The rise of Mobile POS

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2 Contents 1. Key messages 3 2. Introduction 4 3. mpos in Context 5 mpos overview SMEs form the initial market SME transaction volumes are variable Growing competition Commoditization of the POS market Payment related services as a route to differentiation 4. Evolution of mpos 9 mpos payment related services mpos is being embraced by larger merchants mpos will expand beyond retail VAS would need high degree of customization 5. The mpos Ecosystem Merchants Banks Mobile operators Recommendations 14 Merchants Banks Mobile operators 2

3 Key messages Basic mpos-enabling hardware is now a commodity, and the key to revenue growth and differentiation lies in mpos value-added services (VAS). mpos service providers need to take a more sophisticated, innovative approach to VASs, abandon the one size fits all approach, and instead develop applications that better match the needs of specific verticals. There is increasing interest in the potential for mpos in emerging markets, and we can expect to see an acceleration of mpos activity as service providers seek to gain first-mover advantage in the more mpos-ready emerging markets. Characteristics to look out for include growing smartphone penetration, a large base of SMEs and micro-merchants, low penetration of traditional POS terminals, a core base of card users that is expanding, and bank and government schemes to encourage card adoption. Mobile operators with existing mobile payments businesses will need to take a position on mpos and determine how they can participate in the ecosystem. Although mpos will not be a core m-payment revenue stream for operators, it could provide some incremental benefits via distribution partnerships or the provision of bundled services. Banks are coming late to the mpos market, they are nonetheless in a good position to offer mpos services. Bank acquirers have advantages due to their strong merchant base and their expertise and long experience in supporting merchant needs. 3

4 Introduction Mobile point of sale (mpos) has introduced a new dynamic into the mobile proximity payments market. Between 2010 and 2011, approximately 1.2 million mpos solutions were shipped to MasterCard merchants globally; and 75% of those merchants had not previously been able to accept card payments. This early mpos growth was driven by adoption among micro-merchants and while still an important segment, there are further opportunities for mpos with larger merchants as well. mpos allows larger merchants to create efficiencies and enhance the in-store shopping experience for consumers, as well as to equip their field salesforce with an integrated payment capability. Another benefit to all merchants, big or small, is the ability of mpos solutions to gather customer data. Although growth in mpos has predominantly been in mature markets, there are several opportunities for mpos in emerging markets that typically have a very large base of small merchants, and where there is low or limited penetration of traditional POS terminals. However, the mpos opportunity in emerging markets will be dependent on a core base of card users and where consumer demand for cards is increasing, as is the case in India and China. We expect to see an acceleration of mpos activity in the more mpos-ready emerging markets, as service providers seek to gain first-mover advantage. We also expect the consumer-facing mobile commerce and merchant-acceptance ecosystems to converge going forward. Merchant participation is a critical component of any consumer-facing mobile payment service, while on the mpos side service providers are putting increasing emphasis on consumer-facing applications. Who will lead this convergence is not yet certain, although it is likely to be those service providers that have a well integrated consumer-facing and merchant acceptance offering. The rapid growth of the mpos market in terms of the number of players and services is producing a highly competitive market where many solution providers are struggling to achieve meaningful differentiation. mpos hardware is already a commodity proposition, while mpos value-added services (VAS) are increasingly being used for differentiation. The traditional micro-merchant target market for mpos might be growing in terms of the number of people/firms, but it is characterized by low, unpredictable transaction values. In order to grow their businesses, mpos solution providers will need to achieve scale. But this means expanding beyond the core micro-merchant base into larger merchants, where mpos service providers will have to compete with traditional point-of-sale (POS) vendors. This would be challenging, particularly for smaller mpos vendors without a well-defined valueadded service offering. 4

