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© Edgar, Dunn & Company 2014

How to implement a successful mPOS strategy

Edgar, Dunn & Company

June 2014

How to implement a successful mPOS strategy June 2014


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Contents

1 Executive summary .......................................................................................................... 1

2 Current mPOS landscape ................................................................................................ 3

3 Merchant segmentation.................................................................................................. 5 3.1 Identify merchant segments that benefit most from mPOS ............................... 5 3.2 Target small and mobile merchants and capture an untouched market ........... 5 3.3 Target larger merchants by providing value-added services .............................. 6

4 Distribution strategy ....................................................................................................... 7 4.1 mPOS requires an innovative go-to-market approach ........................................ 7 4.2 Importance of the brand ....................................................................................... 8 4.3 Use distribution networks or launch mass market advertising campaign ......... 9 4.4 Implement an all-digital sign-up and on-boarding process................................. 11

5 Trust and security are identical ...................................................................................... 13 5.1 Security is one of the main concerns for merchants and is slowing down mPOS

adoption ............................................................................................................. 13 5.2 Managing security is critical for mPOS success ................................................... 14

6 Develop a sound business model .................................................................................. 15 6.1 Adopt a “low-cost” approach for payment activities ......................................... 15 6.2 Adapt your pricing to your targeted market segment ....................................... 16 6.3 Make a profit by providing value-added services through payment terminals. 17

7 The future of mPOS ........................................................................................................ 19

8 How can EDC help to implement a successful mPOS strategy? .................................. 20



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1 Executive summary

mPOS (mobile POS) is rewriting the rules of who can accept card payments and who

can provide POS services. It is a double-edged sword for payment players. On one

hand, it could increase revenues by reaching new merchant segments and offering new

payment services. On the other hand, mPOS could cannibalise the current card

acceptance market by providing payment services to medium and large merchants (e.g.

Apple, Home Depot, and Nordstrom have implemented mPOS solutions). This major

technological change creates opportunities for new entrants and forces traditional

players (e.g. banks, acquirers / processors, POS manufacturers) to re-think their

acquiring and acceptance strategies.

This paper aims to identify best practices to take advantage of this new environment

and is structured to address four strategic questions:

Merchant segmentation (where to sell?)

Distribution strategy (how to go to the market?)

Security (how to win merchant’s trust?)

Business model (how to create a profitable business?).

At the same time, it also takes into consideration what large retailers are considering at

their point of interaction with their customers.

The answers to these four questions are key factors in the implementation of a

successful mPOS strategy.

1. Merchant segmentation: mPOS is not only for micro-merchants anymore

Initially, mPOS vendors targeted micro-merchants with simple, low-cost pricing models

coupled with basic POS features. Vendors have now enhanced their services by offering

full cashier stations that can be integrated into a retailer’s core systems. Consequently,

companies like Nordstrom, Urban Outfitters, J.C. Penney, Superdry, John Lewis, Moss

Bros, Home Depot and Gap have implemented or are implementing mPOS solutions to

enhance and further personalise the customer sales experience. Many more merchants

are piloting or planning to launch their own mPOS solution for varying ROI reasons from

queue busting to providing a more personalised service. If the small merchant is a

“virgin market” accounting for a significantly high volume of payments, mid-range and

large merchants represent a major additional volume growth opportunity for mPOS

providers and should not be underestimated.

2. Distribution strategy: mPOS success is less a question of technology or product

features than a question of distribution



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Advertising campaigns, distribution networks, and training of sale associates, and digital

sign-up and on-boarding processes are all aspects that will be important for a successful

mPOS strategy. The right distribution strategy will depend on several factors, including

the size of the target client base with which the distributor has a relationship. Mass-

market advertising campaigns, for example, can be efficient for large players that have

already built up a sizable merchant portfolio, while start-ups could reach scale faster by

choosing an indirect approach and establishing distribution networks.

3. Security: mPOS providers will need to invest in security to survive the oncoming

competition and consolidation period

If initially mPOS providers were more focused on offering simplicity and “easy to use”

features, the maturing mPOS business and the increasing demand from large merchants

has put security back to the forefront. Security appears today as a key point in the

value proposition of the mPOS and will be an important part of the proposition in the

future.

It is expected that mPOS devices will be highly prone to attack from fraudsters, most

likely from organised crime. The attacks will be aimed at compromising mPOS payment

devices and gaining full control over it, allowing the fraudster to gather PIN and credit

card data, and even change the software on the device so that it accepts illegitimate

payments. It is critical to get security right early, as there is a huge potential for fraud

with the increasing number of consumers and merchants use mPOS solutions around

the world. Fraud victims will have little hesitation to switch to devices that they

perceive to be more secure.

4. Business model: mPOS is an opportunity to turn payment terminals into a

commerce assistant tool for merchants.

