2014 Will Be Marked By a Weeding Out of the mPoS Market

The number of vendors serving the mobile point-of-sale (mPoS) market has increased by more than threefold in the past year. A combination of razor-thin margins, market maturity and the upcoming EMV liability shift will begin to pull the rug out from under newcomers and established players alike. In the coming year I expect a number of mergers and exits from the market.

The small merchant mPoS market is analogous to the U.S. automotive industry in the early 1920s as high levels of saturation have resulted in unsustainability. On a monthly basis, new vendors jump into the fray with solutions that are by and large undifferentiated from the scores of existing competitors, and competing on price instead of functionality has been the strategy de jour.

Throughout 2014, I foresee a number of vendors following VeriFone’s lead by cutting their losses and seeking a graceful exit from the mPoS market. This will be fueled by:

• Unprofitability. There’s a reason smaller merchants are underserved by acquirers; they’re highly unprofitable. At the standard per transaction rate of 2.75 percent charged by most mPoS providers, small dollar transactions are often losing proportions. For instance, a typical $5 debit card purchase at a coffee shop costs a vendor such as Square somewhere close to $0.23. But they only collect 2.75 percent of the total purchase, or about $0.14, resulting in a whopping loss of 64 percent. This is the case for every debit transaction under $8 or $9. For a larger transaction of $10 to $20, there is some profit, but once an mPoS provider gives up 2 percent or more on interchange and fees to the card brands and issuers the margins are next to nothing. Clearly, targeting merchants with both low volume and small dollar transactions isn’t the most lucrative business strategy.
• Market maturity. It’s important to remember that mPoS is a game of scale. Vendors must sign on many merchants to turn a profit on a fraction of a percent. In the world of mobile payments, mPoS is no longer a new technology, having been around for more than three years. The majority of smaller merchants that were longing for cost-effective card acceptance have already adopted the solution of their choice. While new merchants will undoubtedly adopt mPoS long into the future, the size of the opportunity—when paired with the number of competitors—is significantly smaller than it was just one or two years ago.
• EMV. With the U.S. liability shift less than two years out, the traditional mPoS business model of providing merchants with a free magnetic-stripe dongle will soon be turned on its head. EMV card readers are considerably more costly to manufacture and giving them away would be cost prohibitive. Paying for what was once free will be a tough pill to swallow for small, cash-conscious merchants.

Recommendations

• Target emerging and underserved markets. While the small merchant mPoS opportunity may be drying up in the U.S., other markets hold potential. We suggest targeting countries where credit card penetration is on the rise. Working with partners in other nations—such as financial institutions—is a lucrative and relatively easy way to expand internationally. The first mover in any market will benefit.
• Add value beyond the transaction. Incorporating tools that go beyond payment acceptance is essential. Square’s recent launch of Square Market and Intuit’s integration of QuickBooks with GoPayment serve as excellent examples. By providing merchants with a full suite of products that revolutionize the way in which they do business, mPoS vendors can stand out from the pack.
• Move upmarket. Small and medium-sized businesses (SMBs) have a thirst for easy-to-use PoS equipment that offer tools such as analytics and customer relationship management (CRM). With larger merchants, mPoS vendors can leverage a software-as-a-service (SaaS) pricing model, providing a far more lucrative revenue stream than transaction-based pricing.