5 mpos in Context mpos overview Providers of mpos services supply solutions directly to merchants, or on a partnership or white-label basis to third parties that service merchants (primarily banks and, in a few rare cases, mobile operators). mpos solutions allow merchants to accept credit and debit card payments or even proprietary payments schemes like mobile money from mobile devices, where the payment is initiated from, and executed on a mobile device belonging to the merchant. This is in contrast to consumer-facing mobile proximity payment services that are initiated by consumers from their own devices, and which are increasingly offered as part of a digital wallet service. An mpos solution basically consists of a card-reader hardware accessory and an associated mpos application that manages the transaction. The merchant uses their card-reader-enabled mobile device to take a consumer s card details. In the US and a few other markets card readers support magnetic swipe cards, while in the India and elsewhere card readers must support the prevailing EMV (Europay, MasterCard, and Visa) standard chip and PIN cards. The card data and transaction details are encrypted and sent over a wireless network for authentication and authorization, and once this has been processed the consumer is sent a digital receipt or provided with a paper version via a linked printer. mpos solutions are characterized by very low-cost hardware compared to traditional card processing equipment. For example, mpos dongles can cost as little as $10 and are frequently given away for free, although standalone EMV units can be more expensive (in the $50 to $100 price range). The first iterations of mpos card-readers hardware took the form of a small dongle designed to attach directly to smartphones and tablets. These are still extremely popular but have been joined by standalone card reader units. The enabling technology for mpos is typically Bluetooth and audio jack and with Wi-Fi or GPRS used as the transmission channel. mpos solutions should be able to process all type of instruments like magstripe, contact and contactless including NFC as well as scan QR codes and barcodes etc. to enable payment processing. 5

6 SMEs form the initial market SMEs are the key target for mpos solutions, especially the micro-merchant segment of businesses with fewer than 10 employees. The SME sector is large and growing in terms of the number of companies and employees, and within this sector micro-merchants account for the largest portion of the base. Data from the US Census Bureau from 2008 (the latest available) reported that there were a total of 5.91 million SMEs in the US. Of those, 3.61 million had between one and four employees, while 1.04 million had between five and nine employees (see Table 1 for further details). We expect that by 2014 the base of US SMEs, including the micro-merchant segment, will have experienced further growth. The SME and micro-merchant segment is equally robust in Europe. The EC s 2011/12 annual report on SMEs in the EU found there were million such firms, of which the lion s share (19.14 million, or 92.2%) were firms with fewer than 10 employees. The million SMEs cited by the EC employed more than 87 million people (see Table 2 for further details). The proportion of micro-merchants and SMEs in many emerging markets is very high, and eclipses the number of large enterprises. In Brazil, 99.7% of companies are SMEs and micro-merchants, according to mpos provider izettle, which has launched in Brazil in partnership Banco Santander. Likewise, in India there are 1.5 million SMBs contributing between 15% and 20% to GDP (see Table 3). Table 1: US SME and micro-merchant data Employment size of enterprise Firms Paid employees Annual payroll ($1,000) Firms with one to four employees (or with no employees as of March 2012) 3,617,764 6,086,291 $232,062,907 Firms with five to nine employees 1,044,065 6,878,051 $222,504,912 Firms with employees 633,141 8,497,391 $293,534,352 Firms with employees 526,307 20,684,691 $774,589,335 Firms with employees 90,386 17,547,567 $706,476,693 Source: US Census Bureau, Ovum Table 2: EU SME and micro-merchant data Enterprise Micro Small Medium SMEs merchants Large Total (total) Number 19,143,521 1,357, ,573 20,727,627 43,654 20,771,281 Employment 38,395,819 26,771,287 22,310,205 87,477,311 42,318, ,796,165 Source: Eurostat, national statistics offices of member states, Cambridge Econometrics 6

7 Table 3: India SME and micro-merchant data Enterprise Micro merchants Small Medium SMEs (total) Total Number 14,850, ,000 30,000 20,727,627 15,54,000 Employment 6, 534,000 2, 343, ,477,311 93,000,000 Source: Ministry of Small and Micro Medium Enterprises India SME transaction volumes are variable The SME base is large but the transaction values generated by micro-merchants and small businesses can be unpredictable and low compared to larger merchants. Micro-merchants typically process low-value transactions, or higher value transactions on an infrequent basis. There can also be risks associated with the high attrition that can characterize the micro-merchant segment (many micro-businesses disappear as quickly as they appear). The variable nature of SME transaction volumes is a key reason why so many mpos providers are trying to gain traction with larger enterprises. Growing competition The number of mpos providers and services is growing rapidly there are now well over 100 globally, and more will follow. mpos hardware is already a commodity and some service providers are attempting to compete on price by driving down processing fees, but this a short-term tactic rather than a long-term fix. Something will have to give, and the most vulnerable mpos providers will be those with basic solutions that are reliant wholly on micro-merchants, a base characterized by low, unpredictable transaction values or those without the backing of a trusted brand like a bank. In order to grow their businesses, mpos solution providers will need to achieve scale. They will have to expand beyond the core micro-merchant base into larger enterprises, where they will have to compete with traditional POS vendors, many of which are powerful, resource-rich companies. This will be difficult for smaller mpos service providers in particular. Commoditization of the POS market The commoditization of basic mpos is prompting solution providers to compete on price by driving down the transaction processing fees they charge merchants. In July 2013 PayPal launched a headline-grabbing Cash for Registers scheme in the US, whereby for a promotional period it waived fees on transactions up to a certain level in order to encourage merchants to adopt its PayPal Here tablet-based mpos solution. It was a bold move from PayPal, but unlike most mpos providers, it can afford it. PayPal is large company, and its financial resources allow it to absorb the cost with minimal impact on its business. For the vast majority of mpos 7

