A Step Ahead Of The POS Curve
By Matt Pillar, editor-in-chief, Integrated Solutions For Retailers
What’s next for POS? While you wait for delivery of your crystal ball, this VAR keeps profiting from the writing on the wall.
Steve Norell isn’t a fortune-teller. He doesn’t have extrasensory perception. He’s too busy paying attention to business — his and everyone else’s — to invest much time in prognostication. Ironically, it’s that relentless attention to detail that seems to give him the power to see into the future.
Norell is CEO at U.S. Merchant Services, and his seeming clairvoyance has been contributing to the success of his company for the past twenty tumultuous years. It began with his foray into the payment processing ISO business.
“Back in 1995, nobody knew how to spell Internet, much less use it for commerce,” he says. “There were still a lot of small- and medium–sized merchants who didn’t accept credit cards, because processing was too expensive and too slow at the point of transaction.” Thus, many ISOs shied away from the payment processing arena. But Norell, ever the astute observer of the market, knew the groundwork was being laid for an explosion in card processing adoption. Networks were getting faster. The aversion to accepting credit cards was quickly fading. “In 1995, we jumped in, and we rode the wave through the halcyon days,” he says.
Norell was paying attention again in 2004 when Harbor- Touch (at the time known as United Bankcard), disrupted the market with a plan to offer free terminals to its customers and agents, a move Norell says later gravitated to cash registers and server-based POS systems. While the announcement caused many VARs and ISOs — already reeling from a rapid degradation of hardware margins — to predict end times for the channel, Norell declared it the opportune time for an ISO to get into the POS business. So that’s what he did. Today, the company has added POS sales to its line card, primarily through an engagement with Pioneer POS.
Of course, it helped a whole lot that by the time U.S. Merchant Services entered the POS market under the U.S. POS Services banner, it had approximately 5,000 merchants in its database processing cards on its platform. “We established ourselves in the market with processing. They knew us,” he says. As the POS business opened up (U.S. POS Services came on the scene just as the market was shifting from a door-to-door, two-closes-per-hundred-calls sales model), Norell’s company offered a refreshing change to the POS landscape — an all-in-one POS/card processing solution.
Now, as the POS and payment processing space continues its rapid evolution, Norell’s educated intuition is telling him there are a number of opportunities for like-minded ISOs and VARs.
Perpetual Profit From Payments
When U.S. Merchant Services entered the payment processing space, residuals weren’t part of the profit equation. “Those brave enough to wade into the space were selling terminal leases generating $1k in revenue per sale, moving on, and doing it again,” says Norell. But while U.S. Merchant Services enjoyed the aforementioned halcyon days of payment processing residual income, Norell says the glory was short-lived. “Everyone wanted residuals, so competition became fierce, which significantly lowered prices. Where processing residuals were $100 per month, per merchant, they’re now down to $25 to $50. After including all internal boarding costs, you’re not making money until month 25, which is ridiculous,” he says.
Then the model changed once again, as payment processing software providers like Mercury began signing up POS vendors as agents and integrating the processing platform into the POS software. Norell says that’s a homerun for the POS dealer who had never really shared in the residual income generated from the merchant account, but it wasn’t good news for the credit card ISO. Norell likens it to the POS channel waking a sleeping giant. “When you have the POS channel putting its hands in the pockets of the payments channel, the credit card guys fight back,” he says. Fortunately for U.S. Merchant Services, it’s fully invested on both sides of the fence. It simply has to keep merchants from switching payment providers, and Norell says having a Mercury Payment/Pioneer POS integrated solution in his back pocket helps that effort. “I still think giving hardware away is a bad decision,” he says. “But the Mercury model has led to a bevy of me-too credit card companies out there, doing tons of work to integrate with POS providers and battle alongside them.”
