The new Road for Acquirers: The POS App Marketplace

Written by: Henrique Di Lorenzo

February 22, 2016 - How will acquirers help merchants be successful through an innovative approach?

Traditional Acquiring

As the payment industry is experiencing the so-called digital revolution, acquirers and PSPs are trying to reinvent themselves. Their traditional business relies on payment processing and settlement services, for which they charge a fee. Additional revenue streams may include renting the Point-of-Sale (POS) device, facilitating cash-flow for merchants, and handling disputes and chargebacks. However, transaction fees are still one of the main differentiators. Fierce competition between acquirers (and in some places, government regulations) are leading to a steadily decrease of fees and the unavoidable commoditization of the transaction processing business.

Focusing on the brick-and-mortar domain, acquirers have not managed to move beyond the pure payment processing business (with few exceptions) and are thus unable to add wider value to the merchant business. Ask merchants, worldwide, what they need and you will hear over and over the same wishes:

  1. Attract new customers to their shops,
  2. increase the basket size of shoppers, and
  3. ensure customers will return, as often as possible.

In short, merchants want to connect to their customers and drive business as a result. Can acquirers contribute to these wishes, helping merchants to be successful through an innovative approach?

Getting inspired: The Platform Business

Merchants want to connect to customers, sellers want to interact with buyers; this is absolutely nothing new. It’s the core foundation of trading and commerce. Since the Middle Ages society has understood the value of marketplaces to facilitate commerce. More recently, technology became a crucial component and after the advent of the internet, digital marketplaces are revolutionizing the way of doing business. In the last years, we have observed disruptive companies growing by cleverly designing new digital platforms. Eric Schmidt, the former Google CEO, believes that “The most successful leaders in the Internet Century will be the ones who understand how to create and quickly grow a platform”.

In the traditional way of doing business, firms would create stuff and just push them to their customers (in our context, Acquirers would just develop and deploy a POS application to their merchants). In the platform business there is an ecosystem in which producers can create value on the platform for other users to consume. The network effect is more important than just pushing services. Besides Google, other notable examples of successful platforms are Amazon (connecting merchants and consumers), Uber (connecting drivers and passengers), Airbnb (connecting travelers and property owners), and Spotify (connecting listeners to artists). Also Nike, with their Nike+ Fuel Lab, is remaining relevant in the digital era by creating a platform to connect athletes with other industry high-tech companies. Their motto is “collaborate to innovate” or “partner to win”.

Can the payment acquiring industry learn something from such developments? Does it know how to truly leverage the power of internet to drive future business and remain relevant to their merchants?

The POS App Marketplace

Naturally, such developments and ideas have not remained unnoticed. Traditional vendors in the acquiring industry as well as new FinTech players have seen this opportunity and are creating products to empower acquirers to launch digital platforms. The former head of Google Wallet, Osama Bedier, has founded Poynt, with the purpose of revolutionizing the acceptance landscape. First Data has a similar solution with Clover. Ingenico has also launched an App marketplace, working with its new Telium Tetra terminals, just to cite a few examples. There are two common elements across all different solutions:

  1. High-tech devices, with a more modern design, and
  2. a PoS architecture that supports 3rd party Apps, as part of a marketplace.

The first point is not at all surprising. The technology revolution in consumer electronics has increased our appetite for the latest and coolest gadgets. Whether it’s a television, mobile phone, tablet or even home appliances, we expect and demand a lean design and interesting features. As for most payment devices, it does not feel that they belong to this age of smart and stylish devices. Point-of-sale terminals do little more than reading a card and encrypting the cardholder PIN. Naturally, PIN entry is becoming something that is ‘not enough’. Merchants want to differentiate their offerings, and to provide their customers with ‘value added’ services that not only increase their customer loyalty, but also increase the potential for increased spending. This leads to the second point.

In the current deployment model, acquirers (or whatever party responsible for providing merchants with PoS devices) cannot offer something much beyond payments. Merchants are too different in nature, acquirers do not understand their merchants’ business well enough to offer specific value added services and, even if they did, there is a natural limitation on the number of applications that acquirers can develop per year. Whether by limitations in IT budget, talent scarcity, or sporadic application release cycles, it is basically impossible to serve smaller and medium merchants with specific solutions to help their business needs.

By creating a platform for PoS Apps (The PoS App Marketplace) it is possible to provide these merchants with the functionality that they cannot afford otherwise. Through the ‘democratization’ of the App development there is a many-to-many mapping of developers to merchants, increasing the collective manpower and creativity to design new relevant applications. Such platform enables a micro start-up eco-system which drives innovation and nurture business (which is what happened with the app stores in mobile as well).

Getting Ready for the Future

This is an interesting concept so far. But what does it mean for the current acquiring business? Below we share some quick tips for acquirers considering offering such PoS App platforms:

  • Change of mindset: The vendors that are likely to succeed in this space are those that approach the product with the internet mindset. For acquirers, it’s not natural to move away from a proprietary, closed ecosystem, in which they fully control and own every line of code. Successful leaders in the technology industry have repeatedly advised that the key to success is to “open up and partner”. Technically, this translates into different PoS software architecture and Open APIs. Going into this new domain with the old mindset will not result in success. This is thus the most important point.
  • Have a long term view: Activity in this space is quite dynamic; therefore, careful considerations should be taken when choosing a solution, governance model, target merchants. Open platforms are good, but there are various supported programming languages, ranging from Android, iOS, and HTML/JS. All variables and possible future routes need to be mapped in the beginning. Furthermore, we realize that this is not the end-game. Industry will continue to change, and it’s not unlikely that PoS devices will give place to non-proprietary devices (such as tablets) in the future. This is where eCommerce and physical retail gets even closer. Therefore, it’s crucial to continuously asses how the “internet” will impact your business in the years to come.
  • Running a platform: Platforms can only be successful if there is critical mass of users and content providers joining it. Studies on digital platforms have identified key ingredients to achieve this goal:
  1. The platform owner should provide content developers with toolboxes and proper infrastructure, to simplify plugging into the platform.
  2. Both developers and users should be attracted towards the platform, the benefits should be clear.
  3. Supply is not enough. The quality should be ensured. Not only through quality assurance, but also content curation. Naturally, the acquirer can not only own the platform, but also create content.
  • Contractual agreements: Running a platform also means defining all terms & conditions, responsibilities and liabilities. Do not underestimate the complexity of the legal framework, as it basically formalizes who is entitled and responsible for what. Platforms involving multiple parties will require multi-party agreements, which are not straightforward. This also impacts the testing, certification and security assessment responsibilities.
  • Testing and Certification: As in most business, long-lasting success depends on outstanding quality. Therefore, the participants should be able to trust the platform and the available content. Especially in the payment context, security and trust must be safeguarded at all costs. Quality is an all-encompassing concept. It starts by (re)designing the technical specifications, including the proper abstraction layers and APIs, depending on the entire ecosystem. Quality and functionality of Apps must be ensured. Be aware that terminal vendors may also have requirements which Apps must meet before they become available for these terminals. New system interfaces, merchant portals, and App deployment processes must be tested. Last but not least, proper security policies must be defined and enforced; integrity and confidentiality of the PoS payment data must be ensured at all times. The last thing that we want is to deliver a very cool PoS App, on a very cool device… which steals your credit card number!

If you have any comments, questions, or would like to know more how UL can support you with your PoS App Marketplace initiative, just drop us a message. Thanks!

Disclaimer

These are the personal opinions of UL’s employees and its guests and should not be misunderstood as representing the opinion of UL's clients, suppliers or other relations.