By Patti Murphy
ISOs and merchant level salespeople (MLSs) eager to grow their portfolios often seek new vertical markets, but as card acceptance grows, the search for new verticals can be tough. "The market is changing so much; we're constantly struggling to find the next best thing," said Dee Karawadra, President and Chief Executive Officer at Impact PaySystem LLC. "The trick is to throw everything against the wall and see what sticks."
Sometimes, what sticks may be a new vertical market opportunity. More often, however, it may be new features and functionalities that drive greater value to clients in existing verticals, horizontally across business needs. It's like taking omnichannel access to the next level by addressing both consumer and business needs.
Thad Peterson, Senior Analyst at Aite Group LLC, said, "Retailers are playing catch-up in an omnichannel world. That's their struggle." He noted that to succeed in this changing environment, retailers need to regain control of the customer experience. "They need to redefine the shopping experience," he added.
Online and, to a greater extent, mobile access are critical to that redefinition. Data from a survey conducted recently by comScore illustrates this: while total discretionary retail spending grew 4 percent from 2016 to 2017, ecommerce spending was up 13 percent and mobile retail spending grew a whopping 43 percent.
This phenomenon was addressed in UPS Pulse of the Online Shopper, Volume 1, a white paper published in June 2017 by UPS. "Although shoppers expect to use all digital devices more in the future, the accelerated satisfaction of smartphones not only suggests that they will likely give a greater share of their time and their wallets[s] to this preferred device, but points to mobile's staying power among consumers," UPS wrote.
Raymond Pucci, Associate Director of Research Services at Mercator Advisory Group, agreed. "Consumers want convenience, immediacy, seamless payments, and they want to use their mobiles," he said. In this environment, ISOs and MLSs need to be asking themselves, "How can we meet the behaviors and demands of [our merchants'] customers as we service our merchants?" he added, noting that keeping tabs on the big players is one way to gather intelligence. "Look at the major restaurant chains and general retailers," he said. "Check their websites and see what they're offering."
One trend that will smack ISOs and MLSs head-on is growing demand for mobile order-ahead and payment options. Consumer expectations on this front have been shaped by on-demand ride-sharing services like Uber and Lyft and have been bleeding over into verticals like quick service restaurants (QSRs), Pucci noted. "That's the sweet spot for mobile order and pay," he said. This hasn't been lost on payments disruptor Square Inc., which in March, purchased OrderAhead, a website and mobile app that supports advanced ordering and payment for restaurant take-out orders.
The earliest QSR adopters have been pizza chains. Mobile Order and Pay Ahead: a New Sales Channel for Restaurants and Merchants, a Mercator report authored by Pucci, identifies several notable successes: two leading chains – Papa John's and Pizza Hut – were among them. Each reported that one third of sales in 2016 were mobile-ahead orders.
Starbucks, another checkout trend setter, reported in 2016 that 30 percent of all in-store purchases were being completed with mobile devices, and 20 percent of sales at its busiest stores during peak hours were mobile order-ahead transactions. Against this backdrop, three large burger chains (McDonald's, Burger King and Wendy's) disclosed plans to roll out mobile order-ahead apps later this year.
The payoff for these businesses can be big and include more frequent customer visits and higher average spend per visit. Taco Bell said its mobile customers spend 30 percent more per order than do walk-in customers. Integrating mobile order-ahead with a loyalty program may lead to even more benefits, such as driving some customers to place mobile orders during off-peak hours, which can enhance productivity, capacity utilization and profit margins, Pucci wrote.
In 2016, consumers spent about $210 billion at QSR and casual dining restaurants, according to Morgan Stanley & Co.; about $10 billion of that total came from online orders. Indicating the growing popularity of order-ahead options, Business Insider recently said it expects mobile order-ahead purchases to reach $38 billion in 2020, or about 11 percent of total QSR sales. Mercator is more optimistic; it projects mobile order-ahead sales will reach 20 percent of total QSR sales by 2020.
Order-ahead is not just a QSR phenomenon, however. Consumer demand for instant gratification cuts across all areas of life and shopping. That's why traditional merchant verticals, like department stores and those selling electronics and hard goods, are getting into the game. Among them are big name retailers like Wal-Mart, Home Depot and Best Buy. In these cases, however, the option works best with customers who already know what they want and desire an easy, faster way to locate, purchase and pick up those items, as information presented on mobile screens can be limited, Pucci noted.