Steve Norell, U.S. Merchant Services
Small POS providers, he says, will suffer without the benefit of a credit card processing partner. “I recently heard a story about a guy who had a nice little POS business with about a million per year in sales,” explains Norell. “When he went to sell the business, he only got $5,000 for the phone number.” A higher valuation couldn’t be justified, because like most POS VARs out there today, the company couldn’t tell its buyers where its next check was coming from. They had no recurring revenue. “Smart resellers will do some research and find a good ISO they can partner and make money with on the payment side,” says Norell.
Make Security The Star
Norell says that despite the ambivalence and oblivion that characterizes the midmarket merchant’s take on PCI (Payment Card Industry) security, the channel plays a key role — and is presented a significant opportunity — in the effort to protect cardholder data. “Merchants that process $100,000 to $250,000 per month in card payments have typically heard of PCI and may be somewhat aware of the standards it puts forth, but they don’t understand it. Many don’t even know they have to take an SAQ [self-assessment questionnaire].” U.S. Merchant Services makes it a point to ensure they do. “We’re pragmatic about it,” explains Norell. “Just because I have a burglar alarm in my house doesn’t mean I won’t get robbed, and just because an application is PA-DSS [Payment Application Data Security Standard]-compliant doesn’t mean the retailer running that application won’t get hacked,” he says. But through partnership with ControlScan, Norell’s company offers PCI validation and SAQ services. It also offers an insurance policy of up to $50,000 to cover the cost of forensic examinations in the event of a breach. Norell says some 75 percent of his customer base takes advantage of those services, which marks significant success for a small- to midsize merchant portfolio.
Norell anticipates the security services opportunity will only balloon as more retailers adopt mobile payment and POS applications. It doesn’t hurt, he says, when major retailers suffer the public scrutiny that follows a high-profile data breach. “Anything you do over Wi-Fi introduces security risks, and thanks to Target, the EMV (Europay, MasterCard, and Visa) initiative has become a hot topic among our customer base,” says Norell. To that end, U.S. Merchant Services is only selling EMV-capable terminals in its new installation engagements. In fact, as of June 1, the major terminal manufacturers will only offer EMV-capable devices. And while there’s still plenty of time before the 2015 payment card security liability shift — which might well be postponed due to the debit card routing snafu associated with the Durbin amendment — he anticipates a major upgrade sales opportunity as customers decide it’s time to swap out or retrofit legacy terminals to enable EMV capability.
Move Into Mobile, With Caution
The moves Norell has made to build his business have been calculated, concrete, and never prone to the whims of a fad. That’s why he exercises extreme caution when he evaluates the mobile retail landscape. While Norell is far from ignorant of the insane mobile retail hype trajectory, he’s careful to place his mobile investment bets on sustainable solutions.
Mobile payments, he says, just aren’t the barnburner the vendor community would have retailers believe they are. “The number-one mobile payment users are Square users, and half of them might use the platform to process about $5 per month. There are a lot of subscribers, but their sales volume just isn’t there,” he says. According to Norell, nearfield communication-based payment applications aren’t living up to the hype either. “There’s potential with near-field, given that tech is God to the under- 30 demographic. But the older the demographic, the less comfort with mobile payments, and those over 60 are still going to the bank to cash checks,” he says. “This will grow in the long term, but right now the average person doesn’t see a problem that needs to be fixed. When you have a solution looking for a problem, you have something nobody wants.”
Thus, Norell shares his rudimentary, tongue-in-cheek solutions evaluation logic: “If the vendor community says you have to offer it, your chance at successfully selling it is approximately 0 percent. If your merchants want you to offer it, you have a 50 percent chance of selling it profitably. If the consumer wants it, it’s a home run.”
Smartphone applications, he says, are a grand slam. “Email is fading. People aren’t using it much anymore, and those who are find themselves doing triage on 300 emails per day. Text message marketing is invasive and annoying. Apps, consumers use on their own time, in their own terms.” U.S. Merchant Services is now building, hosting, and marketing a number of custom consumer-facing mobile applications, from scheduling applications for service-based retailers to order entry applications for hospitality.
Norell’s next big call is that the adoption of mobile retail apps will grow at a pace that mirrors that of the early days of Web commerce. If his track record holds, mobile applications might just be your next big opportunity, too.