Clover to Toast, “Hold My Beer: I’ll Show You How to Make Real Money with Convenience Fees”

In what is new the status quo game of making money in SMB, POS vendors fight over who can charge the consumer the most.

You read that right: not who can charge the merchant the most, but who can charge the consumer.

It used to be that a business would buy a product to solve a problem. The business would calculate the ROI of said solution and shift the cost of that solution to its customers.

Some solutions required no such maneuver because they clearly paid for themselves: think marketing, where a dollar in equals n dollars out. So long as the business has a dollar on hand, it can keep investing in the solution to produce a reliable outcome.

Other solutions have an ROI that isn’t so directly related to cash flow.

For instance, you have to do your taxes. You could spend 100 hours and possibly screw something up, or you could pay a service provider to do 90% of the work and own the risk if it goes wrong.

Does it immediately impact cash flow?

No.

Is it valuable?

Sure.

However, this is now a business expense, and a business should amortize the cost of the tax services over its own offerings so it can earn a profit.

POS systems were a cost of doing business. But they made life much easier than the pen-and-paper alternative.

Over the past decade, POS became a Trojan Horse to win the payments business.

In fact, the entirety of selling to SMB (and arguably all of brick and mortar) could be summed up as:

What’s the easiest solution I can build that locks down the payments revenue?

How did we get here?

Well, because merchants don’t pay for value.

So the only way for a vendor to make money is to take money.

Payments are great because 1) merchants have to accept cards (i.e. inelastic pricing), and 2) merchants have no idea how to read a payment statement.

Unlike a SaaS company that transparently bills your credit card each month, understanding what you’re actually paying for payments takes quite a bit of work.

One could reasonably argue that the payments ecosystem intentionally obfuscates payments so nobody can understand how much money they make for doing dick.

Of course flipping through the 10K’s of Visa or Mastercard would tell you it’s a lot of money.

For nothing.

But it turns out that the companies who aggressively sought to acquire SMB merchants raised a lot of money from private investors.

Those investors needed liquidity eventually, leaving many of these companies to go public.

Public investors, like their private counterparts, also demand returns.

And it turns out that acquiring SMB merchants is a very expensive proposition, because the only way to make an SMB shuffle through a rational sales cycle (meaning that a salesperson can close enough business for enough money in a short enough period of time as to be comparable to working a sales role in another industry) is to subsidize the shit out of the product with your balance sheet.

Again, because merchants are not rational, will never understand ROI, and thus only know one lever:

Price.

This leaves a depleted vendor balance sheet.

Sure, these vendors can say how they’ll increase ARPU by selling merchants other solutions, but merchants don’t pay for other solutions.

Not really.

Count the number of public vendors that serve retail.

We’ll wait.

Relative to the amount a vendor can make on payments processing, these other solutions are a lot of work for peanuts.

A distraction, frankly.

So the vendors are still stuck with a massive hole in their balance sheets.

Payments is the only buoying force keeping vendor numbers looking somewhat healthy.

But there’s a limit to what you can charge for payments processing.

Why?

Because it’s not yet a monopoly. And it will probably never be.

SMBs churn at high rates, there’s material nuance in market segments, and there’s always someone who’s willing to work for less (maybe they’ve raised money from dumbass investors who don’t know that returns in retail will never clear hurdle rates).

What’s a poor vendor to do?

Clearly the answer is charge the consumer.

If you were thinking something else, like create value, you don’t know how payments bros think.

Clover has decided that the $1 enacted by Toast was too tame.

So let’s go ahead with a $1.50 fee.

Merchant keeps none.

Reseller keeps none.

All to Clover.

Genius.

(PS we were told this was to fund Fiserv’s acquisition of Bentobox. We suspect Clover sees how much money Toast is making in a market segment that was previously yielding ~30% of the payments margin Toast is currently extracting, enticing more competition for upmarket restaurants.)

Clover’s fee applies to online orders above $30.

$1.50 represents 500 bps of margin on a $30 ticket.

On top of additional payments margin.

The poor, poor consumer.

This shit just has to speed up legislation, which will view this as a consumer hardship.

Get it while you can, because we don’t think this is going to last.

And don’t despair, Toast lovers: Toast will parry with a $2 order fee sometime later this year.

Never count out Toast when the title for Biggest Piece of Shit is on the line.