Check It Out: ScanSource Prepping Partners For Big Opportunities In Point-Of-Sale Space

ScanSource is diving into what it says is the biggest opportunity to date in the point-of-sale and retail space.

That opportunity focuses on chip card technology and payment terminals. This October, the liability for fraudulent cards will shift from the card issuers to merchants. This means that if a fraudulent debit or credit card transaction takes place, and the leak or breach of that card's information is traced back to the retailer, that retailer is held responsible.

Banks and other card issuers already have begun releasing new cards in the U.S. that feature an encrypted chip embedded inside.

[Related: Mobile Payment Platforms Poised For Takeoff]

"Credit cards are an insecure medium and have become more and more so over the years," ScanSource CTO Greg Dixon told CRN in an interview. "There are lots of things that make them insecure, and that magnetic strip on the card is one of them. A way to overcome that lack of security is a new technology, which is an integrated circuit or chip. That chip is integrated inside the card and instead of swiping the card, now you dip the card like you would a hotel key, but you leave it inside. The chip in the card contains a processor, memory and code and your credit card information that can't be easily reproduced. So that is the point -- this chip makes the card very difficult to reproduce."

With the massive amount of reported data breaches in the retail industry over the past few years, analysts wonder why the adoption of encrypted chip card technology has taken so long.

"What's interesting is that this, combined with the Target data breach in particular, kind of pushed EMV [Europay, MasterCard, Visa technology] into the public consciousness in a major way for the first time," said Matt Schulz, senior industry analyst at CreditCards.com. "International travelers have been aware of it for a while, but when Target happened, it was really the impetus for bringing the discussion of 'chip-and-signature' mainstream."

Chip card technology has been implemented in countries around the world for some time, but it's only just beginning in the U.S. Here, chip cards still have the magnetic strip on the back, so they can be read on an older card reader, but these older readers can't take advantage of the secure chips inside these new cards. That is where ScanSource sees an immense amount of opportunity for its solution providers.

"The cost of changing this technology is huge, so that's where we come in," Dixon told CRN. "Every [retailer] in America is going to have to replace their old credit-card-reading device with a new device, and it's a $200- to $400-per-unit kind of a cost. Now multiply that by 20 million, and it causes churn in retail technology sector. If I'm a store on a street and I have five POS terminals in my store and five credit card readers, if my POS solution is also old, then I'm thinking about rethinking the whole thing. So there is a lot of that rethinking, and that creates a lot of opportunity."

While hardware terminals are being replaced, solution providers also can pitch their POS software security solutions. The idea, according to ScanSource, is that if a terminal needs to be replaced, why not upgrade the whole system to make sure it is as secure as possible?

The Greenville, S.C.-based distributor calls this the single biggest opportunity in the POS space today and estimates up to 10 million payment terminals will be replaced nationwide over the next two to three years. Through its solution provider channel, ScanSource has done 20,000 terminal replacements over the past year and expects to double that number this year. As October draws closer, the adoption rate of new chip-card-reading terminals will grow exponentially. according to ScanSource.

ScanSource and POS solution providers have invested a great amount of time and resources in staying ahead of the curve, so they say they will be ready when the adoption rate picks up.

"Really, the biggest challenge for partners who haven't sold in this space before is really just understanding the ecosystem around payments," Paul Constantine, ScanSource president of POS and barcode, told CRN in an interview. "There are so many different players and they're called so many different things. That's where we think we can really add value, helping them make sense of the lay of the land and giving an objective view to the partner. If they have retailers that are interested in upgrading their payment technology, and they're coming to that reseller because that reseller is a trusted adviser, we can be that reseller's trusted adviser when it comes to payment technology."

ScanSource is a certified Encryption Services Organization (ESO), which allows the distributor to inject payment terminals with unique encryption keys to secure card transactions. This allows solution providers to receive new terminals from ScanSource and not have to go through a third-party ESO to secure the hardware. The distributor went through the process of becoming a certified ESO for just this reason, it said.

"It's a huge opportunity," Constantine told CRN. "It's not going to be complete by October of this year. But it's going to be a rollout of two to three years. The opportunity around any technology retailer is to be able to help their customer through this change. At the same time, as you have this mandate coming down, you have new mobile wallet and mobile payment technology like Apple Pay, which also now adds another incentive for the retailer to upgrade their payment technology. So there are two reasons now, not just one, for a retailer to upgrade their payment technology. ... There will be those that continue using magnetic strip technology and don't ever upgrade, but it's going to be fairly pervasive. It'll start at the enterprise and work its way down. It's a huge opportunity."

John Deery, founder of JD Associates, a Leominster, Mass.-based POS solution provider and longtime ScanSource partner, said he has been preparing his company for this opportunity for years and started converting clients a year ago, with more than 100 clients since then.

Deery, who is a former retail store owner, emphasizes that this is a huge opportunity for POS solution providers like JD Associates. He believes his business is about to reap the benefits of staying ahead of the curve in a big way.

"What will happen is there will be summer rush," Deery told CRN in an interview. "I foresee that happening. It's hard to know, but we'll probably get a couple hundred more clients [before October]. We're doing several per week now. The closer we get, the more we'll do, but we've been very proactive and are pushing this. It's really in the retailer's best interest. There are plenty of retailers who haven't got a clue yet and aren't paying attention. That will change when [October] gets closer."

When replacing payment terminals at retailers, JD Associates can offer its own POS security solution called Retail Pro. The software works by completing a payment transaction securely without the POS terminal and the credit card terminal exchanging the card data with each other as they are on their own individual networks. With this point-to-point encryption model, the credit card information is not vulnerable.

"We could offer our retailers a solution that lets them sleep at night because it satisfies the biggest fear a retailer could have," Deery said. "If you are in the point-of-sale space, the opportunity is when they are looking to replace the credit card terminal they may need some upgrade on their POS terminal, so overall there is an opportunity. There is a big opportunity. We've been trying to educate customers for close to two years. We sell a POS software that took this head on."

The biggest challenge, according to ScanSource, is that retailers may want to push off replacing their card readers for as long as they can. But with data breaches becoming more prevalent at retail stores, it's for their own protection to take action sooner.

"The big challenge is that people don't like to be mandated," ScanSource's Dixon said. "This is a mandate. They don't like spending money on something someone else makes them spend it on. Taxes, it's something you'll eventually pay, but you don't ever like it. That's what this is about. It's about merchants being able to afford the change that this requires of them. For the merchants this is not an opportunity for them. But for the solution providers, it's a big opportunity."

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.