Today, mPOS is considered a low margin business by a large majority of payment

players. On the contrary, Edgar, Dunn & Company (EDC) believes that mPOS is an

opportunity to restore margins by integrating value-added services around payment.

We believe that mPOS is as revolutionary for the point of sale and acquiring business as

the smartphone has been for the mobile phone industry. Today, consumers are willing

to pay ten times the price of a Nokia 3310 to have an iPhone 5 because the iPhone 5 is

not just a mobile telephone; it is a life assistant and entertainment device (e.g. GPS, an

app-store, internet access, etc.). Tomorrow, merchants will be willing to pay more for

an mPOS solution (e.g. higher fee per transaction) than for a traditional POS terminal

because it will not only allow them to accept payments, it will also enable them to

attract new customers (e.g. through loyalty programs or targeted marketing), improve

the level of service (e.g. inventory checking or checkout at the point of purchase), and

make managing the merchant’s business easier (e.g. data analytics and merchant

reporting tools).

This white paper is aimed at people in a variety of different roles. The goal is to provide

the reader, whether a business development director at a payment service provider, a

head of customer service in a large retailer or a top executive in an acquiring bank, with

an understanding of the bigger mPOS landscape, how the ecosystem within it operates



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today, and how it is likely to evolve in the future. This white paper aims to find common

ground among the different stakeholders in the mPOS proposition.

2 Current mPOS landscape

The omnipresence and advanced capabilities of today’s smartphones and tablets

has resulted in the development of solutions that leverage these devices as card

payment terminals. This product has been called mobile Point of Sale (mPOS).

mPOS has, in less than four years, become one of the most promising market segments

of the payment industry. After the success of Square1 in the United States, we have

seen a proliferation of new mPOS initiatives around the world (see Figure 1), and the

number of terminals have grown from 1.5 million in 2011 to 9.5 million in 2013 worldwide.

Figure 1: mPOS initiatives around the world

Definition of mPOS

mPOS is the ability for a merchant to accept card payments with a smartphone or a

tablet instead of with a traditional electronic cash or checkout register (ECR),

standalone POS or a PED (Pin Entry Device). mPOS is a separate device that attaches or

connects (e.g. via Bluetooth) to a smartphone or tablet and reads payment cards. The

1 Launched in 2009, Square is on track to process more than $30 billion in payments in 2014 according to

TechCrunch

After the success of Square in the United States, we have seen the proliferation of new mPOS initiatives around the world

http://searchmobilecomputing.techtarget.com/definition/smartphone

http://searchmobilecomputing.techtarget.com/definition/tablet-PC



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card credentials captured via the hardware are typically linked to a software application

within the smartphone to process payment over the standard GSM or Wi-Fi network.

This new technology has had a significant impact on the payment industry for three

main reasons:

mPOS expands the card acceptance market significantly: merchants who have

not traditionally accepted card payments, such as small merchants, stand to

benefit in particular from mPOS. The only investment required now to accept

card payment is a regular smartphone. mPOS has addressed a market segment

previously ignored by traditional players. According to Javelin, a market research

firm, mPOS could expand the current payment card acceptance in the US by as

many as 20 million merchants, accounting for up to $1.1 trillion in annual

new‐card payments

mPOS is an opportunity to increase revenues by offering value-added services

around payments: the sophistication of smartphones enables provision of a

large range of value-added services through the payment terminal, such as

reporting tools or loyalty services (see more examples in section 6.3). Therefore,

mPOS could lead to increased revenue and could position payment acceptance

as the focal point of the merchant relationship with the consumer

mPOS reduces entry barriers to the card acceptance market for new

competitors: card acceptance has so far been primarily reserved for large

industrial manufacturers and banks (with the exception of the ISOs and third

party specialists). The reduced cost and complexity of mPOS payment terminal

manufacturing enables new players, ranging from start-ups to global payment

processors, to enter the market. This can partly explain the explosion of new

mPOS initiatives in the world today.

mPOS is re-writing the rules of who can accept card payments and who can provide POS

services. It is a double-edged sword for payment players. On one hand, it could

increase revenues by reaching new merchant segments and by offering new services

around payments. On the other hand, mPOS could cannibalise the current card market,

by providing payment services to medium and large merchants (e.g. Adyen Shuttle

provides mPOS services to Superdry the fashion retailer). This major technological

change offers opportunities for new entrants and compels traditional players (e.g.

banks, acquirers / processors, POS manufacturers) to re-think their acquiring and

acceptance strategies.

This paper aims to identify best practices to take advantage of this new environment

and is structured to align with four strategic focuses:

Merchant segmentation (where to fight)

Distribution strategy (how to go to the market)

Security (how to win merchant’s trust)

Business model (how to create a profitable business)

mPOS is re-writing the rules of who can provide POS services and who can accept card payments



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It is these four business aspects that EDC considers key success factors to implement

any mPOS strategy.

