We are living in a age of vast and quick technological improvements. In the last 10 years we have seen the advent of Smart Phones, “Cloud-based” Storage, Live-streaming Television, Touch-Point Technology, and other improvements that have changed the way we communicate, recreate, and organize. At the forefront of this technological boom is information and communications technology with corporations like Apple, Microsoft, Facebook, and Google leading the charge. The Payment Processing industry has been slow to keep up with the technological capabilities of today but we are now seeing a variety of new options taking form.
It was not so long ago that simple box credit card terminals were the norm, and required a purchase or lease for a business to own and/or operate such a machine. While these terminals are still widely used, more and more merchants are moving away from these traditional processing options and expanding into more complicated organizational and business management devices. POS systems (or Point of Sale systems) are a popular upgraded option. These systems which have been around for 15 years or so bring payment processing together with business management options such as inventory tracking, bookkeeping, and database storage to simplify the businesses they serve. However, these systems are far more expensive than simple credit card terminals and are often proprietary to the manufacturer or their processing partners. Choosing to utilize a POS system is a decision that often limits the choices that are available to a merchant for their payment processing, locking them into a contract or service that has proprietary control over their machine. This would be fine, but it also allows the processor to overcharge for the processing services without worrying about competition.
Software companies stepped in and designed “plug-ins” that can be installed to a POS system allowing the owner to switch their processing to a company of their choice, so long as the processor has compatibility with the POS plug in. Unfortunately, this often runs a cost in excess of $1,000, and that’s a large sum to pay upfront to switch processing companies and lower monthly fees. Still the hardware is popular because of it’s organizational capabilities. Many businesses depend on their POS system to maintain their books, client base, or inventory, causing the business owner to become dependent on their POS system. But such is the way with technology. Though smart phones were only released 4 or 5 years ago (not including blackberrys), it is hard to imagine living without them now.
Other technological improvements have changed the processing industry such as the advent of cloud-based processing solutions, a model more and more businesses are turning to. Why use a physical terminal to collect data and hold sales (afterall, it could be dropped, have something spilled on it, or even stolen!) when it is just as easy to use the “cloud.” Internet gateways and more advanced cloud solutions are available today. It’s as easy as going online through any web-browser, typing in the sales, and submitting them for authorization. The data is now stored in an off-site server that no one has access to. Sales are still transmitted to the processor the same way, and authorizations are achieved through the same manner, but there is no need for a credit card machine, POS system, or other hardware other than a computer (which, let’s face it, most people have already at this point.)
So, what’s the drawback? Processors and Acquirers alike don’t want you to know that by using a gateway or cloud based solution like this you are racking up additional fees. First there is a monthly gateway fee usually around $10 or more depending on your processor, additional transaction costs (usually 5 cents or more) and because of the riskier transaction type (no signature, card-not-present transactions) the % cost increases by almost double. A transaction for $100 which could have cost merely $1.79 (not including monthly fees) suddenly costs $3.30 (if you are lucky.) All of a sudden the risk of breaking your credit card machine doesn’t seem so bad. Oh, and let’s not forget the activation and set up cost for a gateway (roughly $100 or more). So, why do we see more and more people switch to these models?
Most Processing giants are pushing these solutions as advancements (the technology IS better) that modern businesses need to adopt or they will fall behind and quickly find themselves obsolete. But what isn’t being discussed is that while cloud based solutions POS systems are available, most processors are now giving away FREE credit card terminals. We certainly are! As these terminals are less and less popular, their associated costs drop, and while we know they are still perfectly viable solutions, many merchants are more interested in newer systems, not lower costs.
Another viable alternative that is becoming more and more popular are application plug ins for smart phones that allow the phone to act as a mobile credit card terminal, processing sales and swiping cards on the go. Wireless terminals have been available for a while, but never with the same ease as is now possible with smart phones. In addition to the increased hardware cost and additional fees (similar to gateways), the owner of a wireless terminal had to pay for the data network in order to process sales on the road. Using a smart phone to process credit card sales kills two birds with one stone. You are already paying for the data network (3G, 4G or the like) so there is no additional cost for a data network that you would normally incur if using a traditional wireless terminal.
Of the available next generation processing options, this is the option that I believe provides the greatest benefit and use of technology with the lowest associated costs. You may still incur additional transaction fees for wireless processing, but it is marginal. Smart phone processing is still fairly new and many processors do not support the software required, but as more and more processors get on the bandwagon, this will likely become a popular processing solution.
Finally, let’s discuss the up and coming. The Payment giants like Mastercard, Visa, and American Express are working on chip based cards that no longer require the magnetic strip to swipe, but will simply need a scan (like a barcode). This is the first step towards the inevitable future of using phones and other mobile technology as payment devices (like credit cards) in place of having to carry cash, credit cards, debit cards, etc. Instead, the phone will act as some combination of debit and credit card effectively purchasing items simply by presenting your phone. This technology is a ways off right now and the Corporate giants are still trying to figure out exactly how to make this kind of switch widespread when the world is so used to and dependent on credit cards. Expect this to be a sharp shift at some point where credit cards are no longer being issued and instead this payment alternative is forced upon the populace. This is still a few years away and will likely become popular when a larger % of consumers own smart phones.
Ultimately, while the payment processing industry has experienced technological improvements over the past few years, simple credit card terminals are still the norm and will continue to be so until the associated costs with the newer technology drop. Earlier this month, United Bank Card released the first “Free POS” program to hit the market. While many processors offer free credit card terminals, POS machines have been an option reserved for businesses intent on making the investment, willing to spend thousands of dollars for these state of the art machines. United Bank Card is the pioneer that will undoubtedly force others to follow in their footsteps to remain competitive. However, the free POS machine still comes with the cost of certain pricing minimums, long-term contracts, and high termination fees. As long as simple credit card terminals remain PCI compliant (data security), they will continue to be the most popular option among small businesses intent on keeping costs down and maintaining profitability.
