Point of Sale Terminals
Point of Sale Terminals: The Growing Point of Sale (POS) Trade
The move to smart cards in many countries is lifting the point of sale terminal market. But vendors are also introducing new services and products to keep revenue growing.
Point of sale terminal vendors have something to cheer about. The conversion of magnetic stripe credit and debit cards to smart cards is driving sales of new point of sale terminals in those mostly European and Asian nations that have set deadlines for the move to chip.
But those vendors also have cause for concern. The same forces that drive down the prices of such electronic products as televisions and personal computers keeps putting downward pressure on point of sale terminal prices.
To boost revenue, point of sale terminal vendors are pushing new Internet-based and wireless point of sale technologies, and new point of sale services. They are building on their expertise to branch off into new areas-such as building smart card-accepting point of sale modules for vending machines or developing wireless point of sale payment and dispatch networks for taxi companies.
And they are positioning themselves to take advantage of the move to smart cards in Europe and Asia, and the expected move by potentially millions of Chinese merchants to begin accepting credit and debit cards by the time Beijing hosts the Olympic Games in the summer of 2008.
Next year and the year after there will be good growth rates in Europe says Jerome Janin, marketing vice president for France-based Ingenico, one of the three global point of sale terminal suppliers along with U.S.-based Verifone and Hypercom. “But for us the main markets are definitely in Asia, and more specifically in northeast Asia-South Korea, Japan and China. Those are the three main markets that will make us happy for the next five years.”
2008 is a big year for all those countries. In South Korea and Japan, that is the date set by banking organizations for merchants to deploy point of sale terminals that can read smart cards conforming to the international standard for chip-based payment cards, EMV. For China, 2008 marks the expected arrival of millions of tourists to a country already registering double-digit tourism growth.
Tourists use credit and debit cards, which gives Chinese merchants a big incentive to deploy point of sale terminals. Ingenico estimates the Chinese market will consume 2 million to 3 million point of sale terminals by 2008. There were only 477,000 point of sale terminals in China at mid-year, according to China Unionpay, a national payment network. But that represented fast growth from 280,000 devices 18 months earlier.
Overall, Ingenico’s Janin estimates that global demand for point of sale terminals is growing at 12% per year. That helps offset the annual 4% to 5% drop in unit prices. Wholesale prices of point of sale terminals start around $150; retail prices are typically $300 to $600.
The overall upward trend was noted by U.S. brokerage firm Morgan Keegan & Co., which cites the move to smart cards, the adoption of payment cards in emerging markets, and openings for new point-of-sale technologies in advanced countries as reasons for being optimistic about this market. Morgan Keegan analyst Robert Dodd made the observations this year in a report on Hypercom, to which he gave the firm’s highest rating, “market outperform.”
Citing industry sources, Dodd rated Hypercom as the No. 3 point of sale terminal vendor worldwide, behind No. 1 Ingenico and No. 2 Verifone.
Ranking the top vendors is increasingly guesswork as the three top companies declined to provide 2003 shipment figures to Card Technology. Each company claimed that its competitors were inflating their shipments even more than is usual in such surveys.
In terms of revenue, Ingenico seemed to clearly be in the lead in 2003, with sales of 356 million euros (US$434 million). Hypercom, like Ingenico, is publicly traded and reported 2003 revenue of $231.5 million. Privately held Verifone did not report 2003 revenue, but late last year estimated that its sales for the 12 months ended October 2003 would reach $335 million.
Not all revenue comes from point of sale terminals. Ingenico’s Janin notes that the company increasingly makes money from software, services and “solutions,” that is, developing integrated systems for customers. Those categories represented 18% of Ingenico’s sales last year.
It’s worth nothing that Verifone’s two top competitors both reported revenue decreases in 2003 versus 2002, as they sold off noncore businesses. In the case of Hypercom, the moves helped the company show an $11.2 million profit after a $61 million loss in 2002.
The revenue decreases did not represent lower point of sale terminal sales, according to executives at Hypercom and Ingenico. Those assertions are backed up by a look at point of sale terminal sales in the United States and Canada, two of the most important credit and debit card markets.
Verifone and Ingenico did report their U.S. and Canadian shipments to Card Technology’s sister publication, ATM & Debit News, and the newsletter’s editors made an estimate of Hypercom’s sales in the region. As a group, point of sale terminal vendors shipped an estimated 2.25 million stand-alone terminals in North America in 2003, up 11% from 2.03 million in 2002, according to that survey.
In that region, Verifone reported 8% growth to 656,428 point of sale terminals and Ingenico a 24% increase to 443,600 units. Hypercom shipped 625,800 point of sale terminals in 2003, up 5%, according to the estimate of ATM & Debit News.
While large, the North American market is atypical in that it is the one major region where the conversion to EMV-compliant smart cards has yet to begin in earnest.
Only 18% of the point of sale terminals shipped to North America could read EMV smart cards, according to Pallab Roy, a research analyst with U.S.-based Frost & Sullivan. By contrast, Roy estimates that 91% of the point of sale terminals shipped to the Europe, Middle East and Africa were smart card-ready, 34% to Asia/Pacific and 71% to Latin America.
Overall, an estimated 11.7 million point of sale terminals that accept smart cards have been installed at merchant locations worldwide since 2000, Roy says. That means that about one in four of the 40 million or so point of sale terminals worldwide now can read EMV smart cards.
