The EMV POS reader market is commoditized

1600-2100 Transaction Approved

The EMV POS reader market is commoditized.

The right balance among the components of the Total Cost of Ownership is changing as well.

POS producers have long lived with a market roughly shared among the three or four major producers. Competition pressures were mainly caused by the introduction of new devices (smaller, better integrated with the cash register machines), by the card industry itself (with the introduction of new card technologies – EMV, NFC and more recently mobile and e-payments schemes). Additionally, it costs so much to change the POS management infrastructure, that once they get a new customer (bank or not), they kept it for many years. And the big customers maintained for years a multi-suppliers policy (2 or more POS suppliers, depending on volumes and geographic reach), in which each of the big POS manufacturers fight for the biggest share, knowing that they could rarely reach more than 70 % of the installed base of a single customer.

Nowadays, with the arrival of the new entrants, from Asia, which are reaching a critical mass on their own local markets, the situation is changing. The traditional players are under margin pressures, due to the relative low cost of these new players, and this is changing the overall cost and operating models. The new model structure is not based anymore on having robust machines, with a reduced repairing cost, or to reduce the cost of call centers and of field technicians, but having instead equipment which can easily being replaced instead of being repaired. We are getting closer to a “prêt-à-porter” POS marketplace.

The acceptance / merchant acquiring business used to concentrate its costs reduction efforts on:

  • Ave Lifetime of Terminals (years)
  • Cost of Field Technician
  • Cost of Call Center staff
  • On site installations per year
  • Mean time between failures
  • Cost of fully repairing a terminal
  • Mean time between calls
  • Cost of Terminal

Some POS manufacturers’ relatively new competitors, reducing considerably the costs of the terminals, have changed this logic and have introduced a significant new factor: the number of terminals replaced instead of repaired.
As a rule of thumb, if the average cost of repairing a terminal (spare parts plus staff and logistics) is higher than the cost of remotely destroying the existing terminal and replacing it by mail with a new one, it is worth analyzing the existing model. Of course, the costs of the help desk can increase (due to more phone calls and complaints), but not enough to take that margin. Merchants will have to be aware of this change, and should receive quickly the new terminal; otherwise they will not be happy with the new model and can change to another supplier. In other words, changing the operating model is more than simply buying the cheapest terminals, but at the end the costs savings worth the conversion.

In case the reader would like to compare these figures with its own, in these calculations, were considered as constant values:

  • Ave annual cost of field technicians =52 KEuros
  • Ave annual cost for call center staff = 31 KEuros

In the new model, with POS equipment costing less, the influence of each factor is changing.
Traditional priorities, those still important in the old and the new models:

  • Cost FTE Field Technician
  • Cost FTE Call Center
  • Cost of Terminal (euros)
  • Ave Lifetime of Terminals (years)
  • MTBC: Mean Time Between Calls
  • MTBF: Mean Time Between Failures

Factors with less weight:

  • Cost of Fully Repair a terminal
  • On site installations per year
  • Terminal replaced instead of repaired

New decisive cost components:

  • Cost of preparing, packaging and mailing a POS
  • Stock management costs

In other words, instead of repairing a terminal, the new low cost POS model will priorities the stock management cost and the cost of preparing and sending a new POS, instead of cost of technicians, it will be the cost of the call center. And this is a potential weak point in this low cost model: will the attrition rate of merchants will increase or not?
Considering that all these POS are basically built on the same low cost factories, the main difference between one supplier and the other are, of course, the design itself and the quality of the electronic parts used, but the major factors are the marketing expenses, the sales costs and the margins of the company.
Main facts to keep in mind:

  • When deciding to switch from your POS suppliers to a low cost solution, think about modifying your operating model as well, and the organization to support them.
  • Be prepared to support higher costs during the migration period (to support a dual infrastructure, the old and the new one).
  • The economies and cost saving are at the end of the tunnel, it will take a while to get there (depends on how many POS do you have in the field).
  • The good solution is not always the cheapest equipment; there is a balance between terminal cost and total cost of ownership. Do not underestimate that, you can have short term savings that produce long term increase in operating expenses.
  • Analyze it well before changing, consider all these factors, do not trust manufacturers’ figures, these are always overestimated, think about your current organization, do you have the right managers, the right teams, how to prepare all of them for the changes.

Be also prepared for merchants complaining about the new equipment. Even if these POS are not so bad, you should try to differentiate between the real problems, technical, and the complaints simply associate to the changes. Merchants are used to call, a technician arrives and takes care of the terminal, now they will have to disconnect the POS, send it to a mail address, receive the new one, and connect it. That’s not their main activity, that’s not their priority. For them, a POS is simply an additional payment method; it is not their main business. They can complain and think about changing of card payments provider. Educate them, stimulate them and give them time to change habits.

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