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VeriFone's Mission Is To Create and Lead the Transaction Automation Industry Worldwide.
VeriFone, Inc. has long dominated the market for electronic point-of-sale (POS) transaction systems--those little gray boxes found on sales counters everywhere used for authorizing credit card purchases. Since the late 1980s, VeriFone has held more than 60 percent of the U.S. market, and during the 1990s the company captured more than half of the international market for such systems. VeriFone manufactures the devices, which are actually small computers with their own processors, memory, and display, and develops the software to drive their application. The company does not sell directly to merchants; instead, VeriFone markets its products to banks and other financial institutions, which then place them on their customers' retail counters. In 1996, the company placed its five millionth system. Domestic and international sales of POS systems continue to form the majority of VeriFone's annual sales, which hit $387 million in 1995 and were expected to top $500 million in subsequent years.
But POS systems are only part of VeriFone's future. With the increasing saturation of the domestic POS market, the company has turned its attention to emerging markets to fuel its future growth. If VeriFone has its way, "transaction automation," as the company calls its industry, will become increasingly less reliant on physical products and instead turn to a virtual realm where cash will become obsolete. VeriFone has been at the forefront of this transition, shifting its own emphasis from manufacturing hardware to designing complete software solutions. Toward this end, the company has focused on two primary areas: the "smart" card and the Internet.
Smart cards replace the magnetic stripe of typical credit cards with tiny processors. The chips, which may contain as much as one megabyte of RAM, can be encoded with a variety of information, such as the amount of money available to the cardholder. Purchases made using a smart card are automatically deducted from the holder's account. Transactions are immediate, require no authorization, and thus enable the card to be used in low denomination purchases that would be too expensive or time-consuming with the typical credit or debit card. In addition, smart cards can be encoded with much more information, including a person's health insurance information, as well as that person's various credit card accounts.
The sudden growth of the Internet, and especially the World Wide Web, in the mid-1990s created a demand for secure online financial transaction applications. VeriFone has taken the lead in designing applications conforming to the Secure Electronic Transactions (SET) standards developed by Visa and MasterCard. With the $28 million 1995 acquisition of Enterprise Integration Technologies, the company that developed the Secure HyperText Transfer Protocol (S-HTTP), and a $4 million equity investment in CyberCash Inc., led by VeriFone founder William Melton, and with 1996 partnership agreements with Internet browser leaders Netscape, Oracle, and Microsoft, VeriFone has rolled out a suite of software products targeted at consumers, merchants, and financial institutions allowing secure purchases and other transactions online. Purchases over the Internet, which still produced as little as $10 million in 1995, are expected to reach into the billions by the turn of the century. VeriFone has also been working to marry the smart card to the Internet; in 1996, the company introduced the Personal ATM (P-ATM), a small smart card reader designed to be attached to the consumer's home computer, which will enable the consumer not only to make purchases over the Internet, but also to "recharge" the value on the card. VeriFone has also partnered with Keytronics to incorporate a P-ATM interface directly into that company's computer keyboards.
VeriFone's own infrastructure, developed under Chairman, President, and CEO Hatim Tyabji, gives it a distinct competitive edge in the inevitable, and impending, explosion of electronic commerce. As one of the world's first truly "virtual" companies, VeriFone has no headquarters; its offices in Redwood, California house only about 120 of the company's 2,800 employees, primarily in administrative and financial functions. Instead, VeriFone's employees are deployed throughout the world, attached to a network of research and development centers, manufacturing facilities, and sales offices. VeriFone's sales staff travel constantly. This includes Tyabji, who typically logs 400,000 air miles per year. Communication is performed almost entirely by e-mail; indeed, paper-based communication has been banned by the company. All sales, marketing, financial, and other information is made available to employees over the company's network. Product development is also global, and the company's network enables the development of a product to be performed 24 hours a day, without subjecting employees to the grueling, often 18-hours-or-more-per-day schedules of other software developers. A software application may be initiated at the company's Dallas R & D center. When the Dallas employees have completed their eight-hour day, the code for the application can be forwarded to VeriFone's Hawaii facilities, where employees are just beginning their workday, who in turn send the code to the company's Bangalore, India center. When the Dallas employees return to work the following day, they pick up where the other centers left off, allowing the development, testing, and implementation of new products to be completed far faster than the typical development cycle.
