News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Analysts: How Will Amazon Make Money in mPOS? It Won’t

Analysts: How Will Amazon Make Money in mPOS? It Won’t

By Joe Bush

Analysts: How Will Amazon Make Money in mPOS? It Won’t Last week, Amazon expanded its payments offerings to include a mobile-card-acceptance solution rivalling a similar product first popularized by disruptive startup Square and quickly copied by PayPal, Intuit and a host of others. Amazon entered the fray with an extremely low introductory rate to entice merchants to try its new product, but even when the promotion ends, the company’s per-transaction price will still undercut the current industry leaders. One problem: Even Square, an acknowledged industry leader in mPOS and the company that virtually invented card acceptance for micromerchants, reportedly is finding it increasingly difficult to make a profit. So how does Amazon intend to do so?

According to industry experts, the answer is simple: it doesn’t.

“It is safe to say Amazon has no intention of making money in mobile acceptance anytime soon,” says Gil Luria, a managing director covering financial technology stocks at Wedbush Securities. “They are very used to taking the long view and accepting losses for up to seven years in a new business they enter.”

Amazon announced the credit and debit card reader and app for small businesses, named Amazon Local Register, with great fanfare and an introductory transaction fee of 1.75 percent. When the introductory period is over, the regular rate will be 2.5 percent, compared to PayPal and Square’s 2.75.

Signing onto the POS system is essentially free for merchants; they buy the plug-in reader for $10, which Amazon will credit to the merchants’ accounts as their first $10 in transaction fees. The reader is shipped for free.

And, whether Amazon’s attempt to leverage its brand trust and undercut Square actually wins over merchants, the top performer in this space is struggling enough to be unlikely to react by lowering its rate.

“Square is likely to lose some customers to Amazon’s promotional offer and there is very little they can do about it,” says Luria. “They cannot afford to lose more money than they are losing now.”

Then why would Amazon enter an established game that hardly seems welcoming? Some debate suggested the giant online retailer has its sights set on the data, rather than the revenue, generated by the transactions. Luria says it’s safe to say there’s an endgame other than swipe-fee revenue.

“Amazon’s strategy is to get engaged with small offline businesses to get more information about what is selling and try to get these offline retailers to sell on the online Amazon marketplace,” he predicts.

Aite Group analyst Andrew Copeman says he was surprised at the move, given that fraud prevention and security are priorities in the payments space, and EMV is on the horizon.

“I guess they were keen to get something to market sooner rather than later, but it does seem odd they didn’t try to take a technological leap forward with something that could have a powerful message around security and fraud prevention,” says Copeman.

Copeman says Amazon’s analytic skills are likely crucial to the reason for the launch.

“Given that Square founded the sector and has a huge user base, it’s hard to see where Amazon can make money,” he says. “It will be quite a long payback I would anticipate. (Amazon does) have phenomenal ability in analyzing customer data, their behaviors, spending patterns and so on. Can they add value by sharing that type of analysis with the clients they recruit with the payment system?”

If Square can’t simply lower rates to combat the formidable newcomer, Copeman says it can seek out new clients.

“Square may try to differentiate by targeting different merchant segments,” says Copeman. “It’s got a mature business now, a very good offering, PayPal likewise. I could see Square trying to position itself further up the scale of size of merchants, get more critical mass in terms of transaction volumes and the bottom line will begin to improve significantly. It might have to do it anyway to be a success over the long term.”

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Daniel Leibovitch