There’s been much debate as of late around the need to bundle POS with payments. We think bundling might be the wrong verb, but certainly the ability to offer POS with payments is not a bad thing when done fairly.
As we’ve explained at length, distribution is the major achilles heel for brick and mortar. It’s why you will often see horrible, horrible products still in use at material numbers of brick and mortar merchants. Coupling the POS and payments together effectively eliminates the duplication in distribution costs for the two offerings, substantially improving margin on a captured account.
Naturally there are going to be those who SMOPP merchants to death in a bundled offering. But that’s not to say unaffiliated payments providers are any better: payment entities on both sides of the equation have been known to generously ratchet payment fees in their favor, often with fantasized line items.
The unaffiliated payment processors would have you believe that the bundled providers are the worst of the worst, that their “free” POS is nothing more than slick marketing to lock down the merchant. As with most things it’s not simply black and white.
When POS companies give merchants only one choice in processing, either by offering only one payment option or adding precipitously high, imaginary fees to options that they don’t own, that’s a major issue. It’s not our job to reprimand them on this business practice because the market will eventually prove how dumb the idea was. It might take time (it took about 6 years for merchants to categorically throw out Groupon because merchants are so unsophisticated) but a free market does a great job at sussing these things out.
But for companies that want to offer both POS and payments fairly, the math does make sense. We can no longer sit here and have a debate about the value of adding a POS with processing services when First Data has shared that they’ve shipped over 400,00 Clover terminals since purchasing Clover in Q4 of 2013. (Note: our guess is that only about 200,000 of those 400,000 are still active given the disproportionately high churn of small merchants choosing Clover). Even though First Data has given up on making Clover a robust POS solution, the truth is that there are numerous merchants who will reach for whatever solution is closest, and payments companies have a 10x better sales mousetrap than POS companies.
That leaves us with a question of how to do this appropriately.
As any business strategy conversation begins, the options are either build, buy, or partner. Here are the pros and cons of each in our opinion. By the way, we’re framing these scenarios from the payments provider’s perspective since payments companies have way more money than POS companies.
Build
If you build a POS from scratch you get to mold it in your image. Mostly this should mean the POS will have both modern features and architecture to support future growth; you don’t need to settle. Of course this is probably the most expensive option on the table both in terms of absolute dollars and time. Building a POS to support small merchants takes around 2 years, whereas it will take 5-6 years before you have a product that can sufficiently serve multi-unit groups. As an example, Heartland committed to this approach with Xenial after purchasing a number of legacy POS systems. Their rationale was pretty straightforward: we have the balance sheet to build something fresh, and a lot of experience to lean on in acquiring legacy POS systems.
Buy
This isn’t a bad option considering payments companies don’t yet have a product or software culture. Building a POS system becomes a risk in that payments companies are asking themselves to do something they’ve never done before. The downside here is that the remaining POS companies are those that were left alone for a reason. In their diligence the acquiring payment entities put many of the remaining POS assets into three categories:
- Merchant base is too small to be of interest
- Management is inept and product needs too much investment to maintain relevancy (we vote for this one for 95% of POS companies)
- Company refused to sell, buyer couldn’t get favorable deal economics, or no strategic fit
Partner
At last we get to an option that could make a lot of sense for the remaining payments processors with no POS offering. If you recall we gathered feedback from independent POS companies when we asked for their thoughts on POS and payments consolidation. It was a mixed bag but on the whole it was evident that it made sense to bundle POS and payments if it was neutral and fair in practice.
The biggest pros for partnering are that the payments companies aren’t spending time and money trying to build or buy a POS system. It’s also a subtle benefit that the POS does not get bastardized by the non-product culture of the payments company. The payments companies may even consider investing money in the POS companies to buy exclusivity or expedite the release of new features, as the con here is that the POS companies need not tie themselves to only one payments partner.
The biggest risk in the partnership scenario is that the larger payments company implodes the deal by being too slow. We’ll publish a separate article about innovation at large companies and that will provide a lot more color to our comment here. But just know that we believe payments companies need a POS product for all the reasons we’ve talked to in previous articles.
It’s up to the remaining payments entities to figure out how not to screw it up. But for big ISOs pushing someone else’s POS solution (i.e. Clover), it makes economic sense to branch off and own this yourselves. It will increase the value of your business (lower churn, higher revenue per account) while giving you a number of new tools with which to compete. And you need not think micro merchant either: going after larger merchants with a more mature POS is where we would look at the opportunity given the math we’ve laid out before.
If you don’t do this now you will have to eventually. The clock is ticking.
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