New technologies are enabling payment acceptance to grow among small businesses, previously not able to afford the expense. CI reports on how mPOS and P2P developments are changing the retail and payment industry.
The topic of small merchants is currently at the forefront of discussions regarding payment acceptance. Plumbers, hairdressers, corner stores, self-employed young professionals and tradesmen all fall within this diverse category, which is almost solely defined by the low number of employees per business and their propensity to use cash when making transactions. Developments such as mPOS and P2P technologies promise to enable electronic payments for such merchants and in doing so are driving a step-change in acceptance, despite on-going challenges related to issues such as risk and interoperability. However, whilst the potential size of this market is significant, the penetration of acceptance may be limited by the complexity generated by the fragmentation of the acceptance landscape.
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Exhibit 1: Acceptance development across Europe is variable but its growth is generally declining, indicating the need to drive acceptance in new sectors
Source: ECB, World Bank, IMF, Value Partners analysis
Recent years have seen an explosion of interest in small merchants, as payment industry players seek to expand their activities beyond the top tier businesses that are already POS-enabled. This interest has been driven by a lowering of technical barriers, the continued rise of card issuance and, according to Geraldine Wilson, managing director at WorldPay, "the desire of such merchants to benefit from the acceptance of electronic payments, both financially and through an enhancement of their professional image". It has also been supported by governments seeking to enable SMEs as a means to stimulate economic growth. Technological developments in particular have made the payments system more open than ever before, allowing previously overlooked merchant segments to be enabled at minimal cost.
Media attention has focussed in particular on the growing number of mPOS solutions offered by players such as Square and iZettle. The Pay-As-You-Go (PAYG) pricing model of these products is absolutely critical for small merchants, who are unable and unwilling to enter into the 1-5 year fixed contracts typical of a standard merchant acquiring agreement. Another key element of a successful proposition, according to Stewart Roberts, UK Director of iZettle, "is being able to ‘on-board’ (i.e. sign up) a customer in real time, or as little as 4 minutes, since the quicker and more automated this is, the cheaper the process can be." Merchants are attracted to mPOS because they offer a time-saving, accept-anywhere solution that looks professional, obviates the needs to chase payments and provides the potential for numerous Value Added Services (VAS).
mPOS are not only being supplied by new entrants. Established acquirers see them, and the small merchants they serve, as strategically important to their future. WorldPay Wilson runs a special unit focussed particularly on the micro-merchant segment, which has "reengineered every part of the business" to better serve this segment and plan to launch an mPOS solution imminently. WorldPay in the UK plans to offer more than just the mPOS unit and transaction processing, with future potential VAS including loyalty programmes, e-marketing and product catalogues. Such VAS represent one of the key benefits of card acceptance, with the enhanced traceability of transactions allowing the leveraging of data to extract business insights and improve operations. Acquirers are also increasingly able to offer mPOS solutions via white label providers such as Swiff, who according to Hugues Courcier, head of business development, "can also facilitate the provision of branded digital wallet with loyalty programme and voucher functionalities."
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By GlobalDataNot everyone agrees that mPOS solutions will be key to future acceptance growth. When asked about the evolution of POS Bernhard Lachenmeier, head of products and marketing at Six Payment Service, said "mPOS are unlikely to be the future of payments, since through conversations with banks it seems that Peer-to-Peer (P2P) [solutions] may threaten the traditional 4-party acquiring relationship". Various P2P solutions are being rolled out to increase the penetration of acceptance solutions amongst previously cash-only merchant segments. One such solution is Dwolla, whose mobile platform allows such payments to be made through any smartphone, for a fraction of the cost of card-based transactions. Jordan Lampe, head of communications at Dwolla, sees it as a "dark horse in the payments landscape", as it sets out to provide the "rails on which future electronic payments will run". Although P2P solutions have proven difficult to integrate into merchant POS because of the data exchange required from the banks concerned, their low costs are attractive to many merchants, especially smaller merchants with less stable margins.
The aforementioned interest in small merchants appears valid given the transaction volumes passing through their POS, and the current dominance of cash usage in this segment. The targeting of such merchants will not only benefit new payment service entrants and the merchants themselves (by enabling VAS and reducing the cost of handling cash) but also governments wishing to reduce their country’s Shadow Economy by increasing the transparency and traceability of transactions.
Larger merchants in specific industries may also benefit from this recent drive towards mobility. Marc van Piggelen, European Merchants Services has commented that "mPOS are also likely to become standard in industries such as hospitality and fashion, although uptake may be limited by the recent investments made in EMV by larger businesses, which may make larger businesses unwilling to upgrade legacy systems in the short term". In Eastern Europe, meanwhile, up to 60% of the transactions passing through Swiff’s mPOS solution are used by international delivery companies to accept payment upon delivery for goods bought online. Overall, however, it is clear that small merchants are the primary focus of mPOS solution providers, given that they potentially represent an entirely new source of transaction volumes for payment industry players. In the future this could change, with Square’s recent deal with Starbucks showing how some payment facilitators will attempt to use small merchants as stepping stone to larger businesses, and consequentially benefit from the larger volumes, increased visibility and potentially higher consumer awareness and adoption.
