Riding the Next-gen POS wave

Lost in the ecommerce hype of COVID-19 is the ongoing evolution of the physical point-of-sale (POS) towards next-generation product and service models. Mobile technologies and digital service models have reinvented POS solutions as affordable and easy to use (a major leap from legacy ePOS solutions which are expensive and challenging to deploy or adapt/integrate). We expect the shift towards Next-gen POS to accelerate on the backend of the pandemic when we expect a wave of physical business startups, making the present the right time for service providers or investors to position themselves for this wave of growth.

 

What is Next-gen POS and why it’s so powerful?

There is a broad range of next-generation POS proposition models, and a variety of names that get attached to them (as illustrated in Figure 1). At the low end of the market, mPOS and even pure app-based solutions (SoftPOS) allow any smartphone or tablet to function as a POS device. Small businesses that need dedicated payments hardware now also have access to Android-based payment terminals (‘SmartPOS’), for example, a taxi running Uber on an android mini terminal. Merchants that need superior business management software and often multiple devices are increasingly served by software as a service (SaaS) kits that include core business software with integrated payments (we refer to these SaaS kits as ‘Next-gen POS’ throughout the remainder of this article).

Tier 3 & 4 merchants with 1-20 POS are the sweet spot for Next-gen POS. These merchants want and need business software with integrated payment services, but they do not want to pay for customised solutions. On the low-end of this segment (1 POS), software needs are quite basic. As merchants migrate towards multiple POS or multiple shop locations, the software and hardware need to become more complex. These merchants require vertical-specific software to connect their devices and locations, and to deliver on specific commerce use cases such as table management and online ordering and bookings.

Next-gen POS solutions are built on common mobile technologies, often using Apple iPads as the core platform. iPads have proven to be strong and resilient devices, able to withstand sustained usage, particularly when coupled with supporting hardware such as stands and cases. Mobile platforms are also developer friendly environments where integration to other apps or hardware, including payments, is significantly easier than within traditional, proprietary or Windows environments. The use of standard mobile technology also greatly reduces the cost of Next-gen POS solutions. Traditional ePOS often carries price points of c. USD 5,000 plus monthly costs, while Next-gen POS can be procured for only USD 40-100/month (with options to purchase hardware outright). Next-gen POS can be deployed without physical setup, greatly reducing the costs for customer acquisition and enablement. Whereas traditional ePOS solution developers rely on VARs to distribute, deploy and service their solutions, Next-gen POS providers are focused on digital and multi-channel marketing supported with remote sales and service departments.

Who is best positioned to win the Next-gen POS market?

Note: Logo size indicative of POS scale

There are two distinct groups of companies addressing the Next-gen POS market: 1) providers with payments DNA and 2) providers with software DNA.  The payments DNA group of suppliers is led by Square and Clover (a Fiserv company).  The software DNA group of suppliers is more fragmented and characterised by high-growth SaaS companies such as Shopify and Lightspeed. In the US  market, the payments DNA suppliers have already achieved impressive scale (more than 500,000 POS each, excluding mPOS). Within the Software DNA group, most providers have fewer than 50,000 POS enabled in the market, although the pre-COVID growth rates for these providers was impressive.

We do not view Next-gen POS as a winner-take-all marketplace. However, there are clear scale advantages (success is based on cost-to-acquire and cost-to-serve efficiencies) and we do expect winners to achieve meaningful scale in the relative near-term. Software DNA providers have more advanced business software than payments DNA providers, which is also tailored for specific segments. Software DNA providers also tend to be better at deeply integrating adjacent SaaS services. Software DNA providers position best with merchants operating multiple points of sale, where more advanced, sector-specific software is required.

Payments DNA providers are better at serving smaller, single location merchants who have basic software needs. These providers are highly effective at monetising smaller merchants and driving the distribution scale with a range of POS and payments solutions. While these payments DNA providers are driving more than one million POS, many of these POS are limited to payment acceptance usage and not the full SaaS usage. These suppliers’ more robust Next-gen POS solutions such as Square Register or Clover Station are scaling rapidly, allowing these payments DNA providers to move upmarket into the multi-POS segment.

We Expect Next-gen POS Growth to Accelerate Post COVID-19

In the US, Next-gen POS are highly visible with established scale, but also with great ongoing growth potential. In Europe, Next-gen POS has low penetration today (c. 20%), relative to the potential. COVID-19 is challenging near-term growth in POS SME generally, with low start-up rates and high failure rates. However, COVID-19 is also causing merchants to be more focused on omnichannel readiness where Next-gen POS solutions have significant advantages. On the backside of the pandemic, we expect a wave of business startups, which will accelerate demand for Next-gen POS. New-to-business merchants are overwhelmingly selecting Next-gen POS rather than traditional ePOS (we estimate 75%) while POS solution switching rates for established businesses are low (c. 10% annually).

Next-gen POS solutions are redefining the POS market while creating a new class of highly valued SaaS providers and accelerating value creation for a small number of payments providers who have scaled their position in business SaaS. While COVID-19 has generally introduced near-term growth challenges in point-of-sale, we expect a massive wave of growth for Next-gen POS when the market emerges from the pandemic.

About Joel Van Arsdale

Joel is the Managing Partner of Flagship Advisory Partners, and has worked as a payments specialist for more than 20 years. He is a leading advisor and recognized thought leader on value creation in digital payments. Joel is also a trusted M&A advisor to private and strategic investors having advised clients on dozens of M&A transactions globally.

About Flagship Advisory Partners

Flagship Advisory Partners is a boutique strategy and M&A advisory firm specialized in payments fintech. We provide strategy, delivery, and M&A support to financial institutions, payment service providers, fintechs, technology providers, merchants, and investors. Our key differentiators are deep expertise, a uniquely rich perspective on value creation and marketplace success factors, and personal commitment to our clients’ success.