The Mobile POS Opportunity for European Acquirers

Privileged

The Mobile POS Opportunity

for European Acquirers

4 April 2012

PRIVILEGED

Mobile POS has the potential to unlock millions of new merchants and drive new revenues.

Acquirers should act to own this business on their terms as mobile POS could be a threat.

Summary Overview

1 Mobile POS Opportunity for European Acquirers

What can mobile POS do for acquirers?

• Mobile tools for card acceptance which operate on common

mobile devices (i.e., smartphones and tablets)

• Usually includes a low cost card reader (with magnetic stripe,

chip, or chip-and-PIN capability) and mobile app

• Processing services may be delivered through a payment

facilitator (aggregator) or traditional acquiring model

• Includes standalone solutions and bespoke applications

integrated to retailers’ existing back office systems

+ Expands the overall acceptance market by enabling acceptance

of “micro-merchants” – a truly new-to-card segment

+ Creates cross-sale opportunities for existing merchants (such as

larger merchants looking to complement traditional systems)

+ Powerful, multi-functional mobile devices enable new

opportunities for value-added services

+ Creates a business case to think about distribution strategy and

business processes (e.g., sign-up, servicing) more innovatively

+ Provides acquirers with a runway to compete in the broader

mobile commerce world

What is “mobile POS”?

iZettle mobile POS

Square Register tablet application

‒ Not well suited for conventional distribution and sign-up practices

‒ Lowers barriers to entry for new acquiring service providers (i.e.,

PSPs could win small merchants using innovative mobile POS)

‒ Could disrupt terminal rental revenue streams

‒ Increases complexity of the POS systems environment

Why should acquirers worry about mobile POS?

PRIVILEGED

Mobile POS has gained impressive traction in North America over the past 18 months and

providers are migrating to Europe. Europe will also see many homegrown solutions.

Current Situation


Notable Mobile POS Providers in the Americas Emerging Mobile POS Providers in Europe

CardpayUK

• Square has signed over 1 million

users since its launch in May 2010

• In combination, the top mobile POS

offerings have expanded the U.S.

terminal estate by 15% to 20%

• Over two-thirds of the top-50 U.S.

acquirers now offer mobile POS

• Six months after its

public launch in late

2011, iZettle expanded

the Swedish POS

market by 12.5%

• Big retailers like The

Apple Store have adopted

Ingenico’s up market

iSMP chip-and-PIN reader

sleeve for the iPhone

http://www.tsys.com/index.cfm

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Numerous barriers limit deeper penetration of traditional merchant accounts. Mobile POS,

if accompanied by the appropriate processes, could solve many of these impediments.

Current Situation

Source: MasterCard, First Annapolis Consulting 3 Mobile POS Opportunity for European Acquirers

Tra

dit

ion

al

Pain

Po

ints

for

Merc

han

ts

Tra

dit

ion

al

Pain

Po

ints

for

Acq

uir

ers

Buy POS

Solution

Register for

Acquiring

Accept

Payments

Process

Payments Funding CRM

• High cost of

hardware

• Complex

integrations

with the ePOS

• Cumbersome

application and

adjudication

process

• High rates of denial

• Receipt required

(today - paper)

• PIN validation

(especially

encrypted PED

requirement)

• Difficult to access

alternative schemes

at the POS

• High

acceptance

costs

• Infrastructure

requirements

• Delayed

settlement

• Low quality of

reporting and

reconciliation

data/tools

• High cost of

hardware

procurement,

distribution, and

management

• High cost of

merchant

acquisition

• Manual application,

adjudication, and

boarding

• Blunt, up-front risk

policies & tools

• Burdensome

KYC/AML rules

• Bespoke

legacy

telecoms and

platform front-

ends are

difficult to adapt

• Chargeback risk • Legacy systems

not enabled for

automated

customer support

• Legacy

environments

make

deployment of

value-added

services difficult Red text indicates potential process

improvements under a well-

designed mobile POS solution

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Product Construct


Mobile POS solutions are relevant across the merchant market, from micro

to large corporate, although the needs and use cases vary by segment.

