neb.-based payments consultancy. “They have hundreds and hundreds of apps.”

What all these players have in common, whether they’re selling transactions or devices, is the recognition that small businesses are “where the money is,” as MagTek’s Hart puts it, in contrast with micromerchants.

The money may be there in more ways than one. With somewhat larger merchants, mPOS players can add features that may not have anything to do with payments but that open new revenue streams and keep clients on board.

Companies like Square have been especially active in this regard. Seeing a need among merchants for growth capital, it added cash advances that are paid back through the merchant’s Square receipts. Since then, it has introduced features like Instant Deposit, which speeds up funds availability, and Payroll, which manages paychecks and tax filings for businesses.

Besides incremental revenue—Square charges $20 per month plus $5 per employee—Payroll is also bringing in incremental clients. Some 15% of the businesses signed up so far aren’t using Square for payments processing.

While Square lost $212 million in 2015, it cultivated more business with larger merchants, which it defines as those that process more than $125,000 a year. These clients accounted for 39% of the company’s gross processing volume last year, up from one third in 2014. Meanwhile, Instant Deposit, introduced only in August, had attracted 58,000 sellers and $600,000 in deposits by year’s end.

Analysts like Moussa applaud this approach. “The ones that are doing [mPOS] right are the ones who understand they are dealing with merchants who are facing problems that have nothing to do with payments,” he says.

Still, some long-time observers interject a note of caution about the small-business strategy. If the history of POS payments has proven anything, they say, it’s that merchants are notoriously slow about changing out equipment.

“The broad middle segment is the very segment that’s going to be conservative when they look at [mPOS],” says Ingenico’s Hometh, a payments veteran. “There’s an underestimation of how long it takes to move the needle for a technology in the larger merchant space. Right now, it’s very hard.”

That, he says, could complicate business plans predicated on scaling up quickly—and few plans are predicated otherwise. Hometh offers an example graybeards in the payments business will remember well. “How long,” he asks, “did it take for signature capture to take hold?” The answer, he says, is 12 years.

Even so, few dispute that moving up to larger merchants—and larding on plenty of revenue-generating services—is the right way to go. And merchants may well be open to considering mPOS services. Recently, an online marketplace for retail technology found tablets and mobile-checkout solutions were the second most-searched product category, following only e-commerce and online-shopping tools.

Indeed, mPOS may be sounding some alarms, but those that survive the winnowing process will be stronger for it. Patience will help. “Ultimately, you’ll have a thriving market that will grow,” says Hometh. “People just need to be careful in their business plans.”

—With additional reporting by Jim Daly and Kevin Woodward

 

What Retailers Want—According to Their Online Searches

What kind of technology are grocery stores, drug stores, and convenience stores most interested in? Not mobile payments, at least not right now, but mobile point-of-sale tech may be another story.

That’s the conclusion of the Los Angeles-based Center for Advancing Retail & Technology LLC, which operates an online marketplace of retail solutions for merchants of consumer packaged goods, the kinds of places where consumers shop every day. CART monitors product searches by its 30,000 users and ranks them according to a composite index score that measures both the volume of searches and the length of time spent on the results.

According to its first such ranking, which appeared in December and takes account of all searches since the beginning of 2015, mobile payments comes in 37th out of 38 technology categories, notching a composite index score close to zero. CART defines mobile payments as services like Apple Inc.’s Apple Pay and other digital wallets that let consumers pay with virtual payment cards at the point of sale.

Instead, users are zeroing in on e-commerce and online-shopping tools that help merchants put their stores online, manage inventory, and handle payment. That tech category came in first with a composite index score of 4.31, says CART, which opened its solutions marketplace almost a year-and-a-half ago. That’s 215% above the 2.00 mean score for all 38 categories.

Still, despite the big yawn over mobile payments, tablets and mobile-checkout solutions came in second, with a score of 3.89. “The fact that came in number-two somewhat surprised us,” says Gary Hawkins, chief executive at CART. “It confirmed this is an area of real interest to the retail industry. We feel the traditional [point-of-sale] business is ripe for disruption.”

Hawkins thinks interest in mobile wallets will pick up in coming years, but right now grocers and other merchandisers are struggling to manage other priorities, which include a belated upgrade of their Web sites. “Retailers of all sizes have a lot on their plates,” he says. “They’re focused on e-commerce, and feel pressured to get into the online game. They haven’t had the bandwidth to focus on [mobile payments] yet.”

It’s true that the EMV rollout induced merchants to install new terminals that can not only handle chip cards but also process wallets using near-field communication technology. But not all merchants have acquired the new terminals, let alone activated NFC. “The fact of life is a lot of retailers don’t have it in place yet,” says Hawkins.

Other relatively low priorities, as indicated by their composite index scores, are social-media tools (ranked 28th) and location services, the only category to rank worse than mobile payments.

But Hawkins argues location services—which comprise solutions that let merchants pinpoint where customers are in the store so they can deliver immediate offers to them—may have suffered because retailers see them as part of a larger mobile-marketing category, rather than as a distinct category of their own. Indeed, mobile marketing itself ranks much higher, in 14th place.

“Location by itself is not as appealing to the industry as location as part of a solution,” Hawkins says.