Is The Retail Industry In For Change

By Aaron Pragnell | October 16, 2012 AAA

One industry that technology has had little influence on over the years is brick and mortar stores. E-commerce and online shopping have ballooned in popularity but the traditional face-to-face business has been left untouched. Shopping at your favorite retailer is nearly the same today as it was decades ago. One of the largest changes over the past several years has been consumers switching from paying with cash to paying with credit and debit. The majority of transactions no longer require traditional cash registers. As a result of changes in consumer behavior, the industry is now looking to adjust in order to realign with shoppers. A new point of sale (POS) device may be the solution that the industry has been looking for. Nearly everyone today carries a smartphone or tablet, and new technology allows us to turn the portable device into a convenient POS system.

Companies Behind the Change
Many companies are looking to capitalize on the opportunity. Currently, the largest competitor in the space is Square, but there are several others, including PayPal and Groupon (Nasdaq:GRPN), that have launched similar products looking to exploit their existing relationships with merchants. Square was founded in 2009 by Jim McKelvey and Jack Dorsey, co-founder of Twitter. The company was initially created to help small businesses and sole proprietorships that usually could not accept credit cards payments. Square allows these companies to accept credit cards in any location, without needing an entire terminal. The card reader plugs into any smartphone or tablet and transforms the device into a portable till. Fast forward three years, the company has grown to over one million users and moving around $3 billion in annualized payments, an impressive number for a company with no sales force or business development team.

PayPal introduced PayPal Here in March 2012. Using a similar device as Square, PayPal offers merchants the ability to do business anywhere. No longer are companies confined to accepting card payments in the location of their POS systems. When the device first launched in March, PayPal was receiving roughly 1,000 sign-ups per hour for the first 24 hours. Now with over 200,000 merchants signed up for the service, if PayPal can capitalize on the 100 million active accounts currently using their flagship product, the company could quickly become a major competitor in the space.

Your favorite daily deal site has experienced some growth trouble recently. Since the IPO back in 2011, Groupon stock has been on a steady decline. Since its public inception, the stock has dropped from around $31 down to roughly $5. This has resulted in market cap plummeting over $9 billion. Recently, the company has introduced Groupon Payments. The strategy is to utilize existing relationships with vendors and provide an easier solution to accepting credit card payments, redeeming Groupon vouchers and getting real-time sales or revenue reports. With over 250,000 businesses using Groupon services and total 2011 revenue over $1.6 billion, the coupon king has the cash and contacts to turn this product into a new source of revenue.

Changes to the Industry
The evolution of the new portable POS system is a tremendous breakthrough. Many existing business that could not access traditional merchant terminals, now have complete access at little cost. Girl Guides could now buy a potable card reader and reap the rewards of cashless clientele by accepting credit cards. Many of the new card readers have no upfront costs to the business. They will send you the card reader for free and only charge a percentage of each transaction, in the range of 2 to 3%. Traditional POS systems can cost thousands of dollars on top of monthly servicing fees and charges per transaction. Outside of the convenience factor, the new business model can provide small businesses with substantial savings over previous methods.

Benefits to the Consumer
Consumers no longer have to worry about small businesses not accepting credit card payments and portable card readers are far more efficient. Have you ever purchased a product at an Apple Store? If you pay with credit or debit, the transaction is done anywhere in the store. They simply swipe your card, email you the receipt and you're on your way. No dealing with long lines and the inconvenience if you happen to lose the paper receipt. Just think if all stores offered a similar service.

The Bottom Line
These new card readers can open up endless possibilities for businesses and consumers. The three companies mentioned above are only a few offering this type of product and many traditional POS service providers have launched similar devices. Rumors have also circulated that online shopping giant Amazon (Nasdaq:AMZN), could be developing a similar product. With so many large players looking to capitalize on the movement, you have to think they must see huge revenue potential. A Federal Reserve Payment Study conducted in 2010 with the assistance of McKinsey & Company found roughly 21.6 billion credit card payments were processed that year, for a total value around $1.9 trillion. A 2% cut on the transactions would work out to approximately $38 billion. Even a small piece of the overall pie can turn into massive revenue and you begin to understand why so many big players are suddenly attracted to the space.

At the time of writing, Aaron Pragnell did not own any shares in any company mentioned in this article.

Related Analysis
  1. These stocks have been weak, and despite rallies, investors might be better served by selling or shorting as opposed to buying.
    Chart Advisor

    Time To Take Profits On These 4 Rallying Stocks?

  2. With its huge population and booming economy, China is tops for many emerging markets investors. Here's a leveraged ETF for those who want to double down.
    Stock Analysis

    This Leveraged ETF Is For China Bulls

  3. Stock Analysis

    Markets End Week On Positive Note As Investors Are Encouraged By Central Bank Developments ...

  4. Chart Advisor

    Is Natural Gas About to Tank?

  5. Chart Advisor

    Is It A Breakout? See The Point-And-Figure Chart

Trading Center