Key Points

  • Credit and debit card payments made in physical stores add up to a huge amount of economic value — $4 trillion in transaction volume in the U.S. alone in 2013, and that volume is growing as more and more people move away from cash.
  • But traditional card payments technology has evolved slowly, and merchants must choose from a confusing and expensive array of services and equipment in order to accept credit cards. That's creating an opportunity for more agile players that can offer innovative technology, easy-to-understand pricing, and less clunky software and hardware.
  • The credit card companies themselves aren't going anywhere for now. Visa and MasterCard in particular will remain an indispensable part of the chain because they don't actually process payments. They simply provide the rails that the credit card system works on: They issue credit card numbers to consumers, and operate the networks that ferry payments information between consumers, merchants, and their respective banks. Credit card processors like First Data that actually do the work of processing merchants' credit card transactions on the back-end are also in a strong position.
  • Two pieces in the chain are particularly vulnerable to disruption: the makers of the actual hardware — basically card readers and registers — that are used to physically accept card payments at stores, and the hundreds of vendors known as merchant service providers or MSPs, which set businesses up to accept credit cards. The MSPs act as middle-men, connecting merchants to the big banks, credit card-processing companies, and credit card networks like Visa. They are being pushed to become more tech-savvy and merchant-friendly.
  • Point-of-sale hardware faces an immediate threat from mobile devices. Many small- and medium-sized businesses are replacing their cumbersome point-of-sale hardware with tablets and smartphones outfitted with easy-to-use software and attachable credit card readers. These devices are cheap and easy to implement, they do not require consumers to adopt new behaviors, and free up retailer space previously devoted to bulky hardware.
  • The new payments companies — including PayPal, Leaf, Revel Systems, Square, and others — could shove traditional MSPs aside as they bridge the offline and online worlds. They pair their mobile registers with consumer-side smartphone apps, and often also provide additional merchant services, like software for loyalty programs or for parsing online consumer [...]