The number of companies giving small merchants a way to process card payments from a mobile phone has expanded significantly this year. However, VeriFone said  last week that it will shut down its mobile POS Sail business and others may soon follow.

VeriFone executives, speaking during a call last week with analysts to discuss fourth quarter earnings, said that the low margins from small merchants for the mobile POS business are behind its decision to exit the strategy. The Square-competitor, which launched in May, enables small merchants to process card payments via an attachment to a mobile phone.

“This is very significant news that VeriFone is backing out of mobile POS,” said Dave Kaminsky, emerging technologies analyst at Mercator Advisory Group, Maynard, MA.

“The market has become saturated and a lot of people are realizing that there isn’t enough of a market for them all to share,” he said.

“In the next three to six months, you will see a lot of other solutions pulling out or divesting in a similar way to VeriFone.”

Daily deals parallels
The issue for a large company like VeriFone with offering a mobile POS service for small merchants is that the use by these merchants is infrequent. As a result, the costs to acquire new customers does not balance correctly with what these customers pay out.

VeriFone said it will continue to offer third-party partner customer support and will provide these third-parties with dongle hardware and payment gateway access. However, the company will stop trying to sign up new customers.

There are a lot of parallels between what happened in the daily deals market over the past couple of years and what is taking place in the mobile POS market for small merchants, per Mr. Kaminsky.

In the daily deals space, Groupon made a big splash showing how profitable a daily deals platform could be. Others, realizing it did not take much to start a daily deals business, quickly jumped in and the market became saturated.

However, it soon became clear that the daily deals model faces some longer-term challenges, including being able to drive repeat business for merchants. As a result, many exited while Groupon and Living Social are struggling to hang on.

“In mobile POS, Square came out and showed what the technology could do,” Mr. Kaminsky said. “Like in the daily deals space, a lot of other people jumped in.”

Also similarly, some may quickly exit now that the mobile POS market is saturated and the economics are not bearing out for all.

Value-add services
The difference is that in mobile POS, some entrants are realizing that by providing additional services on top of mobile POS, they may be able to build a stronger business.

“What Square intended to do was make it simple and affordable for small businesses to accept card-based payments,” Mr. Kaminsky said.

“There is nothing inherently flawed with Square’s solution, like daily deals are inherently flawed,” he said. “However, there are a lot of companies that want to take this idea and make it even better.”

For example, Intuit is offering mobile payments to small merchants and integrating its QuickBooks services. As a result, Intuit customers can accept mobile payments and have them automatically show up in their QuickBooks business management software.

“This is one of the best examples that I have seen,” Mr. Kaminsky said.

“It is a lot easier for Intuit to add mobile payments than for Square to add a business management solution,” he said.

Groupon is also moving into mobile POS in hopes of making it easier for merchants to accept its daily deals.

Square has the name recognition and is continuing to expand. It is also trying to integrate additional services, such as providing weekly sales analysis tools for merchants.

PayPal also continues to push into this space as it tries to build a broader point-of-sale business for merchants.

Additionally, Bank of America has made some steps into this area (see story).

“There is going to be a benefit to solutions that are offered by financial institutions because merchants are used to dealing with them, “ Mr. Kaminksy said. “There is one less step between accepting payments and putting the money into a merchant’s account, which may make merchants more comfortable.

“I think there are a lot of merchants out there who are more comfortable with payments acceptance going through Bank of America than they would be with Square,” he said.

Final Take
Chantal Tode is associate editor on Mobile Commerce Daily, New York