3 Merchant segmentation

Regardless whether you are a provider or a large retailer looking to implement an mPOS

proposition for your clients/customers, it is essential to understand the target market

and segment appropriately. mPOS is not appropriate in every use case scenario.

3.1 Identify merchant segments that benefit most from mPOS

Before rushing to engage with mPOS, it is crucial to understand who will benefit most

from this new type of acceptance solution. Merchants who are well positioned to

rapidly adopt mPOS generally fall into two different categories

Firstly, merchants who do not currently accept card payment because the

payment terminal is too expensive or the sign-up processes are too onerous.

mPOS will enable these types of merchants to accept cards for the first time

Secondly, merchants that already accept card payment but aim to improve their

customers’ purchase experience by deploying “smart” and “mobile” POS

devices across their existing stores. This could be to replace existing “fixed”

point of sale equipment or complement, and in some cases integrate with, the

existing in-store point of sale infrastructure.

3.2 Target small and mobile merchants and capture an untouched market

Enable micro-merchants to accept card payment for the first time

Historically, small merchants have not accepted card payment because

traditional POS terminals have been too expensive (purchase cost is around

€500/$680 on average for a traditional standalone POS) and the account sign up

process too burdensome. mPOS enables providers to address this merchant

segment for the first time. In turning smartphone mobile devices into payment

terminals, mPOS enables significant savings compared to the cost of a dedicated

POS standalone terminal. Furthermore, simplified sign-up processes and

adapted pricing (e.g. no fixed cost pricing) facilitate the adoption of mPOS

services for this particular merchant segment.

Allow mobile merchants and delivery services to accept card payments on the

go

mPOS could expand the current payment card market by as much as 18%.



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Small and mobile merchants and delivery services (e.g. taxis, plumbers,

electricians, etc.) typically cannot afford the cost of a traditional POS, together

with any wireless service charges, due to their low value payment activities.

Therefore, these merchants often prefer to be paid by cheque or cash. Mobile

POS significantly reduces the cost of payment acceptance and enables these

merchants to accept payment on the go. It allows them to replace traditional

payment methods (e.g. cash, cheque) with card payments and thus simplify their

payment process such as improved back-office reconciliation. It has also

facilitated converting paper invoices and receipts for payment into an email that

the merchant can send to the customer at the type of payment.

3.3 Target larger merchants by providing value-added services

Allow department stores and specialty merchants to improve in-store checkout

process

Department stores and specialty merchants have been pioneers in mPOS (e.g.

Apple through the Ingenico/iPhone iSMP solution). These large retailers have

understood that mPOS could improve their in-store checkout process. Indeed,

mPOS allows payment acceptance wherever the customer is. Therefore it will

reduce in-store customer movements and reduce waiting time at the checkout.

Furthermore, new services integrated into the mobile device can also improve

both the sales associate’s efficiency and the customer experience (e.g. an

application allowing an inventory check, followed by arranging home delivery).

Provide specialised services integrated into the POS for specific merchant

needs

Multifunctional mobile devices enable the provision of dedicated service for

specific merchant needs. For instance, mPOS can simplify the ordering process

in bars and restaurants. In addition to the payment application, waiters can take

orders directly on the payment device. The order will be directly registered into

the reservation system and thus readily available to the kitchen. The dedicated

application could also provide waiters’ customers with full information about

courses available and daily specials. Finally, waiters can also accept payment

from customers where they are sitting, instead of having to ask for payment at

the electronic cash register.

Figure 2: estimation of the mPOS impact on the card acceptance market in the

next 3/5 years (% based on transaction value)

mPOS could cannibalise 12% of the traditional POS market, with department stores and specialty retailers the highest areas of replacement



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EDC’s perspective: mPOS is not just for small merchants anymore.

Initially, mPOS vendors targeted micro-merchants with simple, low-cost pricing

models coupled with basic POS features. Vendors have now enhanced their

services by offering full cashier stations that can be integrated into a retailer’s core

systems. Consequently, companies like Nordstrom, Home Depot and Gap stores

have implemented or are implementing mPOS solutions to enhance and further

personalise the customer sales experience. If the small merchant is a “virgin

market” accounting for a significantly high volume of payments, mid-range and

large merchants is a major volume growth driver for mPOS providers and should

not be underestimated.

4 Distribution strategy

4.1 mPOS requires an innovative go-to-market approach

EDC has structured its analysis on three different aspects of the distribution strategy:

branding, distribution channels and implementation process. These three key elements

frequently need to be redesigned in order to best leverage the benefits of mPOS

devices.

Many of the European payment providers with an mPOS offering and some of the

mPOS manufacturers are pursuing a land grab strategy, in other words capturing as



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many markets as possible and finding new sales channels and distribution partners in

new territories other than their own. The US market looks particularly attractive

because of the expectation that a Chip & PIN solution is likely to quickly erode the

market share of Square’s magnetic-stripe device. Square will obviously want to defend

its home market by offering a Chip & PIN compliant device but there are a wave of EMV

Chip & PIN compliant devices already knocking on the door of US distribution partners

and retailers.

