The EMV Opportunity for PAY in Terminal Apps


“I think that the coming decade will be the most important in commerce and payments that any one of us have lived through”. Paul Gallant, CEO Verifone, Mar 2014

One of the most important changes in US payments technology is the shift in the storage medium for card credentials from magnetic stripes to computer chips (whether embedded in an EMV[1]-compliant card or ‘phone). The shift to chip technology has been accelerated by heightened industry focus on security following the Target data breach last November (because chip cards are more difficult to counterfeit), and we expect the majority of cards and point-of-sale (“POS”) terminals to be chip-enabled by the end of 2015.

The transition of US payments to chip technology changes industry structure because chips are a more versatile medium than magnetic stripes, and can be used for more than storing static card credentials. In particular, they can be used to integrate marketing offers into the payments process; as MasterCard puts it: “EMV in the physical world is a much thicker pipe [than mag stripe]… not only is it a more secure transaction but you can add more data into the stream that can drive things like offers and receipts”. In other words, chip-technology turns payment devices into more powerful marketing media.

However, there is an important distinction between chip-enabled cards and mobile ‘phones as marketing media: the former does not have a screen on which to present real-time offers to customers or receive real-time input from customers around tender and offer-redemption choices. Until mobile payments are adopted more broadly by consumers, the natural solution for many retailers will be to use payment terminals as marketing media for chip-enabled card payments that we expect will account for $1.5tn of annualized purchase volume by end-2016 (vs. less than $100bn of mobile purchase volume).

This creates an opportunity for terminal market-leader PAY (with 50% share globally and in the US of the EMV terminal market) to sell not only next-generation terminals with touch-screens but also demand-generation terminal applications such as electronic couponing and targeted offer programs. The company does not break out the specific revenue contribution from these advertising services, but services as a category (including terminal maintenance, security solutions such as tokenization and encryption, as well as commerce-enablement) now account for near-40% of firm-wide revenue of $1.8bn and are growing at a CAGR of 15% (versus less than 5% for terminal sales).

Sizing the terminal app opportunity for PAY is not easy but there is a significant opportunity for payment companies that can drive incremental revenues to merchants. We estimate annual merchant spending on advertising that can potentially be converted to digital channels at $500-600bn and there is a secular shift from generic brand advertising to data-enabled marketing with a track-able ROI (see Exhibit below). For example, ADS pitches retailers on transferring $40mm from their advertising budget to data-enabled marketing, and it would take only a few wins of this magnitude for PAY to generate a meaningful growth in service revenue given the current base of $400mm annually. There are competitive risks that:

  • Dongle-providers, such as Square and Amazon (through its newly-announced Local Register product), enable tablets for card acceptance allowing merchants to use tablet-screens, rather than terminal screens, for two-way marketing communication with customers. While this is likely for many micro-merchants, larger retailers will prefer the security solutions, including tokenization and end-to-end encryption enabled by PAY terminals. Indeed, after the Target data breach last November, the security of card data is the top priority for retailers and has helped PAY gain share. As CEO Paul Galant reported after the last quarter “we won another six clients from competitors and gained three new US clients that adopted consumer-facing[2] payments systems for the first time to prepare for EMV acceptance”.
  • PAY is unable to seize the window of opportunity as chip cards are adopted (with the processing capability for commerce-enablement functions but without display screens) ahead of mobile phone payments (which have both processing and display capabilities) to build durable software capabilities; if so, competitor app-conduits (such as Apple given the possible launch of a mobile shopping-and-payments ecosystem with the iPhone 6[3]) have a better chance to take over the support for data-enabled marketing as ‘phone screens displace terminal screens over time. In practice, we believe PAY’s current position in POS terminals gives it the opportunity to build an operating system for security and commerce-enablement apps that will survive this transition.
[1] EMV is the Europay-MasterCard-Visa protocol for communication between chip-enabled payment devices and the point-of-sale terminals.

[2] It is an EMV requirement that payment cards not leave the sight of customers meaning that many retailers, including restaurants and hotels, who are presently accustomed to taking a customer card and processing it in a back office will need to purchase new customer-facing terminals. PAY has estimated that these new customers will lift the addressable market for US terminals to 13mm from the current 10mm.

[3] See our research note “Apple vs. Banks: Update” of May 30th, 2014


Please see our published research for the full note and tables.

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