Archive | November, 2016

RSPA’s POS Data Series, and Why You’re Missing Out

15 Nov

The RSPA – widely regarded as brick and mortar’s technology solutions trade association – has started a monthly webinar series to educate the industry about the commercial value in POS data syndication. The agenda for the series can be found in the Lunch and Learn section of RSPA’s Education page, and it’s free to all participants, including non-members.

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While I am biased because we have a hand in orchestrating the presenters and content, this is the only opportunity we’re aware of where those in brick and mortar can hear experts in their field discuss the no-bullshit commercial opportunities in POS data. Yes, we write about it all the time, but it’s still coming second-hand.

Well, here’s your opportunity to hear it first-hand, straight from someone who isn’t as ugly.

Now if you’re someone who refuses to acknowledge the value merchants will reap when their POS is connected to the outside ecosystem of ecommerce platforms, search engines, online ordering sites, and delivery services, just stop reading right now and run to the nearest rock so you can etch your commentary and send it to me via dodo bird next year.

For everyone else, the next session takes place this Friday at 1 Eastern (GMT – 5) and you can register for it here.

This session brings in metadata experts Kevin Hanna of Vendasta and Elaine Screnci of Acxiom to make clear how simple merchant data – name, address, phone – makes all of our digital experiences seamless, and how those with said data have easy commercial opportunities.

For merchants, correcting this data is worth tens of billions in missed revenue, so everyone should be paying attention.

Real Examples of Online Ordering Companies Screwing Merchants

15 Nov

Angelo’s House of Pizza is an Italian eatery on the outskirts of Boston. Run by a Greek family, they put in long hours and built a small enterprise on a labor of love. This summer, while the owners returned to Greece to spend time with family, something sketchy happened…

Angelo’s is a customer of Clickawaiter, an online ordering platform that allows restaurants to host their own online ordering on their restaurant website. As opposed to third party demand generation online ordering platforms like Grubhub – which takes large cuts of each order through their system – Clickawaiter charges a relatively small monthly fee for unlimited online ordering. In an effort to capture all potential customers though, Angelo’s also subscribes to Grubhub as well.

While Angelo’s owners were abroad, their restaurant employees noticed that orders stopped originating from Clickawaiter. In other words, online orders were originating from Grubhub as opposed to Angelo’s own website, thus costing Angelo’s substantially more money.

When the owners returned, they phoned their hosting provider GoDaddy and learned their domain had expired. Upon expiration their domain entered a public pool where anyone could buy it. But Angeloshouseofpizza.com is such an obscure domain none of the owners worried someone would happened upon it.

Yet sure enough, in the short time the domain had lapsed it had been claimed. But by whom?

 

Charlies Roast Beef of Middleton has been around for 25 years and Charlie has owned his domain for the last decade. When people sought Charlie’s roast beef in search engines, he would appear at the top of the results. Charlie is likewise a customer of Clickawaiter and his domain, Charliesroastbeefofmiddleton.com, was set to forward over to his online ordering portal hosted by Clickawaiter.

Since making this move, however, Charlie noticed that online ordering sales originating directly from his website have dropped by 80%…

 

When Clickawaiter went to investigate both instances, they found some shocking results.

First, Angelo’s domain was snatched up by a company called Kydia Inc.

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Kydia Inc is the parent company of BeyondMenu, a Grubhub clone in Illinois. When I reached out to Beyond Menu for information I only connected with an outsourced phone representative who had no way to pass me to their public relations team or founder, Leon Chen.

If you visit Angelo’s website today, you’ll notice another peculiarity: it’s now owned by Grubhub. The website footer says as much and the whois registration confirms it. I likewise reached out to Grubhub but have not heard a reply.

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It seems the same ploy was initialized by Grubhub for Charlie’s. Grubhub purchased Charliesroastbeedandpizzeria.net. You can search the registration record or simply look at the website’s footer to find ownership.

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Grubhub used SEO techniques to ensure their .net domain beat out the restaurant’s own domain every time.CLICK TO TWEET

When Charlie asked his customers why they were using Grubhub as opposed to online ordering on his site, his customers said they didn’t know the .net domain was owned by Grubhub; they just assumed because of the high search listing and business name in the URL it was Charlie’s site. Here’s a Google search for Charlie’s roast beef:

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It would appear that online ordering companies are going to whatever lengths necessary to steer more traffic to their online ordering site, where orders cost restaurants substantially more. Online ordering companies claim that using their services help restaurants reach more customers, but then the restaurant can convert those new customers to the restaurant’s own ordering portal.

