The mobile phone presents SMEs and independent
merchants a new and convenient way to accept card payments. To meet
this demand, many new products are being developed by established
players and start-ups alike. William Cain looks at the evolution of
this niche sector
Go deeper with GlobalData
Following in the footsteps of Twitter founder
Jack Dorsey, entrepreneurs with impressive track records have
decided to take the plunge into the market for mobile phone-based
POS readers. What is about this new business line that makes it so
appealing to start-ups?
If the potential for a new business line is
measured by the pedigree of entrepreneurs lining up to take part in
it, the mobile phone-based POS market has a bright future.
The line-up looks impressive, even excluding
Dorsey, whose mobile point of sale (m-POS) company Square Inc. was
the first in this space. Consider first iZettle, a Sweden-based
m-POS business which believes it can take advantage of Square’s
teething problems in the US to corner the market in Europe.
Its co-founders, Jacob de Geer and Magnus
Nilson, are serial entrepreneurs with Nilson involved in several
start-up businesses over his 25 year career as an entrepreneur.
After the sale in 2008 of his company Wayfinder, a location-based
service system, to Vodafone, Nilson was ready to leave the world of
start-up businesses to take up a directorship role at a technology
company. However, de Geer, 20 years his junior, convinced him that
the market for m-POS was too good an opportunity to miss and
eventually the pair agreed to co-found iZettle.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalData“He said we should really start a company
together,” says Nilson. “I told him I’m not really going to start
any more companies, I’m 65 years old!
“I asked him what it was about, and he asked
if I knew about a company called Square. He said we should start
something because they were going to be busy rolling out their
business in the US for some time and there was a real demand for
the type of services they’re offering.”
“We spent a month studying the market,
interviewing the banks, the networks and the merchants and really
trying to understand the ecosystem. When a month had passed we just
looked at each other and said, ‘We have to do this’,” Nilson
recalls.
System similarities
De Geer also has experience of setting up
companies, with three previous start-ups under his name and a role
in business development at TradeDoubler, a Sweden-based digital
marketing business which now has a market value of more than
GBP1bn.
Nilson says de Geer’s experience at
TradeDoubler is a valuable asset to iZettle. TradeDoubler processes
the number of advertising click-throughs on websites, which can
number tens of thousands per second, then settles the account with
the media provider at the end of the month. This, Nilson says, is
similar to the way a payments system works and has helped develop
the iZettle platform.
SCCP Holdings, another m-POS business based in
Singapore, is headed by Jérôme Clé. Formerly a private and
investment banker, Clé turned his attentions to building new
businesses in one of the industries he considers among the most
promising in the current economic environment. He began his journey
as a payments entrepreneur nine years ago, setting up a number of
companies under the SCCP umbrella, including YuuPay, an e-commerce
gateway, and 4G Secure, a patented digital accessibility
solution.
SCCP’s m-POS solution, called Swiffpay, is an
attempt to resolve what Clé describes as one of the most pervasive
issues in the industry – the problem of card-not-present
transactions and, in part, the associated problems with fraud.
“Originally, when I left banking, I wanted to
understand and know how the payments industry functions,” he says.
“I tried to work through every possible aspect from issuing,
processing and acquiring. At SCCP, I found out that if you want to
do something effectively in this area, you have to do something
that helps the industry.
“The gap in the market we found was in
transaction types. Essentially there are two types of transactions:
card-not-present and card-present. Our goal was to try to find a
solution to enable all transactions to be card-present transactions
in whatever process you utilise to make a payment,” Clé adds.
m-POS business models
Clearly, the m-POS market offers something to
attract the technology world’s brightest talent, as well as
established payments players like VeriFone, which offers Smart
Charge; PayPal, which offers an m-POS solution through VeriFone’s
technology; and Intuit, whose m-POS offering is called
GoPayment.
Two of the businesses, Square and iZettle,
operate very similar business models, but Clé is keen to point out
that his business is run slightly differently, with SCCP’s approach
sharing some of VeriFone’s characteristics.
The Square/iZettle business model is based on
the free distribution of m-POS readers – card acceptance devices
that plug into a mobile phone. Square makes a flat charge to the
seller of 2.75% on each card transaction made through the device.
iZettle charges 2.75% plus a flat fee of SEK1.5 in Sweden. Square
previously charged a flat fee of USD0.15, but dropped the charge in
2011.
Although the fee level looks quite high,
Square and iZettle argue that the costs actually work out cheaper
for small businesses which do not want to deal with the
complication and additional fees associated with signing up for
card acceptance devices and merchant accounts with acquiring
banks.
