SAN FRANCISCO VeriFone Systems Inc (PAY.N) said on Thursday it will pull out of the hot business of signing up small merchants to accept credit card payments, reducing competition for start-up Square Inc and other companies that jumped into the space recently.
VeriFone, a leading provider of card readers and payment processing services, unveiled SAIL in May, a service that lets small and individual merchants accept card payments through devices that plug into smart phones and other mobile devices.
The move was a response to the success of Square, a start-up led by Jack Dorsey, which has a card reader that has been a hit with small merchants such as cab drivers.
However, it is hard to make a profit from such services because the provider is at least partly responsible for any problems, such as fraud. That's the reason VeriFone decided to get out of the business.
"Our experience through 2012 with tens of thousands of these micro-merchants tells us that the standalone economics of micro-merchant acquiring are fundamentally unprofitable," Doug Bergeron, chief executive of VeriFone, said during a conference call with analysts.
The cost of tracking down and signing up small and individual merchants, through things like TV and Internet-search advertising, "will never justify the razor thin-margins produced by merchants with infrequent volumes and extremely high attrition," he added.
In addition to VeriFone, EBay Inc's (EBAY.O) PayPal division, Intuit Inc (INTU.O) and Groupon Inc (GRPN.O) have gotten into the small merchant payments business in the past year, making it one of the hottest parts of the massive payments industry. However, VeriFone's move may be an early sign of a shakeout in the sector.
Square is already branching out into other services and is focusing on larger merchants. It recently developed a digital wallet, similar to PayPal's main service, and signed a major payments deal with Starbucks Corp (SBUX.O), the world's largest coffee chain.
Groupon's payments business is designed to encourage more merchants to run its daily deals, rather than generate big profits for the company.
"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 said. "You can see evidence of other competitors' similar experience, as they shift their own business models to wallets."
Instead of signing up small merchants directly, VeriFone plans to partner with banks and so-called merchant acquirers who will use its SAIL platform and services to sign them up, the CEO explained.
The move means VeriFone will not be exposed to the risks and costs of handling fraud and other problems from these small merchant accounts.
VeriFone plans to sell the customer acquisition, risk management, and customer billing assets it developed for the micro-merchant initiative, Bergeron said.