Instead online ordering companies are acting to the contrary:

They are taking advantage of the merchant’s unsophistication and buying domains to steer all search traffic to their online ordering portal where merchants pay substantially more.

I understand if you want to charge merchants to be ranked higher on your online ordering portal: that’s advertising. But to go off and buy similar domains and then use your SEO juice to steer customers to your portal where the merchant pays more? You can’t be doing that and telling merchants straight-faced that they will be able to turn customers on your portal into customers on theirs.

These online ordering companies sound a lot like Groupon: we’ll gouge you to deliver customers, and then…CLICK TO TWEET

What should merchants do?

It seems that merchants need to start taking a more proactive approach.

  1. Charge more to customers that want to use a third party solution. If Grubhub is going to charge you an additional 15% for each order originating on their portal, pass that cost along to customers.
  2. Have your own online ordering solution on your website. As cloud POS matures, you’ll find that many POS companies will offer online ordering and start syndicating your ordering in places where consumers go: Google, Bing, Yelp, etc.
  3. Do the math! You should learn how many repeat customers are actually now using your online ordering solution. If many customers are using a third party source to find and order from you, you’re going to get upside down on the economics very quickly. How do you do it? You should require email and contact information from people that order on your site. Use an email marketing tool (most are free if you send less than a few thousands emails per month) to ask your customers if they previously ordered from you from another source. You could also ask Grubhub but I doubt they would release such information because it undermines their sales claims.

Don’t be sucked into the foolish math that doomed many of Groupon’s merchants. If you cannot make the numbers work, DO NOT use a third party ordering provider. Would you rather pay for these services only to be out of business in a year?

Be rational, and use data.

POSitouch is Going to “Cloud”. Did It Make the Right Move?

15 Nov

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Late last week POSitouch and Omnivore announced a business partnership that was three quarters in the making. POSitouch (POSi) would open up Omnivore’s cloud architecture to its merchants via POSi’s distributor channel, and all three would share revenue by bringing the “cloud” and and its benefits to merchants.

We’ve been asked for our thoughts, and I think it’s important that merchants AND their service providers pay attention.

The most obvious question is this:

If POSitouch is a software company, why did it just outsource a major component of its software architecture…CLICK TO TWEET

POSi is obviously a legacy point of sale (POS) company. However, there have been several legacy POS companies in the US hospitality market that are making investments to stay relevant and go to cloud.

So why did POSi not invest in its own business architecture to go to cloud? If they’re partnering with Omnivore, they’re obviously admitting that connectivity and data portability is the future of the POS business. Is it that POSi has only realized this lately?

Well first, POSi had a very expensive ($1500) back office product prior to this. It was so outrageous that CBS went off and built their own solution. At some level this new Omnivore cloud functionality can replace that legacy reporting product and turn it into a recurring revenue business.

But we think the reason for the partnership is much more financially driven than that.

For Omnivore to bring merchants the value of cloud POS, Omnivore must deploy a piece of software to establish bidirectional communication. Once that piece of software has been enabled, the merchant’s data can now be used by third party applications for a host of solutions, and because it’s bidirectional, products like mobile payments can write directly to the POS database seamlessly.

However, POSi doesn’t own the merchants: its dealers do. And to get the agent deployed at merchants – plus presumably cover Omnivore’s nut to install and support their agent – there must be an associated fee.

So POSi charges merchants $50/mo to have a cloud system enabled. Keep in mind that for $50/mo merchants can turn to a number of cloud POS providers and get a brand new POS.

Once the Omnivore agent is deployed and the cloud system is live, merchants can browse third party apps (though in reality they won’t) or the POSi dealer can introduce apps accordingly. If such an app is purchased by the merchant, the app developer, the dealer, POSi and Omnivore take a share of the revenue.

That’s a lot of mouths to feed.

But that’s not POSi’s problem: that’s the merchant’s problem. The POSi merchant is going to pay an increased cost for goods and services because POSi didn’t want to invest in its own product and customer base.

