What’s contained below is the first recorded legal pushback to the merging of POS and payments. Done responsibly, there’s nothing wrong with the bundling of the two services. But done unethically, which is absolutely the potential risk when a POS only offers one payment option, it sets merchants up for SMOPP, an acronym we’ve termed for Screwing Merchants on Paired Payments.
So should you read this if you’re a merchant?
YES: it could help you avoid the biggest headache in your business.
What follow are our thoughts as we read through the antitrust filing. We pasted a good bit of direct text from the filing and we paraphrased some as well.
We are not lawyers. Nor are we unreasonable or unintelligent people. We have gone through the filing and found areas for agreement, disagreement, and some that need more clarity. We have no idea where this case ends up, and antitrusts are notoriously lengthy and expensive – so much so that plaintiffs often file them to secure concessions out of the defendant with no intention of litigating them all the way through.
Let’s dig in.
Payment Logistics, a payments gateway, has filed an antitrust case against Shift4, one of the larger POS players in US hospitality created after a string of rollups last year. Payments Logistics is run by Dustin Niglio, an awesome guy with a reputation as a total straight shooter. In fact we worked with him on a post regarding QIR a few years back.
At any rate, you can read the full 39-page filing here. As we read it, Payment Logistics contends that Shift4 purchased significant POS market share in the full service restaurant category and is slowly choking payments competition out of their POS assets in favor of their own payment solutions. Payments Logistics’s argument is based on the following points, which we will dissect on their own, individual merits.
Their first contention is that there’s less economic competition, and the merchants are bearing the brunt of the consequences.
Before the mergers, Payments Logistics competed with other Payment Interface providers for Restaurant Manager [one of Shift4’s POS assets] accounts, providing state-of-the-art services at competitive prices. Restaurant Manager aggressively marketed the benefits of the enhanced functionalities provided by its integrated Payment Interfaces. This fostered competition among Payment Interfaces, kept prices low and service quality high.
We disagree with the idea that payment companies, either competing or not, are providing “low prices” and “high quality” services. There are a plethora of instances of payments companies ratcheting up rates with questionable fees, and you’ll never hear “service” as the first word mentioned by a merchant when asked to describe their payments provider. This is not a swipe at Payments Logistics but the payments ecosystem generally. Think of it this way:
Merchant acquirers collect a fee equivalent to roughly 0.5% of all transaction volume and offer what for value? Merchants writhe at the thought of spending $100/mo for a solution that saves or makes them tens of thousands a year, but will fork over thousands of dollars for nearly zero value and not think twice. Marvelous brainwashing by PCI – definitely earning those membership dues.
Payment Interfaces aren’t always necessary. In many cases the POS companies build direct integrations with the processors themselves, obviating the need for a Payment Interface altogether. So you can imagine being a merchant on POSitouch and have access to any number of processors without a Payment Interface intermediary.
On to the next point.
Beginning with the ASI acquisition, however, Shift4 began foreclosing independent Payment Interfaces such as Payments Logistics from its POS Systems… Since acquiring POS assets, Shift4 Corp. has begun to eliminate Payment Interface competitors and deny access to the minimum scale necessary for viable competition… locking merchants into a closed system that allows Shift4 Payments to raise prices to supracompetitive levels.
In theory, this is a very real concern. Payments Logistics is arguing that, absent other payment alternatives, there’s nothing keeping Shift4 from increasing their payment fees to such a level that they impose financial hardship on their merchants. The merchant is then forced to go through the brutal process of switching their POS system to a different provider, or suffer under an oppressive rate scheme. This is SMOPP at it’s essence as we’ve explained before.
But a statement alone does not prove these behaviors. Payment Logistics will need to demonstrate widespread behavior or a formalized Shift4 policy that “eliminated payment interface competitors”. Currently all the processor integrations that were available with the POS systems under the Shift4 umbrella before acquisition are available now. An overwhelming majority of the merchants using POS systems that Shift4 acquired are still with the same processor they had before the acquisition. The nature of those merchant accounts (the POS company sells a reseller a license and the reseller activates the license at a merchant location) means that Shift4 has no way to remotely eliminate Payment Interfaces.
Payment Logistics’ next point was that the Shift4 acquisitions were, “Smothering innovation efforts including those intended to further increase data security and restaurant operations.” We view this claim as unsubstantiated. Shift4 has an initiative by the name of Lighthouse 5 that is actually doing the opposite of this: it’s connecting disparate, legacy POS systems into a centralized database that enables connectivity to third party solutions. These solutions will be a boon to restaurant operations, and in many cases the pre-acquisition POS companies would not have bothered with any integrations whatsoever. Additionally, Shift4 openly supports other processors and has expanded processor availability across its POS portfolio. This includes PCI validated P2PE and tokenization, neither of which were available to their POS assets prior to the acquisitions. That action contradicts Payment Logistics’ claim of stifling data security, at least.
