The rise of Mobile POS

The rise of Mobile POS

2The rise of Mobile POS

Contents

1. Key messages 3

2. Introduction 4

3. mPOS in Context 5• mPOS overview• SMEs form the initial market• SME transaction volumes are variable• Growing competition• Commoditization of the POS market• Payment related services as a route to differentiation

4. Evolution of mPOS 9

6. Recommendations 14

• Merchants• Banks• Mobile operators

5. The mPOS Ecosystem

• Merchants• Banks• Mobile operators

13

• mPOS payment related services• mPOS is being embraced by larger merchants • mPOS will expand beyond retail • VAS would need high degree of customization


Key messagesBasic mPOS-enabling hardware is now a commodity, and the key to revenue growth and

differentiation lies in mPOS value-added services (VAS). mPOS service providers need to take a

more sophisticated, innovative approach to VASs, abandon the “one size fits all” approach, and

instead develop applications that better match the needs of specific verticals.

There is increasing interest in the potential for mPOS in emerging markets, and we can expect to

see an acceleration of mPOS activity as service providers seek to gain first-mover advantage in

the more mPOS-ready emerging markets. Characteristics to look out for include growing smart-

phone penetration, a large base of SMEs and micro-merchants, low penetration of traditional

POS terminals, a core base of card users that is expanding, and bank and government schemes

to encourage card adoption.

Mobile operators with existing mobile payments businesses will need to take a position on mPOS

and determine how they can participate in the ecosystem. Although mPOS will not be a core

m-payment revenue stream for operators, it could provide some incremental benefits via distribu-

tion partnerships or the provision of bundled services.

Banks are coming late to the mPOS market, they are nonetheless in a good position to offer

mPOS services. Bank acquirers have advantages due to their strong merchant base and their

expertise and long experience in supporting merchant needs.


Introduction

Mobile point of sale (mPOS) has introduced a

new dynamic into the mobile proximity

payments market. Between 2010 and 2011,

approximately 1.2 million mPOS solutions were

shipped to MasterCard merchants globally; and

75% of those merchants had not previously

been able to accept card payments.

This early mPOS growth was driven by adoption

among micro-merchants and while still an

important segment, there are further opportu-

nities for mPOS with larger merchants as well.

mPOS allows larger merchants to create

efficiencies and enhance the in-store shopping

experience for consumers, as well as to equip

their field salesforce with an integrated

payment capability. Another benefit to all

merchants, big or small, is the ability of mPOS

solutions to gather customer data.

Although growth in mPOS has predominantly

been in mature markets, there are several

opportunities for mPOS in emerging markets

that typically have a very large base of small

merchants, and where there is low or limited

penetration of traditional POS terminals.

However, the mPOS opportunity in emerging

markets will be dependent on a core base of

card users and where consumer demand for

cards is increasing, as is the case in India and

China. We expect to see an acceleration of

mPOS activity in the more mPOS-ready emerg-

ing markets, as service providers seek to gain

first-mover advantage.

We also expect the consumer-facing mobile

commerce and merchant-acceptance ecosys-

tems to converge going forward. Merchant

participation is a critical component of any

consumer-facing mobile payment service, while

on the mPOS side service providers are putting

increasing emphasis on consumer-facing appli-

cations. Who will lead this convergence is not

yet certain, although it is likely to be those

service providers that have a well integrated

consumer-facing and merchant acceptance

offering.

The rapid growth of the mPOS market in terms

of the number of players and services is

producing a highly competitive market where

many solution providers are struggling to

achieve meaningful differentiation. mPOS hard-

ware is already a commodity proposition, while

mPOS value-added services (VAS) are increas-

ingly being used for differentiation. The tradi-

tional micro-merchant target market for mPOS

might be growing in terms of the number of

people/firms, but it is characterized by low,

unpredictable transaction values. In order to

grow their businesses, mPOS solution provid-

ers will need to achieve scale. But this means

expanding beyond the core micro-merchant

base into larger merchants, where mPOS

service providers will have to compete with

traditional point-of-sale (POS) vendors. This

would be challenging, particularly for smaller

mPOS vendors without a well-defined value-

added service offering.

mPOS in Context

mPOS overview

Providers of mPOS services supply solutions

directly to merchants, or on a partnership or

white-label basis to third parties that service

merchants (primarily banks and, in a few rare

cases, mobile operators).

mPOS solutions allow merchants to accept

credit and debit card payments or even

proprietary payments schemes like mobile

money from mobile devices, where the

payment is initiated from, and executed on a

mobile device belonging to the merchant.

