Proliferating smart-phone terminals: Friend or foe to payment pros?

A new report from Mercator Advisory Group predicts mobile phone-based card acceptance is going to skyrocket in the coming years. According to George Peabody, the report's author and Director of Mercator Advisory Group's Emerging Technologies Advisory Service, over 1.4 million smart phone-based payment terminals will be in use by 2014.

Peabody could not pinpoint precisely how many smart phones are used as terminals today, but he said it is "a very small base" numbering well under 100,000.

Cheapness an enticement

Peabody said many merchants who currently use "purpose-built" wireless terminals will be lured into switching to smart-phone terminals primarily because they tend to be much cheaper, particularly for those who already own smart phones and need only download payment acceptance software to begin using them as POS terminals.

Peabody said the advantage of purpose-built terminals is that they are "a little more rugged than a smart phone. Smart phones are consumer grade; they're meant to be dropped but not repeatedly. The purpose-built ones I'd expect to be a little more robust. But still, for a lot of merchants that's not a significant difference."

He added that smart phones are as efficient at processing card transactions as conventional terminals. "The amount of data that has to go though a point of sale transaction is infinitesimally small compared to downloading a YouTube video on a mobile phone," he said. "We've got broadband wireless to do smart phones. It's not like it's a problem in terms of bandwidth."

Peabody also said the relatively low cost of smart-phone terminals is opening up the card acceptance market to a number of new mobile merchants and that mobile phone software startups, as well as existing merchant services firms that have expanded into the mobile arena, are vying for their business.

Bundling a potential blow to status quo

He said that, while the requirement of a separate gateway provider with most mobile terminals opens the way for competition among ISOs, certain new terminal-and-gateway-in-one offerings might threaten the existing order.

"Every merchant needs a merchant account today, but there are now these newer offerings, like the new offering called Square, that have a different business model," Peabody said. "It's totally monolithic: the application, the reader, the fraud and risk management – it's all coming from Square. Now, that business may not make it. But it's pretty well backed."

Peabody reiterated that ISOs are going to get competition from the likes of Square, especially at the very low end of the market with the smallest merchants. "But if the ISO's got a focus in a particular market, has domain expertise and knows how to sell to that niche, they can be competitive," he said.

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