How much? We’ve calculated the average merchant product to cost $30/mo per location across the industry. That’s an average from loyalty, analytics, marketing and a host of other solutions in the space.

What POSi has just done is increase the cost of that $30/mo product nearly 4x. Here’s our math to get there.

  1. A POSi merchant must pay $50/mo to have cloud enabled
  2. The third party developer can no longer afford to sell the product for $30/mo if the dealer, POSi and Omnivore take a cut. I think we can fairly assume they would need to double the price to maintain their original revenues. So that $30/mo product goes to $60/mo
  3. We add the expense from number 1 to the expense from number 2: $50 + $60 = $110/mo. Let’s now calculate the percent increase: $110 / $30 = 367% (note: I am calculating the absolute increase from the merchant’s perspective, not the percentage increase over $30 – which would be 267%).

Wowsers. And here’s how POSi likely justifies it.

POSi purports to have 30,000 restaurant customers. Below I’m whipping up a table that shows potential revenue outcomes for POSi based on conversion rate to Omnivore’s cloud offering. I’m going to throw in varying revenue share on that $50/mo figure too. I’m excluding the potential revenue share on additional applications, which undoubtedly only sweetens the pot for POSi.

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Therefore we argue that POSi believed it would make more money off this partnership with Omnivore than if it invested in its own business model of going to cloud – totally at the expense of their merchants.

We know legacy POS companies that have built “cloud” (data replication) for $20,000, so it’s not like we’re talking about millions of dollars of investment here. The hardest part, rather, is deploying the replication, and POSi doesn’t even need to foot the bill for that since they have dealers.

Good on POSi for recognizing the move needed to be made, though I think it says a lot about the state of their software business, capabilities and view of their customers that they needed a third party to bridge the gap. POSi says they’re working on their own cloud, but it’s five years away. Maybe.

This move feels much more like patchwork than an ideal solution for a “software company”. That’s not to say Omnivore isn’t a great platform, but POS companies need to own something if they want to call themselves software providers. And per usual, the hapless merchant foots the bill for the POS company’s experiments.

Apple Kills Its Auto Ambitions, But POS & Payments Still Think They’ll Build Everything

15 Nov

Project Titan, as Apple furtively referred to it, was the tech giant’s foray into owning the automobile. After all, Apple has been creating new platforms for over 10 years; why stop now?

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Apple is a juggernaut of a company if for no other reason than it holds over $200B in cash. For context, that’s more than the market capitalizations of General Motors, Ford and Fiat-Chrysler combined.

With all this money Apple could surely build it’s own next-generation car, right?

Apple didn’t think so.

Let’s skip past the part where auto manufacturers trade at a revenue discount, meaning that the value of their corporations is less than the annual revenue they generate. GM recorded revenues of $152.4 billion in 2015 but trades at a market cap of ~$50B. Apple, by contrast, is trading at 3x 2015 revenues.

As Bloomberg reported recently, hundreds of the 1,000-person Titanteam have departed over the past months. Changes in vision, direction and leadership undoubtedly contributed to self-doubt within the ranks. Pivots in their scope rendered countless employees useless yet required scores of new ones. By fall of 2017 a more cohesive plan is expected to emerge.

But one thing is clear:

Apple is no longer interested in building automobiles

Why would a company with a seemingly endless war chest step away?

Because it’s not their core.

Apple rationalized that they were not suited to be in the business of building cars, but rather to power the technology platforms behind them. Call it a self-awareness of culture or company DNA, but we have to give someone at Apple credit for drawing a line in the sand and defining core competency.

Saying no can be just as powerful as saying yes.CLICK TO TWEET

If a company with tens of billions in profits and hundreds of billions in cash can step away from non-core activities, why can’t profit-poor POS and payments companies?

In a continual series of bizarre moves, POS and payments companies are expanding offerings in product directions that make no sense. Why is Heartland/Global trying to build a portfolio of bolt-on products for their POS products when they’re struggling to get POS right? Why do POS companies like Micros and Aloha build reporting tools that perform relatively terribly and cost much more than third party analogues?

It’s not so much that the thought of toeing non-core activities is bad, but rather it’s the execution. Swallowing third parties to serve as bolt-on providers can be incredibly dangerous when you consider the acquirers are drowning the acquirees in non-product culture. This layers on bureaucracy and misaligns performance.

