Lightspeed POS is preparing to go public. As such they need to present a good story to prospective investors in their road show. An obvious question one of these investors should ask is what Lightspeed plans to do about payments. We’d imagine something like this,
Hey, payments is super commoditized yet nearly all gross margin. You already have distribution into tens of thousands of merchants so your incremental distribution cost to move payments is trivial. What do you plan to do with payments and do you envision material revenue coming from that strategy?
Make-believe mutual fund analyst
As we’ve stated before we believe every POS company needs a payments offering. No, not a locked-in, exclusive payments offering but a payments offering generally. This earns more money for the POS provider (which is already struggling at the hands of payments providers entering into POS, ironically) and also provides tighter integration for the merchant. One could also argue the whole one-throat-to-choke value in consolidating vendors but we do see merchants preferring multiple throats if it means they realize the highest ROI from best-of-breed providers. Payments, however, is commoditized, offers relatively paltry value, and as such is probably better coming from an existing vendor as opposed to creating a new one.
Well, as we would have advised, Lightspeed POS has announced its own payments processing. We sought clarity on the matter, mostly to make sure it wasn’t a locked-in model that would really bend merchants over (or at least have the propensity to end up that way).
What we found were very pleasant answers, so Lightpeed appears to be architecting their payments program well thus far.
First, payments are not mandatory. You can still be a Lightspeed merchant and use someone else for payment processing. Lightspeed will obviously make it enticing to choose their payments offering, but it’s not a requirement.
Second, there’s no multi-year payment contract. Talk about music to our ears. Most processing companies force merchants into 3-year contracts; if the merchant breaks the contract (likely because they’ve seen their effective rates climb to sky-high levels) they pay an ETF, or early termination fee. Sometimes these ETF can be economically onerous as we’ve shown before.
Third, and in-line with the second point, there’s no ETF. If you want out of Lightspeed’s payments you can get it, no questions asked. This is how payments should be, though we understand payments companies will occasionally use their balance sheet to lease equipment to merchants. Under these scenarios an ETF makes sense since the payment company does need to recoup their loan costs.
Lastly, Lightspeed decided to become a payfac, or payments facilitator, riding Worldpay’s rails. Payfacs are all the rage because you can onboard merchants quickly and often command greater processing profit. Traditionally, a payments processor would need to collect business information from a merchant, assess risk based on that data, and tell the merchant if they were accepted. This could take a week. Payfacs instead become certified with acquirers directly and assume the risk of whatever merchants they bring on. Payfacs have their own risk assessment tools but the verification process is faster and thus less rigorous than traditional methods. Payfac downsides are that a data breach or faulty analysis of merchant risk could be financially ruining. Square, Stripe, Toast – all payfacs. This is a great article explaining how payfacs work if you’re so inclined.
We give Lightspeed Payments an A grade thus far. Obviously with more data our opinions may change. But so far, so good.
