Global Payments, Badly Needing Cloud POS for SMB, Acquires MobileBytes

When Heartland acquired the restaurant and retail POS systems it did in 2015, we all knew they would have an engineering challenge on their hands. At least, those of us with engineering experience knew there would be problems. Not insurmountable challenges, but challenges nonetheless.

To what are we referring?

The POS systems Heartland (now Global Payments) acquired were legacy. They had large customers bases, rich features, but were definitely not the sex and sizzle newer merchants were clamoring for. And while we can all find fault with cloud POS, we can find equal if not more fault with legacy POS systems… and as time passes, there are fewer faults with cloud POS still.

Maintaining all these disparate legacy systems would be a challenge in and of itself. If we were providing product and strategy guidance – which large investor groups frequently pay us to do – we would say that both Global Payments and Shift4 will need to slim their product offerings over time. That over a window of 3, 4 or 5 years newer features will become conveniently and exclusively available on only one cloud POS offering. And why is this shocking if the market is increasingly asking for cloud POS? It seems totally logical to us.

Over the past several years – really since Global Payments acquired Xpient and was able to tap into the mind of Christopher Sebes, Xpient’s founder and CEO – Global Payments has had a plan to build a cloud POS offering of their own. Named Xenial, this solution sought to serve retail and hospitality verticals across a large number of segments: quick service, full service, even SMB and enterprise.

No short order, believe us.

As time and budgets dragged on, however, it became increasingly clear that Global Payments was not the software company it believed itself to be. No matter how clever or committed Christopher was, the monumental task heaped upon his shoulders had but one outcome for anyone who knew software: software is hard and a payments company ain’t going to figure it out any time soon.

(For the record, we believe that Christopher had the right vision for Xenial but was given a Herculean task of delivering far and wide. For reference Toast has burned through $250M to build a POS that just focuses on restaurants and just focuses on mid-market merchants (well, in 99% of their cases anyway). That should demonstrate just how difficult building, selling and supporting POS really is. If it’s this hard for pure-play software companies like Toast, imagine the additional difficulty when you’re inside a payments company that has no software DNA.)

Suffice it to say Global Payments’ channel became increasingly frustrated. “I’m competing against cloud POS systems on a daily basis. I want to stay loyal to Global Payments but it’s getting harder to win deals and pay my bills when the POS systems Global Payments offers aren’t relevant in an increasing number of my sales pitches,” shared an exasperated Heartland POS dealer.

So in mid-2018 Global Payments made a pivot. Global Payments moved Xenial out from the product team and under the US Payments and Payroll Business of Heartland. Christopher would focus Xenial on the enterprise market segment (hence their doubling down with the acquisition of SICOM) and Heartland would buy a cloud POS for SMB – where 85% of its business resided.

Now we get to Heartland’s acquisition of MobileBytes, the cloud POS Heartland will further build out and support to compete with Revel, Toast, Touchbistro and others.

If you recall our earlier article, MobileBytes is a 100% dealer-sold POS system. It works on iOS for both table service and quick service restaurants and has found a home with your upper echelon reseller who wants freedom to be their own ISO and thus make more on payments residuals. “Once Heartland bought the POS system I had been selling for years I turned to MobileBytes. The payment residuals Heartland offered me were peanuts compared with what I would earn if I carried by own payments,” explained a former Dinerware reseller.

On an all-hands MobileBytes dealer town hall held Saturday, January 26th, there were mixed results. About half the dealers were up in arms while the other half viewed the acquisition favorably.

“If Global Payments does what it says, it might not be a problem. Then again they’ve increased rates recently so what’s to keep them from changing their tone in 6 months?” expressed a MobileBytes reseller.

Another dealer said that they viewed the deal through a mathematical lens.

“Global Payments has a large direct sales force. If they send me enough leads I guess it will compensate for my drop in processing residuals now that I’ll be incentivized to process through Heartland. Technically there’s nothing I’ve yet seen that says I must sell Heartland processing but there’s always a risk that changes.”

That simple math is More Leads x Smaller Residual > Current Revenue.

Hopefully.

Now that Global Payments owns MobileBytes they’re going to be accelerating feature development to reach feature parity with other cloud systems on the market. Based on our market feedback we don’t think MobileBytes has that far to go.

