Mobile POS for Micro-merchants

I have been intrigued by the trend to accept mag stripe cards while on the go.  Mobile POS terminals have been used by large organizations for a while now (e.g., rental car drop-off).  However, acquirers did not find it cost-effective to offer similar services to micro-merchants (baby-sitter, handyman...) [US Market size/TAM of 26M].  The total transaction volume handled by these micro-merchants did not justify addressing this unmet need.  Payment received via cards by micro-merchants monthly can vary widely, starting from as little as nothing to thousands of dollars.  While most micro-merchants would like to keep their fixed costs to a minimum, those that wanted to have the facility to accept cards had very few service providers selling them this service [at a premium].

Note: This post evaluates the opportunities in the US market only.



With the proliferation of smart phones and associated app stores, Square, Mophie among others are addressing this opportunity.  Micro-merchants buy their own device [and add-on] and pay a service fee to avail the facility of getting paid via credit cards.  Below is a quick look at the traditional devices and how they stack up against the emerging trend (sources include this site).

Traditionally, part of the acquirer's fees (portion of the MDR paid by the merchant) has covered the cost of the POS device.  However, in the case of micro-merchants, as the user has paid for the device, the MDR has to be reduced accordingly.

The above anomaly is not a big deal initially.  However, as the micro-merchant market grows/explodes, micro-merchants will feel fleeced for having to pay extra.  Unlike the current controversy (Credit Card Act 2010) where the Issuers are the beneficiaries, micro-merchants will be padding the pockets of acquirers.

Another lesson from the PayPal success may be relevant here.  PayPal earned above-average returns, thanks to the high CNP rates necessitated by the 4-corner Visa and MasterCard model.  Would the incumbents make a similar mistake again?