This is in contrast to consumer-facing mobile

proximity payment services that are initiated

by consumers from their own devices, and

which are increasingly offered as part of a

digital wallet service.

An mPOS solution basically consists of a

card-reader hardware accessory and an

associated mPOS application that manages

the transaction. The merchant uses their

card-reader-enabled mobile device to take a

consumer’s card details. In the US and a few

other markets card readers support mag-

netic swipe cards, while in the India and

elsewhere card readers must support the

prevailing EMV (Europay, MasterCard, and

Visa) standard chip and PIN cards. The card

data and transaction details are encrypted

and sent over a wireless network for authen-

tication and authorization, and once this has

been processed the consumer is sent a

digital receipt or provided with a paper

version via a linked printer.

mPOS solutions are characterized by very

low-cost hardware compared to traditional

card processing equipment. For example,

mPOS dongles can cost as little as $10 and

are frequently given away for free, although

standalone EMV units can be more expensive

(in the $50 to $100 price range). The first

iterations of mPOS card-readers hardware

took the form of a small dongle designed to

attach directly to smartphones and tablets.

These are still extremely popular but have

been joined by standalone card reader units.

The enabling technology for mPOS is typically

Bluetooth and audio jack and with Wi-Fi or

GPRS used as the transmission channel.

mPOS solutions should be able to process all

type of instruments like magstripe, contact

and contactless including NFC as well as

scan QR codes and barcodes etc. to enable

payment processing.


SMEs form the initial market

SMEs are the key target for mPOS solutions,

especially the micro-merchant segment of

businesses with fewer than 10 employees. The

SME sector is large and growing in terms of the

number of companies and employees, and

within this sector micro-merchants account for

the largest portion of the base.

Data from the US Census Bureau from 2008

(the latest available) reported that there were a

total of 5.91 million SMEs in the US. Of those,

3.61 million had between one and four employ-

ees, while 1.04 million had between five and

nine employees (see Table 1 for further

details). We expect that by 2014 the base of

US SMEs, including the micro-merchant

segment, will have experienced further growth.

The SME and micro-merchant segment is

equally robust in Europe. The EC’s 2011/12

annual report on SMEs in the EU found there

were 20.70 million such firms, of which the

lion’s share (19.14 million, or 92.2%) were

firms with fewer than 10 employees. The

20.70 million SMEs cited by the EC employed

more than 87 million people (see Table 2 for

further details).

The proportion of micro-merchants and SMEs

in many emerging markets is very high, and

eclipses the number of large enterprises. In

Brazil, 99.7% of companies are SMEs and

micro-merchants, according to mPOS provider

iZettle, which has launched in Brazil in partner-

ship Banco Santander. Likewise, in India there

are 1.5 million SMBs contributing between

15% and 20% to GDP (see Table 3).


Table 1: US SME and micro-merchant data

Firms with one to four employees (or with no employees as of March 2012)

Firms with five to nine employees

Firms with 10–19 employees



3,617,764

1,044,065

633,141

526,307

90,386

6,086,291

6,878,051

8,497,391

20,684,691

17,547,567

$232,062,907

$222,504,912

$293,534,352

$774,589,335

$706,476,693

Employment size of enterprise Firms Paid employees Annual payroll($1,000)

Source: US Census Bureau, Ovum

Table 2: EU SME and micro-merchant data

Number

Employment

19,143,521

38,395,819

1,357,533

26,771,287

226,573

22,310,205

20,727,627

87,477,311

43,654

42,318,854

20,771,281

129,796,165

Enterprise Small Medium Large TotalSMEs(total)

Micromerchants

Source: Eurostat, national statistics offices of member states, Cambridge Econometrics

SME transaction volumes are variable

The SME base is large but the transaction values

generated by micro-merchants and small

businesses can be unpredictable and low

compared to larger merchants. Micro-merchants

typically process low-value transactions, or higher

value transactions on an infrequent basis. There

can also be risks associated with the high attrition

that can characterize the micro-merchant

segment (many micro-businesses disappear as

quickly as they appear). The variable nature of

SME transaction volumes is a key reason why so

many mPOS providers are trying to gain traction

with larger enterprises.