4.2 Importance of the brand

A strong brand is key in the payment industry

Rapid technological development facilitates the emergence of new companies

and proliferation of new services and products. In this confusion, consumers are

in search of certainty and therefore rely on brand recognition to a large degree.

Furthermore, the security concern related to payment activities makes brand

recognition even more important. A strong brand is essential for inspiring

merchant and consumer confidence. A merchant may turn to its banking

relationship to seek trusted advice about the acceptance of card payments. On

the other hand, consumers will prefer to trust a merchant brand and/or the

acceptance brand, such as Visa, MasterCard or American Express. Building or

leveraging a strong brand is even more important to get right in an mPOS

scenario where fraudsters are expected to be operating.

Create a new brand to avoid cannibalisation of high margin traditional POS

business (from the manufacturer’s point of view)

A risk of cannibalising high margin core business can arise from selling traditional

POS terminals and new mPOS products under the same trading name. As a

matter of fact, margins and cost structures of mPOS differ from traditional POS

products. For instance, Ingenico, the POS equipment manufacturer, has decided

to delineate its mPOS activities from its mainline POS business. After the

acquisition of Roam Data in early 2012, the manufacturer continued to sell mPOS

products under the Roam Data brand.

As another example, VeriFone another large POS manufacturer had started to

sell Sail, its mPOS product, under its traditional branding name but announced

six month later that it pulled Sail out of the market, saying that mPOS was not

profitable enough. This illustrates the difficult task for traditional players who

can benefit from the rapid growth of mPOS but need to manage the risk of

cannibalising its traditional and highly profitable business.

When launching a new mPOS brand it can be likened to an airline launching a

new brand to target a new consumer segment, as seen in the Figure below.

Figure 3: comparison between the mPOS strategy of traditional players and the

low-cost strategy of traditional airlines

Traditional payment players should provide mPOS services under a new branding, much like airlines have created new brands to launch low-cost subsidiaries



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4.3 Use distribution networks or launch mass market advertising campaign

Two different distribution models coexist in the mPOS market and can be

complementary: a direct sales model (distribution via a dedicated website) and an

indirect sales model (use of distribution partners).

Direct sales distribution model requires a genuine marketing effort

Early providers of mPOS solutions, such as Square and PayPal, have favoured a

direct sales approach and have grown very quickly in the past few years,

benefiting from the novelty effect. However, the mPOS market is getting more

mature, and direct sales will require more advertising efforts. Square appears to

have understood this change. After putting up a billboard in Times Square in

New York City, Square launched a TV advertising campaign in May 2013 to

promote its mPOS products. Large scale advertising campaigns require

significant investments and therefore will be reserved to the larger players, who

have sufficient. volume to absorb these costs. Small player should opt for an

indirect approach by using distribution networks.

Figure 4: Square billboard in Time Square in New York

After putting up a Times Square billboard in New York City, Square launched in May 2013 a TV advertising campaign to promote their mPOS products



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Indirect sales: use of distribution networks will considerably reduce time to

market

Using a well-established distribution network can considerably reduce time to

market. Different players are able to play the distribution role:

Banks: they are the traditional partner to sell financial services. Despite negative effects of the crisis, banks remain the real trusted financial partner for merchants (e.g. Monetise, iZettle)

Mobile Network Operators: they control smartphone and tablet sales and therefore can facilitate reaching individuals and micro-merchants quickly by selling mPOS as an accessory for the smartphone / tablet. Adyen, a global processor, has recently announced that Vodafone will sell the Shuttle (Adyen’s mPOS solution) in its Dutch business-to-business stores

Retailers: more generally, retailers can play their traditional distribution role, selling mPOS solutions as any other consumer product. As examples, Apple stores in the UK sell the WorldPay Zinc mPos and Maplin, an electronics store in the UK, sells iZettle devices, and PayPal sells their PayPal-Here mPOS devices through AT&T, Staples and Office Depot stores in the US. Square is sold through Walgreens, the drug stores in the US, Radio Shack, the electronics store and Walmart. This distribution model is well established in the US and the UK, and it is expected to be seen more often in mainland Europe within the next 6 to 12 months

Whatever the distribution partner and method chosen, a key element in the

distribution process is the education of the sale associates who are directly in

Using well established distribution network will permit to reduce considerably the time to market



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contact with merchants; their understanding of the mPOS value proposition and

their commercial message are key to making the distribution strategy successful.

Figure 5: Monetise distributes its product through a large number partners such

as banks and mobile network operators

4.4 Implement an all-digital sign-up and on-boarding process

Onerous sign-up and complex on-boarding processes are among the most prominent

pain points that merchants encounter in the acceptance of electronic card payments.

mPOS technology can help to address these issues by providing an all-digital approach.