8 providers, competing on price should be viewed only as a short-term tactic anything more than this is unsustainable, particularly for smaller mpos players. Payment related services as a route to differentiation In this context, mpos VAS become essential from both the monetization and differentiation perspectives. A few forward-thinking mpos solution providers such as Comviva made specialist VAS their unique selling points from the start in the belief that mpos service providers should focus on leveraging the mobility advantage of mpos to cater to merchant advantage of mpos to cater to merchant business needs. This could mean enabling the overall buying and stocking life cycle or enabling how they reach out to their customers and conduct commerce. This will help them deliver higher value to merchants and hence become more efficient, thereby providing a differentiated offering to merchants. An associated trend is the provision of integration services for larger merchants looking to implement mpos alongside existing POS systems. 8

9 Evolution of mpos The mpos market has developed rapidly over the past four years, as Figure 1 highlights. The commodity nature of mpos hardware means that service providers have to compete and differentiate on the strength of their VAS. But mpos VAS are becoming increasingly uniform across service providers; as soon as one service provider innovates, others follow. Providers of mpos services must have well-defined road maps for service development. This means that if certain features are not required immediately or by all merchants, mpos providers need to be able to vary those features and enhance their VAS portfolios. mpos - an overview Bredth & functionality Smartphone Card reader dongles. Basic, horizontal VAS - e.g. Invoicing, Inventory control Card reader from factors diversify, cradles, dedicated units mpos VAS expands: consumer facing apps, specialist / vertical apps, increased range of back office VAS Flexible, competitive merchant fee structures proliferate Table based mpos takes off, gains traction with larger merchants Consumer facing mcommerce mpos start to converge, e.g. Square Register & Square Wallet Introduction of EMV compliant solutions helps drive growth in Europe More mpos provides offer system integration & consultancy with larger merchants in mind Few early mover exceptions have sophisticated, specialist VAS, e.g. Intuit 2010 Service evolution

10 mpos payment related services mpos VAS types The range of potential mpos payment related services can be clustered around the following core service categories Back-office services: Applications that support the operational processes and administrative needs of Bank-office services - Accounting - Banking Services - Stock and inventory management - Ordering and invoice creation - Data analytics merchants businesses. Consumer services: Front-of-house, consumer-facing services geared toward customer-relationship marketing, customer support, and, more generally, applications that enhance customer engagement. Professional services: Specialist services that help merchants navigate, plan, implement, integrate, and maximize mpos technology and solutions. This can also extend to managed services. Consumer services - Customer-loyalty programs, coupons,and offers - Customer receipts - Order taking - Stock checks - Product discovery - Location and navigation services - Social shopping apps Professional services - Consulting - System design - Systems integration - Security - Device/infrastructure management and maintenance - Managed services mpos is being embraced by larger merchants A growing number of medium-sized and even some large merchants are starting to take note of mpos, with early adopters having rolled out tablet-based mpos implementations as a complement to traditional POS or, in a few cases, as a replacement for cash registers. Starbucks, Nordstrom, JCPenney, Gap, Home Depot, and Sephora are all using or experimenting with mpos alongside traditional POS, integrating mpos platforms into existing payment systems. ICICI Prudential in India is working with Comviva to equip its agents with the capability to issue new policies at the customer's doorstep, including the ability to scan and upload documents for "know your customer" and policy payments. The international fashion chain Urban Outfitters has gone a step further: it has replaced cash registers with 10

