Toast Merchants Reporting Massive Fee Increases, Likely Responsible for Toast’s Q1 Asymmetric Software Growth

We told you so.

We’re now hearing from more Toast merchants who are being forced to surcharge their customers (technically add a transaction fee so it doesn’t run afoul of Visa’s 3% limit) or pay additional fees to Toast.

Amazing.

We got a pop-up screen in the Toast portal with all the talking points. But the fees had all been applied the day before we got the notice.

Toast merchant

The merchants then called Toast’s support, which regurgitated the talking points.

Part of Toast’s schtick was that we’d have lower chargebacks if we pass through their fees. I’ve had one chargeback in 14 years. This is nonsense.

Toast merchant

Here’s a sample email chain.

What’s happening is that Toast tells the merchant that unless they pass through their effective surcharge fee, Toast will increase the merchant’s monthly software fee for Digital Ordering AND increase the card not present rates to what amount to the legal maximum limits within interchange.

Nice.

Some merchants have passed fees along to their customers.

Will their customers notice?

Interestingly this move is highly likely responsible for the software ARPU expansion Toast has recently reported: some meaningful number of Toast merchants have refused to fuck their customers and eaten the cost.

Here’s a table to show you our math.

From Q1 2022 to Q1 2023 location count grew by 37%, GPV by 50%, and software by 70%.

Software revenues doubled for each location added.

Seems suspiciously convenient, no?

The explanation could be that Toast is selling more software per store, both for add-on modules and more terminals per store as they tap larger merchants (Toast prices per-terminal).

But Toast’s hardware revenue crawled from $29M in Q1 2022 to $31M in the same quarter in 2023, and they can’t possibly have just eaten the cost as a marketing expense because hardware costs also barely mored over the same periods: from $52M to $57M.

In other words, we can’t explain Toast’s software increase using the assumption that Toast is selling more terminals per store.

And we are super skeptical that Toast merchants have decided to spend twice as much on POS software than they did last year.

Remember, if these merchants were so keen to spend on software, Toast wouldn’t need to hide 85% of its revenue in the payments stream, where merchant’s can’t do math.

In the long run, it’s important to note that whomever owns the most SMBs is going to win, because SMBs can’t do arithmetic, and they are going to get abused with payments ultimately being levered against the merchant directly, or the merchant’s customers.

In Toast’s case, their SMBs will provide Toast a nice balance sheet to move upmarket and fund larger merchant acquisition.

And it’s why Toast will cause problems for upmarket competitors in a few years.

This deserves a separate analysis, but you cannot underestimate Toast’s ability – and clear moral void – to take price on their customers.

Honestly, Toast should just add a $1,000 convenience fee to see what happens.

May as well test the limits for how much John Q Public will subsidize the entire Toast business model.

But borrowing a bit from the legend Jeffrey Sloan, why beat today’s quarter by a lot when you can beat every quarter by a little?

That’s value, baby.