October 26, 2012
I had the occasion to visit with Jacob de Geer, the CEO of iZettle recently in its headquarters in Stockholm. The interview was amazingly candid and insightful. Here are a few of the key takeaways from our discussion.
iZettle has one and only one mission: to allow the 20 million micro-merchants all across Europe — as well as other markets around the world where chip cards are standard — to expand their customer bases and sales opportunities by turning their smartphones (and tablets) into point of sale acceptance devices.
It’s what inspired de Geer to start this, his fourth successful venture, instead of just kicking back and enjoying the long, dark, cold Swedish winters â˜º. It’s also what inspired de Geer to make a pretty big decision about his devices that has become quite controversial - distributing devices that enable Chip and Signature instead of Chip and PIN transactions.
iZettle, today, operates in the Nordic region, which like all of Europe has standardized on EMV. The company is also running a pilot in the UK with 4,000 users, and a smaller beta in Germany. For those of you not all that familiar with the EMV transaction rules, they can be certified one of three ways: via PIN, via Signature or without anything. Most countries, at the physical point of sale, have standardized on Chip and PIN using terminals that enable a card to be inserted and a PIN to be input by the consumer.
The problem for mobile merchants, according to de Geer, is that making little itty bitty Chip and PIN readers that plug into phone headset jacks is really, really expensive. As in 45 times more expensive than producing a reader that can process Chip and Signature - which is already four to five times higher than the cost to produce mag stripe readers.
So, iZettle was faced with a dilemma. “Building the iZettle business around a Chip and PIN mobile card reader would make it way too pricey for most small merchants, according to de Geer. “It would really defeat the whole purpose of wanting to serve a segment of the market not being served well today because they couldn’t afford to buy standard POS terminals, ” he added.
Thus the decision that got them into a little bit of a dust up with Visa Europe in July, which directly affected users in Denmark, Norway and Finland.
|Karen Webster and iZettle's Jacob de Geer|
That dust-up is over Visa Europe’s requirement that iZettle’s transactions must be authenticated via Chip and PIN, even though it is only one of the three ways that a transaction can be authenticated under network EMV rules. (According to EMV, PIN entry is not allowed on mobile devices such as smartphones and tablets. Hence, using PIN was never an option with the current iZettle solution.) When trying to decide how to proceed, iZettle decided to do a little consumer research. It found that consumers in the Nordic region (and throughout Europe) were used to signing their names a lot, and had no qualms doing so - including even on certain Chip and PIN transactions. Consumers have also been educated by banks that Chip cards are secure - very secure. So, bingo bango - a solution that combined Chip (secure) with Signature (an acceptable authentication method and something consumers were used to doing) was born. iZettle’s mobile point of sale hardware accepts Chip cards, with authentication via signature done on the phone’s screen (just like the experience today in the US with mobile POS devices).
Well, Visa Europe saw things a bit differently. It said that Chip and Signature did not comply with its network rules. This was and still is a puzzle for iZettle since its system is certified as EMV level 1 for its readers and level 2 for its back end software. iZettle’s solution is also PCI compliant and comply with MasterCard and AmEx rules (note that both are iZettle investors), as well as Visa Inc. and Diners Club regulations. (It's only Visa Europe that's not in favor of the solution.)
So, it’s a puzzle to iZettle as to why the hard line has been drawn on a solution that, in addition to having airtight EMV certification, touts fraud levels that they say “are well below industry averages at 5BPS” and that could potentially hurt merchant sales if a customer only has a Visa card to use. (To that point, de Geer says that most merchants haven’t lost sales since customers simply produce a MasterCard when told that Visa is not accepted.) It’s also a puzzle since in Sweden, at least, the PSP business is highly regulated - not just any Tom, Dick or Jacob, can get into the business. A raft of rules, standards and compliance actions including KYC and AML must be adhered to in order to operate in this sector in that role.
One speculation for Visa Europe’s hard line is that in Europe, Visa is still a four-party association model, that may be getting pressure from its bank customers to keep acceptance at bay since it is viewed as a competitor to their acquiring business. In Europe, don’t forget, most banks also operate as acquirers. So since iZettle acts as its own acquirer, it may be viewed as a competitor to banks who want to offer a mobile POS solution to its small business customers.
Undeterred, iZettle just keeps on trucking - or more appropriately, planting its flag, with or without Visa acceptance, in key countries like Germany, Italy and Spain where it views the financial crisis as a ripe environment for empowering a whole new crop of entrepreneurs to start their businesses and discover new ways to make money. iZettle says that it helps these merchants attract good business too - with average transaction values higher than many traditional POS environments given the nature of the merchants it attracts and who want to use its solution.
iZettle’s marketing strategy is as unique as its name (the origin of which I’ll get to in a minute). While it uses a marketing mix that includes retail distribution, feet on the street, marketing on electronic receipts and potentially (and ironically) other distribution avenues including FIs, most of its business has come from social media - Twitter, to be precise (and also ironically given its Square connection). De Geer says that one-in-five user-generated tweets is related to the iZettle device itself, which contributes to an enormous and powerful word of mouth phenomenon that delivers new leads.
iZettle has taken what was a barrier to entry - mobile POS readers that needed to be EMV compliant - and turned it into a pretty successful business. In doing so, it also attracts the inevitable comparisons to its US counterpart, Square.
Like Square, iZettle just closed a funding round, its Series B (well less than $225M at $32M+) with Greylock, MasterCard, American Express and a Swedish venture fund participating. Like Square, it also has a tablet solution in market. Like Square, it has expanded its distribution to include retailers.
But, unlike Square, it has no plans for a consumer wallet of its own or to become a consumer-merchant network- at least not now. And it remains hopeful that, like Square. Visa Europe will revisit its decision on allowing its cards to be accepted by iZettle merchants. But, the absence of that acceptance isn’t getting in the way of its ambition to serve the segment of merchant for which a low mobile point of sale solution is a critical business lifeline.
Oh, and the origin of the name? Well, that’s where PYMNTS.com and iZettle has something in common.
As de Geer tells it, when brainstorming names, he and his team wanted to use “I settle” but it was already taken - and too expensive for a young start up to buy from its owner. So, it did the next best thing - it came up with something that sounded like “I settle” but was spelled slightly differently.
Voila, iZettle was born!