I’m going to guess these third parties were sought out because they weren’t the worst performers in their categories. If they were executing so well why now change their marching orders? If you want to buy them, don’t fold them into your non-product culture. Have you seen how far Facebook has distanced WhatsApp and Oculus?

Please, take a note from Apple before you continue down your current paths.

Will Heartland’s Upcoming Cloud POS Flop?

15 Nov

Before being scooped up by Global Payments earlier this year, Heartland operated along an aggressive strategy to roll up a number of legacy point of sale (POS) systems. The maneuver was mostly focused on the hospitality vertical – where Heartland has a large presence.

And it was smart. Bob Carr, Heartland’s founder and then-CEO, knew that payments was a high churn business. If the processor could own the POS asset, it would be much harder for the merchant to leave… something pioneered by Harbortouch, even though they catch flack for it to this day.

Further, Bob Carr saw what many in the field did not: that new, cloud POS entrants were raising tens of millions of dollars on the promise of democratizing data and building platforms that would forever change the local merchant. What these Silicon Valley folk did not understand was the cost of distribution. If a cloud POS was raising so much money on top of a few hundred installs, there was surely an arbitrage in taking a POS system with a larger footprint and converting it to cloud.

This became Heartland Commerce: a consolidated play where payments, POS and merchant add-ons could be offered from one portal. The rub, of course, was truly bringing those legacy POS systems into the cloud and making the data available.

What started out as a sure-thing quickly fizzled as the Global Payments acquisition leaned on the organization. Diligence into the poor database design and extraction schemas looked more daunting. It was then decided that a fresh $25MM should be appropriated to build a new, cloud POS.

And from the ashes shall rise a phoenix

The strategy behind Heartland’s new cloud POS – Zingo – was threefold.

1) In absorbing several disparate legacy POS systems, the new cloud system could pick and choose from a repository of robust, market-hardened features that most cloud POS systems would lack

2) Because the foundation of the new cloud POS would be from legacy POS systems across multiple verticals, the new cloud POS would serve many markets

3) Having a massive direct sales force of payments professionals, in addition to dealer channels from the acquired POS companies, could combine for an enviable distribution network

On paper it looks great. But it’s also uncharted territory.

There are solid POS systems that have been built for two or three million dollars – isn’t $25MM overkill? Most successful POS systems serve one – and only one – vertical because building relevant features for multiple segments even within a vertical can be daunting. I can’t imagine the complexity in building a POS for all segments across multiple verticals. In fact it’s why Micros has abandoned parts of the market after its Oracle acquisition: there was not enough potential growth in certain segments.

And what is this about leveraging the Heartland channel? When Heartland purchased its legacy POS systems the dealers for those systems became property of Heartland. Heartland put some pretty aggressive agreements in front of the dealers, and the provisions are not the most dealer-friendly.

First, dealers have a quota. To maintain dealer status, a dealer must maintain $48,000 in annual sales. That’s high relative to other POS companies we know.

Second, Heartland has the right to purchase a dealer without the dealer being able to refuse the acquisition.

Third, Heartland will directly sell POS any merchant account with more than 100 locations.

Fourth, Heartland can sell products to merchants around the dealer so long as that merchant contacts Heartland directly. This is a huge deal, especially since we must acknowledge that merchants are increasingly either finding solutions via SEO or from payment provider referrals.

In effect, Heartland has engineered its dealer agreements with a realistic look towards the future

But none of this may be as critical as the financial realities in being a dealer under the new Heartland banner, and that’s encapsulated with this statement:

Dealers cannot refuse Heartland payment reps access to their merchants.

Basically, Heartland has the right to jettison existing dealer payment agreements and replace them with their own, even if that earns the dealer substantially less money.

I worked with several dealers to juxtapose old business models to new business models under Heartland rule. The results are surprising.

It’s quickly evident that software margins are far less under the Heartland (HPY) system than independent POS dealers had previously. Credit card processing residuals – where most dealers make a large portion of their income – is also down. I need to add some text formatting here because this is a huge deal!

As a dealer, you can only refer credit card business to Heartland. If Heartland successfully enrolls the merchant in their processing then the dealer earns $20 per month and $0.02 per transaction. If the dealer chooses NOT to refer payments to Heartland – in other words, because the dealer makes way more money under its existing processor arrangement – Heartland can approach the merchant and sell its processing directly, which means the dealer will see nothing (technically it’s $20/mo, but that’s trivial in comparison).