The most obvious advantage to traditional merchants of this new order and payment channel is cost-effectiveness: it can reduce staffing needs while boosting sales. "They [traditional retailers] now realize that they need to do this as part of an omnichannel strategy," Pucci said. "It helps with margins."
Drago Dzerve, Vice President, Product Management at Verifone Inc., cautioned, however, that the technology behind these solutions can pose complex implementation problems. "It's about a lot more than having a cool mobile app," he said, adding, for example, that a tokenization piece must tie transactions to payments. "The migration from ecommerce and card present to omnichannel can be a humongous task," he noted.
Verifone developed several mobile POS solutions for small and midsize businesses. The latest of these, known as Carbon 8, is a portable device for fast-paced merchant environments like restaurants. In addition to supporting mobile payments, Carbon 8 provides support for other business functions such as accounting, real-time inventory management and staffing. Plus it can be leveraged for loyalty programs, Dzerve noted. "ISOs and MLSs are in a tough spot," competing for merchants against the likes of Square and ecommerce giant Shopify, he said. "Carbon 8 is a solution that arms them for this battle."
Karawadra is convinced that mobile ordering is hot, and he's been working on a mobile-ordering app for Impact's restaurant clients. "If you can partner with a technology provider, apps are very easy to build, and they don't cost that much," he said.
Another important consideration: mobile solutions need to solve real needs, as extraneous, seldom used features can drag down payback. "One of the big challenges is to not add features that don't get used a lot," said Derek Webster, founder and CEO of CardFlight Inc. "If you do, it will cost more and offer less value by having features that are not necessary."
CardFlight is a software-as-a-service company specializing in mobile POS solutions. It has developed a turnkey mobile platform for ISOs and MLSs to market to merchants that supports chip-secured and near field communication-enabled payments via Android and iOS devices. The company inked a deal this year with leading acquirer Vantiv Inc., which has co-branded the solution for sale through its ISO and financial institution partners. Working with technology providers with expertise in particular verticals is another plus. "You need partners who understand the [vertical] and its pain points," said Andie Kolb. Kolb, whose career in payments has included stints at several acquirers, is Senior Vice President for Business Development at QubeChain LLC. QubeChain specializes in blockchain technology applications for several markets, including payments and healthcare, and has worked with clients in cannabis-related verticals. Cannabis-related businesses are tightly regulated and require sophisticated technology solutions capable of tracking entire life cycles of products: planting, harvesting, testing, distribution, stocking and sales. These businesses also pose other unique challenges. For example, while cannabis distribution and sales are legal for medical and recreational purposes in about two dozen states, they remain illegal under federal law.
Consequently, a majority of sales are cash, as federally regulated banks are averse to handling card transactions for businesses involved in the cannabis trade. This, in turn, leads to a need for sophisticated cash management tools, like cash vaults. Another problem: each state legalizing cannabis sales has established unique operating and regulatory requirements for these businesses.
QubeChain is developing a blockchain-based solution that addresses these needs. "As we evolve, we can take this blockchain technology to new merchants," Kolb said. And not just cannabis-related merchants. While initially used for crypto-currencies like bitcoin, blockchain technology can be applied to any business processes that require simultaneous access to and sharing of information within and between enterprises. "It's transformative, particularly in certain verticals like healthcare and commercial payments," Kolb added.
Mastercard is embarking on an ambitious plan to enable electronic payment acceptance among 40 million micro and small merchants worldwide by 2020. If it succeeds, the move could open new vertical market opportunities for ISOs and MLSs in the United States and abroad. The plan, revealed in June 2017, expands upon a program the company launched in 2016 to promote universal access to financial services, worldwide, by 2020.
Financial inclusion initiatives abound. Initiatives to date, however, have focused on providing unbanked households with financial tools and transaction accounts, most of which are accessed using mobile devices. Yet many of the small businesses where these households regularly shop can't accept mobile and/or other types of electronic payments. Mastercard aims to change that, and to do so in short order.
"Real financial inclusion happens when people can use their new financial accounts to do what many of us take for granted," said Ajay Banga, Mastercard President and CEO. "Helping micro and small merchants connect to electronic payments will accelerate adoption and usage of new financial tools for the unbanked and will have a true impact on people's daily lives."
One scheme now being tested in the United Kingdom with acquirer Worldpay aims to allow small merchants to accept contactless payments using any mobile phone without the need for peripheral devices.
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