Growing competition

The number of mPOS providers and services is

growing rapidly – there are now well over 100

globally, and more will follow. mPOS hardware is

already a commodity and some service providers

are attempting to compete on price by driving

down processing fees, but this a short-term tactic

rather than a long-term fix.

Something will have to give, and the most vulner-

able mPOS providers will be those with basic

solutions that are reliant wholly on

micro-merchants, a base characterized by low,

unpredictable transaction values or those without

the backing of a trusted brand like a bank. In order

to grow their businesses, mPOS solution provid-

ers will need to achieve scale. They will have to

expand beyond the core micro-merchant base

into larger enterprises, where they will have to

compete with traditional POS vendors, many of

which are powerful, resource-rich companies.

This will be difficult for smaller mPOS service

providers in particular.

Commoditization of the POS market

The commoditization of basic mPOS is prompting

solution providers to compete on price by driving

down the transaction processing fees they

charge merchants. In July 2013 PayPal launched

a headline-grabbing “Cash for Registers” scheme

in the US, whereby for a promotional period it

waived fees on transactions up to a certain level in

order to encourage merchants to adopt its

PayPal Here tablet-based mPOS solution. It was a

bold move from PayPal, but unlike most mPOS

providers, it can afford it. PayPal is large

company, and its financial resources allow it to

absorb the cost with minimal impact on its

business. For the vast majority of mPOS


Table 3: India SME and micro-merchant data

Number

Employment

14,850, 000

6, 534,000

760,000

2, 343,000

30,000

434.000

20,727,627

87,477,311

15,54,000

93,000,000

Enterprise Small Medium TotalSMEs (total)Micro merchants

Source: Ministry of Small and Micro Medium Enterprises India

providers, competing on price should be viewed

only as a short-term tactic – anything more than

this is unsustainable, particularly for smaller

mPOS players.

Payment related services as a route to

differentiation

In this context, mPOS VAS become essential

from both the monetization and differentiation

perspectives. A few forward-thinking mPOS

solution providers such as Comviva made

specialist VAS their unique selling points from

the start in the belief that mPOS service provid-

ers should focus on leveraging the mobility

advantage of mPOS to cater to merchant

advantage of mPOS to cater to merchant

business needs. This could mean enabling the

overall buying and stocking life cycle or enabling

how they reach out to their customers and

conduct commerce. This will help them deliver

higher value to merchants and hence become

more efficient, thereby providing a differenti-

ated offering to merchants. An associated

trend is the provision of integration services for

larger merchants looking to implement mPOS

alongside existing POS systems.


Evolution of mPOS

The mPOS market has developed rapidly over

the past four years, as Figure 1 highlights. The

commodity nature of mPOS hardware means

that service providers have to compete and

differentiate on the strength of their VAS. But

mPOS VAS are becoming increasingly uniform

across service providers; as soon as one

service provider innovates, others follow.

Providers of mPOS services must have

well-defined road maps for service develop-

ment. This means that if certain features are

not required immediately or by all merchants,

mPOS providers need to be able to vary those

features and enhance their VAS portfolios.


mPOS - an overview

Bre

dth

& f

unct

iona

lity

Service evolution2010 2014

SmartphoneCard readerdongles.Basic, horizontalVAS - e.g.Invoicing,Inventorycontrol

Card readerfrom factorsdiversify,cradles,dedicated units

mPOS VASexpands:consumerfacingapps, specialist /vertical apps,increased rangeof back officeVAS

Table basedmPOS takesoff, gainstraction with largermerchants

Consumer facing mCommerce mPOS start toconverge,e.g. Square Register& Square Wallet

Few early mover exceptions havesophisticated, specialist VAS, e.g. Intuit

Flexible, competitive merchantfee structures proliferate

Introduction of EMV compliantsolutions helps drive growth in Europe

More mPOS provides offer systemintegration & consultancy with largermerchants in mind

mPOS payment related services

The range of potential mPOS payment related

services can be clustered around the following

core service categories

Back-office services:

Applications that support the operational

processes and administrative needs of

merchants’ businesses.

