Acquiring: The Allure of Private-Label Terminals

Peter Lucas

Acquirers routinely lose merchants lured away by offers of lower-cost processing. Result? More acquirers are marketing their own branded POS terminals as a way to boost retention.

Ask a merchant acquirer how much it charges a retailer for a point-of-sale terminal and the frequent response is that it’s a free-terminal world these days. Many merchants simply don’t expect to pay for a plain-vanilla terminal when it’s the software inside that differentiates the box. And that has been a problem for acquirers.

Since most POS terminals can be reprogrammed, the door is wide open for competing acquirers and independent sales organizations to swipe business by offering the merchant a better discount rate and loading their own software onto the merchant’s existing terminal.

Because the terminal stays, the ISO poaching the account does not have to eat the cost of providing its own box to win the merchant’s business.

Custom Applications

Tired of watching that scenario play out over and over, a handful of acquirers in recent years have launched their own lines of private-label POS terminals to help reduce costly merchant attrition. This group includes industry heavyweights First Data Corp., Heartland Payment Systems Inc., and Chase Paymentech.

Mid-size ISOs are getting in on the act too. In April, North Miami Beach, Fla.-based Unified Payments LLC announced it was rolling out a private-label terminal made by Dejavoo Systems enabled for near-field communication (NFC) transactions.

Nor is private-label branding limited to traditional POS terminals. Harbortouch, formerly United Bank Card Inc., offers full-blown business-management POS systems with the Harbortouch brand for restaurants and retailers.

“Merchant retention, brand awareness, and control over the device are the primary benefits of private-label devices,” says Jared Isaacman, chief executive at Allentown, Pa.-based Harbortouch. “With a private-label device, we can offer features and functionality to merchants that other ISOs can’t, and that helps lock down the account.”

Indeed, software is the big differentiator when it comes to private-label terminals. Harbortouch, for example, loads its system with custom applications for restaurants that tie into the back office.

First Data, which has offered private-label terminals since the late 1990s, has standardized applications on its FD line of terminals that debuted in 2006, bundling such features as gift card, payroll-check cashing, and TeleCheck verification services, by model type.

It does the same for the corresponding models from leading terminal makers VeriFone Systems Inc. and Ingenico North America, a unit of France-based Ingenico S.A.

“When a merchant gets a free terminal, there better be something more behind it than standard POS software or there is nothing to prevent them from switching acquirers,” says Chuck Fillinger, a senior associate with Omaha, Neb.-based consulting firm The Strawhecker Group. “A processor like First Data can bundle its services in its terminals to create value-added solutions merchants can’t get with a standard, non-proprietary terminal.”

Standardized Features

Adding proprietary software locks the terminal down because it is compatible only with the processor’s own platform. Processors looking to go one step further to secure their terminals can download a code that prevents reprogramming if not entered. Since competitors don’t know the code, the terminal remains linked to the incumbent acquirer’s platform.

“Sales reps are always looking for ways to reprogram terminals as part of their effort to entice merchants to switch, and locking down the terminal is a good deterrent,” says Russell Bird, senior vice president, POS Solutions, for Atlanta-based First Data. “We give our terminals a look that tells an ISO they can’t swap out the software.”

Even if a competing ISO is inclined to offer the merchant a completely new POS terminal for free, it still has to eat the cost, which is likely to make it think twice about doing so when encountering a merchant with a locked-down terminal.

“A free terminal is only free to the merchant, not the acquirer,” says Christopher Justice, the former president of Ingenico North America who is now chief executive of Atlanta-based consulting firm Java Payment. “Any time a merchant breaks a contract with a processor, it triggers an early-termination fee. While the acquirer might be willing to pay that, picking up the cost of a new terminal, too, makes switching the merchant a much more expensive proposition.”

Indeed, having started the free-terminal trend in 2004, Harbortouch currently gives away its feature-laden POS systems.

“Our system costs $10,000. Before that we were giving away Lipman terminals that cost $250,” says Isaacman. “That gets expensive fast. That’s why when you give away hardware you want a POS system or terminal that’s locked down and can’t be swapped out from under you.”

Reliable market-share figures for private-label terminals were unavailable. But, regarding First Data, the largest merchant processor, payments experts estimate that about half of all POS terminals sold by the company directly or through its alliance partners are FD-branded devices.

First Data’s Bird adds that the processor allows its alliance partners to decide which terminals they offer. “We let the market determine what brand of terminals they want and cater to merchants’ preferences, which is why we standardize features across all the brands we offer,” he says.

Most acquirers offering their own private-label terminal, however, are more inclined to push their brand over that of competing brands as they have a financial stake in how many units are sold.

“It’s a substantial financial commitment to offer a private label, which is why there aren’t many acquirers and ISOs doing it,” says Scott Calliham, a principal for Linthicum, Md.-based First Annapolis Consulting Inc. “Private label requires scale.”

Economies of Scale

Opinions vary as to how much scale would make offering private-label terminals viable for an acquirer. Some estimates range from as little as 5,000 units per year to 1,000 or more per month.

“Acquirers can get a private-label deal with a manufacturer for 5,000 units a year,” says Justice. “For an acquirer selling thousands of terminals a month, 5,000 a year is not a huge commitment.”

Experts say the major U.S.-based terminal manufacturers, VeriFone, Ingenico, and the smallest, Equinox Payments, formerly Hypercom USA, have the economies of scale to handle relatively small orders.

While their collective market share is unknown, acquiring executives estimate that the three companies produce more than half of the private-label terminals sold domestically. Most such terminals are modified versions of their existing devices.