Lipman’s Big Move
Israel-based Lipman, the fourth-leading vendor in 2003, figures to move up to the level of the industry’s Big Three following its acquisition last month of Dione plc, a point of sale terminal supplier whose sales are primarily in its home country, the United Kingdom. Dione is also a significant player in Finland and South Africa, and Lipman executives say the acquisition will better enable the fast-growing company to sell into Europe.
Prior to the deal, Lipman’s strongest markets were the United States, Turkey, Spain, Brazil, Israel and China. Lipman chief financial officer Mike Lilo, in a call with analysts following the announcement, predicted that Lipman’s revenue in 2005 would be between $273 million and $285 million in 2005. That would put Lipman above Hypercom’s 2003 revenue of $232 million.
Dione was growing quickly, largely due to the UK being the first major European country to move to EMV. By late September, 438,000 POS devices in the country were ready to accept smart cards and personal identification numbers, just over half of the country’s point of sale base.
Dione, which battles Ingenico for the UK market share lead, reported a 45% increase in revenue in 2003 to $31.5 million, and accelerated that growth to $46 million in sales in the first nine months of 2004. Lipman paid $69 million in cash for Dione, and could pay another $33.4 plus 442,105 shares of Lipman stock if Dione makes undisclosed revenue targets in 2005 and 2006.
While Visa and MasterCard have set Jan. 1, 2005, as the date for shifting liability for card fraud losses in Western Europe to the party to a transaction-issuer or merchant-not EMV-ready, that rule only applies to international transactions. In fact, the move to smart cards is uneven from one European country to another.
According to Ingenico, Italy has 800,000 point of sale devices that must be upgraded to accept EMV cards by the end of 2007 by mandate of the Italian banking association, the ABI. That group has set milestones of converting 30% of terminals by December 2005, 35% by December 2006 and 35% by the December 2007 deadline.
In France, where banks introduced chips cards in the early 1990s, before the EMV standard was created, the switch to EMV is now getting underway. As of mid-September, the France-based card association Groupement des Cartes Bancaires estimated that 8.2% of the nation’s 640,000 POS terminals were EMV-compliant, along with 4.6% of the 47.6 million cards and 49% of the 40,780 ATMs.
But vendors are not just counting on smart cards or growth in emerging markets to fuel growth. They are also introducing new services and products.
A major new focus for Dione will be selling a smart card-accepting module to manufacturers of vending machines. Steve Green, Dione’s marketing chief, says machines that sell high-value products, such as commuter rail tickets or long-term airport parking validation, will need smart card readers in countries like the United Kingdom that are introducing EMV-compliant chip cards.
Dione offers a module “that a machine manufacturer can take off the shelf, drop into a machine, write an interface to and it’s chip-and-PIN-compliant,” Green says.
Ingenico, meanwhile, has developed a wireless communication network aimed at taxi companies. The IngeCab system can contact cabs about potential customers, receive replies from the drivers, monitor meters and accept payment card data.
The CabCharge taxi company in Australia plans to deploy the system in more than 15,000 cabs, according to Ingenico. Janin says the company will provide a customized payment and communications system for 1,000 taxis in Japan and will start work this fall on a similar system in Thailand for several thousand cabs. Ingenico estimates there are 2.6 million taxis worldwide, making such systems a big growth opportunity.
In the United States, where the move to smart cards is not yet on the agenda, vendors are pushing devices that communicate via the Internet. They are targeting smaller merchants whose terminals typically connect to authorization networks via dedicated, dial-up phone lines, but who may have a broadband Internet connection to their shop for other purposes.
By plugging the point of sale device into an Internet-connected computer, the merchant can save $30 to $50 per month on a dedicated phone line, the vendors say. One U.S. multilane merchant saved $250 per month by disconnecting eight phone lines and moving to Internet authentication, says John Mayleben, vice president of sales and marketing for the Michigan Retailer’s Association, a provider of payment services mainly to smaller merchants.
Approximately 90% of all retailers worldwide use dial-up lines for transaction authorization, says Frost & Sullivan’s Roy, making this another significant growth opportunity for point of sale terminal vendors.
Other point of sale terminal vendors are also promoting wireless devices to such mobile merchants as taxi drivers, delivery services and vendors at outdoor “flea markets”.
Will Graylin, president and CEO of U.S.-based Way Systems Inc., says there are more than 10 million nonfixed merchant locations in the United States alone, compared to 3.5 million fixed retailers. He sees that as a big potential market for Way’s Mobile Transaction Terminal (MTT), a point of sale module that attaches to a Siemens mobile phone to create what Graylin calls “a pocket point of sale.”
To conduct a transaction, the merchant swipes or inserts a payment card into the device, keys in the amount of the transaction, including tips and presses the “send” key.
Way charges merchants a few pennies for each transaction, Graylin says. The device itself retails for $375, or $499 with a printer that accepts data through an infrared link. Way launched its wireless point of sale device in the United States this year and has shipped nearly 1,000 units, Graylin says.
That’s a modest start, but a big opportunity. With all the big openings-including smart card migration, emerging markets, Internet authorization and wireless- point of sale vendors could have plenty more to cheer about in the years ahead.
Driving growth in the point of sale terminal market are several factors: the move to smart cards by banks in many countries, growth in China and other markets where credit and debit cards are relatively new, and the introduction of new technologies, such as Internet authorization, in mature card markets.
Overall growth in the point of sale terminal market is estimated at 12% to 15%. Ingenico, Verifone and Hypercom capture more than 60% of unit sales, but Lipman is growing fast and recently bought UK-based vendor Dione.
In terms of smart card acceptance, about one quarter of the 40 million point of sale terminals worldwide now comply with the global EMV chip card standard.