POS Systems Present Big Opportunities for Payment Providers

Just as smartphones are transforming consumer payments, tablets and other technology are transforming the merchant point-of-sale. Payment service providers are offering an array of new products that promise to reinvent the POS experience for merchants looking to boost sales and improve customer relevance. 

Large and small merchants are starting to change the traditional POS. San Francisco's Flywheel Coffee allows customers to pick up their cappuccinos using Square Register, a new digital POS system. Starbucks has also signed up with Square and has rolled out the new payment services across its 7,000 locations. Nordstrom is using mobile POS devices to let their staff engage customers anywhere in the store.

For traditional payment providers, the strategic stakes are high. The recent adoption of digital POS systems shows there's no turning back to the old-fashioned cash register.  "Two or three weeks ago we placed our very last cash register order," noted Urban Outfitters CIO Calvin Hollinger. "All our stores will be equipped with iPod touches and iPads."

The point-of-sale is sacred ground in the commerce experience. Two major trends are reshaping this interaction. First, POS systems are being radically redefined by new technology, open platforms, and cloud computing. POS systems were historically designed to have tightly focused functionality and high dependability. The market has been led by payment terminal manufacturers like VeriFone and Ingenico, software system providers like Micros and payment processors like First Data. It was a tightly managed ecosystem, with a few gatekeepers controlling POS access, much like the telecom industry before the iPhone.

If that closed system was POS 1.0, the business is moving to POS 2.0. These open platforms allow integration across devices and channels and give POS entrepreneurs the ability to develop new services that tie into the merchant's existing payments, marketing and back-office systems.  As Leonard Speiser, co-founder of POS startup Clover, noted, "The moment you open a system up, you enable new innovations and get products right to your customers."

Second, new commerce innovators are battling to get access to these systems. An array of new payments solutions and providers are competing for access to merchant terminals. To note a few, Google Wallet has been advancing NFC-based payments, PayPal is leveraging software applications on existing terminals and LevelUp is pioneering new checkout options. All of these players require merchants to provide access to their terminals.

While POS 2.0 is attractive, merchants have concerns about it. Security and stability are paramount. Fly-by-night POS schemes bring uncertainties, and they need partners who can help them scale their solutions while growing sales and increasing customers.

POS applications must be appropriate for the merchant type. Retailers with distributed store formats and a consultative sales approach (like Nordstrom, Sears and Macy's) want a multi-device strategy with traditional registers and iPad-equipped POS. High volume, multi-lane retailers have other requirements. Smaller single location retailers may prefer lighter, more flexible POS solutions.

Regardless of the complexities, merchants are intrigued. According to McKinsey's Small Business Panel, roughly half of small businesses are willing to consider alternate POS models if the particular model delivers value. The merchant POS system, therefore, is the gateway that must be unlocked. Here are a few of the considerations for POS players:

Secure merchant trust. Merchants do not want their POS to be a test lab for every startup with a new payment solution. Trust is key for merchants selecting their partners.

Ensure integration. Offering successful applications will hinge on the deployment models for merchants. Integrating applications into a seamless solution will be a critical differentiator.

Build scale and momentum.  The merchant landscape is highly fragmented with legacy systems. Look for large merchant partners or niche segments to gain scale.

Evaluate partnerships. Many players will look to strategic partnerships to drive adoption. Heartland Payments has teamed up with LevelUp to bring new checkout options to merchants; PayPal is working with large companies (VeriFone) and small players (ShopKeep POS). Further alliances are expected.     So who will be the new king of the merchant POS? No one has fully broken out of the pack.  One thing is clear: Tomorrow's shopping experience will look very different from today.

Dan Ewing is a senior expert at the global consulting firm McKinsey & Co.