SoftPOS: are smartphones going to displace Payment terminals?

Tech-savvy consumers started using leading mobile wallets in the likes of Apple Pay, Google Pay, Samsung Pay, a few years back. Under the circumstances created by COVID-19, a new wave of adopters joined the ranks as more and more in-store clients favored contactless transactions.

So it is now widely known that smartphones can be used as a payment method using Near Field Communication (NFC) protocol. But a number of headlines have recently brought a different use case to the financial services community: the possibility to use a smartphone in “reader” mode, as a contactless payment terminal. And to enable it, end-users would just have to download a “Soft POS” app.

Although deployments are still in their infancy stage, the perspective of a smartphone-powered technology sounds appealing to address unserved business owners. Some commentators even anticipate a disruption of a higher magnitude in the payment acceptance solution market. We suggest having a closer look here.

What does SoftPOS mean?

SoftPOS refers to a software-only mobile application solution enabling individuals to accept contactless payments, from cards or NFC wallets, on their personal smartphones, without the need for any additional hardware. 

As we are dealing with the POS (Point-of-Sale) terminology let’s bring further clarifications. SoftPOS shall not be confused with:

• Mobile POS, also called mPOS, which refers to lightweight, wireless payment terminals

• Android POS, which is the common name for smartphone-like devices, running different multi-purpose business apps (ex. order management, payment, stocks).

A SoftPOS application can be installed on any off-the-shelf consumer smartphone, alongside other apps. The device is typically not dedicated to professional use and these solutions mostly target independent business owners.

Who is pushing for SoftPOS enablement today?

Even if the core technology has been around for over a decade, SoftPOS has practically been at work only since the last 3 years. As a matter of fact, massive adoption of contactless payment methods was a prerequisite to deploy SoftPOS solutions.

Payment schemes are probably the most active promoters of SoftPOS, as an opportunity to onboard millions of micro-merchants, and have broadly announced a series of initiatives. Visa released certification standards and launched a new Tap to Phone program in October 2020. They have also contributed to an early multi-party pilot with Samsung and Fiserv, and invested in software development company Magic Cube. Mastercard announced a pilot in India mid-2020 with Axis Bank and Worldline. Later on, beginning of 2021, they introduced their Cloud POS framework and pre-certified SDKs to bring further security to the acceptance software as well as their first live implementation with CEG, NMI and Global Payments. Payment networks have a genuine interest in encouraging SoftPOS deployments by providing developer toolkits, subsidizing and marketing initial pilots, in order to keep increasing the number of transactions they process in underserved geographies and cash-based economies.

In parallel, the acquisition of Mobeewave by Apple in July 2020, as a $100m deal, was also perceived as a game-changer ; is it part of Cupertino firm’s plans to bolster their global payment business, by competing with Square and other leading Merchant Services providers? It is interesting to note that one of Apple’s biggest competitors, Samsung, had announced only 6 months earlier a partnership with Mobeewave combined with an investment from its VC arm in the startup. By acquiring it, Apple made sure not to lag behind.

Finally acquiring banks, like BBVA, have also trialed the concept but no commercial Soft POS solution release has been announced yet. 

Are there some limitations to SoftPOS technology?

SoftPOS could be a strong enabler to expand financial inclusion in developing economies and meet governments’ ambitions to reduce the use of cash. Though, the history of the technology is very recent as evidenced by the aforesaid key events. Transaction volumes still correspond to a pilot-scale user base. Specifications will keep evolving as software-based security will be scrutinized. And a complete ecosystem and commercial model must be built.

It is also fair to say SoftPOS is far from being a “one-fits-all” approach. It can be used only on the newest generation of Android-powered smartphones – not on iPhones. While payment terminals have to meet specific EMV requirements in terms of contactless usability, smartphones follow less demanding standards issued by the NFC forum. In that respect, significant discrepancies can be expected in terms of phone behavior in reader mode. It is also important to stress that SoftPOS supports only contactless payments – PIN entry is not specified, which de facto excludes transactions subject to amount limits.

Besides we should reflect on the user experience, for both parties involved. The business owner has to repeatedly leave his own phone in the hands of payers. It is hard to imagine asking employees to do the same. Furthermore, commercial off-the-shelf smartphones do not meet the robustness and durability standards of professional terminals that go through extensive qualitative physical and logical testing. On the other end, customers have to tap their payment cards on the personal device of a stranger. The slow beginnings of contactless card adoption and major debates on the technology security have shown that the perception of security can also be the biggest hurdle to overcome. Under Covid-19, hygiene and safety have also been added to the list of consumer concerns.

Finally, the economics also deserve careful consideration, keeping in mind mid-range smartphones cost around $500, 10 times more than a high-performance and lightweight mobile POS. Thus SoftPOS makes sense only for low-end independent merchants leveraging their personal mobile to occasionally accept electronic transactions. Besides, a dongle-free approach does not eliminate the inherent interchange fees.

Should a massive cannibalization of POS terminals be expected soon?

SoftPOS appears as an easy-to-deploy solution for infrequent transactors with low amount transactions. It is also highly probable that the main applications will be peer-to-peer. Though the technology, mostly security-wise, and available solutions will likely necessitate an additional 2 years at a minimum to be market ready. This timeframe could be well-used by OEMs to enhance smartphones’ architecture in cooperation with mPOS specialists, with the NFC reader mode in sight.

The most popular NFC wallets have not eliminated plastic cards: the global physical card base actually continues to grow, with some notable innovations (ex. biometric cards, crypto debit cards, all-accounts-in-one card) while contactless cards have highlighted the convenience of plastic. Likewise, we do not anticipate massive cannibalization of other physical acceptance solutions including dongles, mPOS, Android POS, or more traditional terminals. SoftPOS is a good fitting complement for micro-merchants. Different technologies, products and user experiences should prevail to meet the variety of checkout options businesses want to offer in proximity.