The next point is more specific to the alleged Shift4 channel practices.
At Shift4’s’ behest, POS dealers have stopped or have become adverse to offering and supporting Payment Logistics and other Payment Interfaces… Some restaurant merchants are being told that they either must switch to the Shift4 Payments network or pay debilitating monthly and transaction costs to use an alternative. For instance, pre-merger Restaurant Manager charged approximately $40 per month if the merchant was using a preferred Payment Interface such as Payment Logistics’ Paygistix Payment Gateway. Pre-merger, approximately 40% of that fee would be returned to Payment Logistics, with the remainder paid to Restaurant Manager. Post-merger, the entire Payment Interface fee will go directly to Shift4 Payments.
Call us crazy, but these are commercial terms for revenue share and are up for negotiation. We also need substantial proof that “dealers have stopped or become adverse to offering other payment interfaces” and that restaurants “are being told they must switch to Shift4 payments”. Shift4 has already gone on the record to denounce these practices and has said that if these tactics are occurring it is from independent resellers who are neither employees nor contractors of Shift4.
Here’s what we found specific to the economics of the Restaurant Manager payment fees prior to the acquisition. Using a “preferred gateway” resulted in no additional fees since Restaurant Manager was getting a kickback on the processing. These preferred partners were:
- Heartland via Direct Certification
- Vantiv via Direct Certification or Datacap
- Payment Logistics but only if used for full payment services (gateway + processing)
If the Restaurant Manager merchant wanted to use non-preferred, stand-alone processing provider, they would pay an additional fee since Restaurant Manager wasn’t getting a kickback. Here were same gateway fees:
- Datacap was $40/mo
- Payments Logitics was $25/mo and $0.03 per transaction
This next point is a bit of a gem.
Restaurant Manager enjoyed significant growth in payment processing-related income with Payment Logistics’ approval to preferred payment interface.
Payment Logistics is arguing that it was in Restaurant Manager’s best commercial interest to maintain their relationship. Our contention would be that any increase in income realized by Restaurant Manager came on backs of their merchants! Payment Logistics, or any other payment company for that matter, is earning their income by charging merchants for commoditized and very low-value solutions. It’s not as if the payments industry is innovating merchant tools that assist them in running a more successful operation. Any increase in Restaurant Manager income is directly attributable to how much the payments company is soaking the merchant. Plain and simple.
Payment Logistics then goes on to argue that the these acquisitions “significantly increased Shift4’s market share, to approximately 35%.”
We find a little bit of difficulty in believing these numbers. First, there are about 650,000 US restaurants. Shift4 has a mere 100,000 in their POS portfolio now – that’s a little over 15% of the market. Second, Payment Logistics is concentrated on the mid-to-large table service market, which it defines as merchants with 10 or fewer locations that have 2+ terminals and $50K in monthly payments volume. According to NPD, there are 294,167 full service restaurants in the US. Even if Shift4’s entire POS portfolio were full service restaurants (which it is not) they would only represent 33%. But even then Shift4 does not have direct relationships with the vast majority of merchants using the POS systems Shift4 acquired. So it’s not clear how Payments Logistics is arriving at these numbers. Even so, Microsoft had 90% of the PC operating system market share when they lost their antitrust case.
They go on to say that “the firms comprising the remaining 65% market share include few firms that allow for independent Payment Interface integration… These POS Systems became essentially unavailable for independent Payment Interfaces such as Payment Logistics,” and they specifically call out Heartland.
We talked with Christopher Sebes, founder of Xpient POS and now-President of Heartland Commerce/Xenial, the division overseeing Heartland/Global’s POS assets, who vehemently disagreed. “All the POS solutions acquired by Heartland, and now part of Global Payments, support a myriad of payment processing providers. These systems are not in any way unavailable to competing options.”
We also are struggling to understand another point.
Similarly, cloud-based systems do not have the level of customization or durable hardware devices required to serve full service restaurants and therefore are not alternatives.
We can’t blame Payment Logistics too harshly because they are correct in a general sense: cloud disruption is occurring faster in quick service and fast casual segments of the market because the required list of features is shorter. But companies like Breadcrumb, Northstar, Mobile Bytes, Toast, Touchbistro, Upselz, and others are in full service restaurants and slowly tackling the enterprise segment of the market. Suffice it to say there are plenty of alternative POS systems for full service restaurants that don’t require payments exclusivity (i.e. not Toast or Breadcrumb).