• As long as cost structure is

scalable the masses can be

profitable. This means driving

customer acquisition in a fully

automated fashion

• Even a €250 acquisition cost

(fractions of a normal acquiring

merchant) can kill profitability

• Requires business process

innovation to serve profitably

• Similar buying criteria and

usage behavior as individuals

(i.e., consumer-style marketing,

fully automated boarding, etc.)

• If costs are fixed, margins

scale very well for these

merchants which can have

significant transacting upside

• Requires business process

innovation to serve profitably

• Tablets + Apps substantially

reduces barriers to ePOS

adoption, a decision then

impacting choice of payment

acceptance device

• Mobile POS could cannibalize

traditional terminal revenues

• PSPs specializing in mobile

POS become competitors

• Mobile POS opens a window

into front-end services provided

to larger merchants (acquirers

can potentially reclaim lost

front-end position)

• Enabling new use cases

creates retention value for

acquirers or other legacy

providers

• A secondary/

complementary POS

• Enables new use

cases: queue

busting, floating

POS, out-of-store

events, field

service workers

• Modest cannibalization of

traditional POS

hardware/revenues (but only

modest, can’t handle large

volumes)

• Security is critical to this segment

• Mobile as

primary POS

• May only sell

occasionally,

so low/no fixed

costs are

important

• Generally new-to-cards because

POS cost too high or sign-up

process too burdensome

Co

mp

eti

tive

Imp

lic

ati

on

s

for

Ac

qu

ire

rs

Mo

bil

e P

OS

Va

lue

Pro

po

sit

ion

for

Se

gm

en

t

• Card acceptance made easy

• P2P individuals respond to a

micro-merchant proposition

• May use

mobile as

primary POS,

but more likely

it’s secondary

alongside a

traditional POS

• Sweet spot for tablet ePOS with

store management functionality

• Motivated by both cost and

functionality; compatibility with

legacy systems is less important

Mobile POS at Various Types of Merchants

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Mobile POS is just one in a range of mobile-enabled selling and transacting applications.

Product Construct


Revel Systems Cloud-

Based ePOS for iPad

PayPal Mobile

Express Checkout Square Card Case

app for iPhone

Mobile POS Product Spectrum

iZettle app

for iPhone

Global Bay iPad Retailing

and CRM apps

Cloud-Based ePOS,

Mobile Hardware (Lower-Tier ePOS)

Mobile Enabled

Distance Selling E-wallets and

Merchant Offers

Basic Card

Acceptance

Mobile CRM Apps (Compatible with

Legacy ePOS/ERP)

Order

Taking

Apps

Tesco Grocery app

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Technology (Adaptability,

Reliability,

Security)

Product

Merchandising (simple, easy,

bundled product)

Marketing (new channels,

etc.)

Automated

Operations

Large

Enterprises 4 1 1 1 SME

Retailers 2 2 2 2 Micro

Merchants 1 4 4 4

Product Construct


Mobile POS requires a new technical infrastructure …

Card Reader

Hardware

Software

App

Gateway &

Middleware

Acquiring

Services

Mobile POS Technology Mobile POS Key Success Factors

1 4 Less Important More Important

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Flexible merchant hierarchies

Online/mobile servicing

Product Construct


… Of equal or greater importance, however, is that serving micro-merchants also requires

extensive process and marketing innovation relative to the legacy acquiring business.

Technology (Adaptability,

Reliability,

Security)

Product

Merchandising (simple, easy,

bundled product)

Marketing (new channels,

etc.)

Automated

Operations

Large

Enterprises 4 1 1 1 SME

Retailers 2 2 2 2 Micro

Merchants 1 4 4 4 1 4 Less Important More Important

Process Innovations for

Micro-merchant Acquiring

Deferred underwriting/regulatory checks

(back-end risk management)

Automated boarding

Online/mobile application, simple

sign-up

Simple pricing, bundled service

Consumer-style / mass marketing,

low acquisition cost channels

Mobile POS Success Factors

and Merchant Buying Criteria

Based on First Annapolis Surveys

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Product Construct


Micro-merchants have extremely low lifetime values, which limits the scale of the revenue

opportunity and compels suppliers to develop a low-cost acquisition and servicing models.

