There’s a massive change happening in the POS and payments processing markets, and it will substantially change the way the market looks in as little as three years.
Churn for POS providers and processors has always been high. In the restaurant vertical, 25% of restaurants go under annually. Add on top of that the number of merchants that change processors to secure a lower rate, and the churn numbers are very high. Processors are, effectively, competing on processing rates – hundredths of a percentage point of each transaction – and those with the lowest rates are obviously able to secure more customers. So processors are driving rates further and further down. Sprinkle in the market fallout engendered by companies like LevelUp – whose aim is to eliminate interchange (processing) rates – and it’s a downward spiral.
To compound this, POS companies are now competing on razor thin margins. When POS first arrived on the scene, companies like NCR and Micros were charging upwards of $40,000 per install. Then there were service contracts that guaranteed $200/hour for any maintenance requirements (where POS companies actually earned 2/3rds of their revenues).
Now the new mPOS companies are using a “bring your own device” scheme, and with an old iPad/Android tablet and $1000 of miscellaneous hardware (printer, cash drawer, etc.) a merchant can pay $50/month for POS software that’s synced to the cloud with forever-free backups and local reliability when the internet goes down. Companies like Boomtown are providing flexible service contracts that are much more reasonable than those offered by legacy POS companies. Legacy companies have started to move to the cloud, but there’s massive competition to offer a quality solution at a fraction of legacy prices; a business model legacy POS companies are not structured to support.
Processors have recognized the margin erosion happening in the market and the smart ones have taken action: they’re buying a more stable merchant footprint. First Data bought Clover and has scaled distribution through its ISO network. Heartland rolled up PCAmerica, Leaf, Xpient, and most recently Dinerware. Collectively, these processor moves have garnered a footprint of ~150K merchants.
Why are they buying merchants? Because merchants used to pay $40,000 for a legacy POS system and now they’re paying a lot less. This means that the delta between legacy POS cost and current POS market pricing is available in merchant coffers… it just has to be earned with value-add products and services. We see this as a win-win opportunity for those able to execute. Merchants will now receive many more products and services for same price they were paying for a basic legacy POS system as few as five years ago. Processors and POS companies will drive innovation and develop novel solutions that add differentiation and change competition away from a commoditized POS product.
We liken this to the changes the SEC made in late 2013 that clarified the types of relationships research firms were allowed to access. Since then, firms have had to compete on what they could do with the data, not on who had the best relationship with the CEO.