Before starting, we should say that Toast is far from the only payments company benefitting from the card not present malfeasance. And we understand that Toast needs to present a strong, resilient, and growing image to prospective investors, but we don’t like how Toast portrayed this as an advantage in their business…. it feels slimy when you’re purporting to be helping customers yet – as we in the industry know – are actively taking advantage of their lack of payments knowledge.
In attempting to work with Toast for this article (we asked them to explain how a doubling+ of payments margins benefitted their customers while they were fighting for their lives), Toast was quick to point out what they have done during the pandemic:
- The launch of Rally for Restaurants to increase consumer support for restaurants
- Catalyzed our partners to call on Congress to support the restaurant community
- The launch of flat-fee delivery to help restaurants combat 3rd party commissions
- Over $35M in software fee relief and funding for restaurants
In fairness, this is substantially more than a lot of other POS companies… but then again most other POS companies haven’t raised over a billion dollars, nor do they have north of $600M on their balance sheets.
Seriously, when you’ve got $600M on the balance sheet and you’ve just cut headcount in half to reduce burn to about breakeven, offering $35M is a slap in the face, especially when some of your benefits are pushing people to use your online ordering solutions which come with really high processing margins. In fact, it can be reasonably argued that the $35M proffered by Toast was paid back in full by Q3 2020 thanks to their higher payment margins. That would be like asking a borrower to pay off their entire mortgage in a quarter – it’s a fantastic ROI for Toast, and equivalent to a loan with a 300% APR.
How high are those margins?
The first exhibit comes from Toast’s financial statements. We’ve only pasted the pieces relevant for this article, and we’ve highlighted in red the changes in gross payments profit.
In January 2020 Toast’s payments margin was 9%, and by May 2020 -when restaurant analysts were worried that 75% of independent restaurant might close for good – Toast had nearly tripled to their payment margins 24.9%.
This isn’t a case like Olo’s transaction model, where more usage incurs more expense. No, this is a straight up Toast-can-rate-set-margins-on-payments-and-chose-NOT-to-lower-them situation.
Not cool.
But worse than this, Toast openly boasts about their margins to prospective investors. This is from their Q1 2021 management presentation, of which we’ll do a full teardown in a future article.
Payments is a giant cheat code, and there’s no better opponent than an SMB who can’t read a contract. We’re over here second guessing Toast’s TAM of $71,000 per merchant location but maybe they’re betting on a 10% effective rate. Their merchants haven’t flinched so far, so why not just keep boiling that frog?
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