Should VeriFone’s Exit From the Mobile Payments Space Worry Square?

VeriFone, a company that has proclaimed in the past that it will be playing “the role of Switzerland” in digital payments, is naming at least one technology that it won’t be agnostic about: Mobile payments.

verifone sail

A year and a half ago, VeriFone unveiled a product that would give small-to-mid-sized retailers the ability to use an phone or tablet to accept payments. But during a quarterly conference call this week, Verifone chief executive Doug Bergeron explained that the company would be discontinuing the service, called Sail, because it is unprofitable.

“Customer acquisition costs, either through search engines or TV advertising cannot and will never justify the razor thin margins produced by merchants with infrequent volumes and extremely high attrition.”

Square must be feeling a little bit vindicated that VeriFone couldn’t hack it in the space, given the two companies’ ongoing rivalry. The two first started bickering more than a year ago after VeriFone wrote an open letter about Square, calling out a potential security flaw in its mobile-phone card reader.

When Square promised to add encryption to its devices as part of an investment by Visa, VeriFone felt like it won that battle. Shortly after, it unveiled Sail, which was targeting smaller merchants, such as food trucks or taxicab drivers — much like Square.

VeriFone said that, going forward, it will focus exclusively on providing mobile payments to small merchants through an indirect channel. The company plans to sell off its assets, although it didn’t expect a deal to be financially meaningful to the company. Reuters first reported the company’s moves on Thursday.

As part of the call with investors, Bergeron didn’t stop at explaining VeriFone’s reasons for exiting the business. He also took the time to question whether the model was flawed for all companies, and not just VeriFone.

“I think you can see evidence of other competitors’ similar experience as they shift their own business models to wallets. My belief is that the only possible survivors in this fundamentally challenging business model will be companies who might have an opportunity to provide other services to these micro-merchants.”

Bergeron’s statement does bring up a good question: If charging a flat rate of about 2.75 percent per transaction doesn’t pay off for the mobile payments industry, then what other features will they have to build in order to bring in revenue?

Square, which is now processing $10 billion annually in transactions, isn’t the only company in the space. Other players include PayPal, Intuit, Pay Anywhere and, more recently, Groupon. For them, it’s not all about the transaction fee. For instance, PayPal is focused on providing a digital wallet, while Groupon’s main business is offers.

Square gets a disproportionate amount of attention in the space because the start-up is led by Twitter’s Jack Dorsey, and because it has made a lot of progress quickly.

As Bergeron suggests, Square has started to shift its focus toward providing other services. For instance, it would like consumers to visit its mobile app to discover new local restaurants and find offers and discounts. A recent partnership with Starbucks, in fact, is designed to help lift consumer adoption of its mobile app. Rather than use the standalone Starbucks application, consumers will be encouraged to pay for their lattes with the Square Wallet. In theory, the partnership could naturally lead to consumers using the app more.

To be clear, there’s no indication that Square has ever shifted its strategy. Logically, it would make sense for it to build up its base of merchants before trying to get consumers to start using a wallet that wasn’t accepted at a lot of shops.

So far, it’s just VeriFone getting out of the race. Will others follow?

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