Does Your Company Have A Path To Sell POS-as-a-Service?
By Chuck Hebbel, Founder, CEH Leasing
“POS-as-a-Service” is a phrase that is the buzz in our point of sale (POS) industry. Does it mean the same thing to every VAR, ISO, or ISV? Most certainly it does not and nor should it. The list of benefits for both the merchant and the POS provider is varied depending on your position in the market, your targeted customer, and your selling strategy. How did we get to be an emerging POS-as-a-Service industry, and where are we headed?
The underlying principle for POS-as-a-Service is simple. The merchant pays a fixed monthly fee or a per-terminal fee is fixed based on the level of software services, maintenance services, hardware requirements, and usually ongoing support. For the end user, POS-as-a-Service is a great option to managing the cost associated with the POS functions needed to run and manage his business. It’s a great option to get the services they need without the cost of purchasing.
The three biggest factors affecting the POS-as-a-Service concept have been shrinking margins on traditional POS sales, iPad cloud POS solutions, and the merging of the merchant service ISO markets offering POS systems tied to credit card processing. For traditional POS sales, the margins have been eroding for years and for the majority of today’s one- to three-terminal sales margins for VARs are paltry. Only in the large POS configurations does the VARs profit margin still have value and that is solely due the size of the dollars in the deals. Selling POS-as-a-Service into one- to three-terminal segments is more profitable in the long run for the VAR. This fact must be taken to heart by POS sales organizations. It’s the largest segment of the market being serviced by small independent POS companies.
The VAR and ISO however need capital to put deals on the street because the VAR or ISO have to buy hardware, and in some cases licenses, to get there. The VAR has to make an investment in his customer. iPad cloud solutions offer a typically lower entry cost on hardware and the cloud forgoes the cost of upfront license cost for software modules. There is no doubt iPad cloud solutions are cutting into traditional POS sales. Many ISO and ISV are selling direct and through channels offering POS systems using the POS-as-a-Service selling strategy. Many of these POS systems are being offered by the ISO merchant services providers as an easy cost effect way for the merchant to get POS system and credit card processing bundled together.
Tying the POS to credit card processing is nothing new to the POS industry. Mercury Payments and others have changed the way POS is sold. It also has created a revenue steam for everyone including the ISV. The POS industry has been capturing credit card residual checks for years. What is different in today market is that smaller VARs need to be able to compete with well capitalized ISOs and ISV who are running away with one- to three-terminal market share based on their ability to deliver POS systems to the end user and create a POS-as-a-Service economy for the merchant. It’s easy for a VAR to sell localized service that his customer can see and call easily 24/7. It’s entirely different for a small VAR to be able to invest the cost of installing and servicing a POS for his customer who may be out of business in a year.
The challenge for POS-as-a-Service concept is that it must be economically feasible to both the POS vendor and the merchant. The POS leasing industry is adapting to the POS-as-a-Service concept. Leasing for POS is nothing new. What is new is how POS leasing companies are creating new products for the POS market.
Just as the credit card processing world and POS world found each other, the POS world and financing world need to find each other in a bigger way. We all know leasing companies have been providing equipment capital for POS deals for established business and solid merchant credits. New business looking for capital is available but only to quality credits and on limited bases. A typical “new business” will pay higher rates and be approved for generally $10,000.00. The terms are usually limited to 36 months and require security and advances to offset the financing risk.
If you have been selling POS and use leasing or financing this is not new news! In the end, getting a deal done for new business may not be sellable because of the total cost of financing to the merchant. The VAR, ISO, and ISV and the finance companies are losing those deals! A new risk model is needed to close this higher risk segment of POS sales. That model can be achieved with what is known in the finance world as risk management. POS-as-a-Service offers an ideal opportunity to close the POS sale.
The model can work as follows: The POS vendor invoices the financing company the total amount of the sale including service maintenance agreements. Based on the amount of the total cost the merchant agrees to POS-as-a-Service agreement (not a lease). The vendor is paid in full for the invoice including hardware, software, installation, and maintenance support. Once the payment on the finance side is complete, usually 36 to 48 months, the finance company will assign the payment stream to the ISO, VAR, or ISV. So in the end, the merchant gets the POS system sale on a POS-as-a-Service model. The POS vendor is paid up front same as cash and receives the back end revenue stream for providing the POS-as-a-Service to the merchant.
This model currently works for the merchant who would qualify under standard approvals. In other words it is great for a merchant who not a new business and is credit worthy, but not so great for less than desirable credit. The challenge is with the merchant with less than perfect credit. That gap can be closed by establishing a reserve loss fund for the ISV, VAR, or ISO. It makes sense for financing companies to mitigate risk by partnering with POS vendors willing create a recovery fund for business that fail. The POS world and the finance world have an opportunity to come together using the POS-as-a-Service model. There are definitely arguments for both traditional ownership of the POS system and the POS-as-a-Service model. In the end it’s about making sales and holding market share.
Find a POS leasing partner or lending partner who will create programs that can provide a selling solution to meet the new demand for POS-as-a-Service model. Create a program unique to the products and services offered. Think bundled services with price points. Offer a menu of services at price points. Get pricing and configuration pricing down to a compelling value the merchant can buy into easily.
Does your company have a path to be able to sell POS-as-a-Service?