To put that into tangible numbers, for a merchant processing $1MM annually, that processing contract is the difference between annually earning $2,760 (non-Heartland processing) and $789 (Heartland processing).

Unfortunately, the end merchant is also paying more for POS products under the Heartland umbrella. Here’s a chart of the same services before and after Heartland involvement. As can be seen, software is now more expensive (because Heartland charges a perpetual 10% annual fee for software updates and bug reporting) and credit card processing could be made twice as expensive if it’s NOT Heartland processing.

The same costs are reflected on the dealer’s balance sheet as well. Dealers under Heartland are now paying more for their POS software and could be paying twice as much if they choose not to refer Heartland’s payments processing.

Heartland believes its dealers can make up lost revenue selling add-ons: additional products in Heartland Commerce. Heartland visualizes this as a flower and petals analogy.

It’s not a bad strategy assuming each of the add-ons could stand as a solution on its own. Unfortunately, I’ve seen far too many POS companies – which are much closer to product companies than Heartland, a payments company – consistently screw up any product that wasn’t POS.

An expensive price tag, broad ambitions, and upside-down channel economics make Heartland’s new POS tough to assess. Add to that the historical difficulty with integrating to Heartland’s flagship POS product – XPient – and it could spell trouble.

As much as Bob Carr was a visionary and guiding force for the payments industry, his departure might signal a cultural change that only works in one party’s favor. Without an ecosystem that wins – including the customer and the channel – this could be more than Heartland – err, Global – can stomach.

These Are The Features That Matter for Tomorrow’s POS

15 Nov

We’re not going to spend time talking about boring features like splitting a check or recording voids. These are the basic POS features needed to be relevant, and despite what legacy POS companies argue, they are finite in number and will be in every legitimate cloud POS over the next year.

Debate over.

We’re instead focusing on the “future-proofing” features of POS: the features that will position the POS as a strategic asset and hub for tomorrow’s commerce. These are the features forward-thinking POS companies are pondering already, so let’s lend a bit more thought to the efforts.

First we must paint the future. Without understanding what tomorrow looks like, we can’t begin evaluating what to do today.

Tomorrow’s customer will want everything to happen fast and conveniently. If they want to order a burrito in the jungle, they’re going to get a burrito in the jungle. This means commerce will take place on the go, from any number of devices across any number of platforms.

The POS providers of tomorrow need to think about how they are best-suited to meet consumer expectations of convenience. This is the classic buy, build, partner mindset that smart companies have had to ruminate for ages.

Online Ordering

It’s no secret that online ordering is taking off. There are a number of objective ways to measure this, whether it’s the amount of investor money pouring into the space, or the number of reported online merchant orders.

The above chart seems to best crystallize the trends. We know that 30% of the restaurant business is carry out, and before the internet those orders were, by definition, 100% offline. Now it looks very much like all of the carry out volume will be handled via online orders – mobile phone or otherwise.

How does the POS play a part?

Noah Glass, the founder of olo and unquestioned expert in the space, recently shared potential pitfalls with moving too quickly. Noah’s argument is that most POS companies neglect the details really needed to make online ordering successful through the POS.

I’d add some clarifications. POS companies have access to real-time merchant data. This can be inventory in retail, or menus in restaurants. Legacy POS systems did not pay much attention to content management of the merchant’s data, but newer POS companies can more easily make database changes to menu organization for online ordering, or merchandise organization for ecommerce. Therefore content management, while previously more involved, is less material than it used to be. Noah made great strides for the industry by developing an online ordering standard that shows precisely how POS companies should organize the data.

Payments security and PCI compliance only become an issue if the POS companies want to process payments directly. In most cases, third parties (like Yelp, Google or others) will handle payments on their own, simply passing back relevant, sanitized data to the POS. In fact, this is how the POS systems of today work: they avoid storing any of the payments data to be out of PCI scope (which, I’ll remind, is not a law but a guidance). That’s generally a foolish move for data reasons, and it’s something we’ve already discussed.

The biggest adjustment POS companies will need to make is the operational impact of online ordering syndication. If a consumer wants to order something online from Bing, how will it impact the kitchen or the retail associate? Conventional ordering platforms usually provide a tablet for the operator to input when the order will be ready, somewhat controlling business operations and managing customer expectations. This will need to be solved.

