The market for retail payment-processing is highly fragmented, according to a survey of small businesses by Morning Consult and Protocol.
The businesses reported using a variety of providers, such as Square, Clover, Lightspeed and others. In the survey group, which included more than 700 U.S. small business owners, 35% of owners said they used Square, 7% Clover and 4% Lightspeed. Other providers include Revel, Verifone and Vantiv.
That picture matches other assessments of the point-of-sale market, like a recent report by Research and Markets, which found that even the largest providers made up only half of the market. Yet there is considerable potential for growth: In the restaurant industry, businesses spent less than 3% of total sales or $25 billion on technology in 2019, which Toast estimates will grow to $55 billion in 2024.
One reason it’s so fragmented: Payment processing is highly commoditized with razor-thin margins, with banks on either end and networks and gateways in the middle taking their own cuts. And small businesses are hard to reach, with legacy payments companies deploying armies of salespeople to hawk systems and competing on price. Customers generally weren’t very loyal, eagerly switching for a better deal.
Square was able to grab a foothold in this sales-driven industry by targeting micro-merchants that didn’t do enough volume to attract salespeople's attention and who were often daunted by the upfront cost of a point-of-sale device. Square has since sought to go upmarket to larger sellers; it now sells a $299 Terminal device, though its original $10 magnetic-stripe Reader is still available.
Given that fragmentation, point-of-sale hardware and software providers have sought to provide a range of services beyond just payments. That could lead to more loyal customers, said Leonard Speiser, a co-founder of Clover. If a small business runs its inventory on its point-of-sale system, it’s much more work to switch and re-train all its staff, he said.
“The more they use it for more than just payments the more they see the value,” Speiser said. “And the higher the switching costs.”
Clover began shipping its hardware in 2014 and quickly added an app marketplace, making it one of the first payment providers to offer third-party apps. As of July, Clover, which is now owned by Fiserv, was doing $184 billion in gross payment volume on an annualized basis.
Others have gone after specific verticals. Toast offers a number of services targeted specifically to restaurants, such as kitchen displays, invoice management, digital ordering and staff scheduling. Meanwhile, Lightspeed Payments offers ecommerce, payments processing and loyalty tools to its customers.
Square, now part of Block, offers a range of services from shift scheduling to payroll services. It seeks to generate revenue from software services from its larger customers while relying on payments revenue at the smaller end, where its free software helps retain customers.
With so many providers catering to different parts of the market, it’s not clear point-of-sale payments will get any less fragmented in the near term. But the market has changed in a significant way. Instead of armies of salespeople selling payments, it’s the payments service itself that has become a way to sell software.