Report Predicts How the U.S. Terminal Base Will Migrate to EMV and Mobile Payments

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The gradual spread of point-of-sale terminals capable of handling so-called EMV and near-field communication (NFC) transactions will result in slightly more than half of U.S. POS locations supporting such technology in 2015 and 13% actually using it through hosted POS systems that take advantage of its capabilities, according to a new research report.

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The predictions come in a report from Boston-based Aite Group LLC about how centrally hosted POS systems that enable chip-based mobile marketing and payments are poised to displace the limited-function POS terminals the vast majority of merchants currently use to accept magnetic-stripe credit and debit cards.

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In the report, “The Hosted POS: Enabling Mobile Marketing and Mobile Payments in the United States,” author Rick Oglesby notes that the three leading U.S. POS terminal makers have been configuring their devices in recent years so that they could handle NFC, point-to-point data encryption, and transactions from EMV chip cards if the merchant or merchant acquirer later decides to add such capabilities.

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Collectively VeriFone Systems Inc., Ingenico S.A., and Hypercom Corp. have 93% of the U.S. POS terminal market, according to Aite. (A subsidiary of Gores Group LLC recently bought Hypercom’s U.S. operations as part of VeriFone’s acquisition of Hypercom.) They’re building in such capabilities in order to control costs through standardization of manufacturing and to accommodate a future in which software-based services that generate recurring revenues are more important.

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Based on interviews with 50 industry executives and applying the three manufacturers’ market share and an estimated replacement cycle of about seven years, Aite estimates that while fewer than 200,000 U.S. POS locations are NFC-capable today, 6.7 million, or 53%, will have such capability in 2015. Visa Inc.’s new EMV and mobile initiatives lend further impetus to this migration, which means the entire base could be converted by 2018, according to Aite.

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NFC is a chip-based radio technology that facilitates two-way data exchanges between terminals and mobile devices such as smart phones. NFC chipsets have more capabilities and data storage than mag stripes and are more secure, so NFC is the technology of choice for many new mobile-phone-based loyalty and marketing systems as well as payments. EMV chip cards, meanwhile, already have or are in the process of displacing mag-stripe credit and debit cards in most of the world, the major exception being the U.S.

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Actual adoption of the new technology, however, will lag the hardware rollouts, according to Oglesby, a senior analyst at Aite. Mag-stripe payments are a relatively simple affair involving small amounts of data moving from the terminal to processors and through networks to card issuers. But mobile payments replace the card with an NFC-enabled smart phone and need NFC/EMV terminals. Adding in electronic coupons and loyalty programs results in a complicated transaction flow centered on gateways, the gatekeepers of electronic commerce.

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Thus the need for so-called hosted services that control the activity flows from a central source. “All that stuff needs to be recognized at the point of sale, and that’s far more complex than swiping a Visa card through,” says Oglesby. “The level of incremental complexity is massive. There’s really no way to handle that complexity without handing it off to a cloud service.”

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Large, technologically sophisticated merchants are likely to lead the way into this new, cloud-based POS environment, according to Oglesby. From an estimated 0.1% base today, Aite predicts that 13.2%, or 1.1 million, of U.S POS locations will be using hosted POS solutions by 2015. Aite estimates that the providers of such services could earn $350 million in monthly and transaction-based revenues in 2015, up from a mere $2 million this year.

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Earlier this week, VeriFone chief executive Douglas Bergeron said the replacement of POS terminals by devices capable of chip-based and mobile payments could generate “hundreds of millions” of dollars in new business.