Is First Data’s Clover Hoisting The White Flag?

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Late last year Square partnered with otherwise competitive point of sale (POS) software manufacturers TouchBistro and Vend. Why? Square realized that its core software solution was too lightweight to move beyond the ice cream cart. Small merchants (Square’s target customer) can’t afford Square’s additional services, which kinda makes it impossible for them to turn a profit (more on that below). Yes, larger merchants do fall into Square’s marketing trap and assume they can use Square’s POS software to run their table service restaurant, but they end up sour on the whole experience after a few weeks.

By partnering with other POS providers, Square does two things:

  1. It makes available its core processing services to a potentially larger market. Square’s processing rates, however, become comically high for merchants of any real size (2x what they would normally pay), so there is a definite ceiling.
  2. It syndicates its “subscription services” like Square Capital and Caviar, which have grown to over $40MM in the most recent quarter. These are services POS companies who haven’t raised $600MM cannot afford to offer, so Square’s created a product moat by scale.

Recently First Data’s Clover POS seems to have copied a page from Square’s book.

First Data forged partnerships with ByPass POS, Shopkeep POS, and KWI POS under their newly formed Integrated Solutions Group. Much like Square, the goal of these efforts is to the same end: move upmarket to larger merchants via partnerships.

While I don’t have the line item detail for Clover’s income statement, we can learn enough from Square’s 10-Q’s to know why Clover is trying this approach.

Square isn’t making any money from the small merchants it serves. Not only do these merchants churn in incredibly high numbers, but they’re not appropriately underwritten to protect Square from fraud. This makes the merchant on-boarding process relatively easy, but it also comes at a huge risk to Square. The husband-wife retailer is also not buying Square’s other products, like analytics or marketing, which makes incremental revenue, and thus profit, impossible to come by.

Like Square, First Data has also sunk serious money into its app store only to learn that merchants don’t do self-discovery. Can you picture a weary merchant wrapping up their 16-hour day only to be revitalized with the carnal urge to peruse the app store for two hours?

“Screw seeing my kids, I got this app store to keep me busy!”

Me neither.

First Data’s partnerships could be signs that it’s waiving the white flag on maturing its own POS software. These deals seem to be avenues for Clover to move the First Data processing banner while simultaneously selling Clover hardware. We’re already well aware that a number of legacy POS companies, who didn’t bother to become EMV certified by the deadline in October of 2015, are using Clover minis to make their merchants EMV compliant.

The concern these POS partners need to have is what direction Square and Clover will ultimately move. Right now Square is amicably reselling software like TouchBistro and Vend to larger merchants, negotiating down their own processing rates to win the payments contracts and hoping to move its bolt-on services. Limiting themselves to supplying hardware, payments and reselling partner POS software is one thing, but what’s to keep the aforementioned from building more robust POS features and eventually competing with their POS partners on the software?

Acquiring merchants is a cost-prohibitive activity, otherwise Square and Clover wouldn’t be sniffing around. Giving them access to your merchants could be giving them the keys to the kingdom. Look before you leap.

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