Millions of POS

1 mil 2 mil 3 mil 4 mil 5 mil

An

nu

al

Vo

lum

e

per

Acco

un

t

€1,000 €10 €20 €30 €40 €50

€2,000 €20 €40 €60 €80 €100

€3,000 €30 €60 €90 €120 €150

€5,000 €50 €100 €150 €200 €250

€10,000 €100 €200 €300 €400 €500

€20,000 €200 €400 €600 €800 €1,000

Today*

*If you apply Square’s current position

(1 mil users, €3B annualized volume,

1% revenue margin)

Potential?

If you assume strong unit

demand and continued

growth in account activity

& usage levels

Source: Square press releases, First Annapolis estimates

Mobile POS Revenue Pool Potential

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Product Construct


Mobile POS is just one more indicator that bank-centric sign-up processes in the micro-

merchant segment are not appropriate to the profit and risk dynamics of the segment.

Both card schemes and regulators have shown willingness to think about micro-merchants differently,

requiring less robust regulatory processes.

• KYC and AML requirements increase acquisition

costs and reduce ease of sign up significantly

which is not consistent with the risk profile of

processing for micro-merchants (if well

controlled)

• Traditional acquiring applications often cover too

many products/services, rather than focusing on

the minimum information requirements for the

service requested

• Application requirements are typically not well

suited to start-up or informal businesses (trading

history, business registration, etc.)

• Paper + post is not an easy way of doing

business; fully digital, online, and automated is.

Note: A “Field” is “Last Name”, “First Name”, etc.

10 14 13

90

12

27 27

238

Number of Fields Required on

Typical Merchant Application

Traditional

Bank Acquirer

Key

Full Merchant Application

Individual/Basic Application

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Product Construct


Various product constructs are now live in Europe; more are coming soon.

SEPA requirements do not prohibit mobile POS solutions.

Card Reader

Technology

Authentication

Method

Secured

Trans. Pros Cons EU Example

Magnetic

Stripe

Reader

CVV X • Quick product roll-out

• Improves user experience

• Treated as e-commerce

transaction; higher interchange

and chargeback liability

incurred

(Germany / Pan-Europe)

Chip

Reader

Chip-and-PIN ✔

• Multi-function reader supports

broad enterprise-centric

functionality

• Meets current rules

• Hardware is costly due to

development, certification, and

manufacture

(Iceland / UK)

Chip-and-Sign X • Meets EMV requirements for

chip card validation

• Relatively cheap cost

• Less secure than PIN

• Merchants exposed to

chargeback liability due to lack

of PIN validation

(Sweden / EU)

None

(key entry)

CVV / Secure

Code X

• Simple and cheap for

merchant to attain (e.g.,

download free application)

• Merchants must verify 3D-

Secure to gain chargeback

protection

• Poor user experience

(UK / EU)

Typical Mobile POS Product Constructs

Recent Mobile EMV

Reader Introductions

Source: Company disclosures, market observations

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Market Opportunity


We estimate that mobile POS could increase the total POS in the market by 40%,

potentially cannibalizing 5% of traditional POS hardware/software along the way

(albeit, much of the 40% will be micro, low-volume, low-revenue POS).

0 5000 10000 15000 20000 25000 30000 35000 40000

Acceptance After Mobile POS (2020)

Incremental Demand Created by Mobile POS

Traditional Acceptance Solutions (Today)

Total Enterprises

Registered,

Businesses

Unregistered

Businesses

Already

Accept

Potential to

Accept Low or No Potential to Accept

(+c. 40% incremental growth in

POS from mobile POS, 5%

cannibalization of traditional POS)

Size Potential of Mobile (shown as number of POS, in millions)

Comments

• 29 million registered businesses in the

EU; Circa 20 million unregistered

businesses in the EU

• Noting that some of these enterprises are

insubstantial shells

• 9.5 mil F2F POS today in Europe

• c. 4 million potential additional POS

based on today’s POS product

• Remaining businesses unlikely to accept

cards based on today’s POS product (i.e.,

B2B, etc.)

