Is Toast Subsidizing Its Products to Rake It on Processing?


To start this analysis, we need to look at some data. We’re going to post a few toast quotes so we can all examine them together.


Now, here are three big things we want to talk about.

First, we must look at toast’s consistent stance on discounting. This is fine, and there’s nothing inherently wrong with it. In the game of POS, POS companies (ISVs) are almost always building custom features or dropping prices on hardware/software bundles to convince the merchant they’re getting a deal. Toast seems to offer greater discounts for larger volume – look at the 11 terminal quote vs the 3 terminal quote for proof.

Second, toast charges an implementation fee. Which they’ll also discount. This includes the standard menu programming, installation (which might include running cables), and employee training. For an estimated 48 hours of implementation work toast will bill $5,938, with a 10% discount. This comes to $5,344, which is $111 per hour. Since there are 2080 hours in a standard (non-governmental) work year, $111 an hour comes to an annualized salary of $230,880. Despite this eye-popping figure (which merchants don’t really bother to cost), toast’s rates are par for the market.

Third, and most importantly, toast shows an aggressive processing contract with a number of potential loopholes that could prove very, very costly for merchants. This is despite toast’s match or beat rate guarantee.

We’ll start with a quote from a prospective Toast customer on Merchant Maverick

The whole match or beat scheme similarly struck the Merchant Maverick gang as suspicious.

Here at Merchant Maverick we have reviewed enough payment processors and merchant account providers to have nurtured a healthy suspicion of the whole “meet or beat” gimmick, which is easily manipulated with added fees. 

When reading through toast’s processing language we come away with these bullet points:

  1. Toast is determining how they’re matching rates: “X% + $0.15 where X is set following Toast’s analysis of each Merchant location’s pricing statements.” There are so many fees processors invent to deal with the pain of serving local merchants that “price matches” may continue to be overly inflated. However we can appreciate the complexity in determining interchange given monthly fluctuations and numerous kinds of credit cards.
  2. Toast gives themselves an out. “If Toast’s processing costs exceed the revenue associated with the foregoing processing rates for any Merchant location, Toast shall, upon notice to Merchant, be entitled to adjust such processing rates upward so that Toast’s revenue from Merchant… matches Toast’s cost of processing; the rate of such upward adjustment to be made in Toast’s reasonable judgement.” Mercury invented the whole profit vs revenue obfuscation in the payments channel. We have no idea how Toast will calculate this “revenue”, and neither do merchants.
  3. Nowhere in here is Toast saying they won’t change merchant processing rates, naturally upward, after they meet or beat rates.

Suffice it to say that merchants need to check their processing statements early and often. 

Toast has provided some instructions for how merchants can find their processing rates, but toast doesn’t explain if the rates they offer are fair. If we can sadly admit that 85% of restaurants don’t even know how much their plate of pasta costs to serve (yes, we’re not making this up), they won’t have the ability to suss out their processing rates either.

It is in this way that we think toast may be working a little smoke and mirrors:

Watch our amazing discounts on our hardware and software and ignore the processing agreement… where we make all our money.

How much money does toast make on its agreements? Well, at 2.49% and $0.15 per swipe, probably a lot. For the 11-terminal merchant in the first quote toast’s rates are equivalent to an extra $40,000 annually.

That merchant probably does somewhere around $4MM a year in revenue. If we assume a $50 check average, interchange is closest to 1.8%. So with a $50 check average, that’s 80,000 checks per year, at $0.15 per pop, that equals $12,000.

The difference between toast’s 2.49% and the 1.8% on interchange is .79% which, when applied to a $4MM business, becomes $31,600. Add the two together and you see how lucrative payments can become.

Interchange – the amount charged by the networks and banks – becomes a moving target once you get to effective rate. The type of merchant, the type of credit/debit card used, and the processor’s greed can change all these rates. A good table to look at can be found here.

Some restaurant industry rules of thumb to follow

  • Adding 10 basis points and 10 cents to interchange usually gets a processor to breakeven
  • Larger merchants will pay less – think of McDonald’s who only pays about 2.5 cents above interchange
  • Larger ticket restaurants have lower rates while smaller ticket restaurants have higher rates. This can be a range from 1.8% to 2.8% generally

The genius in bundling payments with POS has always been the unbearable nightmare that is switching POS systems. Switching payments is very easy by comparison: a quick phone call and you’re done. Don’t even need to change hardware most of the time.

But changing POS is a real setback. Toast could be following a growing trend where POS companies overcharge merchants on processing knowing that a merchant’s only recourse is to endure the torture that comes with swapping POS systems. We know of a 25-unit chain that is currently a toast customer. They have admitted that toast is overcharging them by $120,000 annually but their other option is to effectively cease operations while they move over to a new POS system. But biven the cost of switching POS across their locations ($150K), after about 18 months it’s mathematically irresponsible NOT to switch off toast.

We are not against the coupling POS and payments but it needs to be done responsibly. Locking merchants into a POS and gleefully gouging them is unethical. But given how much hassle merchants are to work with (yes you, the merchant who doesn’t even know what their goods cost and myriad other problems you’ll blame on your service providers), it’s not surprising.

We continue to be against POS and payments companies that think they will do everything. Joining POS and payments is toast’s first move in this direction, but certainly not their last. As one of their founders recently admitted in an interview, toast wants to build it all.

After dozens of conversations with distraught restaurant owners and managers, it became clear to Toast’s executive team that before they could sell mobile payment solutions and other add-on software, they would need to build a new POS system from the ground up.

If merchants think toast is aggressive with their processing, imagine if toast starts monopolizing all possible add-ons and reverts back to the walled garden problems of legacy ISVs; the same problem toast set out to solve.

How would that be that for irony?