Update: Toast Will Make Next Four Quarters on Low Quality Revenue Paid by John Q Public

A good friend once said that Toast will be their own undoing.

We shall see.

On the heels of our latest analysis comes even more inbound information from Toast merchants.

Back in October, 2022 Toast started to test the waters with surcharging. But of course Toast didn’t actually call it surcharging because surcharging is very well defined by the card schemes and comes with fee limits – and a risk those limits go ever lower (heaven forbid).

Visa and Mastercard discourage surcharging because cardholder always loses money.

Here’s an example.

John has a rewards card that earns him 1% cash back.

If he pays with credit card at his nearest restaurant he eats an additional 3% fee thanks to a surcharge

So John is losing 2% to pay with card.

But John is likely an absolute moron and will never understand nor do that math, and payments bro who represents said restaurant stands to make 100 bps of margin on the account depending on card mix, so of course he’s convincing the merchant to surcharge all day every day.

Toast, on the other hand, would rather just pass down a flat fee per order.

This avoids running afoul of any card scheme surcharging cap (now at 3% from a previous 4%), but more importantly earns Toast way more money.

While a 4% surcharge on a $30 order (Toast’s average ticket size) likely nets Toast an unreasonable 150 bps of margin for all the hard work they undertake, a $1 fee on that same order is 330 bps of pure margin, baby.

On top of their 55 bps of average take rate.

385 bps of margin?

Yes, please.

Earlier this year Toast merchants informed us that their choices were no longer about saving on processing but that the merchant could either eat a material increase in SaaS fees or run the risk of pissing off their customer.

Solid.

Now Toast has a new gameplan:

Fewer choices.

And by fewer we mean zero.

Toast is going balls-deep and adding fees to all online orders above $10.

But it’s a for a great cause.

Because merchants get $3,000 in annual chargeback protection!

I got an email in September 2022 about a customer fee, but we had the ability to opt-out and it also had a reduction in our processing fees.

This new notification from Toast was even worse.

We had no choice: just a promotional email to learn what this fee is. It’s a static service charge. We have no way to alter the charge, split the charge, or eat the fee ourselves.

All we got was a lousy $3,000 in chargeback protection.

I did the math and Toast will make $20,000 a year off my location.

We restaurants get nothing.

Didn’t realize I worked for Toast.

Toast merchant

Toast even created promotional pages so restaurants can explain how awesome this fee is to their customers: here and here.

The nuts required to just come out and say it:

If you receive questions from your guests on the Order Processing Fee, we suggest explaining that the new fee of $0.99 on orders $10 and above helps Toast continue to innovate, provide a seamless ordering experience for guests, and keep technology costs lower for restaurants. 

LOL.

This is great.

Toast is doing billions in revenue.

But we guess that’s not enough.

As you can imagine, Toast merchants across the board were pretty pissed.

I would have eaten this fee instead of passing it to my customers. Instead I have no choice. I make nothing on this.

If a customer asks why we have this fee we’re supposed to tell them it’s funding ‘Toast Innovation.’.

I’m sure my customers can’t wait to fund that.

Maybe I don’t need Toast anymore. I can’t see Toast getting any better as they keep having to hit higher numbers for investors.

Toast merchant

Here’s perhaps the most interesting nuance:

In classic payments bro fashion, Toast is increasing rates on random accounts so as not to totally crush a single quarter but to guarantee that they meet every quarter for a longer period of time.

We confirmed with some multi-unit operators who received the fee notice for some Toast locations but not others.

Let’s summarize how Toast’s messaging has changed over the past 8 months:

• October 2022: Toast will share some of the payments margin with the merchant for implementing an ordering fee.
• Q1 2023: The merchant either passes an ordering fee to the consumer or sees select SaaS fees increase.
• June 2023: Toast forces an ordering fee on the consumer. The end.

Doesn’t it feel good knowing that Toast is going to keep increasing fees forever?

The best part is the years of published history on this outlet, pointing out ethical failure after ethical failure.

No Toast merchant has an excuse to be in the dark on Toast’s business model.

But, you know, why self-educate when making the largest technology decision for your business?

Toast’s fee will probably be $2 a year from now, then $4, then $8, until every person unlucky enough to visit a Toast restaurant pays $10 for their lunch and $80 in Toast ordering fees.

Or Toast just charges $80 to the restaurant for each order.

And you know what?

Toast will get away with it, because SMB restaurants are powerless.

And clueless.

All Toast needs to do is find a creative way to stick this fee back into the payment stream and their customers will be none the wiser.

Sure, Toast merchants will go bankrupt at 2x the rate of other merchants.

And sure, Toast will be a consumer hardship worthy of an entirely new piece of legislation sponsored by the CFPB.

But in the meantime, Toast will crush.

Even if this fee revenue is the lowest quality revenue possible, demonstrating that Toast is unable to reach profitability by selling additional software to restaurants because restaurants don’t pay for value.

We repeat: this fee proves that Toast is unable to sufficiently cross sell bolt-on modules to restaurants, who refuse to pay for anything regardless of ROI, thus forcing Toast’s hand to reach profitability.

And Toast cannot grow fast enough to reach profitability either.

Take away the payments stream and Toast is a company that’s raised ~$2B (inclusive of IPO proceeds) to generate $400M of software revenues.

This is what restaurants believe they’re actually paying for Toast.

If Toast were to push the ~$600M of payments revenue (net of interchange) back into a software fee Toast would lose nearly all their customers.

Because restaurants cannot – and will not – pay for value.

They just can’t comprehend it.

But no matter.

Here’s how much Toast will make at scale with this $1 ordering fee.

$110B of GPV with a $30 average check = 3.6 billion transactions.

Assume 10% of these are made digitally = 360 million transactions.

A dollar per and it’s $360M to Toast.

Pure EBITDA.

Now why would Toast give $3,000 in annual chargeback protection in exchange for this fee?

Doesn’t it seem odd that this is the olive branch?

Here’s why:

Consumers who see the $1 trash fee aren’t being warned about the fee prior to checkout. Unlike surcharging, which has rules that require merchants let consumers know about the surcharge prior to payment or ordering, these convenience fees don’t.

So some meaningful percentage of guests say “WTF is this nonsense?! I didn’t agree to this fee. I’m calling my bank and disputing the entire transaction.”

There’s nuance here which we’ll save for another article, but every Toast merchant should now understand the truth…