What Happens When POS and Payments Companies Say They’ll do Everything

29 Aug

Intuit is one of my favorite brick and mortar conquest stories. The founders not only built a large business (currently valued at $28B), but they had to struggle to make it work – who doesn’t love grit? In Inside Intuit, the company’s unofficial biography, authors Taylor and Schroeder detail the low points founders Scott Cook and Tom Proulx slogged through to make the company work.

One reason for Intuit’s ultimate success was their rapid ability to define who they were, and who they weren’t. Scott and Tom were shrewdly inclined to draw a smaller box around Intuit’s core capabilities, and leave the rest for others to work on.

In 1990 Intuit started work on a small business bookkeeping product codenamed “Snoopy” – remember, Intuit was vigorously struggling against Microsoft during this period so everything was under wraps. As development languished from “feature creep” under Ridgely Evers, a fellow Intuit executive noticed this interesting product called QuickPay from an individual developer named Mike Potter. Potter had effectively hacked the Quicken code to add payroll functions for small businesses.

Intuit decided to license QuickPay instead of building it. The result?

Quickpay, retailing for $59.95, shot onto PC Magazine’s top ten sellers list. The high margins, low marketing costs and rapid sales convinced everyone at Intuit to pursue the buy vs build approach going forward. Sounds logical, right?

Unfortunately most payments and POS companies are not scholars. That something like this played out in such a riveting parallel 25 years ago is totally lost on them.

Want an example?

Womply leverages payments data streams in addition to scraped data from merchant social media pages. Womply has been partnering with leading payments companies to tap merchant payment data and offer merchants better analytics products. These efforts mean the payments company does not need to build and support such products and can instead collect effective profit from the Womply relationship.

How about another?

Swipely (now going by Upserve) has built POS integration agents that extract POS data and create useful analytics for upper-end restaurant merchants in a superior user interface. Since Micros and NCR (and virtually every other legacy POS company) don’t work with third parties, Swipely has partnered with Micros/NCR’s POS resellers to sell their product. Resellers can offer increased value to their clients, earn new revenue for themselves, and know the POS company will never offer a remotely competitive product for the same value.

These two “startups” are proof-positive that payments and POS companies have an impossible time creating useful products outside their core competencies. If that weren’t true, merchants would be seeing products of similar quality directly from their payments/POS providers; but they’re not.

Many payments and POS companies – ironically, just like the merchants they serve – continue to operate under a delusion that ignores financial facts. I’m going to borrow from a very well-constructed argument that can be found here in its entirety.

The first argument is that selling new products (i.e cross sell and upsell) to existing customers is a much cheaper source of new revenue than acquiring new customers. Further, the cost of acquiring new customers is only increasing.

This chart from 2013 Pacific Crest survey data shows that for every $1 in new customer revenue, it takes $0.92 in acquisition costs. By comparison, it only takes $0.17 to acquire a new dollar in revenue from an existing customer. The cost of making $1 more from existing customers is just 19% of the cost of making $1 from new customers.

But these acquisition costs are only increasing as markets get more competitive.

The same survey taken in 2015 shows that it costs $1.18 to acquire $1 in revenue from a new customer, and $0.28 to create $1 of new revenue from an existing customer. This is likely the result of gluts of venture capital, and could be even worse for commoditized businesses like payments and POS. At a minimum it should quantifiably explain payment companies’ entrance into POS: unless a merchant stays with them for a considerable amount of time, they’re losing money on every new merchant acquisition.

The second argument is that upsells and cross sells can combat churn. Churn is the number of customers who leave your service (i.e. stop paying) over time. Startups measure this metric religiously. You can have the world’s best growth but if your customers are dropping off like flies you’re never going to earn a profit.

If the expanding revenue from new customers > the lost revenue from churn, you’ve just produced a glorified negative churn metric.

POS companies should draw an ownership box that looks like this:

Instead, they draw a box like the one below. If you’re having trouble reading everything in there you’re not alone. Visit the websites for Micros or Aloha if you want to see great examples of feature creep.

I honestly have no idea how responsible payments and POS companies ignore these data to their own demise. Intuit, which is nearly 6x the size of Micros, 7x the size of NCR, 2.5x the size of Global Payments and First Data, 3.5x the size of Vantiv, and 8x the size of Square has drawn a very neat box around its core competencies. Intuit is avoiding development expenses and support costs while simultaneously bolstering the quality of its offerings and net new revenues. The only explanation I can come up with is that payments and POS companies must be suffering from bloated politics and egos. Intuit would not approve.