Reforming Retail

The 3 Questions Needing Answers from The “Free POS” Experiment

Every POS/payments company in US hospitality is doing some variety of the Free POS model pioneered by Harbortouch (now Shift4) several years ago. To bring you up to speed, Harbortouch discovered they could make merchant payments processing – a very commoditized offering with high churn – much stickier if they bundled it with a POS system. The thought was that it is easy for merchants to rip-and-replace processing from any number of providers, but throwing out their POS – the system with all their data – was much more challenging.

The industry ridiculed Harbortouch but we suspect they’re having the last laugh now.

So the POS and payments markets are on a natural collision course. As we have discussed previously, some of this overlap makes sense (excuse us while we quote ourselves):

POS and payments ultimately merge for the most fundamental reason: acquiring merchants is a pain in the ass. Nobody is producing any decent economics (certainly not margin + growth >= 40%). This is further reflected in the ridiculous costs of online ordering and delivery services; if merchants were easy to acquire, they wouldn’t have to pay so much for these services. Ironically these high costs are of the merchants’ own doing.

Joining payments and POS eliminates one set of distribution costs off the bat and payments is very obviously squeezing into POS.

But is all this good for the merchant? Is it working as expected for the POS/payments bundlers? Where is the whole experiment taking us?

There are three questions we need answered.

1.   Does merchant churn decrease when you bundle POS and payments?

The answer here is not as simple as one might be led to believe. The cursory answer to this is probably yes: fewer merchants are jumping off MY payments services for another payments provider IF they are also using one of my POS systems. If we define churn as merchants departing for competitors, my numbers look good.

But this is missing a whole other set of numbers

Churn, as far as we’re concerned, means a customer is no longer paying you. Yes, it’s great to know why that customer is no longer paying, but the reason is moot through a financial lens: if a customer isn’t paying you, you’re losing revenue.

Churn comes from two places.

First, it comes from customers leaving you for competitors, or deciding your product is no longer worth the money. Since payments providers have a guaranteed demand (i.e. merchants need to accept payment cards to appease their customers) they’re only losing merchants to competitors: merchants aren’t suddenly deciding to stop accepting credit cards and churning off.

Second, churn comes when customers go out of business. It’s this we need to talk about further.

In the rush to lock merchants into the free POS model, payment providers will “meet or beat” processing rates. They do this so the merchant thinks they’re getting a great, competitive deal on the processing. But as soon as the merchant has onboarded the POS, the payments company becomes giddy. In a phenomena known as SMOPP, or screwing merchant on paired payments, the payments companies can keep ratcheting up payments rates because they know the pain of replacing that POS. Another quote from ourselves:

SMOPP, in other words, means that the POS company can let it be known how badly the merchant is being screwed, but the merchant still won’t change POS. It’s the ultimate F-U to the merchant; so long as the amount is less than the cost of swapping POS systems, the merchant can do nothing but say, ‘thank you sir, may I have another?’

So to answer this question definitively we would need to understand not only how much competitive churn has decreased in the bundled offering but how many merchants were pushed into premature bankruptcy due to avaricious payments rates in the POS bundle. For companies that are supposed to be on the side of the merchant we bet there are far too many that keep stacking straw on the camel’s back.

2.   Will larger, more “sophisticated” merchants accept one provider for both their POS and payments needs?

Pursuant to the first question, larger merchants are typically those who have been around for a considerable length of time – at least relative to the average merchant. They better understand payments shenanigans and have seen all the ways to get screwed before. The largest Tier 1 merchants even beat up processors so badly that the processor sometimes wishes they didn’t even have the account – ask Square about its relationship with Starbucks.

So we have to wonder if a larger merchant would even consider bundling POS and payments. We’d think any sophisticated** ones would view this as a massive risk explicitly because of the SMOPP liability. A great way to think about it is like this:

Sure, a bundled payments provider can “guarantee” an effective rate for a large merchant over a 3-year period. But what happens when that 3-year period expires? What “guarantee” do I have that you’re willing to lock in an effective rate for 10 years or more? Because that’s how long I’ll own my POS.

The larger merchant who has been around for 30 years needs to know what the payments rate looks like when the contract expires. Because according to the fundamental law of SMOPP, that bundled payments “partner” knows exactly how painful it would be for a n-unit chain to swap out all their POS systems. Buy new hardware. Install systems. Reprogram menus. Retrain staff. Integrate third parties. Move historical transaction data. Lose money to inefficiencies. Lose money by being down.