Consumer services:

Front-of-house, consumer-facing services

geared toward customer-relationship market-

ing, customer support, and, more generally,

applications that enhance customer engage-

ment.

Professional services:

Specialist services that help merchants

navigate, plan, implement, integrate, and maxi-

mize mPOS technology and solutions. This can

also extend to managed services.

mPOS is being embraced by larger

merchants

A growing number of medium-sized and even

some large merchants are starting to take note

of mPOS, with early adopters having rolled out

tablet-based mPOS implementations as a comple-

ment to traditional POS or, in a few cases, as a

replacement for cash registers. Starbucks, Nord-

strom, JCPenney, Gap, Home Depot, and

Sephora are all using or experimenting with

mPOS alongside traditional POS, integrating

mPOS platforms into existing payment systems.

ICICI Prudential in India is working with Comviva to

equip its agents with the capability to issue new

policies at the customer's doorstep, including the

ability to scan and upload documents for "know

your customer" and policy payments. The interna-

tional fashion chain Urban Outfitters has gone a

step further: it has replaced cash registers with


mPOS VAS types

Bank-office services

Consumer services

Professional services

- Accounting

- Banking Services

- Stock and inventory management

- Ordering and invoice creation

- Data analytics

- Consulting

- System design

- Systems integration

- Security

- Device/infrastructure management and maintenance

- Managed services

- Customer-loyalty programs, coupons,and offers

- Customer receipts

- Order taking

- Stock checks

- Product discovery

- Location and navigation services

- Social shopping apps

iPad-based mPOS solutions in selected US stores, and has plans for a wider rollout. Some large FMCG

companies are also considering mPOS to complement their direct to consumer initiatives.

mPOS will expand beyond retail

The retail sector has been the prime target for

mPOS, but there are many other merchant

segments and organizations that mPOS can

address. Basically, any business or organization

that would benefit from its staff being able to

process card payments while mobile is a potential


For larger merchants,

mPOS solutions offer

value-added features

and benefits not

available when using

traditional POS

Queue busting – mPOS can be particularly valuable during peak shopping hours

(lunchtimes and after work) and peak periods such as seasonal holidays, when retail-

ers can supplement their fixed POS with mPOS.

Fast inventory checks – it can be used to help customers find desired items.

Space saving – if mPOS is used as a POS replacement, it frees up valuable store

space for other uses.

Promoting greater customer interaction generally.

Enabling associated marketing services. For example, mPOS can be used to encour-

age pre- and post-sale shopping activities through discounts and reward schemes.

Allowing merchants to reach out to their customers more effectively e.g. an insur-

ance agent being able to complete a policy sale in a single visit to the doorstep of a

customer using a tablet and a dongle.

Sophisticated services like analytics that can sift through payment transactions and

make recommendations to merchants on issues such as optimal inventory, ordering

cycle or even make recommendations to customers based on previous buying

patterns and preferences.

Integration with merchant's existing IT and CRM systems like loyalty, inventory to

seamlessly integrate with existing business processes.

Use of technology like BLE (Bluetooth low energy) and location-based services to help

provide real-time accurate information to consumers about store layout, or location

of articles.

candidate for mPOS. This could also include large

enterprises and public service organizations that

at the moment are not typically viewed as mPOS

candidates, from everyday scenarios such as

police services that issue on the spot fines, to a

stem cell banking company signing up customers

at their home or local clinic.


mPOS could also be used at sporting and other

events in fixed venues to prevent queues and take

payments at additional, flexible locations. Essel-

World, one of India's premier entertainment

destinations, is experimenting with mPOS to allow

customers to buy entry tickets at a venue's car

park or while they are travelling on a bus to an

event. mPOS could be used in a similar fashion at

conferences and conventions, and also at events

such as outdoor concerts and festivals that take

place at temporary locations.