Unlike traditional POS (which requires a setup by a professional), mobile devices such as

smartphones and tablets enable self-guided on-boarding processes. Merchants can sign

up directly on a dedicated webpage, and the on-boarding process can be simply started

by downloading a mobile app. This innovative approach simplifies the implementation

process for merchants and also reduces the cost of distribution (e.g. there is no need

for an IT technician to manually install and setup the POS terminal).

Figure 6: iZettle provides an all-digital sign-up and on-boarding process



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EDC’s perspective: “the future has already arrived, it’s just not evenly distributed

yet”. This quote from science fiction author William Gibson captures a central

point in the distribution of mPOS devices. mPOS success is less a question of

technology or product features than a question of distribution. Advertising

campaigns, distribution networks, training of sale associates, digital sign-up and on-

boarding processes - all these operational aspects are important elements in the

success of any mPOS strategy. The right distribution strategy will depend on

several factors such as the size of the mPOS providers; for example, a large above-

the-line advertising campaign can be efficient for large players with significant

volumes (and funds), while start-ups should opt for an indirect approach by using

distribution networks.



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5 Trust and security are identical

Winning merchant trust by providing the highest level of security is imperative. The

early indication from consumers is that mPOS devices are treated with some degree of

suspicion. In EMV-compliant countries banks have spent many years educating

consumers to protect and enter their card PIN only at POS and ATMs that they

recognise and trust. For this reason, consumers are not comfortable entering the card

and PIN into a device that looks very different to what they have previously used and

possibly operated by someone who may not be located in or associated with a known

merchant. In the US (not yet EMV-compliant) Square was able to rapidly penetrate the

market with a less secure device that is essentially a swipe-and-sign solution. This is

expected to be an issue as the US move toward to becoming EMV-compliant.

Android and iPhone operating systems are both prone to malware and hacking. As

mPOS devices become more familiar amongst the general public, fraudsters will also

target these devices to capture personal card information and associated PINs.

Security has always been a key aspect in payment, but some mPOS providers have

neglected it so far. At the current stage of maturity of the mPOS market in the context

of recent fraud and data breach scandals have reminded providers that every payment

system that aims to be sustainable needs to ensure a high level of security. In this

section, we will explain why security will be the next battlefield for mPOS providers and

how some of these challenges can be outcome.

5.1 Security is one of the main concerns for merchants and is slowing down mPOS adoption

Recent data breaches have decreased consumer and merchant trust in payment

systems

The payment industry has been recently shaken by several payment fraud

scandals. Target, a large US retailer, announced in December 2013 that the

company had been victim of a widespread fraud, potentially exposing the

payment data and personal information of 40 million customers. In 2012,

another large retailer, Barnes & Noble, reported that it was the victim of a

widespread credit card fraud. The restaurant chain, PF Changs, had its POS

systems recently hacked. These recent data breaches can have a direct impact

on the consumer’s perception of the payment systems and the merchant brands.

In the US merchants are seriously questioning the level of security of payment

systems and this will be a stimulus to moving to EMV.

Security breaches have been proven on mPOS technology

mPOS has not been spared by fraud scandals. In April 2014, researchers from

MWR InfoSecurity demonstrated that some of the mPOS solutions can be easily

hacked with multiple attacking techniques. For example, researchers were able

to load a simplified version of Flappy Bird (a game) on an mPOS device.



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Exploiting malware embedded in the game, criminals then could compromise the

mPOS payment terminal and gain full control over it. This shows that

cardholders paying at mPOS devices worldwide are potentially at risk. Banks and

retailers should also be wary when distributing and deploying this technology

since it could leave them open to serious fraud. MWR InfoSecurity, the

technology security specialist, has said that they cannot predict the potential

impact of mPOS-related security breaches, but this risk could potentially put a

stop to the widespread use of mPOS.

Security concerns are slowing down merchant adoption

These different elements demonstrate how the current payments environment

accentuates security concerns and is slowing down merchants’ adoption of

mPOS. As competition increases in the crowded mPOS market, security will

definitely be a key competitive element. If consumers remain uncomfortable

with entering their PIN into an mPOS device, or become uncomfortable due to

any significant fraud events, then this will have a dramatic impact on adoption.

5.2 Managing security is critical for mPOS success

Increase security level to survive the mPOS consolidation period

The level of security for mPOS solutions differs significantly from one provider to

another. While 60% of mPOS providers still do not offer EMV solutions (magnetic

stripe only), others already provide ecosystems with end-to-end encryption. An

upward harmonisation of security levels across various devices will happen in the

near future, and most companies will need to increase their security standards to

survive the consolidation and competition.

