How the mPOS business model expands beyond payments acceptance

As pure payments acceptance becomes a commodity for smaller merchants, most mobile point-of-sale (mPOS) strategies are focused on value-added services to maintain high growth.

Even a couple of years ago, asking stallholders at the local farmers market or Girl scouts selling cookies to take payments by card was almost unheard of. This has changed in many countries around the world as mPOS makes card acceptance solutions widely available to small and micro merchants that have been underserved by traditional payments acceptance providers. mPOS solutions – enabled by a mobile card reader wirelessly connected to a smartphone or tablet – hold three key benefits for merchants:

• Quick on-boarding:
  Merchants can instantly on-board themselves and have their card reader delivered within a few days.
• Low initial costs and transparent pricing:
  Blended transaction fees are free of monthly fixed changes and multi-year contracts.
• Value-added services: 
  mPOS platforms are easy to understand and manage, allowing merchants to add other services beyond payments acceptance, such as bookkeeping or an ecommerce shop.

This clear value proposition, and the global ongoing transition from cash to electronic payments, is driving the mPOS boom. Global annual mPOS transactions are predicted to grow from 28 billion transactions in 2018 to 87 billion by 2023 – an annual average growth rate (CAGR) of over 25% (Juniper Research, 2018).¹

Automating value-added services will boost profitability

Achieving profitability in the micro and small merchant segment requires payments providers to automate as many processes as possible. mPOS providers, unburdened by legacy systems, have built systems and processes that almost fully automate on-boarding (including know your customer), customer service and fulfillment, both to keep costs down and offer a superior experience for merchants. Instead of the usual process that involves significant paperwork and several days, new mPOS merchants are on-boarded almost instantly.

With card readers generally sold below cost to fuel growth, the main source of revenue for mPOS providers comes via payments transactions fees. By typically acting as a payments facilitator, providers charge a mark-up on top of acquiring fees. This is usually in the form of a simple, volume-based transactions fee for debit and credit cards without any fixed fees per transaction or per month. To date, these volume-based fees have been relatively high, but, as in other segments of the payments industry, they are coming under pressure. Our analysis of the UK’s competitive mPOS market revealed an ongoing erosion of average merchant discount rates (MDR) which have fallen from around 2.75% in 2012 to approximately 1.7% in 2019. With this decline expected to continue around the world (depending on the maturity of individual geographies), the need to offer comprehensive value-added services is becoming increasingly important if payments providers are to compensate for declining revenues from the pure payments acceptance business.

Successful transformation requires rethinking the platform strategy

Payments acceptance will remain at the heart of mPOS, but its relevance to payments providers is expected to shift as pure payments acceptance for smaller merchants becomes a commodity. More mPOS providers are moving toward offering the value-added services that support merchants, beyond payments, to run successful businesses. These services include:

In a traditional set-up, these products and services are typically provided by different providers and, therefore, are not (or only with effort) interoperable. mPOS providers can pool data between the offerings and develop new and better products and services.  For example, a highly automated risk-scoring process for merchant financing based on transactional data can allow for a faster credit granting process, compared to traditional Small and Medium-Sized Enterprise (SME) financing options.

Offering value-added services can also benefit mPOS providers by:

1. Increasing the stickiness of merchants
2. Allowing for product and service differentiation to mitigate pricing commoditization
3. Cross-selling products to an existing merchant base

With this in mind, most mPOS providers, depending on their maturity and level of success, are transitioning from being pure payments players to becoming a full-SME solution provider. But, a successful transformation requires a diligent platform strategy. Players will need to decide whether to make, buy or partner to acquire the capabilities and technologies they need to offer the value-added services merchants demand. While less complex services such as inventory management software might be built in-house, other products may be best obtained through M&A or partnerships. 

A blueprint for adoption across payments?

mPOS providers have enjoyed fast growth within the small and micro merchant segment, almost undisturbed by industry incumbents. And, free from the constraints of legacy systems, these providers have developed new merchant acceptance solutions that include feature-rich ecosystems centered around payments. In a market environment where fees from transaction processing come under pressure, a strategic focus on value-added services will allow providers to continue their high growth.

The one-stop SME solution being developed by mPOS providers is a model that may be a blueprint for traditional acquirers faced with similar challenges. But, it also highlights the market entry barriers in the micro and small merchant segment for traditional acquirers, and raises concerns that mPOS providers wanting to accompany high-growth merchants on their journey are increasingly targeting larger merchants too.

This article originally appeared in our #payments newsletter - volume 24 (pdf).