VAS would need high degree of

customization

At the moment there is a tendency to adopt a

one-size-fits-all approach to merchant solutions.

Although merchants have certain common

requirements (e.g. inventory and sales manage-

ment), this top-down approach is out of step with

the fact that merchants’ needs differ depending

on the verticals they serve – small coffee shops’

requirements will be different from those of lone

traders, which will be different from those of high

street chains. Given the diversity of the merchant

base, the underlying platform should be highly

customizable to meet requirements of specific

industry verticals.


The mPOS Ecosystem

Merchants

Most mPOS solutions have experienced strong

growth among micro-merchants, and for good

reason. Most micro-merchants operate on a

cash or check-only basis out of necessity

rather than desire, because they cannot afford

the high costs associated with traditional

card-processing equipment, processing fees,

and maintenance. Adopting mPOS provides

them with a low-cost solution and flexible

pricing models that make credit card accep-

tance feasible where previously it was not. At

the same time, mPOS also provides opportuni-

ties for larger retailers to create efficiencies

and enhance the in-store shopping experience

for consumers.

Banks

Merchant acquiring banks have often been

reluctant to take on micro-merchants because

of their unpredictable transaction volumes, the

risks associated with underwriting very small

businesses, and the cost and lengthy payback

period related to installing payment card

processing terminals.

However, the much lower cost of mPOS

solutions means that acquiring banks can

now build the business cases they need to

facilitate credit card acceptance among

micro-merchants, opening up new opportuni-

ties in this market. Banks are also in a strong

position to cross-sell mPOS solutions to

larger merchants with which they have

strong, trusted relationship.

Mobile operators

Mobile operators are pushing consumer-facing

digital wallet services in a bid to drive new

revenues, but so far few have embraced

merchant-facing mPOS solutions. This is

because operators have very limited merchant

experience, while at the same time most

operators believe there is more value in

consumer-facing digital wallets rather than in

mPOS.

However, there are opportunities for mobile

operators in the mPOS market. The most

straight forward tactic is for operators to act

as distributors for mPOS hardware, offering it

as a way to add value to an existing portfolio of

financial services. An example of this approach

is AT&T’s retail partnership with Square,

whereby it sells Square Card Readers in more

than 1,000 stores, offering a rebate on the

dongle to merchants that sign up. There are

additional higher value options for operators,

which are put forward in the Recommenda-

tions section of this whitepaper.

.


Recommendations

Merchants

mPOS is a young, fast growing market with

multiple players, many of them start-ups, which

from a merchant perspective makes selecting

the right partner particularly challenging. We

advise merchants to favor mPOS solution

providers with the following characteristics:

mPOS solution providers that have a

well-defined portfolio and road map for

value-added services (this includes support

for horizontal payment related services

solutions required by all merchants such as

inventory control, mobile marketing applica-

tions) and VAS tailored for the needs and

requirements for specific industry verticals.

Data analytic capabilities. A key benefit of

mPOS is its ability to capture customer

data, a capability lacking in traditional POS

equipment. Customer insights are invaluable

to small merchants that cannot compete

with the wealth of customer data that larger

online merchants are able to gather,

particularly global online players like

Amazon.

mPOS solutions providers that support

tablet-based solutions. These are starting to

be used by larger merchants as a comple-

ment to existing POS, or in some cases as a

replacement.

mPOS solution providers that have strong

service partnerships which benefit

merchants - for example, PayPal Here

comes with pre-integrated partner solutions

including ShopKeep, Vend, and Erply. Associ-

ated with this, mPOS solution providers

should offer open APIs to support integra-

tion with third-party applications.

Larger merchants and other organizations

in particular will need partners that have the

ability to integrate mPOS solutions with

existing front-office and back-office systems.