11 ipad-based mpos solutions in selected US stores, and has plans for a wider rollout. Some large FMCG companies are also considering mpos to complement their direct to consumer initiatives. Queue busting mpos can be particularly valuable during peak shopping hours (lunchtimes and after work) and peak periods such as seasonal holidays, when retailers can supplement their fixed POS with mpos. Fast inventory checks it can be used to help customers find desired items. Space saving if mpos is used as a POS replacement, it frees up valuable store space for other uses. For larger merchants, mpos solutions offer value-added features and benefits not available when using traditional POS Promoting greater customer interaction generally. Enabling associated marketing services. For example, mpos can be used to encourage pre- and post-sale shopping activities through discounts and reward schemes. Allowing merchants to reach out to their customers more effectively e.g. an insurance agent being able to complete a policy sale in a single visit to the doorstep of a customer using a tablet and a dongle. Sophisticated services like analytics that can sift through payment transactions and make recommendations to merchants on issues such as optimal inventory, ordering cycle or even make recommendations to customers based on previous buying patterns and preferences. Integration with merchant's existing IT and CRM systems like loyalty, inventory to seamlessly integrate with existing business processes. Use of technology like BLE (Bluetooth low energy) and location-based services to help provide real-time accurate information to consumers about store layout, or location of articles. mpos will expand beyond retail The retail sector has been the prime target for mpos, but there are many other merchant segments and organizations that mpos can address. Basically, any business or organization that would benefit from its staff being able to process card payments while mobile is a potential candidate for mpos. This could also include large enterprises and public service organizations that at the moment are not typically viewed as mpos candidates, from everyday scenarios such as police services that issue on the spot fines, to a stem cell banking company signing up customers at their home or local clinic. 11

12 mpos could also be used at sporting and other events in fixed venues to prevent queues and take payments at additional, flexible locations. Essel- World, one of India's premier entertainment destinations, is experimenting with mpos to allow customers to buy entry tickets at a venue's car park or while they are travelling on a bus to an event. mpos could be used in a similar fashion at conferences and conventions, and also at events such as outdoor concerts and festivals that take place at temporary locations. VAS would need high degree of customization At the moment there is a tendency to adopt a one-size-fits-all approach to merchant solutions. Although merchants have certain common requirements (e.g. inventory and sales management), this top-down approach is out of step with the fact that merchants needs differ depending on the verticals they serve small coffee shops requirements will be different from those of lone traders, which will be different from those of high street chains. Given the diversity of the merchant base, the underlying platform should be highly customizable to meet requirements of specific industry verticals. 12

13 The mpos Ecosystem Merchants Most mpos solutions have experienced strong growth among micro-merchants, and for good reason. Most micro-merchants operate on a cash or check-only basis out of necessity rather than desire, because they cannot afford the high costs associated with traditional card-processing equipment, processing fees, and maintenance. Adopting mpos provides them with a low-cost solution and flexible pricing models that make credit card acceptance feasible where previously it was not. At the same time, mpos also provides opportunities for larger retailers to create efficiencies and enhance the in-store shopping experience for consumers. Banks Merchant acquiring banks have often been reluctant to take on micro-merchants because of their unpredictable transaction volumes, the risks associated with underwriting very small businesses, and the cost and lengthy payback period related to installing payment card processing terminals. However, the much lower cost of mpos solutions means that acquiring banks can now build the business cases they need to facilitate credit card acceptance among micro-merchants, opening up new opportunities in this market. Banks are also in a strong position to cross-sell mpos solutions to larger merchants with which they have strong, trusted relationship. Mobile operators Mobile operators are pushing consumer-facing digital wallet services in a bid to drive new revenues, but so far few have embraced merchant-facing mpos solutions. This is because operators have very limited merchant experience, while at the same time most operators believe there is more value in consumer-facing digital wallets rather than in mpos. However, there are opportunities for mobile operators in the mpos market. The most straight forward tactic is for operators to act as distributors for mpos hardware, offering it as a way to add value to an existing portfolio of financial services. An example of this approach is AT&T s retail partnership with Square, whereby it sells Square Card Readers in more than 1,000 stores, offering a rebate on the dongle to merchants that sign up. There are additional higher value options for operators, which are put forward in the Recommendations section of this whitepaper.. 13

