Reforming Retail

What’s Happening to The Upserve Channel?

Private capital has a love-hate relationships with channels. They love channels that deliver sales and lower direct burn, but they hate channels that don’t produce results as quickly as direct sales. Basically, investors hate channel partners if those partners run lifestyle businesses (which is like 98% of POS dealers if we’re honest) and it might be why Toast has seemingly made substantial changes to their channel program in recent months.

Upserve was acquired by Vista Equity, a very well respected software-focused private equity fund, in mid-2017. Up until the acquisition Upserve had a fairly robust referral program. Yes, things got a bit more complicated as Upserve changed from stand-alone analytics company to payments processor to POS company (with analytics and processing), but the channel was part of their life at every stage.

After Vista, things seemed to have changed. Was this expected investor behavior or something else? First, here’s a history of Upserve’s channel efforts as explained to us by those around its construct.

Channel 1.0: 2015-2016

In the early days Upserve was focused on growth. The did a flat revenue share across the board for any referral partner, both with payments and SaaS. The revenue share was determined by Upserve’s channel team and generally ranged between 30% and 50%. Payments partners would get 40% of net revenue after Upserve’s Schedule A. As you can imagine, having a flat year on account growth would mean that Upserve’s revenues might actually decline.

Channel 2.0: 2017-2018

As Upserve grew they could afford to turn away underperforming channel partners and had the leverage to negotiate revenue share more in their favor. With the new channel model Upserve would pay out “n” number of months of SaaS revenue upfront in addition to spiffs for implementation services. That n would vary based upon the performance of the specific channel partner though there were cross sell SaaS opportunities. Upserve also changed their payments economics: they negotiated a better Schedule A with their processing partners and now their channel received a buy rate of $0.05 per transaction. For some of the top performing referral partners this could equate to 60% of the payments revenue. Upserve terminated a number of channel partners “for convenience” and all remaining channel partners upgraded to this new 2.0 pricing.

Channel 3.0: Spring 2019

In 2019 things changed materially. Upserve quietly shifted their channel team to inside sales roles. Commissions changed again and are made clear in the following screenshots, although Upserve disputed the screenshots as recent and they would not provide terms to the contrary.

First are “Legacy” merchants, or merchants that were represented by dealers (now called referral partners) prior to this agreement.

Next is the provision for “New” merchants.

There are some nuances to this but they’re not relevant for the article. What we should focus on is the discontinuation of SaaS revenue share to the channel. Because SaaS payouts discontinue after six months, some of the “payments bros” pushing Upserve are trying to pawn off their accounts on real resellers. “We have an Upserve rep in our area who’s trying to get us to take over supporting his account,” shares an anonymous reseller in the Northeast.

One needs to question what level of support are these Upserve merchants are going to be getting in the future. While Upserve has always provided first-line support – and every channel partner we spoke with did attest that it was very good – the reality was that many channel partners were providing the hand holding that could be expected with larger merchants. Discontinuing the SaaS fees prematurely might prevent some of these partners from being so hands-on.

If that wasn’t nebulous enough, somewhere between Channel versions 1 and 3 Upserve changed their merchant agreements to look much more like those of Vantiv, Toast, and now NCR: multi-year contracts often with ETFs (early termination fees). In the case of Upserve, a merchant who cancels early owes the remaining term on their SaaS license. So if you have 12 months of a 36-month term remaining, you’d owe 12 months of SaaS at the time of cancellation. Previously that cancellation fee was a flat $300.

I have a merchant using Upserve who went to cancel and got a $2,500 bill. It turns out Upserve’s new SaaS agreement references a ‘Master Agreement’ which, if you chase deep enough, discusses a three-year ETF. I’ll never board another merchant with these guys again.

Anonymous Upserve reseller

Upserve clarifies that they’re not trying to eliminate their channel program, and in fact they’ve just made a big reinvestment in their efforts. “We’ve invested heavily in engagement and enablement resources to help our referral partners perform. In fact Upserve held its first-ever channel partner meeting in July this year where we listened to how we might improve,” shares Sherly Hoskins, Upserve’s CEO. She was also clear that any changes to the channel program were her team’s decision and not some larger move by Vista Equity.

Still, that doesn’t quite explain the change in cancellation fees. Why does any processing entity need a multi-year agreement? If the processor has a multi-year agreement, why do they need the flexibility to increase processing rates to whatever rate they want?

The only justification for a multi-year term is if the POS company is substantially discounting the up front cost of the POS system as a loan (also called “Free POS” in industry-speak). In this scenario the merchant must very closely scrutinize the fine print, as most merchants could otherwise secure a loan at 20% APR. When “Free POS” providers lock in merchants over multiple years with the flexibility to increase rates as they see fit, you end up with situations like this one, where a Toast merchant was paying an effective 65% APR for his POS system.

Much of this pricing is driven by the need to satiate investor returns. For private companies that’s generally 25% IRR and for public ones it’s about 10% IRR. But what’s good for the goose is good for the gander, and now most stand-alone processors are following suit and peddling multi-year processing agreements (nobody would ever accuse processors of missing an opportunity to make money for nothing).

Ironically, all of this is coming at the expense of the merchant, or the ultimate customers of these shams. Can a business succeed long term if it seeks to bankrupt their customer base? How much juice is there to squeeze? Will it even be possible to secure processing without signing multi-year agreements in the near future?

Harrowing times for merchants, to say the least.

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