Continuously update technology to maintain merchant trust

Compliance with PCI DSS rules is a necessary first step to ensure security, but it is

not enough to prevent future fraud attacks. For example, Target was certified as

PCI compliant before being attacked, and the security flaw found by MWR

security researchers hit mPOS providers that were PCI DSS compliant. The

scheme security rules ensure the safety of payment systems at a given point of

time. However, fraud techniques are always evolving, meaning safety systems

must be continually monitored, upgraded, and improved. Ultimately, scheme

rules do not prevent fraud attacks and security breaches, meaning mPOS

providers will need to continuously update their technology to remain secure

and to win and maintain merchant trust.

Figure 7: Payliquid, the mPOS solution chosen by Barclays, has paid particular

attention to security and successfully passed the MWR security test



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EDC’s perspective: mPOS providers will need to pass the security test to survive the

oncoming period of competition and consolidation. If initially mPOS providers

were more focused on offering simplicity and “easy to use” features, the maturing

mPOS business and the increasing demand from large merchants has put security

at the forefront. Today and going forward, security is a critical component of

mPOS’ value proposition and a key table stake for any mPOS provider.

6 Develop a sound business model

mPOS market specificities require the adoption of an innovative business approach but

also provide an opportunity for payment players to rethink their business model and to

restore margin that recently has been under pressure.

6.1 Adopt a “low-cost” approach for payment activities

A significant part of the mPOS market is composed of small merchants that traditional

players have typically refrained from serving, largely because they were not seen as

sufficiently profitable. mPOS technology can permit traditional players to address this

market, but the specificities of this merchant segment requires them to review their

cost structure.



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Low payment activity of small merchants limits economies of scale and compels

adoption of a “low-cost” approach

The average lifetime of small merchants is shorter (e.g. higher risk of

bankruptcy) and their payment activities lower than large merchants. Therefore

the value of transactions per terminal is much lower in the mPOS business than

in the traditional POS business. While the average value of transactions per

terminal is traditionally around €1 million (based on a traditional manufacturer

model), this falls to €10,000 per mPOS terminals (based on the Square model).

This means that all costs that are not downward-scalable (e.g. cost of terminal,

on-boarding process etc.) can kill the profitability of an mPOS business.

Non-scalable costs need to be reduced

In all stages of the process, non-scalable costs should be reduced as much as

possible. Traditional card acceptance processes should be reviewed in detail and

adapted to this new type of product. For instance, sign-up and on-boarding

processes should be fully automated to reduce distribution cost. As an example,

iZettle uses Facebook to streamline the sign-up process, thereby adding in a

“social network” credit risk check on accountholders.

6.2 Adapt your pricing to your targeted market segment

Different pricing options exist and will satisfy, to a greater or lesser extent, merchant

needs. Offering the right pricing to the right merchant is one of the key requirements

to better penetrate specific merchant segments. Preference for a particular pricing is

clearly related to the size of the merchant:

No fixed costs and a simple pricing structure will appeal to small merchants

Pricing simplicity and the absence of fixed costs are the two key elements for

small merchants with low payment activity. The success of Square in the U.S

market is partly due to its “transaction-based pricing”, which allows small

merchants to accept payments without any up-front cost. Square provides an

mPOS reader (a simple magnetic stripe reader) for free and then charges a flat

fee of 2.75% per transaction, underlining cost predictability and simplicity as a

selling point. However, this pricing strategy will be more difficult to implement

in Europe, where mPOS devices need to be Chip and PIN (unlike in the U.S.).

Higher manufacturing costs of Chip and PIN terminals may therefore compel

providers to charge a fixed cost for the mPOS device.

Larger merchants will prefer a one-off charge for hardware and

correspondingly lower transaction fees

Larger merchants take into consideration their global acceptance and acquiring

costs. They are likely to prefer to buy mPOS terminals (or pay a monthly fee) and

thus benefit from a lower percentage charge per transaction. The Shuttle, the

Adyen mPOS solution, targets higher-volume merchants, with a one-off charge

Specificities of the small merchant segment (such as a higher risk of bankruptcy) compel acquirers to adopt a low-cost acquiring approach



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for its Chip and PIN hardware (€99/$135) offset by lower transaction fees

(interchange + pricing).

6.3 Make a profit by providing value-added services through payment terminals

Value-added services are a central component of the mPOS business model. Because

mPOS usually requires a different cost structure for the acquiring business, and

traditional players therefore have to reduce their margin on payment activities, value-

added services are the channel through which acquirers could overcome this negative

impact to revenue.

Make point-of-sale the focal point of the merchant relationship

Merchant acquiring is a business of low profit margins compared to other

payment activities. Payment strategists have, in the past, identified this activity

as a “necessary evil” to maintain commercial relationship with merchants. The

only viable strategy was to achieve competitive pricing through economies of

scale. mPOS technology offer new opportunities. Indeed, the advanced

sophistication of today’s smartphones and tablets enables the provision of a

multitude of services around payment.