Merchant-acquiring sources say the manufacturers will make private-label terminals should a big enough piece of potential business from an acquirer come their way. But the terminal makers are very guarded in discussing the private-label niche. And, sometimes, determining exactly what is and isn’t a private-label terminal can be a matter of terminology.

A VeriFone spokesperson says by e-mail that “the VeriFone brand is critical to both end-user customers and OEM [original equipment manufacturer] partners alike. While VeriFone does partner with OEM customers on co-branded solutions, we do not ‘white label’ our products.” Ingenico declined to comment.

Nevertheless, while Asian manufacturers play in the private-label space, acquirers say the North American manufacturers do pursue the business. “When First Data put out its first RFP [request for proposals] for a private-label terminal, Ingenico responded with a good solution,” says Fillinger, a former head of First Data’s product group that oversaw the FD terminal.

Ultimately, Ingenico did not win the bid and First Data ended up modifying its original RFP and resubmitting it to prospective manufacturers after it made the decision to divest Western Union around the same time.

“Private-label manufacturing is nothing new for the leading terminal makers. You can go down to the Caribbean and find Nabanco-branded [VeriFone] Tranz 330s still being used by merchants,” Fillinger adds.

Quality Control

Despite their presence in the private-label market, the leading terminal makers don’t own it, as Unified Payment’s deal with Manhasset, N.Y.-based Dejavoo Systems attests. According to payments experts, there are numerous terminal makers in and outside the United States that acquirers can turn to for private-label deals.

Unified Payment’s new terminal is a 32-bit, NFC-enabled terminal certified by most major processors in the U.S. It is being marketed under the Unified brand and also the ISO’s Process Pink brand. The Process Pink model comes in pink and features a pink ribbon to signify Unified’s exclusive affiliation with the National Breast Cancer Foundation. When a consumer makes a credit card purchase at a merchant that has deployed the terminal, a portion of the transaction is donated to the foundation.

Giving a terminal a distinct color can help create a brand identity for the acquirer’s line of terminals. Chase Paymentech reportedly colors its terminals blue in keeping with parent company JPMorgan Chase & Co.’s corporate color.

“There is a branding component to private label that helps with merchant retention by making the acquirer’s brand more prominent,” says Rick Oglesby, a senior analyst with Boston-based Aite Group LLC. “But it’s the software that is a real differentiator.”

First Data started down the path to marketing its own terminal due to its desire to consolidate all the features and functionality of its platforms onto a terminal.

“A terminal manufacturer builds terminals for the broader marketplace, not one client,” says Justice. “If an acquirer wants a terminal built just for their platform, it has to be a private-label job.”

While the importance of software can’t be overlooked when it comes to private-label terminals, having the opportunity to produce higher-quality hardware is a prime consideration too.

Offering private-label terminals allows acquirers to set specifications for design, in addition to monitoring performance of the unit and reporting back to the manufacturer, which then corrects any design flaws.

Payment experts are quick to point out that when a terminal breaks down, merchants can’t accept credit or debit cards, gift cards or other electronic payment options it is programmed to take. “Not being able to accept payment through a POS terminal because it has broken is problematic and frustrating for merchants,” says Justice. “It also reflects on the acquirer.”

Today, First Data’s FD line of terminals is produced by two manufacturers, which the company declines to identify. The line is overseen by a full-time engineer who monitors quality control, works with the suppliers to set quality standards, and reviews design specifications and modifications from the suppliers.

“Quality control over the hardware is extremely important to us because we also develop the software that goes in it,” says Bird. “When there is a problem with the design of the terminal, we can go direct to the manufacturer to learn how they intend to fix it. You can’t do this with an off-the-shelf manufacturer.”

Easing EMV

One advantage of contracting with a leading terminal maker on a private-label deal is that their terminals are already certified on the major payment networks and are up to date in meeting Payment Card Industry data-security standard (PCI) specifications.

“PCI compliance and other necessary certifications are already taken care of. That’s why doing business with overseas manufacturers is such a hassle,” says Harbortouch’s Isaacman. “When you work with a leading supplier, you’re basically changing the color of the unit, the screen, and the model number, and you’ve got a private-label terminal that’s ready to go.”

Working with a leading manufacturer also helps smooth the path to getting private-label terminals EMV-certified. The EMV (Europay-MasterCard-Visa) standard spells out interoperability specifications to enable POS terminals and ATMs to authenticate chip cards.

With processors and ISOs now required by the bank card networks to be able to process chip card transactions by April 1, 2013, and liability shifts coming in 2015, the race is on to retrofit or swap out old POS terminals.

Overall, payment experts don’t see EMV compliance as a major issue for acquirers selling private-label terminals, as their new terminals are already likely to be EMV-compliant and they expect retrofit kits to be available for legacy terminals.

First Data, for example, plans to offer a peripheral device to make all terminals used by its merchants—including its FD line—EMV-compliant.

“That helps the merchant avoid having to buy a new terminal,” says Bird. “But if the terminal is too old, it will need to be replaced with an EMV-compliant terminal.”

Given the benefits of private-label terminals when it comes to merchant retention and brand awareness, the big question is, will more acquirers and ISOs jump on board the train?

Maybe a few, but payments experts give long odds for a mad rush into the world of private-label terminals.

“Cost and commitment of resources are the biggest deterrents,” says First Annapolis’s Calliham. “For most acquirers it’s going to be a separate business to manage, just look at Harbortouch. It all comes down to how much control the acquirer wants over their destiny.”