Commentators generally say the products make
sense for individuals and businesses which need to accept a few
transactions a month – anything higher and they may be better off
signing up for a merchant account.
Devices can also be bought at retail outlets
but the package includes a fee rebate which subsidises the cost of
the device. The Square/iZettle target market is small and
medium-sized enterprises (SMEs) and sole traders.
Dorsey’s idea for Square is widely reported to
to have come to him when he heard how a friend’s small business
missed out on a USD2,000 sale because it was unable to accept
cards. He realised the technology on a mobile phone should be able
to provide a platform to allow those types of transactions.
Transaction aggregators
In fact, for all of the providers mentioned
above, m-POS readers are targeted at the sole trader/SME segment.
It is the relationship providers have with these end users and the
acquiring banks which is the real point of difference.
This difference is outlined by Clé, who is
keen to point out that while SCCP provides the same kind of m-POS
readers as part if its proposition, it has a slightly different
target client base to Square and iZettle.
The key difference is that Clé wants to work
with a variety of different acquiring banks and link them with
SMEs. Square and iZettle both act as a kind of super-merchant that
aggregates all of their customers’ transactions under a single
acquiring bank that they work with. In Square’s case, this is Chase
Paymentech. iZettle did not disclose which bank it is working with,
but said it was a multinational bank operating in many countries
across Europe.
Clé calls the Square/iZettle super-merchant
approach a “transaction aggregator” model. Unlike Square and
PayPal, which are transaction aggregators, SCCP can be linked up to
any processor, acquiring bank or payments gateway.
Clé sees this as one of the strongest
differentiators of the SCCP product – that the business is a
partner with the financial industry rather than a competitor, and
has the technological infrastructure to link up different
banks.
Partnership approach
SCCP’s model means it has the flexibility to
work with a number of different acquiring banks rather than
aggregating transactions for one of them. However, this leads to a
different revenue model. SCCP allows the acquiring bank to
negotiate fees with the merchant, primarily the transaction-based
fees which are the core revenue driver for the Square/iZettle
model. Its revenue comes from a one-off account set-up fee and an
annual charge for use of the service and its platform.
One important benefit to SCCP of this type of
model is it cements its role as a facilitator for banks and
merchants, rather than a ‘disruptive’ payment technology, which
iZettle and Square are (rightly or wrongly) perceived to be. This
fits in with Clé’s idea that successful payments businesses work
with the payments industry, rather than against it.
The second benefit is it associates the m-POS
transaction with a bank rather than a new brand which customers are
unfamiliar with. This may help it overcome one of the key concerns
about m-POS readers – the potential for, or perceived risk of,
fraud when a card is swiped across a reader in someone else’s
mobile phone or tablet.
“We want to be partners with the banking
industry, not in competition with it,” says Clé. “If you look at
most of the solutions currently on the market, they are generally
front-end solutions or mass transaction aggregators. That means
they require either the assistance of one specific entity to
process transactions for them, or it requires that one entity
accepts the fact they are becoming a mass transaction aggregator –
Square is an aggregator, Paypal is an aggregator. All of those
transactions are what we call aggregating.”
“In our case we just provide our technology to
the industry, and this gives freedom back to them to run their
payments businesses in a more efficient and convenient way to end
users without creating competition,” explains Clé. “In effect, we
let each bank run their own business without trying to run the
business for them.
“What we really want to do is offer this
product to the financial industry and for it to become a standard
system for card-not-present transactions, and ultimately reducing
fraud,” Clé adds.
In fact, the SCCP approach appears to be along
similar lines to traditional POS terminal providers which offer
secure electronic payment services. For example, the PAYware m-POS
solution offered by VeriFone is also focused more on linking
acquirers and merchants than disintermediating them.
Additional costs?
One argument against the SCCP model is that it
adds an extra layer of fees to end -users, with the end-user paying
transaction fees to the acquiring bank, set-up fees and annual
charges to SCCP.
This fee structure seems to ignore part of the
key value proposition of m-POS readers to SMEs: a more
cost-effective way to accept small volumes of card payments than
opening a fully fledged merchant account.
It also potentially adds a barrier to the
sign-up process of merchants. Merchants signing up under the
Square/iZettle model only have one contract to sign and a
transparent and easy-to-understand fee, allowing them to get up and
running straight away.
Under the SCCP model, there is the risk that
adding a third party – the acquiring bank – into the
fee-and-contract process slows down the sign-up of new merchants.
This could be a limiting factor in a market where gaining quick
market share and first-mover advantage are likely to be
important.
