Salido, an upscale cloud restaurant POS system, was acquired by North American Bancard (NAB) in early 2019. Salido had made a name for itself by serving some of the most notable dining concepts across the country, including Jean-Georges and ESquared. That made Salido substantially different than most other cloud POS companies that focused on a smattering of SMBs.
As Salido grew, it took investment from First Data and built a bundled payments offering. Salido didn’t start this way, but given how hard software is to build – especially of the POS variety – we don’t fault POS companies in reaching for the payments treasure chest when it becomes apparent. That Salido’s customers average more than $5M in annual revenue would also make any payments revenue material.
It’s this confluence of POS and payments that made Salido an attractive target for NAB, one of the largest US payment processors. NAB, unlike other acquirers, has been late to the POS party. First Data bought Clover in 2012, Heartland bought a handful of POS companies in 2015, Shift4 made their buys in 2018, and Global then added Heartland and even more POS companies to their ranks over the past few years as well.
We should take this opportunity to again explain why this is happening. Payments is the poster child for a commodity. POS, while reaching a commodity status, is much harder to replace than payments processing, thereby making bundled processing less prone to churn. Only after the fact do most merchants realize they’re paying way too much for processing in a bundled model. Restaurants in particular are the perfect hosts for this parasitic strategy because:
- They’re very bad business operators who will never read a contract
- They have a high number of transactions and each transaction earns payments revenue
- They’re not being killed by Amazon anytime soon (though ghost kitchens should be a growing concern)
We’re still not sure if the merchant deserves the blame for being so dumb, or the acquirers deserve the blame for misleading or outright lying to their “customer”. We digress, so back to the article.
NAB is different from other processors on this list in that they’re private. Why does this matter?
Toast, a mandated payments/POS provider (i.e. you cannot use Toast POS without using their processing, while you can use a Shift4 POS without using their processing, they’d just prefer you bundled it) is burning insane amounts of capital to buy market share. The latest financials we’ve seen put Toast burning ~$200M annually. That’s in addition to their revenue, meaning Toast has spent ~$1.3B since January of 2019.
That’s something that’s impossible to pull off if you’re a public company. Public companies, especially of the payments processing variety, print earnings (because COGS for payments is effectively $0). These companies can’t tell their shareholders that they’re suddenly going to stop being profitable. That would almost certainly result in the executives being thrown out, and it’s a pretty cushy job at the top of a payments company. So why risk it?
NAB doesn’t have that problem. Unlike every other payments competitor*, NAB can invest the capital necessary to make Salido a legitimate threat to Toast and Square. They can build a robust product suite and incentivize their channels to get installations the same way Toast has: losing money upfront to make it up down the road with additional services (in Toast’s case that service has materially been payments processing, but they want to monopolize the product stack).
(*Note: it wouldn’t be fair to include Square in the group of public payments competitors because Square, while public, is priced much more like a software company. Square spends meaningful capital on R&D and loses money to achieve growth. Other public payments companies can’t do this because they don’t have the right leaders to transition their business to software, which we think over time means they’ll cede nearly their entire market share to the Stripes and Squares.)
If NAB is to make this happen they’re going to have to do a few things well.
First, they’re going to need to commit to investing the necessary capital to transition to a software company. This is not something you can do for a few million dollars. Toast is spending hundreds of millions to get there. That’s obviously the far extreme, but you can look at Global Payments as a company that has effectively refused to invest even a few hundred thousand dollars in keeping their existing POS base relevant.
Second, they’re going to need to invest in people. Committing lots of capital to a project without the right people will have the same result as lighting the capital on fire. And this starts at the top. NAB will need to hire senior software executives and give them full control (and responsibility) over the outcome of the efforts. Global Payments can again show us what to not do: spend over $50M on new POS efforts with seemingly nothing to show for it because leadership has no idea how to build software.
Third, they need to keep the culture. Investors have learned to keep founders around because it leads to higher returns. Founders often understand the market problems better than any hired gun, have very close relationships with key customers, and can convince superstars to join the team (with the proper equity incentives, of course). Shu has been key to Salido’s product vision and customer successes, and keeping him involved would pay dividends. This is very much a wait-and-see. Payments companies have nearly singularly ruined POS at the merchant’s expense, and NAB may be no different. But NAB is in a place that most payments companies should love to be… at least, should love to be if they have any desire to become legitimate software companies.
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