Payment Logistics goes on to expand their grievances.
Independent Payment Interfaces such as Payment Logistics are rarely being offered by POS Dealers as alternatives, are not receiving proper technical support, and will not be supported in newer versions of the POS System Software. Shift4 Payments is also now charging merchants an additional toll of $25 + $0.03 per transaction to use Payment Processors outside of its network, and is reported to be adding a $125 monthly fee and additional programming fees. Some merchants are reporting that they are being charged an additional $25 per month plus $0.03 per transaction fee.
Again, Payments Logistics will need to provide tangible evidence, not hearsay from a handful of merchants or rogue dealers, who are free to price how they see fit. According to several Restaurant Manager resellers we spoke with, the new Shift4 gateway fees are less than what was being charged prior to Shift4’s acquisition. “$25/month and $0.03 per transaction is our gateway buy rate and is the same now as it was before the acquisitions,” commented one reseller. We’ve heard this rate is also less than wholesale gateway pricing from Merchant Link, Authorize.Net, Cybersource, and other gateways. “Shift4’s rates are quite comparable to what Payment Logistics gateway fees were to Restaurant Manager dealers, so I’m not really seeing the fuss,” explains another reseller. Since lower costs are often a defense to antitrusts, that’s going to be difficult for Payments Logistics – especially since there’s written record of Shift4 lowering rates on software licenses, EMV hardware, and dropping processing rates.
Lastly, Payment Logistics contends that resellers are unfairly promoting Shift4’s processing services.
Shift4 Payments is directing POS Dealers selling Shift4-owned POS Systems to move substantial portions of existing customers over to Shift4’s Payment Interface by July 2018, or risk losing the accounts or having them poached by other POS Dealers abiding by Shift4’s directive. Shift4 is offering significant monetary incentives to POS Dealers to switch merchants away from Payment Logistics and its competitors and onto the Shift4 Payments network.
Look at this another way. Shift4 just spent a boatload of money acquiring POS assets and taking risk that other payments competitors didn’t want to take. Can you blame Shift4 for economically incentivizing resellers in their interest? If Shift4 is going to pay its resellers more to sell its payments services, how is that an issue? Larger companies have deeper pockets. Walmart’s prices are substantially lower than independent retailers’ prices. Scale drives efficiency which allows Walmart to be more enticing to customers. You’re welcome to pay more for a gallon of milk at the smaller grocer but how is Walmart to blame if it’s able to offer better prices?
As we read it the filing is filled with a lot of “wills”, “mights”, and “coulds”. It is hinged on the idea of “market power” that is theoretical, and not yet proven in practice. Payment Logistics will need direct evidence of wrongdoing and we can’tfind it in this 39-page complaint. It will be nearly impossible to build a case around hypotheticals and conditional statements, so Payment Logistics surely has some evidence, otherwise this would be a frivolous suit.
Even if the individual complaints hold up, 15% market share is hardly a monopoly. Walmart, the world’s #1 retailer, purchased Jet.com to expand their ecommerce offerings. Can Walmart be blamed if their goods are cheaper than third party goods on Jet.com because they only charge listing fees to third parties? That’s vertical integration, hardly a new concept, and if prices come down then it’s an uphill battle to prove the case of collusion.
We still wonder why Payment Logistics took a stand against Shift4 when there are other POS companies targeting full service restaurants that ONLY OFFER ONE PAYMENT OPTION. Any presumption of wrongdoing against Shift4 could certainly be more staunchly argued against the likes of Toast or Breadcrumb, who literally only offer one payment option today: themselves. The same could be said for Clover or Square in other restaurant segments, the former of which has deployed 400,000 POS devices and the latter of which is a payments/POS company commanding an enterprise value of nearly $20B.
Will these companies now become defendants? What about POS companies that charge integration fees to third parties – will they be added to the filing too?
The truth of the matter is that there are still hundreds of restaurant POS alternatives. Merchants have an actuarial life of 30 months, meaning there’s sufficient churn in the POS market to prevent a monopoly for any reasonable period of time. Every week cloud POS companies are capturing more full service restaurants. Accordingly we don’t see much merit to the case as presented in the filing… but what do we know.
Merchants, however, should now know the risks of choosing a POS company that only offers one payments option. Shift4 does NOT mandate that merchants use their processing but makes their own processing services cheaper with subsidies. Not all payments companies with POS assets can or will do this. For those that don’t the concerns Payments Logistics put forward are very real.
You’ve been warned.
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