In case you haven’t heard, Olo built a payments product.
How did we get here?
When consumers interact with a restaurant on their digital device, they are almost always guided to an Olo product when they want to order online. That’s because Olo represents 82,000 restaurant locations, which as far as the enterprise segment of the US restaurant market is concerned, is over 60%.
Suffice it to say, Olo has very impressive industry coverage.
When a consumer enters their payment details and orders from that restaurant’s website, the payment has to be processed by somebody.
Traditionally, Olo would integrate to whatever payment processor the restaurant was already using.
But as should surprise nobody who reads this periodical, legacy payment companies cannot spell R&D. Accordingly, their products are inarguably terrible, especially in digital environments; hence the rapid rise of software-first payment companies like Adyen and Stripe, both of which are worth substantially more than the three large processors Worldpay ($35B), Global Payments ($35B), and First Data ($22B).
For the curious among us, Adyen is worth $45B and Stripe is worth about $90B.
As Olo tells it, Olo Pay was a result of multiple requests from their customers. According to Tor Opedal, Olo’s General Manager of Payments (who comes from Mastercard), Olo customers found themselves with a number of payments challenges.
“For starters, merchants were paying higher fees than they expected… you know how this game works: the merchant thought they were paying X because that’s what their contract said, but sure enough they were paying substantially more when you looked at all the fee increases,” shares Tor.
Tor explains that Olo merchants additionally experienced high chargeback rates, lower authorizations (i.e. fewer successful transactions), suffered through prolonged onboarding processing, experienced cumbersome reconciliation processes, and scored low marks for legacy processor support.
Anecdotally we could corroborate all of this, and we bet Olo could just as easily have peeked at the payment data flowing through their pipes to build the business case that their partner merchants were underperforming industry payment benchmarks.
So Olo built Olo Pay.
We should first explore the value adds: do they make sense?
Value adds
Olo’s analysis is solid: legacy processors are terrible. So we asked Tor for some specifics.
We have brands that would take 90+ days to onboard with legacy processors. That’s because processors often deprioritize smaller brands, and they have a very manual process of capturing the needed onboarding information. Onboarding with Olo Pay is much faster: on average we’re onboarding customers in 2-3 days.
Tor Opedal, GM Payments @ Olo
Here’s what Waba Grill had to say about the improvements Olo Pay brought.
Most merchants are used to seeing chargebacks on their bill. A chargeback occurs when a customer disputes a charge. These can be legitimate (wrong order, hair in food, etc.) or it can be fraudulent, like a customer just wanting a free meal.
Merchants will get hit with chargeback fees separate from their processing rates; we’ve seen some as high as $35 per occurrence.
Olo offers lower chargeback fees than many legacy counterparts. And yes, surprisingly, chargebacks are a legitimate cost for processors and not a total bogus fee (though there is clearly a lot of markup going on).
Authorization rates determine how often a transaction will go through. Crappy payments technology doesn’t retry cards when an authorization fails. Newer processors, like Stripe and Adyen, use techniques to minimize failed transactions and increase authorization rates.
This makes consumers happier and also increases a merchant’s revenue.
Olo Pay has increased authorization rates by 6% over legacy providers by leveraging Stripe to build their payments platform.
Support is handled in the same way any other Olo product is handled, which, by itself, is almost assuredly better than payment processing customer service. Since Olo Pay is fully integrated into the Olo tech suite, operators only have one support center to reach out to for issues and Olo instantly understands the payments issue as they operate the underlying ordering software.
There’s also an advantage to processing all of a merchant’s online payments in the same software that they’re using to record those online transactions. For example, if a merchant needs to issue a refund they can see exactly for whom, when, why, and execute the refund from one platform.
It’s almost like software is eating payments…
Pricing
Without a doubt pricing is the thorniest issue in payment processing. Larger merchants logically eschew locking payments into a POS that only offers a single payment solution for (rightful) fear of getting screwed on rates over time.
So, what are Olo Pay’s rates?
Like everything in payments, Tor says it depends.
