European Merchants Services Prospering for First Data

First Data’s IPO filing documents have shed a little light on its European merchant acquiring businesses which are grouped together under Global Business Solutions in its reporting. The issuer facing business, Global Financial Solutions, is larger but I don’t discuss that here.

Europe, Middle East and Africa (EMA) accounts just 14% of Global Solutions total sales. America is where the real money is made.

Nonetheless, EMA revenue has been growing nicely over the past two years, from $453m in 2012 to $554m in 2014. This still still lags behind WorldPay, the European market leader, which records $2bn annual net sales in the UK alone. About 30% of First Data revenue is accounted for by product sales – primarily the rental of card machines, and the remainder by transaction and processing fees.

The filing calls attention to growth in 2013 and 2014 in the EMA mechant acquiring alliances businesses and in direct sales in Ireland, UK and Poland in 2013. The alliance businesses are CardNet (UK), AIB Merchant Services (Ireland), European Merchant Services (Benelux) and BNL POSitivity (Italy).

The product line was flattered in 2014 by a one-off item of $12m for the sale of a merchant portolio in Poland.

First Data EMEA merchant facing business

First Data EMEA Merchant Facing Businesses
Source: First Data IPO filing, 2015

First quarter performance in 2015 wasn’t so impressive at first sight as reported dollar revenues fell by 6% to $119m. In constant currency, sales were up 10% so the dip is more a reflection of the Euro’s woes than the health of First Data’s businesses.

Source: First Data IPO filing, 2015
Source: First Data IPO filing, 2015

mPOS is dead. Long live SmartPOS!

The mPOS hype is over. Micro-merchants proved an elusive market so the industry is taking its technology upmarket in partnership with the burgeoning tablet EPOS sector. That’s my main conclusion from two days in Frankfurt participating in mPOS World 2015. The new approach has already been named SmartPOS.

In 2012, the payment world went wild for mPOS. The success of Square in the US, sparked an investment frenzy in Europe. Analysts forecast an additional 5m merchants would begin taking money on cards for the first time thanks to these cheap and flexible devices. One hardware manufacturer reported receiving 30 enquiries/day as interest peaked.

European mPOS market forecasts
European mPOS market forecasts

Although the reality didn’t meet the hype, the proposition has made steady, if unspectacular, progress.

Miura, alone, claims to have shipped more than 1m mPOS devices worldwide although First Annopolis estimate that just 350K, from all manufacturers, are active in Europe. Only a handful of service providers have more than 5K units in the European field of which it is estimated that 200K are supplied by iZettle with most of the remainder by Payleven and SumUp.

The banks and traditional merchant acquirers have made very little impact although many have launched products. All Spanish banks have an mPOS proposition but have sold a total of 500 units between them. There are 82 mPOS services available in Italy but with collectively negligible market impact. See here for my presentation to the conference which explains some of the background to this disappointing performance.

Yet, mPOS is growing, albeit at a measured pace, supported by several major trends:

  • The steady march of regulation is diminishing the attractiveness of cash. For example, certain French and German towns are now forcing taxi drivers to accept plastic. Italy requires electronic payments to be provided as an option for all transactions over €30.
  • The cost of taking money with cards is falling as reductions in Interchange pass through the system. Longer term, charges will be closer to 1% than 3%.
  • Tablet based electronic point of sale systems (EPOS) are beginning to take significant share and these often include mPOS as standard
  • High street retailers are beginning to use mPOS as part of a technology tool kit that helps to improve customer service by getting more staff talking to customers and taking orders on the shop floor

Responding to these factors, and with a consensus that servicing the very smallest merchants is not economically viable, the industry segmentation model has evolved to focus on larger customers which normally have both staff and premises. Here’s how iZettle (and its competitors) are now viewing the world:

New mPOS segmentation
New mPOS segmentation

From single outlets upwards, many retailers/restaurants are seeking to replace traditional fixed payment terminals and cash registers with tablets linked to mPOS devices – a combination we’re now calling SmartPOS. These merchants require:

