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Growth and Maturity in the Payments Industry

By Paul Rasori

Predicting the future is an uncertain science at best. Nevertheless, it's useful at the end of each business year to evaluate recent trends and attempt to extrapolate how they will continue to unfold in the coming year.

I began by looking back about five years: 2001 was the year that VeriFone gained its independence from an ungainly four-year merger with Hewlett-Packard Co. Competitors declared themselves in a turnaround mode. Projections for the POS terminal industry were for revenue growth in the low, single digits.

At that time many viewed POS terminals as a commodity business destined for a lengthy period of declining margins and starved for R&D funds. The "experts" predicted that thin-client systems on the countertop would rely on intelligence at financial institutions' host servers to provide new services at the POS, thus negating any need for applications to reside on the payment device.

Those prognosticators overlooked the lack of flexibility in those backend systems and a natural unwillingness by financial institutions to tinker with their legacy systems. It's no easy task to develop new applications for such host servers, and the legitimate concerns and bureaucratic inertia of bank IT departments make it practically impossible for them to innovate for the POS.

The past five years have more than proven that these predictions were wrong. Innovation at the POS is rampant. Technology and business issues have turned the POS systems business into a double-digit growth business with very respectable margins ... at least for some.

Competition among the card Associations is a large contributor to the industry's vitality and certainly a welcome change from the sluggish behavior of the 1990s. Merchants are no longer cowed by card Association supremacy, which has resulted in a healthier balance of power and decision-making over what is allowable and appropriate at the POS.

The desire of the card Associations to go after smaller, previously all-cash purchases resulted in reduced interchange and relaxed restrictions, combined with technology innovations, which have effectively revolutionized the entire quick service restaurant (QSR) industry segment.

Technology has certainly played a role in the QSR revolution, as elsewhere. The availability of always-on, Internet protocol (IP)-based processing made it possible to provide electronic payment at the countertop that is demonstrably faster than paying with cash.

That development, along with lower interchange and the ability for no-signature purchases, made it possible for QSRs to use electronic payment to speed up their throughput and increase their profitability.

Where do we go from here? Without a doubt, IP-based electronic payment processing will continue to sweep through the industry as more merchants understand the benefits of always-on processing capabilities and as the cost of broadband technologies continues to decline while telephone costs remain relatively high, or even increase.

Wireless will become an increasingly attractive medium for merchants of all types; it will even replace single-line telephone countertop connections.

Wi-Fi is already a no-brainer when it comes to extending one broadband connection to several payment devices using a wireless technology that essentially requires no extra cost. This is likely to be the dominant technology for the pay-at-the-table segment in the restaurant business.

Code division multiple access and general packet radio service are now stable and widely available cellular connectivity options that provide a low-cost, always-on payment processing capability for the mobile merchant. Wireless carriers have targeted such merchants with attractively priced service plans that will readily justify the cost of payment devices for at-home delivery, at-home services, outdoor venue and other on-the-go needs.

With such opportunity and the return of attractive growth rates and profit margins, one might think that the industry would generate many product developers rushing to take advantage, as much as the early days of the personal computer spawned hundreds of equipment suppliers.

In all likelihood, we will see small numbers of market entrants with innovative products. The reality of this marketplace is that barriers for successful market entry are high. As one commentator in the investment industry observed recently, "the credit card terminal industry has the potential to be a well-behaved oligopoly."

New vendors in the United States have to deal with strict regulations and security standards that banks and card Associations impose. To achieve scale, they have to do this in many countries around the world. As the investment writer concluded, "the value here is the software that interacts with the myriad of card Associations and banks, not the actual plastic box."

Any payment solution supplier that aspires to a market presence also has to achieve certification from a significant number of payment processors in order to have a credible national market presence. This is time consuming and costly; it also requires a trust relationship between the solution supplier and the financial organization that takes years to build.

Successful suppliers have to be strong, with a significant R&D investment. They should have a global presence, a streamlined supply chain and financial stability. They must be seen as reliable, which requires a track record of consistent delivery, a support infrastructure, demonstrable quality, and be perceived as an ethical player.

Without a doubt, any serious players have to be innovative. As we've seen with the declines of AT&T and IBM and others, market share can easily evaporate if an organization becomes static.

In our industry, innovation requires the ability and vision to take advantage of enhanced communications technologies, deliver value-added applications, provide secure solutions and focus and capitalize on change.

Suppliers also should be connected, which means having the ability to develop strategic partnerships that marry the core competencies of one company to another to create a larger presence. They should have relationships with banks, card Associations and processors, and the ability to provide nationwide services and programs to support a large customer base.

Those are significant barriers for new entrants to overcome, but it does not mean that we won't see new ideas and innovations from new players. The opportunity for growth will continue to spur development of new products and solutions, but we won't be living in the Wild West. The electronic payments industry is a vibrant, growing segment that has achieved a measure of maturity and self-governance that pays dividends for suppliers and customers alike.

Paul Rasori is VeriFone's Vice President for North America Marketing. He plays a key role in helping VeriFone customers integrate current payment and communication technologies. E-mail him at .

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