14 Recommendations Merchants mpos is a young, fast growing market with multiple players, many of them start-ups, which from a merchant perspective makes selecting the right partner particularly challenging. We advise merchants to favor mpos solution providers with the following characteristics: mpos solution providers that have a well-defined portfolio and road map for value-added services (this includes support for horizontal payment related services solutions required by all merchants such as inventory control, mobile marketing applications) and VAS tailored for the needs and requirements for specific industry verticals. Data analytic capabilities. A key benefit of mpos is its ability to capture customer data, a capability lacking in traditional POS equipment. Customer insights are invaluable to small merchants that cannot compete with the wealth of customer data that larger online merchants are able to gather, particularly global online players like Amazon. mpos solutions providers that support tablet-based solutions. These are starting to be used by larger merchants as a complement to existing POS, or in some cases as a replacement. mpos solution providers that have strong service partnerships which benefit merchants - for example, PayPal Here comes with pre-integrated partner solutions including ShopKeep, Vend, and Erply. Associated with this, mpos solution providers should offer open APIs to support integration with third-party applications. Larger merchants and other organizations in particular will need partners that have the ability to integrate mpos solutions with existing front-office and back-office systems. There can be an assumption that payment related services are of most importance in attracting larger retailers to mpos. While this group does increasingly expect innovative services, it is a mistake to think that the traditional micro-merchant base does not have an appetite for sophisticated payment related services. If anything, the need for VAS is more acute in the micro-merchant segment, where it can play a key role in building their core business. mpos solution providers that have experience and expertise in secure payment systems should be favored, as even minor security flaws have the potential to shake merchant and consumer confidence in this new technology. Merchants should have the flexibility to be able to subscribe to custom VAS bundles, selecting applications such as loyalty programs, or catalog management. 14

15 Support for SDK development environment is desired as it accelerates creation of custom applications (IPOS) to meet distinct requirements of merchant categories or individual merchants. For large merchants using mpos as a complement to existing POS solutions, prebuilt-connectors facilitate integration with critical backend IT systems used for CRM, inventory, billing and loyalty allowing merchants to better manage their business. Support for mpos APIs is also desirable as it gives merchants an option to embed card acceptance functionality within existing payment applications, saving time and money. Banks Most banks are arriving late to the mpos market and need to move quickly, but they also need to consider very carefully the models they use. The easiest route is for banks to partner with an established mpos product provider and focus on merchant acquiring and servicing rather than on technology. An alternative is for banks to source and provide their own mpos solutions. A white-label product like payplus from Mahindra Comviva is lower risk and affords greater speed to market than a scenario where a bank tries to develop its own mpos in-house. Launching a bank own-brand mpos service is clearly the most challenging strategy. It requires banks to re-engineer their merchant sign-up process and risk-management models (merchant onboarding) to suit the requirements and constraints of micro-merchants. This is a major undertaking, and the effort required should not be underestimated. The merchant onboarding process established by mpos providers has set a new benchmark and is very different from the processes used by banks for the larger merchants they typically target. Mobile operators The most straightforward way for operators to participate in the mpos value chain is by acting as distributors for basic mpos hardware, but there are higher value opportunities available. A more strategic approach is for operators to offer mpos as part of a service bundle, for example a package comprising a smartphone, dongle and data plan. Operators could build on this by offering more sophisticated cloud-based VAS such as accounting software or analytics as part of the package, or integrating mpos with their existing enterprise solutions. They could also add tablets into the mix. This sort of out of the box proposition would appeal to both micro-merchants and larger enterprises. AT&T has taken a step in this direction by offering GlobalBay s mpos solution to SMEs. In the UK O2 is doing something similar, offering an mpos solution in partnership with Visa Europe and Global Payments. 15

16 Appendix This white paper was researched, authored and produced by Ovum in association with Mahindra Comviva, as part of a series of papers assessing the current state and future market direction of mobile broadband services for mobile operators. About Mahindra Comviva Mahindra Comviva is the global leader in providing mobility solutions. It is a subsidiary of Tech Mahindra and a part of the USD 16.7 billion Mahindra Group. With an extensive portfolio spanning mobile finance, content, infotainment, messaging and mobile data solutions, Mahindra Comviva enables service providers to enhance customer experience, rationalize costs and accelerate revenue growth. Its mobility solutions are deployed by 130 mobile service providers and financial institutions in 90 plus countries, transforming the lives of over a billion people across the world. For more information, please visit Ovum Consulting Ovum has an enviable and hard-earned reputation as a provider of telecoms consulting services. Our consulting customers tell us that, above all else, it is Ovum's industry knowledge and attention to detail that puts us ahead of our competitors. This is directly related to the expertise of our consultants and analysts, and the project and research methodologies we use. We work across the globe with business leaders of telecoms operators, service providers and ICT vendors and with investment banks, governments and industry regulators. We hope that this analysis will help you make informed and imaginative business decisions. If you have further requirements, Ovum s consulting team may be able to help you. For more information about Ovum s consulting capabilities, please contact us directly at consulting@ovum.com. Disclaimer All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the publisher, Ovum (an Informa business). The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions, and recommendations that Ovum delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such Ovum can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.