  • a rich software platform (with APIs allowing people with no knowledge of payments to integrate payments into their business applications),
  • docking capabilities,
  • easy connections to a range of peripherals
  • personalisations such as bright colours with branded designs to match a particular retailers’ environment

Tablet based EPOS is cheaper and more flexible than a Windows-based till system and is now proven to be reliable in the field. Innovation hasn’t been slow in arriving and ther are now over 100 start-ups commercialising tablet based EPOS for retail and hospitality. Of course the established vendors haven’t stood still and many of them are now offering their software on tablets of various kinds.

The excitement for parts of the payment industry is that integrating an mPOS device to Android/iOS app on a tablet, to create a SmartPOS, is much easier than integrating a traditional payment terminal with Windows based EPOS software. This allows the tablet EPOS vendors to make integrated payments available to large volumes of SMEs who, hitherto, would have bought a till system and payment service separately.

The new SmartPOS bundle looks like this:

From mPOS to SmartPOS - the new SME bundle
From mPOS to SmartPOS – the new SME bundle

The EPOS software is the element of the bundle that delivers the most value and its selection drives the merchant’s choice of which SmartPOS bundle to purchase and when to buy it. Merchants need a till with a payment terminal attached; not the other way around, and this has serious implications for the payment industry:

  • mPOS-focused PSP’s need to partner with the tablet EPOS vendors to ensure their service is embedded as standard in as many SmartPOS bundles as possible
  • The EPOS vendor owns the customer relationship. PSP’s will become trade brands and shouldn’t be investing in direct-to-merchant above the line activity unless they really believe in the nano-merchant opportunity
  • EPOS vendors need to focus on their user experience. To succeed, PSP’s will need to innovate to keep pace with evolving merchant expectations – form factor, periperhals etc – but also ensure that payments does not intrude into the standard processes of retailing. A demonstration by iZettle that showed the screen-flow on an iPad EPOS provided by Inventorum that switched back and forth between the two applications was, in my view, not meeting these standards.
  • Banks/acquirers with large estates of stand-alone payment terminals are vulnerable. As the market shifts to tablets/mPOS devices, merchants will direct their processing to providers offering the best deals via the PSPs, possibly sold as part of the SmartPOS bundle. Banks/acquirers will lose their direct relationships with merchants unless they can offer something beyond a mechant account and a card machine. They need to be in the SmartPOS bundle or to offer their own one. Two good examples: First Data commercialises its own SmartPOS with the Clover proposition; Concardis is inside Order Bird’s SmartPOS bundle with a jointly branded mPOS device linked to a merchant account.
Concardis/Orderbird mPOS device
Concardis/Orderbird mPOS device

To conclude:

A nano-merchant will ask “will your payment service work with my phone?”

A larger merchant will ask “will your payment service work with my tablet EPOS?”

Banks, acquirers and PSP’s need to decide which market they want to be in and which question they want to anwer.

mPOS World – Vendor Commentary and other Notes

My notes from the mPOS World conference in Frankfurt, July 2015.

Tablet EPOS Vendors

I Love Velvet – French start-up that hitherto focused mainly on the US market but is now looking for customers in Europe. It has designed a wonderfully Gallic set of peripherals that are reminiscent of a 1980s Citroen. Target market is large retailers.

I Love Velvet iPad stand
I Love Velvet iPad stand

Shopkeep. This is a very fast growing US based tablet EPOS vendor focused on small retailers which already claims 16K customers including 50 in the UK. Jason Richardson, its CEO, was good value. “There are thousands of different payment devices but they all do the same thing,” he said. “There are hundreds of payment gateways and they all do the same thing too. They just compete on price.”
To win his attention, vendors will need to underline their service credentials. Shopkeep wins business because of its reliable telephone support and PSP’s will need to make this easier, not harder, to manage.

