1 + 1 = $1 Trillion in Card Payments: The Gold Rush for Micro and Small Business (July 2013)
The surge in new mPOS tools and e-commerce options for micro and small businesses represents a significant growth opportunity to a diverse array of payments industry players.
By Kate Fitzgerald, Emerging Payments Editor
Local dog-sitters, dry cleaners and doughnut shops could become as important as gold nuggets to payments industry providers that recognize their potential to expand the electronic payments market significantly through the growth of mobile POS acceptance devices and e-commerce channels.
While such tiny businesses don’t generate tremendous annual revenue, the surge in new mPOS options could drive up to $1.1 trillion in additional card payments annually and increase payment card acceptance by 20 million U.S. merchants over the next few years if eligible firms embrace card payments, according to Javelin Strategy & Research.
Though micro and small businesses account for only a small part of the overall payments industry, companies are eager to maximize the growth opportunity they represent, analysts say. From Square Inc.’s new online marketplace for micro-merchants to a plethora of new tools from payment networks designed to smooth the path for small businesses to join the mPOS movement, all signs point to a bit of a gold rush to reach little businesses everywhere.
“The movement from merchants conducting face-to-face transactions to selling more online is definitely an important trend as merchants of all sizes operate in multiple channels more than ever before,” Marc Abbey, a partner with First Annapolis Consulting, tells Paybefore. “Consumers want to interact with merchants through mobile and desktop channels, and that desire affects the micro-merchant sector as well, which sees an opportunity to level the merchant playing field and compete in new areas for new customers.”
The ferocity of competition to equip small merchants with mPOS tools underscores the payment industry’s interest in this market, beginning with Square Inc.’s introduction in 2010 of its tiny mobile card reader that plugs into a smartphone, enabling merchants to accept any type of card payments for a fixed fee of 2.75 percent per transaction. Square sparked a host of imitators, ranging from PayPal Inc.’s PayPal Here to Fiserv Inc.’s SpotPay to Sweden-based iZettle, whose EMV-compatible mobile card reader is available in Mexico and seven European countries.
Despite the flurry of activity in the mPOS arena, the long-term profitability from smaller merchants, including individuals and occasional sellers that conduct only a handful of transactions per year, remains unknown, Abbey says. “If you get too micro, it’s not profitable,” he notes. But the U.S. micro-merchant market altogether could amount to potential annual revenue of approximately $1 billion, according to Abbey. “That isn’t chump change, but it isn’t so huge,” he says. To see stronger growth, operators like Square will need to continue to increase transaction volume, including serving more and larger retailers, he suggests.
Expanding the Haul
Square appears to be exploring that strategy with Square Market, an online marketplace for its merchant customers it quietly launched in late June. Square Market provides easy connections for small businesses to a virtual storefront within Square’s Website with product photos, a business profile with contact information and links to sell products directly through Square Market using any payment card or Square. Square Market also offers merchants links to Twitter and tools for creating rewards programs, such as discounts for first-time visitors. Geared to small merchants that lack an online presence, Square Market also welcomes larger businesses that want to reach Square’s growing number of users.
Square Market opened with two dozen merchants for what participants say is a “soft launch.” Matthew Walton, owner of Los Angeles-based popcorn specialty maker Z Confections, is an early Square Market participant who previously accepted Square payments from suppliers and wholesalers and primarily sells his products through his Website. Since joining Square Market, Walton says he has racked up additional sales from new customers who are discovering his products solely through Square Market. “I’m definitely seeing an increase in sales since Square Market opened, although it’s early in the rollout and they haven’t really begun promoting it,” Walton says.
Many micro-merchants do not sell online today, but as their participation in online marketplaces that include well-entrenched players like eBay and Amazon grows, there’s a big opportunity for e-commerce in general to grow significantly, Rick Oglesby, a senior analyst with Aite Group, tells Paybefore. “With mobile devices making Internet connections available anywhere, there are many new ways to find and interact with consumers, creating opportunities for whole new types of commerce,” he says, adding that small businesses don’t generally own their own technology so they need to get it from service providers. That fact, coupled with small-business growth potential, primarily is what’s driving interest from large players.
Streamlining Card Acceptance
Payment networks are taking notice. However small the micro-merchant army may be compared with mega-retailers, equipping small merchants with card acceptance tools helps drive payment network revenue, Abbey notes. “Payment networks are interested in expansion of the system for accepting cards, and when these mPOS players succeed, it fulfills their growth objectives.” The effect of Square and its peers has expanded the card acceptance market in the U.S. by 10 to 12 percent in the last couple of years, if you count total merchants, Abbey says.
As part of that movement, Visa Inc. signed agreements with mPOS providers Roam, AnywhereCommerce, Miura Systems, iZettle, SumUP and SCCP Group’s Swiff to enable merchants of all sizes to accept Visa payments more easily through its Visa Ready Program. The program streamlines hardware and software testing and the approval process for mPOS technology, helping to speed adoption of electronic payments by companies targeting micro-merchants that today transact primarily in cash, Visa said. In certain countries, Visa can enable Visa Ready partners to directly connect to its network through the Visa POS Solutions platform or through CyberSource and Authorize.net, merchant platforms Visa acquired in 2010. “Even setting aside the fact that Visa is a Square investor, you can see by these moves that Visa has a strong interest in driving mPOS adoption everywhere,” Abbey says.
MasterCard rolled out its red carpet to small businesses this summer with a partnership inked with Web.com Group Inc. The deal centers on MasterCard’s MasterPass digital wallet, introduced earlier this year as a tool to help merchants accept cards through multiple channels and simplify the shopping experience for consumers, who need only register payment details once. MasterPass also aims to enable merchants to customize and differentiate their e-commerce offerings, according to MasterCard.
The new deal means MasterPass is now available to Web.com’s 3 million small-business customers at no extra charge beyond fees users pay to Web.com for Website design and management, search engine optimization, online marketing, social media and call center services, says Michael Cyr, MasterCard group executive, U.S. customer delivery. “Many small businesses are struggling to figure out the checkout process online and have opted for bare-bones approaches, but they want to accept all cards to maximize sales from all customers,” he tells Paybefore. “By bundling MasterPass into the basic Web.com offerings, we’re making it very easy for merchants to add a digital wallet to even the simplest e-commerce Website.”
American Express Co. with its Serve offering also is reaching more micro-merchants and the company recently intensified its efforts to “to bring on smaller merchants in larger numbers,” Edward Gilligan, American Express’ president, told analysts in June. He also noted that Square in particular has helped the company amass thousands of new micro-merchant customers. “The vast majority of [these] never accepted American Express before because they are micro-merchants, they are flea markets, they are farmer markets, they are spa technicians, they are plumbers coming to your home…and they’ve added a lot more merchants to our network,” Gilligan added.
Small businesses are gaining access to capabilities that historically only large businesses could afford. The growing array of options for micro- and small businesses to sell products and services for mobile and online channels suggests continued growth and innovation payments, Oglesby says. “When there are new types of buying and selling, there is a need for new types of payments.”