VeriFone turns payment disruption into a services business

Right after announcing VeriFone’s $812 million Monday purchase of Point, a European-based point-of-sale, gateway and payment services provider, VeriFone(s pay) CEO Douglas Bergeron got calls of congratulation from PayPal (s ebay) President Scott Thompson and top Google Wallet (s goog) officials. These two companies have been feuding and there’s no love lost between them. But they found common ground in congratulating VeriFone, because the company’s evolution is very much tied to their efforts in disrupting the in-store payment experience.
As Google and Isis, the carrier-led joint venture, bring forward new NFC-based payment systems and PayPal builds its own in-store solution for payments that leans on other methods besides contactless, they’re increasingly looking to VeriFone to make sense of it all for merchants, which are confused about how to handle this transition to alternative payments. The thinking by VeriFone, Google, PayPal and others is that VeriFone can help lead merchants and retailers through this transition by becoming a managed services provider, not just a payment system seller, VeriFone CEO Doug Bergeron told me in an interview.
By helping integrate these new payments models into the existing systems of merchants, VeriFone can be an independent third party, a “Switzerland,” said Bergeron. He said VeriFone can make all the alternative payment systems and their new discounts and loyalty features work through point-of-sale hardware merchants are familiar with.

“We’re realizing our customers need more than just our products; payments is [sic] getting too complex for them and they need ongoing service. They need someone to manage not only credit card acceptance and security but all the new stuff that will co-exist like Google Wallet, Isis, and PayPal and Groupon (s grpn). Retailers want the ability to keep current with all this stuff  but they can’t hire an IT team.”

VeriFone CEO Douglas Bergeron

That’s where the purchase of Point comes in. Point — which offers point-of-sale technology and support, payments gateway services, card encryption services, and multi-channel e-commerce processing — has the biggest footprint in Europe with 475,000 merchant contracts, which will no doubt extend VeriFone’s existing business. But really critical in the pick-up are Point’s services business and technology.
Point doesn’t just sell terminals; it provides merchants with ongoing security, compliance and technological capabilities, as well as other mission critical service. That fuels a recurring services model that will add about $260 million in sales over the next 12 months to VeriFone. VeriFone plans to use Point’s technology and business model in other markets where payment systems are mature to help retailers make the transition to alternative payments.
VeriFone said with the addition of Point, its services revenue will grow from 20 percent this year to 30 percent in fiscal year 2012 and will hit 50 percent of revenues by 2015. By that time, services will represent a $1.5 billion business, including rentals. If all goes according to plan, the company will become a services provider, delivering remote support and help in connecting these new payments solutions with a retail business’ system and ultimately with their banks.

This strategy isn’t without risks. Standard & Poor’s lowered its outlook on VeriFone Tuesday based on the debt it was taking on for the Point deal and the integration risks. And it’s unclear if VeriFone is being too optimistic in its belief that merchants will turn to it for managed services. But this is where VeriFone is ultimately going as it tries to become a full-blown resource for merchants and retailers. That’s the motivation that went into its recent purchase of Global Bay, which helps retail employees connect with consumers on the sales floor through mobile devices and provides software that ties into inventory systems and online commerce sites. Bergeron said merchants are increasingly going multi-channel, blending online and offline commerce, and they need more help in doing that.
It shouldn’t be a surprise that VeriFone is poised to capitalize on payments. It has been around for years and has a huge footprint in the U.S. with its point-of-sale terminals. But it’s making some bold decisions to grow beyond the point of sale, getting on to the sales floor with mobile devices like its PAYware card swipe tool and with Global Bay’s software and creating a services business that can provide a lot more recurring revenue. It’s hard to say which digital wallet and alternative payment system will win out. And VeriFone doesn’t connect to other mobile-based solutions like rival Square. But with its latest moves, it seems VeriFone will do quite well as the payment landscape goes through a lot of upheaval in the coming years.