There can be an assumption that payment

related services are of most importance in

attracting larger retailers to mPOS. While

this group does increasingly expect innova-

tive services, it is a mistake to think that the

traditional micro-merchant base does not

have an appetite for sophisticated payment

related services. If anything, the need for

VAS is more acute in the micro-merchant

segment, where it can play a key role in

building their core business.

mPOS solution providers that have experi-

ence and expertise in secure payment

systems should be favored, as even minor

security flaws have the potential to shake

merchant and consumer confidence in this

new technology.

Merchants should have the flexibility to be

able to subscribe to custom VAS bundles,

selecting applications such as loyalty

programs, or catalog management.


Support for SDK development environment

is desired as it accelerates creation of

custom applications (IPOS) to meet distinct

requirements of merchant categories or

individual merchants.

For large merchants using mPOS as a

complement to existing POS solutions,

prebuilt-connectors facilitate integration

with critical backend IT systems used for

CRM, inventory, billing and loyalty – allowing

merchants to better manage their business.

Support for mPOS APIs is also desirable as

it gives merchants an option to embed card

acceptance functionality within existing

payment applications, saving time and

money.

Banks

Most banks are arriving late to the mPOS

market and need to move quickly, but they also

need to consider very carefully the models they

use. The easiest route is for banks to partner

with an established mPOS product provider

and focus on merchant acquiring and servicing

rather than on technology. An alternative is for

banks to source and provide their own mPOS

solutions. A white-label product like payPLUS

from Mahindra Comviva is lower risk and

affords greater speed to market than a

scenario where a bank tries to develop its own

mPOS in-house.

Launching a bank own-brand mPOS service is

clearly the most challenging strategy. It

requires banks to re-engineer their merchant

sign-up process and risk-management models

(merchant onboarding) to suit the require-

ments and constraints of micro-merchants.

This is a major undertaking, and the effort

required should not be underestimated. The

merchant onboarding process established by

mPOS providers has set a new benchmark and

is very different from the processes used by

banks for the larger merchants they typically

target.

Mobile operators

The most straightforward way for operators to

participate in the mPOS value chain is by acting

as distributors for basic mPOS hardware, but

there are higher value opportunities available. A

more strategic approach is for operators to

offer mPOS as part of a service bundle, for

example a package comprising a smartphone,

dongle and data plan.

Operators could build on this by offering more

sophisticated cloud-based VAS such as account-

ing software or analytics as part of the package,

or integrating mPOS with their existing enter-

prise solutions. They could also add tablets into

the mix. This sort of “out of the box” proposition

would appeal to both micro-merchants and

larger enterprises. AT&T has taken a step in this

direction by offering GlobalBay’s mPOS solution

to SMEs. In the UK O2 is doing something

similar, offering an mPOS solution in partnership

with Visa Europe and Global Payments.

Appendix

Ovum Consulting

This white paper was researched, authored and produced by Ovum in association with

Mahindra Comviva, as part of a series of papers assessing the current state and future

market direction of mobile broadband services for mobile operators.

About Mahindra ComvivaMahindra Comviva is the global leader in providing mobility solutions. It is a subsidiary of

Tech Mahindra and a part of the USD 16.7 billion Mahindra Group. With an extensive port-

folio spanning mobile finance, content, infotainment, messaging and mobile data solutions,

Mahindra Comviva enables service providers to enhance customer experience, rationalize

costs and accelerate revenue growth. Its mobility solutions are deployed by 130 mobile

service providers and financial institutions in 90 plus countries, transforming the lives of

over a billion people across the world. For more information, please visit

www.mahindracomviva.com.

Ovum has an enviable and hard-earned reputation as a provider of telecoms consult-

ing services. Our consult ing customers tell us that, above all else, it is Ovum's industry

knowledge and at tention to detail that puts us ahead of our competitors. This is

directly related to the expertise of our consultants and analysts, and the project and

research methodologies we use. We work across the globe with business leaders of

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governments and industry regulators. We hope that this analysis wil l help you make

informed and imaginative business decisions. If you have fur ther requirements,

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