NCR’s JetPay Acquisition (Unsurprisingly) Upsets NCR Customers

NCR, the parent company of Aloha POS for restaurants and Counterpoint POS for retail, announced the acquisition of JetPay, a large payments ISO. Consistent with NCR modus operandi, NCR offered a very hefty premium of 138% for the already-public company. Usually an acquirer can subsume a target for a 20% premium, especially if working with shareholders ahead of time. All-in the deal looks like it will cost NCR $184M in cash, which is no small sum for a company working to pay off its debt (ironically from previous M&A activity).

JetPay is a unique payments asset in that it’s part of an exclusive group of payments processors that have both front end and backend capabilities. Front end entails full authorization and capture technology direct to card brands. Backend entails settlement, interchange quantification calculations, statement generation and clearing directly with the bank. This is important because card brands (Visa, et. al.) don’t want more end points: owning both front and back ends is a big control factor. Here’s how JetPay explains itself:

JetPay is a full end-to-end processor with direct connections for authorization and settlement to all major networks enabling it to provide debit and credit card “processing-only” services directly to merchants and ISOs, full debit and credit card acceptance services to merchants and full merchant services to independent sales agents and ISOs, Value Added Resellers (VARs), and Independent Software Vendors(ISVs), as well as ACH services to its customers. JetPay Payments is one of fewer than approximately 20 United States processors that connects directly to the card networks (e.g., Visa, MasterCard, Discover, American Express, etc.) for both authorization as well as clearing and settlement services providing end-to-end processing.

The acquisition, while seemingly expensive, does make sense for NCR.

It’s no secret that NCR’s payments attempt, currently branded as Connected Payments, just flat-out doesn’t work. At least not reliably enough to instill any market confidence. Here’s a quote from the CEO of a 100-unit restaurant chain currently transitioning out of Aloha, NCR’s hospitality POS solution, on the matter: “How has no one been fired yet? NCR should be utterly embarrassed about Connected Payments.” We actually toned his quote down quite a bit.

But while the management at NCR likely concluded that this purchase would be the panacea for their Connected Payments troubles, they didn’t calculate the other, more subtle signals the acquisition would send the market.

For starters, NCR must be keeping their POS assets. At least for now. That’s troubling when, according to our sources, the leader of their POS divisions, now rebranded as NCR Commerce, has privately intimated that he’s riding this out until retirement in 2020. Some within NCR thought the best chance at POS product success involved placing the Commerce assets under a new owner – an external party that was fully committed to the transformation task at hand. For those of you who viewed a potential sale as a life preserver, don’t expect one any time soon.

Second, what becomes of NCR’s Worldpay relationship? Worldpay, a large payments processor, struck a deal with NCR to serve as its preferred processing partner. That relationship struggled to produce expected results over the past few years and we’ve been told the rapport has become strained. Now that NCR has its own payments asset the relationship will surely dissolve. Yes, Worldpay will still service existing accounts, but NCR didn’t buy a payments company just so they could turn over more payments business to Worldpay. NCR will need to earn a return on that investment and we can’t see that coming by any other means than competitively replacing Worldpay processing with their own. (By the way, is it just us or is Worldpay’s strategy of “POS neutrality” looking like a bigger mistake by the day?)

Third, this has to be the Old Yeller moment for NCR’s Connected Payments. Maybe the division’s engineers and business folk get reshuffled, but they haven’t been able to produce an acceptable payments product (by market standards) in years. Why would NCR not let JetPay take over? For the record we believe this to be a continued reflection of NCR’s hardware culture, which is low on the list of desirables when the Gregorian calendar reads anything after 1992 AD.

Fourth, merchants and the channel are concerned about what this means for their existing payments relationships and revenues. Does NCR come in and demand that every new POS system use their payments processing? Do they force their resellers to change their existing payment partner relationships? For all the concerns we’ve laid out about SMOPP does NCR ignore industry lessons and plow on ahead anyway? NCR has a history of walled gardens and as we alluded to in our analysis of Payment Logistics’ antitrust filing against Shift4 why wouldn’t a company like NCR be added to the list of defendants, especially if they follow their past behavior and erect commercial tariffs against competitive payments products?

Lastly, and easily most importantly, is the massive strategic misstep NCR seems all too happy to continue making. NCR’s retail and hospitality customers have shared with us the (very) numerous issues they have with NCR. If we boiled it all down to one complaint it would be this: NCR refuses to become relevant. In today’s parlance, that can be inferred to mean that NCR refuses to become a software company.

Here’s what one very large NCR customer shared with us after reading the news of NCR’s JetPay purchase.

Connected Payments doesn’t work. We all know that. But customers aren’t leaving NCR over Connected Payments. In fact most of us have found work-arounds since POS is so damn hard to replace. But while NCR is out spending hundreds of millions buying a payments solution they’re likely going to ram down my throat in six months, they’re not investing in the software problems we’ve had for years. Why doesn’t NCR come out and say they’re going to invest $184M in fixing the problems in front of their faces?

It’s no secret that Aloha POS has lost ~15% market share in 2018. And like the NCR customer above noted, it’s fair to assume that only a small number of customers reasonably left because Connected Payments was broken. Most left because Aloha has become irrelevant with no stated path forward – ask any NCR reseller fighting in the trenches and they’d give you a list of woes matching the one below:

• Overpriced hardware with delivery failures
• Walled gardens
• Broken and expensive APIs
• Terrible bolt-on solutions
• Zero vision or confidence in future relevance

So when NCR’s new CEO, Mike Hayford, issues a statement like the one below about the acquisition, how do you think his customers, partners and employees are receiving it? You think they’re happy to discover that NCR is more focused on finding ways to (potentially) bend over customers on payments processing than they are in fixing their core problems? Our guess is that any customer on the fence is now hurling themselves off and searching for another POS solution.

Per Mike Hayford,

“Enabling payments as part of our transactions is part of our long-term strategy to create integrated value for our clients.”

Sure, integrated payments is better than non-integrated payments, but who cares about payments when your POS has as many problems as it does? The irony in all this is that NCR can’t sell their payments solution if their POS isn’t used by anyone.

Our prediction? Aloha loses another 20-25% market share in 2019 barring substantial leadership changes and R&D investment.

While we sit and watch NCR seemingly burn their house to the ground, we wonder if this is just what strategy looks like at hardware companies. Seriously, someone tell us: we don’t remember life prior to 1992 AD.