Jason was negative on app stores linked to payment or EPOS services as he didn’t think volumes were yet sufficient to attract good quality third party developers. He was also negative on anything that adds complexity to the point of sale as it slows down the checkout process. “People are flumoxed by new form factors,” he said, refering to some of the cool new payment terminal concepts. Keep it simple.

Touch Bistro. Like Shopkeep, Touch Bistro is a fast growing iPad EPOS app but, as its name suggests, it’s focused on the hospitality trade. Alex Barrotti, the CEO, claims to be the #1 food and beverage app on the Apple Appstore and his software is now powering 3.000 venues, mainly in North America. Most are small but there is one with 65 iPads running simultaneously.

Touch Bistro sells on its ease of use (80% of installations are done online) and significant price differential with a conventional Windows based Micros-style set-up. The iOS apps are also more attractive to the younger demographic of waiting staff and require less user training. Integrations, to reservation services such as Open Table, or to food delivery providers, hitherto provided at the whim of large software vendors become straightforward. Inputing an order directly to the kitchen from the waiter’s device at table saves 7 minutes per party.

New restaurants are an easy sell. Switchers, especially large venues, are harder to convince.

Touch Bistro only uses Apple devices as there are so few that the support staff can know them in detail. With Android, you never know quite what you’re getting, it appears, and that makes for a diminished customer experience. iZettle had a similar complaint. Its free card reader uses the headphone jack to communicate with the merchant’s smartphone but “it’s a nightmare dealing with 100 Android handsets, each with a different configuration.”

Order Bird. Another German iPad EPOS for the catering market, Order Bird services 4.000 venues with an average of 1.6 iPads/restaurant and claims 10% of the market for new installations in Germany/Switzerland/Austria. Order Bird sell on their customer service and employ only ex-restaurant staff on their helpdesk. mPOS has been helpful more because of its scalability in a seasonal business than because of its price. Concardis, a German acquirer/PSP, has taken invested €6m for a stake in Order Bird, and has launched a combined proposition that includes a merchant account with a lean onboarding process and a jointly branded mPOS device. This being Germany, 70% of transactions processed are still cash, of course.

Concardis/Orderbird mPOS device
Concardis/Orderbird mPOS device

Nobly, a London based tablet EPOS vendor targeting quick service restaurants and cafes with turnover around €1000/day. It claims activities in 40 countries and offers a standard Ingenico card machine, the PayLeven and iZettle mPOS services. Nobly has taken the brave decision to supply its software only on PowaPOS hardware.

mPOS service providers

SumUp – claims to have been the first European mPOS player and is now present in 13 countries and differentiates by keeping the whole value chain in house – hardware, PSP and regulatory licenses. This allows it to make a profit on the sale of card readers while its competitors lose money on reselling them. It also makes entering new markets easier.

SumUp began with a direct sales force but now finds most new customers sign up online. It has signed distribution agreements with banks in Spain, Switzerland and Germany. Banks have struggled to sell mPOS but micro-merchants are a segment for which banks have little new product so should use mPOS as a footfall driver to get new customers into the branches.

SumUp claims 300K customers but won’t disclose any other details. Its CEO says most customers are small as its proposition (card reader + card processing) is cheaper than a bank terminal for any business taking < €5k per annum. Half of its customers are new to cards; half switch from a bank terminal.

Larger merchants are now showing an interest based not on price but on the elegant form factor and enhanced reporting capabilities. These need to be dealt with via the EPOS partners as they have complex requirements SumUp has no interest in developing EPOS features, this is done well by the specialists and it will stick to doing the payment part really well.

