Back in May we wrote a comparison of the cost of the various mobile/Pay as You Go (“mPOS”) card acceptance devices on the market. There’s been some movement in the mobile payments market since then and we thought it was time to do a follow up.
Ironically, so have a few mainstream publications……..we genuinely wrote this before today’s FT article !
Is UK mPos an attractive market?
Although the UK mobile payments market is very competitive and arguably already saturated, it was widely expected that US players PayPal and Square (the Twitter founder Jack Dorsey’s successful US startup) would enter the UK market. Neither has, nor have any of the plethora of other US card reader providers (eg, Mobilized).
We’ve also see the demise of PaymentSense’s Judo Payments which has been withdrawn from the market and mPowa’s offering, which started its brief life as a card reader before being withdrawn to be re-invented as a chip & pin device, has never re-appeared on the market. We are told that whilst Judo had “lots of merchants they were not transacting enough to make a return on investment” so they are now focusing on developers rather than end users.
Mpos is an incredibly “hot” area for card acceptance, judging by the column inches devoted to it, but the reality is its just not that profitable in the UK. The UK is a relatively small market, compared to the US, and there is already too many similar products available on the market. Pricing has started high, compared to traditional acceptance methods, and it can only come down over time. The merchants using mPos are small, low volume transactors and only become profitable for merchant acquirers if they grow, at which point they switch to far cheaper traditional acceptance methods (terminals).
In the US PayPal is launching an interesting technology called Beacon which interacts with a customer’s mobile phone to accept payment by PayPal without any device or card being used. It uses near field technology to automatically connect the customer and merchant as soon as they walk into a store and payments can be accepted automatically. If we were PayPal, we would potentially focus on this technology which can bypass any mobile payments device in a retail environment. It’s unique, proprietary and is truely forward looking.
Cost comparison update
Enough of our future gazing, what’s currently happening on the mPos pricing front? Most players have maintained the status quo when it comes to transaction rates and some have tinkered with the upfront cost of their device.
There are also, a few interesting developments which are likely to lead to more .………..
Firstly, we’ve updated our cost/turnover graph to reflect availability of a marginally lower market rate for traditional terminal for new to cards businesses (1.3% credit, 16p debit, £14pcm hire).
Then, we have to hold our hands up to an omission to our last article where we didn’t feature Adyen’s Shuttle device as it was relatively new to the market. Their pricing is unique in that they charge a “pence per transaction” rate for debit (14p) which none of the other propositions do. To put in context, a £50 debit transaction with one of the other devices at 2.75% would cost £1.38, whereas the Shuttle is 1/10th of this at 14p. Credit card rates at 1.4% are about half the amount of the others. Drawbacks ? Well, the device is slightly more expensive at £99 but you would soon re-coup this on transaction costs, it does have a minimum monthly service charge of £10 which makes it more expensive below £5,000 pa of card turnover and we understand it does not handle CNP transactions. To be fair neither does iZettle or Sum Up whereas some of the other devices can be used for CNP.
iZettle has introduced tiered pricing which offers a reduction on the standard 2.75% for card turnover above £2,100 per month reducing as far down as 1.5% if your card turnover is above £12,835 per month. It sounds great, but as we’ve said before these mPos devices are not for you if your annual card turnover is greater than £15,000 per year (£1,250 per month) and a traditional terminal hire solution will be more cost effective. At £40,000 of card turnover per year (£3,333 per month) the iZettle tiered rate is still as high as 2.29% so it is of marginal benefit.
Sum up have also joined in with a rate reduction to 1.95% for all cards across the board. You will recall the Sum Up device is a card reader not a chip & pin device and opinions vary as to cardholders’ perception of the security of these style of devices. Although mPos readers are prevalent in the US market where chip & pin is not mainstream, the UK shopper is more used to chip & pin. Also, Sum Up does not currently process Visa transactions through its reader and instead uses an SMS based app on the cardholder’s smartphone.
WorldPay’s pricing is unchanged and they still offer 3 packages – 1) a standard 2.75%, 2) a flat £12.99 per month for up to £1,000 of card turnover pcm and 3) a reduced rate of 1.95% per transaction for a flat fee of £5.99 pcm. What has changed is the way we modeled WorldPay Zinc as it is was previously unclear as to how pricing operates if you go over the £1,000 of card turnover per month on the £12.99 flat fee package. We thought you might be charged at rate 1) for turnover in excess of £1,000 pcm whereas their website now makes it clear you will be charged at rate 1) for all turnover if you breach the £1,000 limit, so more expensive. Another interesting observation is WorldPay’s own comparison of Zinc to the pricing of their traditional terminals – they believe Zinc is cost effective up to turnover of £25,000 per annum at a cost of £576 at which point you are better off with a traditional terminal. We think you can get a terminal package for lower than that and Zinc becomes uneconomical at turnover greater than £18,000 per annum at a cost of £440. Suggests a price gap of 32% on traditional terminals for new to cards businesses between WorldPay’s pricing and what is available elsewhere in the market.
For low turnover below £5,000 per annum, there is not a lot between the chip & pin offerings, but Sum Up have stolen a march on the rest with their 1.95% card reader, albeit it processes Visa transactions using SMS rather than the card reader. Adyen, with its £10 per month minimum charge is more expensive but above £5,000 annual turnover it becomes significantly cheaper (above £7,500 to become cheaper than Sum Up). Adyen has no CNP functionality, so if that is a necessity then WorldPay with its packaged pricing becomes the cheapest option.
We still maintain that a traditional terminal is the most economical solution for businesses of any real scale. As you can see on the graph, it beats all devices on cost except Adyen at annual turnover of £15,000 – £22,000. Even though Adyen looks better on the graph at all turnover, bear in mind that we are using new to cards rates for the traditional terminal option and an established business would get a reduction. The Adyen pricing does however highlight that the days of the terminal rental model are numbered and we seem to be drawing closer to the US model where many merchants buy and own their own terminals rather than incur costly monthly rentals. Beyond that, it seems likely that terminal devices will very shortly thereafter go with the dinosaurs as e-wallets and hands-free payment acceptance takes over.
Usual caveats, these numbers are based on mobile payments market data at 25 September 2013 and do your own research before buying, lest pricing has changed or your business specifics differ from our assumptions.