Pioneering Transaction Automation in the 1980s
William Melton already had more than a decade of experience in payment processing before founding VeriFone in 1981. Ten years earlier, Melton had founded Real-Share, Inc., in Hawaii, a pioneer in the use of computers and other database and telecommunications systems for check authorization and guarantees. In 1980, Melton sold Real-Share to TeleCheck Services, later part of First Financial Management Corp., for some $3 million. Melton used this money to start up VeriFone in Honolulu the following year. Initially, the company provided retailers with access to information on people known to have written bad checks. The company started at the local level, but soon spread throughout the islands. Part of Melton's operating philosophy was to place his sales and support staff close to the company's customers. To maintain contact among his widely dispersed employees, Melton turned to the nascent networking and portable computer industries, outfitting the company with early e-mail messaging and online database capabilities.
A development in the still-young credit card industry, however, caused Melton to change the focus of the company. The use of credit cards first became widespread during the 1970s. By the beginning of the 1980s, the major credit card companies began seeking methods to reduce processing costs and losses due to fraud. In 1981, Visa and MasterCard began offering merchants discounts on their transactions if they agreed to use newly developed automated transaction technology for all credit card purchases greater than $50. This move opened the way for the creation of an industry devoted to producing POS authorization systems. Early systems typically had starting prices of $900.
VeriFone introduced its first POS product in 1982. By slashing operating costs and lowering manufacturing costs by outsourcing production, VeriFone brought its first system to the market at $500. In financing this effort, Melton received help from Lexis-Nexis founder William Gorog, who had sold that company and founded Arbor International to produce credit card authorizations systems under contract for Tymnet. When Tymnet decided not to pursue the POS market, Gorog agreed to finance VeriFone with letters of credit. He next brought VeriFone in contact with a venture capital firm for additional financing. In return, Arbor received the right to sell VeriFone products east of the Mississippi.
Working with Visa, VeriFone quickly captured a strong share of the POS market. In 1984, however, the company took a major step toward achieving industry dominance with the introduction of its ZON credit card authorization system, which, taking advantage of improvements in processor speeds and the lowering cost of both processors and memory, cost as little as $125, making it easier to convince retail merchants to install the system in their stores. The following year, the company's revenues grew to $15.3 million, earning a net profit of $864,000. In that year, VeriFone moved its headquarters to Redwood, outside of San Francisco, to be closer to that area's software and hardware engineering talent pool, as well as to its customers and investors.
The company doubled revenues, to about $30 million, in 1986. But VeriFone's products were beset by quality problems, the company was barely producing profits, while in constant need of new financing, and investors were critical of the company's management. As one early investor told the New York Times, VeriFone was led by "management by reactive panic mode." The venture capitalists behind VeriFone urged Melton to bring in a new president and CEO.
Melton chose Hatim A. Tyabji. Born in Bombay, India, Tyabji had moved to the United States at the age of 22 to attend graduate school, eventually earning two graduate degrees. Tyabji joined Sperry Corp. as a junior project manager, but in 13 years rose to become president of information systems products and technologies. When Sperry was bought up by Burroughs Corp., forming Unisys Corp., Tyabji decided to leave. Named president and CEO of VeriFone, Tyabji worked to turn the company around. Quality problems were quickly addressed; by 1988, Tyabji moved to create manufacturing as a core competency, opening VeriFone's first manufacturing plant in Taiwan. The company also acquired Arbor International, for an exchange of stock, giving it full control of marketing and sales of its products. Tyabji sought to transform the company into Melton's original vision of a virtual operation. Laying down a corporate philosophy, Tyabji encouraged the growth of the company's computer network, outlawing paper-based communications and mandating that employees make constant use of the network's e-mailing and database functions. Employees and operations were placed close to the company's customers, enabling Tyabji to institute what the company calls its "culture of urgency," allowing for 24-hour-per-day product development and sales and marketing efforts.
By January 1988, VeriFone controlled more than 53 percent of the POS systems market. Revenues had reached $73.4 million, with net earnings of more than $6 million. The following year, the company increased its dominance in the industry with the purchase of the transaction automation business of Icot Corp., then second in the market with a 20.5 percent share. The acquisition boosted VeriFone's revenues to $125 million. By then, VeriFone had entered the international market, starting with Australia in 1988 and placing its millionth ZON system in Finland in 1989. Tyabji added chairman to his titles after Melton retired from the company in 1989, taking a seat on the company's board.