• We estimate that Mobile POS could add 5

million incremental POS to the market

(while cannibalizing 0.5 traditional

terminals)

• 3 million of these POS would come from

unlikely to accept (i.e., unregistered)

• Projected 2020:

• 11.5 mil traditional POS

• 5.5 mil mobile POS

• (excludes virtual/e-comm POS)

Source: First Annapolis estimates

Note: Square and iZettle have

both expanded their POS market

by 12.5% with early adoption

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Market Opportunity


Available market fundamentals are somewhat divergent. On the one hand smart phone

penetration is key (mature markets); on the other hand, the substitution of traditional POS is likely

to be greater in less established card markets.

Italy

France

Spain Germany

UK

Poland

Portugal

Holland

Czech Republic

Denmark

Hungary

Belgium

Romania

Sweden

Bulgaria

Austria

Slovakia

Finland

Lithuania Ireland

Slovenia

Latvia

Estonia

0.0

1.0

2.0

3.0

0.0 0.3 0.6

Card Penetration Payment Cards

per Capita

Smartphone

Penetration Smartphones

per Capita Size of the Bubble Indicates

Addressable Merchants in

Traditionally Card-Accepting

Sectors (not number of card-

accepting merchants)

European Market Landscape Based on

Card and Smartphone Penetration Mobile POS can unlock

micromerchants in

developed markets

with high card and

smartphone penetration

The low cost of mobile

POS can be a catalyst

for first-round POS

market development in

underdeveloped areas

Source: Eurostat, Google/IPSOS, Tomi Ahonen,

First Annapolis estimates

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The End Game

• Consumer and merchant-led

ecosystems converge. Access to the

merchant becomes critical for

consumer-facing providers while

consumer ecosystem relevance

becomes important to merchant

payment service providers.

• Control of the merchant POS and/or

consumer wallet are strategic assets

towards revenue pools beyond

payments.

Strategic Implications


Mobile POS is purely an acceptance play today, but the product is also one step in the

evolution towards convergence of acceptance and consumer mobile payment technologies.

Evolution of the Mobile Commerce Ecosystem

Today: enabling

mobile devices as

basic card terminals

expands the

merchant market

Tomorrow: cloud-

based technology,

new hardware

options shakes up

the ePOS market

Future: Mobile commerce

acceptance ecosystem

converges with consumer wallets

(offers, marketing) . The owner

of the POS software is potentially

well positioned for this

convergence

Today: banks broadly

roll out mobile banking

tools and test mobile

wallets

Potential Future: Wallet owners potentially

compete as merchant offer ecosystems and

payment schemes

Acceptance

Evolution

Consumer

Account/Wallet

Evolution

Tomorrow: Mobile platforms

(Google, Apple, etc.),

payment schemes (Visa, MC,

PayPal, etc.), and MNOs

compete to own wallet

PRIVILEGED

Mobile POS could disrupt (somewhat) the traditional payment acceptance value chain.



Mobile POS Rationale Positioning Advantages /

Disadvantages

Current &

Future Players Potential Implications

Acquirers Maintaining ownership of the

merchant account with a

competitive, bundled POS offering

Cross-sell opportunities into current and

target customer base

– Aged platforms, slow to adapt to front-end

technology

– Not well adapted to micro merchants

• Unique opportunity to move

market share

PSPs

& OEMs Can lead the charge in Mobile POS

h/w and s/w development

Strong POS technical abilities

– Not experienced at bundling acquiring

service or small merchant distribution

(orient around wholesale channels)

• PSP / OEM success in Mobile

POS will bode well for Acquirers

who are aligned with these

providers (e.g., referral, white-

label)