Examples of value-added services that can be offered through the mPOS solution

Category of value-

added service Examples

Customer service

System allowing sales people to check inventory and to provide delivery information

E-receipts

Loyalty

Couponing, loyalty point programs, vouchers

Customer account management system that allows sales people to predict future purchases of their customers based on their purchase habits and history

Reporting

Customisable dashboard providing instant information on payment activities, sales and financials

Analytical tools for financial and commercial activities

Predictive information on their business (e.g. estimation of annual results based on first quarter results)

Accounting services Tools and features that make reconciliation easier

Invoicing management

Financial services Lending products based on firm’s activities

Automated treasury management based on payment activities

If mPOS compels acquirers to reduce their margin on payment activities, value-added services are the channel through which they could overcome this negative impact to revenue.



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mPOS terminals have the potential to become the focal point of the merchant

relationship by offering a full range of products adapted to their needs. This new

strategy will enable the creation of value, and therefore increased profitability, rather

than just offering ever more competitive pricing, which leads to lower profits. .

Figure 8: mPOS is an opportunity to increase revenue by offering value-added services

around payment

mPOS can be a launching pad for developing a mobile wallet solution

One of the main issues encountered by payment players during the development

of a mobile wallet solution is the chicken-and-egg problem. How do you

convince merchants to accept a new payment method if nobody uses it? How do

you enrol users without an acceptance network? mPOS can potentially solve this

problem. A successful mPOS strategy results in a large footprint of devices

among merchants, in effect a merchant acceptance network.

EDC’s perspective: mPOS is an opportunity to turn payment terminals into a

commerce tool for merchants. Today, mPOS is considered a low margin business

by a large majority of payment players. On the contrary, EDC believes that mPOS

provides an opportunity to restore margins by integrating value-added services

around payment. We believe that mPOS is as revolutionary for the point of sale

and acquiring business as the smartphone has been for the mobile phone industry.

mPOS will enable acquirers to create value around the payment and therefore to increase their revenues.



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Today, consumers are willing to pay ten times the price of a Nokia 3310 to get an

iPhone 5, because the iPhone 5 is not only a mobile phone, it is also a life assistance

and entertainment device (e.g. GPS, app-store, internet access). Tomorrow,

merchants will be willing to pay more for an mPOS solution (e.g. higher fee per

transaction) than for a traditional POS terminals because not only will it allow them

to accept payments, it will also enable them to attract new customers (e.g. loyalty

programs), improve the level of service (e.g. inventory checking services) and make

managing the merchant’s business easier (e.g. reporting tools).

7 The future of mPOS

The mPOS proposition has recently experienced a surge in popularity, with a host of

new players looking to establish their presence in this emerging sector. For small

retailers and businesses that previously operated on a cash-only basis, and larger

retailers looking to enhance the in-store customer experience, the mPOS has quickly

become a vital component of retail POS infrastructure. Sales associates are already

increasingly offering consumers the ability to pay anywhere within the retail store, and

consumers have become at ease with the “pay-at-table” concept due to the

deployment of mobile POS devices by restaurants, bars and cafes around the globe.

Given the widespread availability and affordability of mobile phones and tablets, mPOS

platforms require less up-front investment and are far more affordable to repair or

replace than traditional POS systems. EDC has seen several retailers considering or

replacing their old electronic cash registers (ECRs) with mPOS devices integrated with

tablets that cost about a fifth of the price. Using mPOS platforms, sales staff will also be

able to accept payment cards or other forms of payment from anywhere in the store –

enhancing the consumer experience. Some value-added resellers are offering bundled

packages of iZettle and other mPOS solutions already integrated with an iPad, receipt

printer and cash drawer, which effectively address both the fixed and mobile needs of

most retailers.

All the stakeholders across the value chain have recognised that the mPOS business is

not only about the payment and not only about technology. Providers will need to offer

value-added features that boost merchant acquisition and consumer usage. They may

also attempt to enter into strategic partnerships with large retailers or merchant

aggregators that aims to increase their distribution models.

As competition intensifies and new players continue to enter the space, the future of

mPOS is very much in a state of fluidity. This can be frustrating for retailers. Already we

are seeing some consolidation in the market through mergers and acquisitions; for

example, Powa Technologies acquired Hong Kong-based MPayMe in an all-share deal

worth $75 million in June 2014. Powa has also made a move into the crowded mPOS

market, offering an app and dongle system for turning mobile phones into card

acceptance devices. However, Powa has had a difficult start, ditching its initial swipe-



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based dongle soon after launch last year. In 2012 Verifone also pulled its mPOS offering,

“Sail”. Interestingly, at the time Verifone was very vocal in saying that the economics of

mPOS were "fundamentally unprofitable," with "razor-thin margins," meaning that

revenues were unlikely to offset the costs of acquiring new customers. While some

innovations will flourish, others are expected to fail if they are unable to gain an

effective distribution strategy, secure retailer (and consumer) adoption, and reach a

reasonable scale. More consolidation is expected.

