Corporate America Discovers Payments - Digital Transactions

Trends & TacticsTrends & TacticsHeartland Vs. VeriFone:What’s Really at Issue?The merchant-acquiring business hasn’tseen a fight like the one between leadingU.S. point-of-sale terminal manufacturerVeriFone Holdings Inc. and bigacquirer Heartland Payment SystemsInc. in years. As of mid-November, thisbrawl featured four lawsuits, numerouspress releases, and Web-site lettersfrom chief executives, all portrayingthe other company as the bad guy.An especially interesting twist isthat VeriFone, in suing Heartland, isgoing after one of its bigger customers,though exactly how big depends onVeriFone acquired in 2006. On Sept.9, VeriFone filed suit in U.S. DistrictCourt in San Jose claiming Heartlandis infringing on its patent. Heartlandthen sued VeriFone in a New Jerseystate court on allegations that includeinterference with its business and defamation.The parties now have tworelated suits pending in the federalcourts in New Jersey and San Jose.The real issue could be end-toendencryption, but it also could bethat VeriFone is trying to keep Asianterminal makers out of the U.S., ifHeartland is to be believed. And thenthere is the issue of recurring revenueas price competition crimps marginson POS hardware.‘VeriFone is trying to get more recurringrevenue, rather than just selling boxes.’who’s talking. Princeton, N.J.-basedHeartland has approximately 170,000merchants with 200,000-plus locations.VeriFone estimates that 75%of Heartland customers in the retail,restaurant, and petroleum markets useits systems.Retorts Robert O. Carr, Heartland’schairman and chief executive officer:“How would they know that? I knowexactly how many terminals VeriFonehas, and it’s less than 50% of our business.”And dropping, he adds.But San Jose, Calif.-based Veri-Fone perceives Heartland to be a rivalin end-to-end encryption of paymentcard data during the transaction process.Heartland became a vocal apostle of thetechnology after the huge data breachof its computing system last year, abreach that may have compromised 130million debit and credit cards.VeriFone has a patent on end-toendtechnology that was granted toLipman Electronic Engineering Ltd.,an Israel-based terminal maker thatGil Luria, a vice president at LosAngeles-based Wedbush Morgan Securities,says there’s a fundamental reasonwhy VeriFone and other terminalmakers are trying so hard to keep andwin business: the basic POS terminalhas become a commodity. “VeriFoneis trying to get more recurring revenue,rather than just selling boxes,” he says.Tapping into new revenue sources “isactually pivotal to the future of thepayment-terminal” industry. A Veri-Fone spokesperson says the companydoesn’t respond to analyst reports.End-to-end encryption is a hot newservice to offer merchants because ofdata breaches. Processors, POS terminalmakers, and tech companies are comingout with their own twists on it (“An EndlessDebate Over Encryption,” October).With everyone seeking a piece of theaction, acquiring executives say patentlawsuits are no surprise.But Heartland claims the disputearose because it refused VeriFone’salleged demand that VeriFone be thesole supplier of its “E3” encryptingterminals. Heartland is using TaiwanbasedUniform Industrial Corp. (UIC)and its Chinese subcontractor, IKON.Heartland says the Asian manufacturerswill get its terminals to marketfaster than VeriFone would.VeriFone also wanted an ongoingrevenue stream from the E3 terminals,Heartland claims. “They wantedto charge 2 cents a transaction forthe privilege of using their box,”Carr says. Heartland calls VeriFone’srequested revenues “junk fees.”VeriFone’s spokesperson, however,calls that assertion “disingenuous” andadds, “Despite Heartland’s efforts toobscure the issue, this is a dispute overpatent infringement, pure and simple.”VeriFone is raising the stakes bysaying that because of the patent disputeit would no longer support its Heartlandusers unless they sign up for freeVeriFone support by Dec. 15. VeriFonesaid the merchants need its softwareupdates, though Heartland insisted itcould handle any support issues.VeriFone may be raising the stakeseven further by seemingly bringingindependent sales organizations intothe dispute. “VeriFone CommendsISO Community Response to HeartlandTransition,” reads the headlineof a Nov. 12 VeriFone release. Itgoes on, “Thousands of merchantrepresentatives have begun a nationwideeffort to personally visit Heartlandmerchants. The ISO communityis helping prepare Heartland’s merchantsfor the transition to avoid anydisruptions, particularly during thecrucial holiday season.”The release didn’t specify whatkind of “help” the ISOs were offering.Asked by Digital Transactions,VeriFone’s spokesperson said bye-mail that “ISOs are offering merchantsalternative processing services,fully backed by VeriFone support.”8 digitalDecember 2009