“Pricing is variable based upon the average check and debt and credit mix. Our stance is that Olo Pay needs to be net positive for the merchant or it just doesn’t make sense.”
We agree with this in theory, but the math gets challenging for merchants who struggle with arithmetic, and we’ve also seen Olo Pay rates for smaller merchants that are significantly higher than we would expect.
Is it because Olo’s rates are appropriately accounting for their other value adds?
For simple conversational figures, let’s say a merchant is paying $.01 per transaction.
At the same time, their current processor is dropping 10% of all authorizations, slaps a chargeback fee of $25 per occurrence, and has terrible-borderline-nonexistent support.
What if Olo Pay offers a rate of $0.02 per transaction? The merchant sees the headline rate and declares Olo Pay more expensive.
But if Olo reduces failed authorizations by 50%, lowers the fraud and chargeback rates, offers a $5 chargeback fee, and actually answers the phone when it rings, what’s this worth?
Companies like Aben breath payments and routinely simplify this math for merchants; we do this to ensure that customers get a fair economic shake and the necessary data from their payments stream to drive revenue.
Which leads us to the next point.
Data
Offline merchants need to track their customers. Most CDPs (customer data platforms) were built for online merchants. That’s totally fine, but these merchants have a very different set of problems than merchants like restaurants who only know about 10% of their customers via a loyalty program.
Payment tokens allow offline merchants to track unknown guests who pay with card (which is 80% of guests typically).
Aben has had to move merchants to processors that enable this data for marketing and general capital allocation decisions.
What data does Olo Pay provide?
“As of today, trackable payment tokens are not fully active, but they’re on the roadmap to be made available later this year.”
Pursuant to data initiatives, Olo is also working on “borderless payments”, where customers can upload their card on file with any Olo merchant so that card can be leveraged again for payment at any Olo merchant within three clicks.
And clearly, Olo has ambitions to bring this to card present transactions.
This news isn’t great on the token front, but enabling a universal ecomm experience would be awesome.
Here’s why.
Most chain restaurants are franchised. Aben works with several of the largest franchised restaurant groups in the world. These groups have the same problem that smaller franchised outfits have: driving consistent payments adoption.
Consistent payments across franchisees 1) centralizes data (just like POS did a decade ago), and 2) increases negotiable volume to drive down rates.
The vast majority of franchisees have yet to understand either of these two points, and it will probably take an edict from the franchisor to get sensical things done.
But what franchisees can understand (hopefully, at least) is how their customers encounter totally disjointed ecommerce experiences from the same brand.
“Hmm, so how come I can pay seamlessly online at some {your brand} locations but not others? This experience is terrible and I’m not coming back.”
Olo Pay becomes a wedge to implicitly drive consolidated payments across franchise groups, and that’s a good thing.
Olo has the potential to do some really cool things given their scale. Personally, we’d love to see Olo enable a buy now, pay later or ACH rail on Olo Pay, eliminating the middlemen so processing rates drop to nothing. Olo could do this by leveraging Plaid. The only other company with the scale and business model flexible enough to try this in the restaurant vertical would be Punchh.
Toast, Square, and others have the scale, but when 90% of your revenues come from payment processing margins you can’t disrupt yourself.
Olo has the benefit of not relying on payments revenues, so they could build something really disruptive if they were to get aggressive.
For investors out there, Olo Pay has some upside, but don’t expect it to be nearly as profitable as Toast or Shift4. Larger restaurants, the kinds that are Olo’s mainstay customers, generally pay very little in payments margin. These are accounts where we’re talking about 5 basis points, not 50, and Treasury audits the rates (i.e. you can’t ratchet up fees like payments routinely do on SMB merchants).
So while payments have no cost and any money Olo Pay earns will be incremental, don’t expect it to be an EBITDA windfall.
Our closing comment is a question about neutrality.
Today, merchants can use Olo Pay or bring their own processor. As we’ve learned from Clover, Square, Toast, Shopify, and others, payments are too lucrative to pass up. Will Olo force Olo Pay as the only payment option for Olo merchants in the future? This has been a sticking point for Toast’s upmarket efforts.
Olo must be careful.
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