GoSwiff – Singapore based with distribution via banks and mobile operators in the Middle East, South East Asis and Latin America. There is a large acceptance gap in these markets – there are a great many cards issued but relatively few places to use them – which means merchants are keen to buy. In contrast to Europe, banks have the credibility to sell the product.

iZettle – growing swiftly thanks to (1) a free card reader and (2) high spending on advertising, iZettle (like its competitors) didn’t give sales figures but did introduce a new concept in segmentation. It has redefined micro-merchants as nano-merchants and created a new micro-merchant definition of €5K-€50K turnover, the upper part of of which would normally be recognised as an SME by a UK mechant acquirer.

The implication of the new segmentation is that iZettle needs partners to sell into micro-merchants and these will be the tablet EPOS vendors. One interesting point. iZettle has hired ten analysts from Klarna who have developed the automated decision on whether to accept a new merchant. 85%-90% of customers are accepted with no human intervention.

Respect to PayLeven for bring a customer along. Sabine Seitz, who runs an art gallery in Frankfurt called Fotographie Forum, explained that wanted to replace the cash register but didn’t want Windows as Microsoft wasn’t cool enough for a art venue. She came across Inventorum, a German EPOS start-up, who convinced her that an iPad based option was least risk. After all, if you don’t like the software, you can always find something useful to do with a spare iPad. Inventorum comes with PayLeven as standard. Sabine was very happy with the payment service too but this underlines my earlier point that PSP’s need to embed themselves with the EPOS vendors and not the other way around.

Adyen – mainly known for its e-commerce payment gateway, also commercialises an mPOS device but sells based on its ability to link up sales from all channels through a single payment gateway aimed at larger retailers. The key advantge of this approach as highlighted at the mPOS conference is the ability to tokenise cardholder details in one channel and take actions based upon this token in another.

This can allow a retailer to offer much improved customer service but the use cases are rather too specialised to make a large market. For example, Miliboo, a French furniture retailer, uses the service to take an authorisation when people want to buy in the shop but uses the token to put the transaction through only when the goods are shipped.

Market specific commenatry

Spain – Verliana Ivanova from ITOS Technologies explained how the Spanish mPOS market had evolved. All major banks and the two largest PSPs have launched products based on a common template provided by ITOS using Datecs devices. BBVA and Santander went further and invested in SumUp and iZettle respectively although the involvement seems to be purely financial so far.

None of the propositions have been successful. According to Verliana, less than 500 units have been sold to micro-merchants in Spain. Banks now believe that mPOS is wasted on micro-merchants and that a more rewarding strategy will be to target large retailers and businesses with large, mobile fieldforces.

Italy – the numbers looked positive for mPOS in Italy. Only 15% of SME’s take money on cards yet card payments are growing at 4% pa. Even better, a new law required retailers to offer the option of electronic payment for transactions >€30 sparked the launch of no fewer than 83 mPOS services in the Italian market.

Andrea Nardi from Telecom Italia Mobile (TIM) spoke about his launch of a white labeled mPOS service from PayLeven. TIM’s proposition looks interesting – free device + 1.95% for all transactions bundled with a €10/month SIM. Like many other providers across Europe, TIM has found that reality hasn’t met the hype and less than 1.000 units have been sold.

Telcom Italia mPOS proposition
Telcom Italia mPOS proposition

Italians have preferred to keep using cash and the Government has not backed up its law with any sanctions for non-compliance. And TIM has discovered that it takes a few conversations to explain card payments to a merchant new to the subject. Sales have been disappointing and TIM is working with Olivetti (owned by Telecom Italia) to integrate the mPOS service with Olivetti’s EPOS. This would produce an Italian SmartPOS bundle that sells, I assume, through Olivetti’s normal channels.

Field Force

The second new opportunity for mPOS lies with large enterprise field forces. Self employed tradespeople haven’t taken to mPOS but employers of large mobile workforces understand the value of taking money on the move. A good example cited was the UK TV Licence enforcement whose representatives have an mPOS device. Field forces may struggle to use consumer orientated smartphones and tablets to generate and track tasks and payments.

