Will Mobile Payment Companies Expand Into SMB Marketing?

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Square, the mobile POS (point-of-sale) and payments company founded by Twitter co-founder Jack Dorsey, is going great guns. Growth has been stellar. The company is now on pace to move more than $5 billion per year in transactions.  Naturally, this has started to attract competition, both from incumbent players and from startups. Both PayPal and Intuit are offering credit card readers that can jack into Android and iOS devices and that undercut Square’s 2.75% transaction fees. The latest entrant to take on Square? PayAnywhere, which is about as easy to sign up for, has a similarly simple UI, and actually charges lower transaction fees.

Most importantly, both Square and PayAnywhere provide merchants with funds from the conducted transactions far faster than legacy players. In other words, they are shrinking the “float” from days to hours. For mom-and-pops this is a total game changer because not having to wait those extra days can add percentage points to their bottom lines over time and makes it much easier to conduct business. This is only the early days of the new POS era for small merchants and I believe that the percentages charged will come down even faster as more and more companies compete on what are rapidly becoming similar products. All of the new entrants radically improve over older, legacy-style POS systems. The float will necessarily be shrunk further and further. Mom-and-pops will get more in their pockets.

Where am I going with this? I actually think that transaction processing will become only a moderately profitable business. Where the big POS guys will make money is in value-added marketing services. Square has already started to add in loyalty programs that allow merchants to award discounts based on credit card usage. It’s only a matter of time before the digital loyalty card startups (like Belly, Stampt, and ShopKick) start to tap into the POS APIs to enable tight integration between their loyalty efforts and the POS vendors.

It’s not all that hard because they are both operating on the same computer platform (iOS or Android). This is a tremendous jump from the old days when POS was traditionally either on a locked-down PC or on a specialized black box (like we still see in many places) that has circuits designed only to handle credit card and debit card transactions. By merging so many functions that previously lived in different buckets and putting them into the same digital formfactor, siloes are more easily broken. Further, local merchant users of these platforms have grown accustomed to apps interacting with each other on a regular basis.

The various marketing and POS platforms, too, have done an excellent job of using the various public authentication schema such as OAuth to make it much easier to authenticate and sign-in users. This both boosts security and accelerates adoption but enhancing ease-of-use.

I wrote a while back about the coming loyalty program shakeout. I don’t think we’ll see as radical a shakeout in new-style POS products. But I think we will see them face declining margins and a business model shift to charging users for additional services such as location-based marketing, loyalty programs, and business analytics. Naturally, the POS platforms with the most users will make the most money in what will become a bit of an app store model. But there’s plenty of money to be had because most mom-and-pop users of POS systems are extremely new to digital marketing and can shift plenty of money from dead trees and dwindling mediums over into the new realm of bits and bytes.

Alex Salkever is an executive at a cloud computing company and a former technology editor of BusinessWeek.com. The views expressed in his column are his own and not those of his employer. His Personal Fight column appears Wednesdays on Street Fight.


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