Strategic partnerships, and differentiation through value-added services, will be

essential to preventing market fragmentation, which otherwise could result in both

consumer and merchant confusion. mPOS is definitely an interesting development and

will cause additional disruption as companies continue to push the boundaries and

develop more affordable, innovative solutions. The point of interaction between the

retailer and consumer in physical stores is undergoing the most significant change in

many years. This provides significant opportunities for existing companies and new

ones, but due to the competition, it is important to have a clear strategy in the market.

8 How can EDC help to implement a successful mPOS strategy?

This paper has clearly identified that Acquirers, PSPs, innovative start-ups, and large

retailers can further explore additional revenue streams, streamline the on-boarding

process, enhance profitability, and improve the consumer experience, all through

mPOS.

EDC suggests that the different players that are planning to implement or have

implemented an mPOS strategy need to consider the following three simple questions;

1. Where are you now?

2. Where do you want to go?

3. Are you getting there?

To answer these three questions, EDC has developed a proven three-step methodology

that focuses on problem solving while recognising that every situation is different and

thereby requires a specific strategy.

1. Where are you now? Understand the current situation – Conduct a EDC 360°

Payments Diagnostic

The first step is to complete a diagnostic of the current situation. Payment

providers must have a factual understanding of where they currently stand, what

are their strengths and weaknesses, what is the size of the mPOS opportunity for

them in terms of incremental revenue and cost reduction, what are the risks for

their current business, and who are the potential partners? This diagnostic sets

the basis for the development of a strategy in step 2.



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2. Where do you want to go? Define your mPOS strategy

Based on the outcome of the diagnostic, payment providers will need to

prioritise the list of potential improvement initiatives in order to design a

strategic plan consistent with their company profile and with their environment.

EDC will help acquiring and acceptance players to define their strategy and their

long-term vision into a roadmap for the next 3-5 years.

3. Are you getting there? Implement and monitor – Establish on-going monitoring

and management

For the payment providers:

Implementation of strategies and change management are often not given the

appropriate senior management attention or executive sponsorship. mPOS is

strategic and provides a great opportunity for payment providers to offer a

differentiated acceptance solution. Once the strategy is in place, it is important

to set up the right organisation (e.g. a cross-functional ‘payments committee’)

and tools (e.g. a payments dashboard with monthly updates on payments-

related Key Performance Indicators and benchmarks) in order to monitor the

progress of the strategy and make any adjustments on an on-going basis to

ensure success.

For the retailers:

As with the providers, retailers that implement mPOS need to plan and prepare

for the implementation carefully and, as they are rolling it out, they must

monitor the progress and resolve issues fast. EDC recommends that retailers

ought to identify some representative store locations and pay special attention

to the training of sales associates. The staff on the shop-floor must be

comfortable with all the operational aspects of the mPOS device. If the sales

associates do not fully understand the functionality or come across as confused,

the consumer can quickly become disinterested or frustrated. This is particularly

true when the mPOS device is linked to a tablet that offers a range of

functionality, such as inventory information. A failed attempt to offer greater

convenience can often exacerbate feelings of inconvenience and

disappointment.

Running a pilot at some less busy stores with your best staff can often reveal

areas of the customer journey that need to be enhanced, better supported or

simply redesigned. A pilot needs to be run for several months to best anticipate

different scenarios and allow for adjustments of the implementation to better fit

the desired customer experience.



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If you are interested in discussing any of these topics, EDC will be pleased to set up

an initial conversation to discuss in further detail the learnings from this research

and how banks, payment providers and retailers can benefit from establishing an

mPOS strategy.

Contact

Mark Beresford, Head of Retail Payments Practice

e: [email protected]

t: +44 (0)7283 1114

m: +44 (0)7825 027525

EDC's contact in North America: David Whitelaw

e: [email protected]

t: +1 415 442 0551

m: +1 202 412 9200

The observations and conclusions in this document are entirely those of EDC

and are not intended in any way or form to reflect the views or perspectives of any

individual, payment provider or retailer.

mailto:[email protected]




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Edgar, Dunn & Company (EDC) is an independent global financial services and

payments consultancy. Founded in 1978, the firm is widely regarded as a

trusted advisor to its clients, providing a full range of strategy consulting

services, expertise and market insight.

From offices in Frankfurt, London, Paris, San Francisco, and Singapore, EDC

delivers actionable strategies, measurable results and a unique global

perspective for clients in more than 45 countries on six continents.

For more information contact: Mark Beresford

Tel: +44 (0) 7283 1114

Email: [email protected]

www.edgardunn.com


http://www.edgardunn.com/


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Copyright © 2014 Edgar, Dunn & Company

All rights reserved. Reproduction by any method or un-authorised circulation is strictly

prohibited, and is a violation of international copyright law.

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