Should the POS company build, buy or partner for online ordering? I’d answer it like this: if the POS company sets up properly, they can serve as a gateway and earn revenue from each online order passing through their system. This is best facilitated by having the right data setup, and being open to third party partners. Building an online ordering system beyond the standard established by Noah is a massive distraction, but you don’t want third parties cutting you out of the revenue opportunities either.

Commerce Syndication

Much like online ordering for restaurants, there’s steady growth in ecommerce.

Riding these trends are newer POS companies that create ecommerce channels for brick and mortar retailers. VolusionShopifyBigCommerceare such stand-alone systems. Even others have started extending the conventional brick and mortar POS into ecommerce: see Lightspeedand Bindo as examples of two cloud POS companies heading this way.

Creating an ecommerce store for the merchant is a natural extension of the POS’s capabilities. As discussed above, a good POS will already have inventory and pricing in its databases, and more people are buying online.

But there’s a further step that needs to be considered. If I’m looking for a pair of skis, do I go directly to a local merchant’s website to find it? That seems very unlikely. I’m going on Amazon, or Google, or a number of large ecommerce platforms where I can search many products.

There are now a growing number of companies who do just that: take a retailer’s inventory and syndicate it to numerous, and well-trafficked, ecommerce sites. However, these providers are mostly focused on larger, enterprise retailers.

POS companies can extend the online presence of their merchants by becoming a point of data syndication. POS companies can give their customers – who would otherwise pay hefty sums to service providers if they weren’t altogether ignored – wider exposure for their products. Following similar data standardizations, POS companies can work within ecosystems for syndication, capturing a portion of new revenue each time an order is placed. Using geolocation, POS companies can start fulfilling local commerce so customers wouldn’t even have to wait for shipping.

There is nothing for POS companies to buy and very little to build here. POS companies need only make make some small tweaks to start participating in these opportunities. As with online ordering for restaurants, however, there will be some required training on behalf of the merchant: you don’t want to be selling merchandise on eBay and have a merchant forget to ship it to the customer. But we see no reason this can’t be figured out.

Delivery

It’s been reported that the US saw $2.3B in food tech investment in 2015, but we need to caveat that heavily to show where the money is really going. Included in these numbers are grocery startups, at-home meal kit startups, and a slew of others that we normally wouldn’t consider “food tech”; I think of things like loyalty, analytics and marketing services as those that directly help merchants. However, most merchants cannot rationalize these solutions so the money goes into services that benefit the consumer by working around the merchant.

Of the $2.3B, Rosenhiem Advisors calculates that 44% went to last-mile/convenience services. As followers in the space we’d estimate that $50MM – $100MM of that $2.3B went into traditional merchant tech products – so less than 5%. Until merchants wisen up this will continue to be the case.

It’s often theorized that all this venture money in last-mile services is subsidizing convenience at the investors’ behalf. In other words, the true cost of delivering a cheeseburger is $15, but venture capital is eating $10 so the remaining $5 is palatable to the customer. This is in line with a larger effort to achieve critical scale and reach true economics of $5 for cheeseburger delivery.

I’d argue how well this is working since Uber is likely the largest on-demand delivery fleet (they’ve at least raised the most capital) and they charge restaurants a 30% commission in addition to a separate fee for the consumer. When we worked through our own math we couldn’t understand how delivery would ever be reasonable to a middle-income family.

But none of these concerns should be had by POS companies. If anything, the glut of investor money in this space has only increased consumer appetite for such concierge experiences. At some point entrepreneurs will figure out how to make it economic and POS companies should be prepared to benefit.

What does that mean?

POS companies should create APIs and data structures that enable delivery services to seamlessly connect with their merchants, likely earning a residual. POS companies have no business trying to create their own delivery services: they’re too expensive. I’d argue restaurants should also defer to third parties for delivery, unless they’re a fine dining establishment and need superior quality control of their food.

POS companies have an opportunity to become a vehicle of distribution for these next societal shifts. Developing the right strategies now will pay massive dividends as these markets continue to gain steam. POS can very much be the hub for all merchant value going forward, but they need to do the right things. If they don’t think about these features today, then they really won’t have the right features tomorrow.