A POS in Your Pocket, a Boost for Local Retailers

By David Delony - September 10, 2012 | Tickers: DFS, EBAY, INTU, MA, V | 0 Comments

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One of the great things about living in a college town in the Pacific Northwest is the wide variety of quirky local shops and businesses to patronize if you get tired of bland corporate offerings. One thing that's not so great about them is paying for that new used book or that cup of coffee.

Even though many of these mom-and-pop stores have joined the 21st century and do take your debit or credit card, it's often an expensive proposition for them thanks to fees charged by Mastercard (NYSE: MA) and Visa (NYSE: V), which they have to pass on to their patrons.

One convenience store near my house, for example, only accepts cards for transactions of more than $2.00. It can be a little embarrassing and annoying to have to pick out another snack to go with my candy bar, not to mention what the extra calories will do to my health. I'm not exactly thin as it is.

Douglas Ehrman, another Fool blogger, noted that some major retailers were suing the major credit card companies over their fees in his own post on mobile payments. One possible settlement is charging a fee to credit card users for each transaction, which would make paying with plastic even more expensive.

Large chain stores like Wal-Mart can amortize the fees (though they direct debit card users to use their PINs instead of their signatures, bypassing them) across its many stores around the country, letting customers put even a pack of gum on plastic. Smaller businesses either must have a threshold mentioned previously or simply avoid cards altogether.

Fortunately, there is hope for local retailers in the form of mobile payment processors. One newcomer, Square, has just inked a deal with AT&T to sell its card readers in its mobile stores. The scanner attaches to the iPhone and turns it into a mobile POS system. Square gets a cut of 2.75 percent for each transaction on the company's free plan, or customers can pay $275 per month and keep every penny.

Square's website also promises anyone who signs up a free card reader. Though the user has to have an iPhone for it to work, the cost isn't too bad. A POS (Point Of Sale, business-speak for cash register) system, even though it's designed to be used for years, can represent a substantial cost for a local business that's just starting up, compared with a smartphone. Square also allows businesses like Starbucks to scan their customer's smartphones and use them for payment instead of having them dig out their cards. Wal-Mart is also testing a similar function where customers scan their iPhones at self-checkout counters.

Another major player in this space is Intuit (NASDAQ: INTU). In addition to its Quicken and QuickBooks software, Intuit also has a card reader and an app that integrates with QuickBooks. The company turned the accounting world on its ear with QuickBooks, offering powerful accounting software to small businesses. The company could be poised to do it again with mobile payments, even if Intuit's sales seem very seasonal, peaking in April of each year. (Three guesses as to why.)

PayPal, which is owned by eBay (NASDAQ: EBAY) has also recently introduced mobile payments and a mobile card reader. PayPal's revenue grew by 26 percent year-over-year in the second quarter. With the rise of mobile payments, an established player like PayPal could expect to do well, especially since eBay is partnering with Discover (NYSE: DFS) to allow PayPal users to pay in brick-and-mortar stores in addition to on the Web. Discover will actually handle the processing, but will offer PayPal as an option to customers in stores that have the system installed.

(PayPal will have to do something about its customer service. It's notorious for freezing customer accounts at the drop of a hat, claiming possible fraud. It will have to act less like a monopoly in the mobile payment space now that it has some real competition.)

Even established companies like Visa and Mastercard are getting in the game. Mastercard announced that it is teaming up with Deutsche Telekom to introduce a digital wallet solution in Europe that will allow users to swipe their phones in stores. Visa has been named the top mobile payment provider in a new report by Javelin Strategy and Research, with 15 percent of the market. Visa is planning to launch its own mobile payment app later this year.

With profits of $3.6 billion for Visa, $2.2 billion for Discover and $1.9 billion for MasterCard last year, don't cut up your cards just yet.

Mobile payments are an example of what Clayton Christensen calls a "disruptive innovation." Purveyors of full-featured POS systems might scoff at them, but by serving markets that don't need advanced features, like a used bookstore I decided to check out one day that used what looked like Square's system, the makers could scale up and unseat the major card companies in the future if they don't adapt.

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