Instead, a new range of ruggedised handhelds running Android and linking to mPOS devices will develop. GMX YouTransactor has some interesting ones aimed at 15m potential users worldwide. Its CEO suggested that the largest opportunities are in logistics, utilities, lottery agents and onboard selling on planes and trains. These devices are designed to be integrator and VAR friendly.

Micro or nano-mechant opportunities

Meanwhile, the interesting micro-merchant opportunities are in emerging markets such as Brazil rather than mature European ones. The focus is on small, robust and cheap devices that are typically the merchant’s first electronic payment device and have been helped by public policy initiatives to reduce cash usage. iZettle has shown some courage in moving to offer a free device albeit one that connects in the old fashioned way through the headphone jack. This is a good way of gaining a great many customers quickly but risks attracting the wrong kind of customer – infrequent, low users.

Some case studies from MasterCard highlighted some nano-merchant success stories:

  • A Stockholm food truck cut staff from three to two but introducing mPOS. In Sweden, you’re not allowed to handle both cash and food for hygeine reasons so the move to 100% electronic money cuts operational costs. This use case might struggle in the UK where food truck chefs typically wear blue latex gloves which prevent them operating a smartphone or tablet while cooking.
  • A beautician in South Africa who travels to peoples’ home to cut hair, cut debts from 10% to 0% by using mPOS to offer card payments to people who hadn’t enough cash to pay the bill.
  • A pharmacist in India used mPOS to take payment on delivery via card from elderly patients who don’t get out much and are often short of cash. His customers now have the means to buy a wider range of items and his sales are up 14%.

There was some anecdotal evidence presented that distribution costs fall as communities of smaller merchants are seeded with the product. Shopkeep mentioned this.

Other questions

Security – mentioned by very few participants although one said that fraud on mPOS devices was still very low because “organised crime hasn’t got round to it yet.”

Contactless – the card schemes laudable drive to increase usage of contactless has slowed the mPOS market. In Europe all new payment terminals must be shipped with contactless capability from January 2016 but adding this feature increases costs and puts extra strain on the sometimes under-powered batteries. Consquently, fewer new products being launched in recent months as manufacturers focus on the challenge ahead. The insistence on contactless has baffled some in the mPOS industry as the devices are unsuited for high volume retail usage where contactless is demanded by shoppers.

Equally annoying (and costly) is the continuing requirement to include a magnetic strip reader. With the Americans belatedly moving to chip and PIN in 2015, these will be needed for a few years yet, it seems.

Are traditional payment terminals dead? The consensus at the conference was that mPOS and standard desktop machines will coexist. I think this is only partially true. Many retailers will still prefer a chunky card machine sitting on the counter but that’s not to say that they will keep faith with an old fashioned Ingenic/Verifone machine. A new wave of terminals is arriving which capture the spirit and innovation of mPOS but in a more usable format for retail. Poynt is a good example; so is Clover from First Data and Albert from Wincor Nixdorf.

Mobeewave – defying classification, this Canadian start-up has found a way of turning a smartphone into a contactless card reader. The conference pitch didn’t do the idea justice and its CEO was rather battered by his fellow panellists who focused on obstacles (there are many) rather than the opportunities. By entirely removing the need for a card reader, Mobeewave could reduce the cost of card acceptance still further but there’s a way to go to convince a sceptical industry audience.

MasterCard index

MasterCard’s new mPOS index showed 78m transactions globally in the first five months of 2015 with an average transaction value (ATV) of $50 and a highest transaction of $129K. The index is brand new so doesn’t yet show clear trends and only covers transactions processed centrally by MasterCard. Nevertheless, it will become a welcome source of facts in an industry characterised by andecdotes.

According to MasterCard, the top merchant categories globally for mPOS are barber/beauty, office supplies, restaurants, fast food and bars, dentists/doctors/pharmacists and insurance sales. Top markets are US, Australia, Canada, Sweden and Brazil but ATVs are highest in Middle East and Asia Pacific.