We’ve warned merchants about SMOPP for over a year. As a quick refresher SMOPP – screwing merchants on paired payments – occurs when the POS provider only offers one payments option, effectively locking-in the merchant. These providers know the pain of changing POS systems and know they can increase your processing rates without much fear of reprisal: pulling out the POS is so painful that merchants hunker down and take the payments punishment. Knowing this we’re continually flabbergasted when larger, “sophisticated” merchants choose such a POS provider.
That said, we also know it takes the collective brick and mortar industry about 5 years to figure something – anything – out. Therefore when we come across merchants who recognize they’re getting SMOPPed in their businesses we know it’s unfortunately only the market leaders who are doing the math.
But if you want to avoid these troubles – and you’ve already made the horrible business decision of choosing a locked-in POS provider – we’ll share what those market-leading merchants are doing to mitigate their SMOPP pain.
See exhibit A:
Why would a merchant have two disparate POS systems? Because the processing rates for the first one were so outrageous it made sense to get a second system. Why wouldn’t the merchant just dump the first system, you ask? Because they were locked-in by early termination fees.
Here’s how this happens.
A hot little number walks in and tells the merchant how bad his current POS system is. She then explains how her POS system is superior, and how it’s so cheap (because companies aren’t in business to make money ever, right?). The merchant doesn’t bother reading any of the paperwork and signs on the dotted line.
The merchant’s wife is running the books when she realizes the business is making far less money than it was before… even though sales haven’t dropped. What gives? So she starts reading the paperwork her husband was supposed to understand.
Turns out that new whizbang POS came with language that gives the company the right to increase processing rates at their convenience. Calculating some numbers the wife realizes that sure, the POS “matched” their processing rates for the first few months, but ever since then the rates have been steadily rising. Today she estimates that their rates are 0.35% higher than they were before. Ouch!
The wife berates her husband, who is now forced to think about what to do next. His first conclusion is to simply replace the POS that caused them so much grief. But that clever wife read all the language and explains that they’re stuck with the POS unless they want to pay 3-years worth of penalties.
That’s when the wife notes she found something that might work. She knows the business needs a POS to succeed. But they can’t very well stay afloat with these payment rates either. She notices that there’s a minimum monthly payment requirement to this POS provider – $50 per month per device – but there’s nothing stipulating that all their payments must run through this POS. The wife proposes ringing up every transaction on this POS as cash, then buying a second POS that they can use to run credit cards.
And they do.
We’re doubtful that this was the exact series of events, but the outcome is the same: this merchant saw how high Toast’s processing rates were and opted to use Square instead. By the way, Square offers processing at an effective rate of 2.75%. So if you think those rates seem high (and they are for merchants of any significant size), think about how much higher Toast’s rates must have been to get the merchant to go through all this trouble.
Operationally-speaking this merchant professed that Toast offers a much more feature-rich POS system than Square. No arguments here. But to use a separate POS system for your processing shows you what level of SMOPP pain must be out there.
Why this merchant doesn’t just use a dumb terminal to process payments separately is beyond us. But the sad reality of the story is this: most merchants won’t have a wife that can so easily comb through the legalese of their POS and payment suppliers. So merchants will be getting screwed on SMOPP until the overall market learns these lessons. Which will be at least another 4 years.
Groupon 3.0, anyone?
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