New Directions for the 1990s
VeriFone went public in March 1990, raising more than $54 million. As the credit card industry matured, VeriFone pushed to install its systems into new markets, such as restaurants, movie theaters, taxis, and fast food restaurants, while developing software capacity to bring its systems into the health care and health insurance markets and to government functions, such as state welfare systems. International sales also began to build, as use of credit cards became increasingly accepted in foreign markets. VeriFone was also building its global operation, opening facilities in Bangalore, Singapore, England, Dallas, and Ft. Lauderdale, in addition to its Hawaii and California facilities. Rolling out its Gemstone line of transaction systems, which added inventory control, pricing, and other capabilities, VeriFone was aided by announcements from Visa and MasterCard that the companies would no longer provide printed warning bulletins, while requiring merchants to seek authorization for all credit card transactions by 1994.
These moves further stimulated demand for VeriFone's products. Revenues jumped from $155 million in 1990 to $226 million in 1992. By then, VeriFone had placed its two millionth system (in Fouquet's restaurant, near Paris, in 1991); by 1993, VeriFone systems were in place in more than 70 countries, including its three millionth system, in Brazil, representing the company's expansion in the Latin American market. International sales, which had contributed less than ten percent of revenues before 1990, now accounted for more than 30 percent of the company's nearly $259 million in annual revenues.
New opportunities arose as banks began rolling out debit cards in the mid-1990s. VeriFone was quick to launch itself into this new market, producing terminals designed with key pads for customers to punch in their PIN numbers. But as the domestic credit and debit card markets neared saturation, VeriFone made ready to launch itself in new directions. While continuing its international expansion, topping four million installed systems in 1994, and maintaining its manufacturing capacity, doubling production capacity with a new plant near Shanghai in China in 1994, VeriFone had already evolved its primary focus to producing software applications, offering vertically integrated systems solutions, including applications for standard computer operating systems.
VeriFone moved to take the lead in the coming smart card revolution, teaming up with GemPlus, a France-based maker of the cards, and MasterCard International to form the joint venture SmartCash. To place the company close to technological developments in France and the rest of Europe, VeriFone opened its Paris research and development center in 1994. The company launched its smart card in May 1995. The company introduced its Personal ATM, a palm-sized smart card reader capable of reading a variety of smart card formats, in September 1996, with the product expected to ship in 1997. Among the first customers already signed to support the P-ATM were American Express, MasterCard International, GTE, Mondex International, Visa International, Wells Fargo Bank, and Sweden's Sparbanken Bank. Contracts for each called for the purchase of a minimum of 100,000 units; the total market potential for the device was estimated at more than 100 million households. In addition, VeriFone began developing smart card readers to supplement and eventually replace its five million credit and debit card authorization systems.
In 1995, VeriFone began the first of its aggressive steps to enter an entirely new area, that of Internet-based transactions. In May 1995, the company partnered with BroadVision Inc., a developer of Internet, interactive television, computer network, and other software, to couple VeriFone's Virtual Terminal software--a computer-based version of its standard transaction terminal--with BroadVision's offerings, thereby extending VeriFone's products beyond the retail counter for the first time. In August 1995, however, VeriFone took an even bigger step into the Internet transaction arena, with its $28 million acquisition of Enterprise Integration Technologies, developer of the S-HTTP industry standard for safeguarding transactions over the World Wide Web. VeriFone followed that acquisition with a $4 million investment in William Melton's latest venture, CyberCash Inc., also working to develop Internet transaction systems.
By 1996, VeriFone was ready with its Payment Transaction Application Layer (PTAL) lineup of products, including the Virtual Terminal interface for merchants conducting sales with consumers; Internet Gateway or vGATE, to conduct transactions between merchants and financial institutions; and the Pay Window interface for consumers making purchases on the Internet. After securing agreements from Netscape, Oracle, and Microsoft to include VeriFone software in their Internet browsers, VeriFone and Microsoft announced in August 1996 that VeriFone's virtual point of sale (vPOS) would be included in the Microsoft Merchant System to be released by the end of the year. VeriFone's announcement of the P-ATM, able to be attached as a computer peripheral, wedded the company's smart card and Internet transaction efforts.
The success of these ventures depended on the long-term acceptance of the new technologies, and VeriFone faced powerful competition as the industry struggled to achieve international standards and specifications. But with Hatim Tyabji leading the company in its culture of urgency, VeriFone hoped to become as ubiquitous on the screen as it had become on the store counter.
Principal Subsidiaries: TIMECORP Systems, Inc.; VeriFone Finance, Inc.
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