There are those who will argue it’s a benefit to have both payments and POS data in one package. And we wouldn’t disagree. But is it worth the risk of bundling when either set of data can be made available in an API? Companies like Womply are making payments data more accessible and valuable, so it’s not hard to ask your payments provider to share your own payments data with you. And it should go without saying that cloud POS is making data availability much, much higher.

While we’ve seen larger merchants signing with bundled payments providers we’re very skeptical of these deals. Maybe a few bundled providers are winning these merchants over by taking it in the pants on long-term payments contracts but we’d bet that it’s lack of merchant sophistication driving wins: even large merchants are provenly clueless and follow trends without understanding any of the business implications. This behavior will benefit the bundled payments providers until a merchant’s investors realize what a mistake it is.

But the jury is still out on a definitive answer to this question.

3.   Does a bundled cloud POS require lower levels of support?

Payments companies are notoriously horrible at support. From their perspectives it is much cheaper to onboard a new customer than it is to spend time supporting an old one. In the “too bad, so sad” acceptable culture of the payments industry, this poses a huge problem as they grow into POS.

POS customers are used to paying (usually a lot) for support. With legacy systems this was understandable for a myriad of reasons. There was little in the way of remote diagnostics so a support tech had to visit on-site. The systems were local server-based, so upgrading software was a cumbersome and time-consuming exercise. Hardware was less reliable and there was no such thing as next-day shipping from Amazon. The stability of the overall system was pretty abysmal, requiring frequent touch points.

Cloud POS changes a lot of this. There’s this thing called the Internet that enables remote diagnostics and monitoring. Software can be updated remotely. Hardware is more reliable, cheaper, and available quickly. All of this yields a better experience for the merchant with less outside support.

In theory.

In reality, the touch points still matter and the benefits of the cloud rely on a stable and secure local network, which is outside the control of the POS or payments provider. Additionally, delivering software over the cloud means merchants can and will leverage multiple 3rd party technologies for things like loyalty, employee management, and other business processes.

If the POS is tendered by a local reseller then the payments/POS bundler can punt a lot of the support to that local resource and only take escalations on the backend processing. But that VAR needs to deliver true value as a trusted business consultant and help merchants run their business with best-in-class technologies for the applications listed above.

Yet a large number of bundled payments providers are selling the POS systems themselves. Or they’re using ISOs and payments agents to sell their POS, both of which want nothing to do with anything that sounds like support. This leaves the payments companies with an unforeseen exposure. Because the culture of payments companies is not built around software, payments companies have just assumed a number of unfamiliar tasks by taking on POS.

POS software, IT networking, and third party bolt-ons are all entirely new playing fields for payments companies. The merchant is buying a number of technologies, built by multiple companies, that all rely on a local internet setup. The result is mass confusion when it comes time to support the customer through troubleshooting a seemingly simple problem.

The world effectively looks like this:


A large payment processor has already shown exactly how we expected payments companies will handle this discomfort: by giving up on their POS efforts. So much for developing a new skill set…

The truth of the matter is that payments companies do not have the DNA to successfully support what they’re taking on; this is not the same as rebuilding a merchant file or replacing a dumb terminal. Even the POS companies they’ve acquired are mostly antiquated assets with outdated processes and products, so it’s difficult to rely on the people that now report to you to solve this issue.

No one party is going to be able to act as a universal support desk for all the merchant’s products / services / technologies. What you need is a unified platform that stitches together the different providers and makes it really easy for the merchant to get support across that network.

We have been following Boomtown since they started and believe they are tackling this problem head-on with their support platform called Relay. That’s in addition to other capabilities they provide that we’ve been fans of for a long while.

We caught up with Chip Kahn, Founder and CEO of Boomtown, to ask about this. Chip explained, “Given the tangle of vendor solutions on a common local network, a unifying fabric is needed to bring together a complete view of the ‘support graph’. From a single dashboard a merchant can request help for a large number of things.” In Chip’s mind the right solution – bespoke to the payment industry – breaks down silos and utilizes past interactions to predictively solve for the unique technology and service stack on an individual merchant basis. ”We call this fabric Relay. Relay is an intelligent platform for technology support and customer service that enables you to deliver simple, predictive, and personal experiences at scale.”

A tool like Relay is sorely needed to answer this third question because as-is, merchants are struggling with the payments industry’s definition of “support”. It could be that payments providers answer the first two questions successfully but screw the pooch on the third one.

We’ll wait on the sidelines to see how the answers to these questions play out. But they’re critical if the payments industry doesn’t want to shit the bed on POS. 

**We use the word sophisticated loosely in brick and mortar because even large, public merchants are massively unsophisticated and irrational relative to companies like Google, Amazon, and Goldman Sachs.

 


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