Are Toast’s Early Termination Fees Usurious or Expected?

In the payments and POS industries the Early Termination Fee, frequently abbreviated as ETF, is the price a merchant pays for cancelling their agreement before the term is due. Sadly it is common that merchant acquirers lock merchants into 3-year or longer terms, whereby the processor hoses the merchant on monthly fees. The hapless merchant has no recourse until the term ends, or they may terminate early “for cause” and stress the pending litigation of the acquirer if they refuse to pay the fees, as we’ve shown before.

A growing number of processors are moving above board on these practices, though, so there is a silver lining.

Beyond, the payments company founded by Heartland founder Bob Carr, has no ETF. That’s right: there’s $0 in fees if you terminate as a Beyond customer.

Global Payments is a bit more complicated because it has such a wide array of offerings. Xenial, Global’s POS which is not locked-in to their processing services, has a one-time termination ETF of $395 if you’re using Global’s processing. Dealers have an ability to waive this fee, however.

Shift4 recently changed their ETF policy to $60 per month for the remaining months on the agreement or a flat $600, whichever is greater for a standard 3-year agreement. For merchants on their PaaS offering an ETF costs $49/mo for the remaining months on the term. Like Global there’s a hardship waiver.

Upserve’s ETF has a lot of nuances, but the long and the short of it is a merchant will pay 75% of their remaining balance plus a $300 payments termination fee. So a merchant with a $2,000 remaining balance would pay $1,500 + $300.

Worldpay (Vantiv), as we’ve reported previously, has some of the steepest ETFs in the industry. Or does it?

Toast is a restaurant POS company that only offers one processing option: its own. Technically Toast is a payments facilitator, riding on Worldpay’s rails. One of the tools available to these bundled POS providers is “Free POS”, a marketing tactic that presents a low upfront cost in the hopes of making up any lost expenses on the tail end of a 3-year (or longer) term.

To see how this works in practice we’re dissecting Toast’s merchant agreement, found on their website.

Section 8.4 of the agreement specifies the following:

By executing an Order Form or Toast Master Agreement, Merchant agrees to pay Toast all Hardware and Software Fees, plus applicable Taxes, indicated in the applicable Order(s), for the total number of Initial Locations indicated therein, and for the entire duration of the then-current Term. Merchant acknowledges and agrees that it may terminate this Agreement and any applicable Order(s) at any time during the Term, subject to payment to Toast in an amount equal to all Software Subscription Fees that would have otherwise been due for the remainder of the then-current Term, plus any additional Fees for Services provided through the date of termination (e.g., Fees for professional services and Card processing).

Here’s how we’re reading this.

First, there’s the term. The document specifies an “original term” and then 1-year terms thereafter. It’s common practice to have 3-year payment terms but those would be specified in the unique merchant agreement. The term is important because it is used as the basis to calculate the total financial exposure for the merchant; a shorter term means less financial exposure while a longer one could be lethal.

Next, Toast lets the merchant know that if they cancel during the then-current term the merchant must pay for hardware, software, taxes, and “additional Fees for Services” through the remainder of the term. This is not entirely unreasonable if Toast is offering some variety of Free POS, whereby it’s subsidizing the upfront cost of hardware and software with its balance sheet so it can recoup the costs (plus plenty of interest, no doubt) with guaranteed payments processing over a multi-year term.

But the math can get dangerous quickly, and it becomes a “devil’s in the details” situation.

Let us assume a $1M/year merchant signs up with Toast on January 1 of 2015. Toast “meets or beats” the effective processing rate of 2.2%, and because there’s a fair amount of competition on the deal Toast comes in hot with deep discounts on hardware and software – let’s say 50%. Toast signs the merchant to a 3-year term.

Six months goes by and Toast starts raising processing rates as their contracts allow them to do. That effective rate of 2.2% is now 2.8% (we’ve found plenty of Toast quotes that demonstrate these effective rates and higher). The merchant does some back-envelope math and realizes they’re paying an extra $6K a year in processing to Toast (2.8% effective rate – 2.2% competitive rate * $1M = $6K) as opposed to using an independent processor that would charge an effective rate 2.2%. The merchant also looks at his hardware and software and does a little more math…

• 3 terminals at $1,000 a piece = $3,000
• Cash drawer and printers = $1,000
• KDS = $1,000
• Implementation = $2,000
• Software for 3 terminals = $200/mo or $2,400 per year

At MSRP, the merchant would have paid a one-time hardware and implementation expense of $7,000 and $2,400 in annual recurring software fees, or $7,200 in software over three years. Toast gave the merchant a 50% discount upfront, “saving” the merchant $2,500 on hardware (half of $5,000 for terminals, cash drawers/printer, and KDS) and $1,200 (50% of $2,400) on the first year’s software. All-in the merchant paid $5,700 upfront ($2,500 hardware + $2,000 implementation + $1,200 first year’s software), not including the processing nor year 2 and 3 of software fees.

So now the merchant is thinking, “Well I ‘saved’ $3,700 (savings on hardware and first year’s software) but my effective rate is really high. This year I’ll pay an extra $3K since Toast only raised my rates after six months, but next year I’ll pay an additional $6K, and in year three it’ll be another $6K. So really, these ‘savings’ of $3,700 become a net loss of $11,300 (effective payments profit of $15,000 over 3 years – initial savings on hardware and software) if I am stuck with Toast for the full three-year term.”

This is where it becomes about the details.

If the merchant wants to cancel after 6 months, what do they pay?

According to Toast the merchant will pay the full hardware and implementation price ($7,000), the full software price for the entire term (three years in this scenario, or $7,200), and “any additional Fees for Services provided through the date of termination (e.g., Fees for professional services and Card processing).”

If the fees for card processing are calculated as the latest rate Toast offered – an effective rate of 2.8% – then the merchant is on the hook for some amount of Toast’s processing profits. If interchange is reasonably 1.8%, that effective rate of 2.8% is $10,000 in annual profits to Toast (1% of $1M in annual revenues), or $25,000 over the remaining 2.5 years on the term. Remember that we should calculate this profit from Toast’s perspective, and they’re roughly paying interchange of 1.8%, not the 2.2% rate that Toast matched to win the deal.

Is the merchant required to not only pay the full price of the POS system (which as a sum of the hardware, implementation, and software comes to $14,200) but also the additional $25K in “card processing services”? If that’s the case Toast is charging an effective annual interest rate of 59%. From another article of ours we saw that SMB loans come with APRs of 10-15%: is Toast charging 4-6x this amount? If so could it be explained by their alignment with Vantiv/Worldpay, who have demonstrated liquidated damages clauses that attempt to recover the entire payments “profit” the processor would have earned over a 3-year term?

Please do the math for yourselves. We’re tired of merchants complaining they got a raw deal when 10 minutes of work would have shown them just how expensive that new POS systems was going to be.