However, one key reason that such merchants have not been directly targeted by the payments industry until now is their opacity relative to top tier players. Small merchants carry high and/or unknown levels of risk that make them unattractive propositions for many acquirers. Whilst some acquirers such as WorldPay have undertaken to, in Geraldine’s words, "take a more innovative approach to this risk" as they seek to implement procedures to measure it more effectively, many mPOS providers now act as payment facilitators, managing such risk and acting as a key filter for their partnered acquirer. Carl Scheible, executive vice president of MoneyGram in Europe, Africa and Emerging Channels, is well aware of this need to manage risk, given MoneyGram’s focus on the P2P remittance market: "To enter new market segments one needs to correctly measure risk, which often involves formulating a customised credit score. No-one really knows if SMEs etc. actually represent a good opportunity because of the lack of data that exists about them". This concern was reiterated by Geraldine, who points out that "a key challenge [to rollout out mPOS] is getting credit information, since no pan-European scoring agency exists for this purpose."
Those supplying mPOS solutions face further challenges. Developing a sustainable business case has proven difficult because of the low volume of transactions carried out by small merchants. This led Verifone to abandon its attempt to launch such a solution in the US and has caused European players to be cautious when launching such products. As Chris Davies of Global Payments UK highlights, moreover, "in Europe a key problem is that each country has its own standards that dictate how the terminals ‘talk’ to the host" – such interoperability issues make rapid geographical expansion difficult, and may well be a barrier for any US entrants wishing to enter European markets. Equally, as Chris explains, "While multi-country deployment of these projects in Europe is problematic, in-country implementation is significantly more straightforward. mPOS has emerged as the only sustainable offering for small, independent businesses to enable them to reduce cash handling costs and tap into growing card usage. As such it is likely to become a permanent and welcome addition to the payments landscape." US grown solutions moving to Europe have also to take in account the required EMV certifications necessary to operate in a chip and pin environment.
Issues such as risk management and the need for cross-border interoperability are paralleled in the online retail sector, which continues to grow strongly despite such challenges. Optimal Payments are a Payment Service Provider (PSP) specialising in the online gaming and gambling industry and other high risk merchant sectors. According to Joel Leonoff, the CEO, they have "successfully managed this risk through the use of various risk rules and fraud controls" that proactively identify anomalous payment behaviour. Joel tells Cards International that this experience will soon be leveraged to offer "Square-like devices to small merchants, since the margins could be decent". Noca, a US-based rival to PayPal, has also undertaken to manage risk effectively, as outlined by the founder, P. J. Gupta: "we risk-assess merchants on an on-going base, giving them a transaction ‘limit’ that is gradually increased if we fail to detect any anomalous behaviour." Sage Pay has gone some way to making this transition from online to offline retail, as outlined by Chris Wade, head of strategy and product management, who has described how the company "moved into the card-present space because of the on-going convergence of on and offline transactions". In the future Sage Pay plans to "leverage Sage’s relationship with small businesses to expand Sage Pay’s European presence", and will doubtless continue to benefit from Sage Pay’s experience in the UK online retail market.
Another PSP whose skills may provide useful, as the penetration of electronic payments extends to transactions of lower values and volumes, is MPP Global Solutions, which specialises in subscription and micropayment-type transactions for the disbursement of online media. Paul Johnson, the CEO, has described how the company has adopted practices such as aggregated transactions and alternative payments to respectively reduce the cost and risk of new customers. Much like Global Payments UK in the offline acceptance sector, MPP also offers VAS such as CRM and data analytics that improve the value proposition for accepting such payments. Such innovations – both on and offline – make it likely that the barriers to entry for small and/or high risk merchants will continue to fall. Acquirers too slow to act upon such developments may find themselves disintermediated by innovative competitors and by new payment facilitator entrants, as has happened in the online space where, according to Paul, "acquirers being ‘slow’ has already created opportunities for MPP".
The proliferation of new entrants entering the payments space may not necessarily be conducive to the future growth of acceptance in Europe. Initial statistics from mPOS providers indicate the usage of the new devices remains extremely low, and across Europe numerous such providers only exist in the form of a website, with actual beginning of operations lagging behind the high levels of excitement surrounding the small merchant opportunity. The movement of acquirers and PSPs into this space has led to a surge in launch announcements, with two key consequential risks. Firstly, on the supply side, heightened competition for a customer segment that is only profitable if managed carefully will rapidly reduce the available opportunity for those serving small merchants. On the demand side, meanwhile, the fragmented nature of the payments market is in danger of increasing complexity to the point where taking a decision is made difficult. Combining this with the growth of P2P payments, the interoperability issues prevalent in Europe and the technical integration required to assimilate the huge variety of acceptance methods available, and the attractiveness of electronic payments relative to cash may well begin to decline. This is especially the case for time-poor small merchants, who lack the resources to explore the various payment options available so may instead opt for a conservative approach, despite the efficiency of emerging ‘Shop-in-a-box’ solutions.
In conclusion, the nascent small merchant payment market is currently the target of much media attention, particularly with the launch of innumerate mPOS solutions in the US and increasingly in Europe. On top of the usual benefits associated with electronic payments, mPOS terminals offer a new source of malleable transaction data for various future VAS. Although in the long term P2P solutions may prove equally revolutionary, at present mPOS is seen as the solution that will begin to drive small merchants away from their current cash-dominant environment. However, issues such as risk, and the viability of building a profitable business model to serve such merchants, means that important lessons will have to be drawn from online retail, where KYC is inherently more difficult. As new entrants, acquirers and PSPs all descend on this opportunity, there is a risk that the ‘buzz’ surrounding it will prove self-defeating. To succeed will thus require clarity and differentiation from the players concerned as a prerequisite for the expansion of acceptance into this new market segment.