“I’ve got a customer that chose Aloha for their first restaurant. Now that they’ve opened a second restaurant they went with MobileBytes. This customer is running 10 terminals at that new location, doing north of $2M in annual revenue and they’ve not skipped a beat coming from Aloha.”

After Global Payments irons out these features and stops building an Android version they’re thinking about features and product lines they can add to find differentiation. “Where can we take the product where competition isn’t hunting? What is the market looking for and what will they pay for? We need to answer these questions,” Global Payments shared.

One of the largest changes comes in the reseller model structure. Heartland already has a large base of over 250 POS dealers. MobileBytes brought 53 resellers with the acquisition. MobileBytes resellers were given exclusive territories (which we’re no fans of). Heartland will honor the exclusive territories for MobileBytes; however, Heartland will launch a new product format from MobileByes into Heartland Restaurant POS (HRPOS) over the next 30 days, and there won’t be the same sorts of exclusivities there.

To resell HRPOS you must be a signed Heartland POS dealer. Heartland undertook a lot of research to arrive at the pricing for HRPOS. HRPOS won’t be the cheapest option on the market but they don’t want to be since they want to make sure their channel can make a profit.

HRPOS won’t be available to Heartland’s payments team and Heartland is really going the extra mile to make sure the system is the right fit. “We have products called Mobile and Register for merchants that do less than $350K in annual revenue. HRPOS should be the system for merchants larger than this and up to 50 locations, which is where Xenial takes over. If someone sells the merchant the wrong system the group responsible for that product will need to make it right and the lead goes to the right product line to close.”

We found Heartland’s commentary on cloud POS to be very insightful.

When customers are leaving legacy systems they’re thinking of going to new, modern POS. They’re not thinking of going to another legacy type system like Dinerware or Digital Dining. We will not be shutting down the legacy systems in the foreseeable future and in fact we have dedicated teams that work on these products exclusively.

We don’t believe we’ve yet seen a cloud POS reach the scale we have in go-to-market capabilities. We see new cloud entrants get to 1 or 2 percent of the market using some viral marketing tactics but once they get beyond this level of penetration their limitations become apparent and they can’t grow further. When cloud first came in, the guy that would kill you if you couldn’t print in 20 languages would take a cloud POS that couldn’t even print. But that’s changing and cloud POS needs to deliver features that solve real problems merchants face.

Andre Nataf, SVP Dealers at Heartland

Heartland believes it can upend cloud with its scale. They have confidence in their distribution model and believe they will cause real havoc to existing cloud players.

“We have 20% of the US restaurant market but there’s 80% up for grabs with lots of attrition. The cloud POS companies with viral marketing are causing churn and we should be the beneficiaries.”

HRPOS will start its rollout quickly, penetrating a significant percentage of its Heartland POS dealers by this time 2020. “There’s no shortage of Heartland POS dealers lining up to sell HRPOS but we want to give our existing Heartland POS dealers the opportunity to sell HRPOS first,” said Andre.

Heartland is looking to grow its POS business to $250M in annual worldwide revenues. Part of this plan involves quadrupling the revenue each merchant pays through incrementing its solution stack – think of all the bolt-ons that can be offered to the merchant, including payments.

Of course we have very strong feelings that this won’t end the way they think – at least if done internally. Every private equity company we’ve ever worked with sharpens their pencils at the opportunity to dominate the entire solution stack and increment ARPU, and yet every one of them has failed despite the money they’ve thrown at it. Even worse, the distraction of chasing bolt-ons can lead one to the NCR Outcome, where the core POS product becomes irrelevant.

So how awesome are those bolt-ons if nobody even wants your damn POS?

In fairness to Global Payments they’ve re-architected their POS efforts to streamline operations and avoid as much of this as possible. They’ve split enterprise and SMB POS divisions; they offer open payment options so as not to lock-in merchants like POS competitors Clover, Toast or Upserve do; they prefer acquiring solutions as opposed to building them in-house when given the opportunity. Global Payments even shared that their SMB POS group has grown every year and they attribute that success to their open approach. It ain’t a half crazy conclusion when you realize that they achieved this growth without even having a cloud POS in their portfolio.

Still, that Xenial, an internally-built software solution, didn’t pan out the way they thought should give Global Payments pause before it gets overzealous on software bolt-ons and stack monopoly.

But MobileBytes? That was an acquisition Global Payments Payments had to make and we think it’s a solid solution. Can Global Payments keep it separate enough from the payments culture to succeed long term? Their future kinda depends on it.