Payment

Schemes

Provide an extension of current

payment solutions (e.g., mobile

wallet), with closed-loop potential

Established reputation, global footprint, &

network

– Channel conflict with existing merchant

services members

• Payment schemes (existing and

emerging) form closed loop

networks, requiring Acquirer buy-

in and/or compliance obligations

Specialists

& Startups

Caters to specific merchant niches

(e.g., traders) that are not satisfied

by traditional providers

Ability and flexibility to focus on serving

market niches / gaps

Quick sign-up / sales process

– Limited distribution assets

• Specialists beat Acquirers to

micro-merchant base

Mobile

Network

Operators

Evolve to provide a more

comprehensive set of business

services beyond data networks

Mass marketing and distribution assets

– Limited payment acceptance experience

• MNOs displace acquirer’s cross-

sell influence on the merchant

http://www.hsbc.com/1/2/home

http://www.orange.co.uk/

http://www.vodafone.co.uk/

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Acquirers have several options for developing a mobile POS solution.

The right approach, and the right partner, should be tailored for your specific situation.



Solution

Delivery

Options

Re-sell a third-

party solution

Develop a

new product

White label an

existing solution

Integrate a

new solution

Potential

Partners

Software

Developers

Hardware OEMs

Integrated Solution

Providers

PSPs

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We believe that all acquirers should have a mobile POS strategy

(acknowledging that this strategy could be quite different among acquirers).

Set a clear strategy

• Explore various business model options to answer the

question, “What role, if any, do we want to play in the

mobile POS value chain?”

Make a product development decision • Answer the in-house versus outsource question.

• Find a technical solution partner

Develop a marketing strategy,

Invest in supporting business processes

• Into which segments will you sell the product?

• How will you merchandise the product and tailor it to

targeted segments?

• How will you support the product?

Develop new distribution channels • Find new distribution partners and channels

• Develop internal teams and resources to support

1

Basic Strategy Steps Commentary

2

3

4

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First Annapolis can help to analyze the mobile POS market, to develop your strategy,

and to support implementation to get you into the market.

Next Steps


Opportunity

Assessment

Strategy

Development

Go-to-Market

Support

Review & Improve

Operational Processes

Establish Partnerships

Benchmark the Competition

Analyze Your Strengths and

Weaknesses and the Market

Opportunity and Threats

Select Vendors

Product Landscape

Market Sizing

Product / Proposition Design

Marketing Strategy

Develop the Business Case

Customer Needs Analysis

Distribution Strategy

Pricing Strategy

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About First Annapolis


EXPERIENCED COMMITTED

Baltimore-Washington | Amsterdam

Proven

• Founded in 1991

• Global HQ in Washington DC;

European HQ in Amsterdam

Professional Expertise

• Focus exclusively on payments

• 70+ billing professionals

• Balanced combination of industry,

functional, and consulting experience

Market Leadership

• Advise market leaders:

‒ Financial institutions

‒ Payment schemes

‒ Transaction processors

‒ Technology providers

‒ Retailers and leading global brands

Acceptance & Acquiring

Credit Issuing

Deposit Access

Commercial Payments

Mobile & Alternative Payments

Merg

ers

& A

cq

uis

ition

s

Man

ag

em

en

t Co

nsu

lting

So

urc

ing

& P

artn

ers

hip

s

Service Offerings

Representative Client Coverage

Company Summary

Fu

ll Serv

ice A

dvis

ory

Su

pp

ort

OBJECTIVE

FA Offices Representative Clients

PRIVILEGED Mobile POS Opportunity for European Acquirers 19

Contact Us

First Annapolis Consulting | M&A Advisory Services

Joel Van Arsdale, Partner [email protected]

+31 20 530 0363

900 Elkridge Landing Road, Suite 400

Linthicum, Maryland 21090

USA

Phone: +1 410 855 8500

Fax: +1 410 855 8599

http://www.firstannapolis.com

Keizersgracht 313-I

1016EE Amsterdam

The Netherlands

Phone: +31 20 530 0360

Fax: +31 20 530 0369

Ben Brown, Associate [email protected]

+31 20 530 0364

Mandy Giacchetto, Associate [email protected]

+31 20 530 0364

The Mobile POS Opportunity for European Acquirers

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