Will 99 Cents Burn Toast at the POS?

After spending the last 20 minutes online deliberating over what you really need to round out your summer wardrobe, you’re ready to check out. You review your basket, apply the promo codes to get your discount, and check the total before clicking the buy button. It’s then that you see a line item: Sales Taxes and Fees.

Curious, you click through, since the “and fees” part of that line item is new. That’s when you discover that a surcharge totaling 5% of the order has been added by the carrier contracted by the merchant to deliver the package and is paid to them. The carrier is a familiar name, but a brand you have no direct business relationship with. The explanation for the fee is to “fund investments in better serving” the merchant you just shopped.

Mildly furious, increasingly annoyed and extremely confused — since you have also been charged $12.95 to ship the package — you complete the purchase because you have no time to start the process all over again at another merchant in order to save about $7.25. If you’re really annoyed, you might call or text the merchant to ask what’s up. That’s when you learn that this isn’t anything the merchant you just shopped had control over — it is a requirement of doing business with the carrier, and they say they are stuck. After telling the merchant that’s their problem, not yours, and that they should find another carrier or negotiate better, you tuck that bit of information away for the next time you are shopping online so that you can avoid that merchant.

This scenario is essentially what the customers of the 40,000+ restaurants who use Toast as their POS provider may start to experience in July.

That’s when Toast will add a 99-cent surcharge to the consumer’s bill for online orders from one of Toast’s restaurants. The charge kicks in on any order totaling $10 or more. Even though 99 cents sounds cheap, as a percent of the order it can be material. On a $20 order a 99-cent surcharge comes to about 5%, like another sales tax. This surcharge is hidden in the fine print, but it clearly states that the fee is paid to Toast and will support its ongoing efforts to improve their restaurant services.

With its tiny-sounding 99-cent-per-order fee, Toast committed two of the most egregious cardinal sins of platform dynamics.

First, failing to recognize who its customer is and who really pays its bills — and going to great lengths not to tick them off.

And second, creating a situation that could rev up platform dynamics in reverse — which can happen very quickly. Once the customers on the side of the platform who pay the bills lose trust, they look for alternatives. The names for this — doom loop and death spiral — say it all.

Burned Toast

Toast is a software platform that enables payment processing along with a raft of other solutions and features to help restaurants run their operations more efficiently. Restaurants sign up for Toast and pay them a fee. Toast’s customer isn’t the end consumer who eats at the restaurant or orders food online — it is the restaurant that takes the orders, prepares the food, delivers the service and is paid directly by the consumer for that service. Toast is largely invisible to the diner.

What’s unusual is that Toast, a B2B platform whose customer is the restaurant, is going around the restaurant and charging the restaurant’s customer — the consumer — the fee. And Toast can do this because it controls the POS for those restaurants.

So, when Toast decided to get in the middle of the restaurant/customer relationship without their permission — and worse, decided to impose a surcharge directly to the restaurant’s customer without their permission, it also shifted any potential consumer backlash about that fee to the restaurant. The restaurant has no ability to opt out — or at least not at the time I wrote this on Sunday — but has all of the responsibility to explain it to their customers and decide how to handle it.

It’s also quite possible that despite the fine print — who reads that? — consumers will assume it is the restaurant who decided to tack on the extra fee. Even if consumers make the Toast connection, it’s hard to imagine them having much sympathy for an $11B firm that needs to fundraise via a surcharge to wrangle the money needed to up its game.

Restaurant operators have taken to social media to express their displeasure. What could deepen that displeasure further is the reality that it may be up to the restaurant to absorb the cost to keep diners from defecting. Imagine the restaurants’ ire if it turns out Toast was operating under that assumption as part of its surcharge-path-to-profitability strategy.

Passing the Responsibility — and the Hat

The Boston Globe first broke this story last week. Toast is a Boston-based FinTech that has built an innovative, vertically-integrated restaurant POS platform. According to the Toast website, it supports 40,000+ restaurants with 85,000 locations on its platform and went public in September of 2021. According to reports, the company  processed $27 billion in gross volume across its 85,000 restaurant locations in Q1 2023.

Here’s the rub — and presumably their rationale for the fee.

In the ten years Toast has been in market, it has failed to turn a profit. That’s neither a shocker nor a news flash. Before mid- to late-2022, it was FinTech-fashionable to lose money.

Chart sourced from Google

Like many of its FinTech IPO compadres, it has also seen its stock price hit the skids since its public debut in 2021: down by 61%.  Despite the massive comeback in the restaurant and hospitality space, Toast stock has remained relatively unremarkable.

The restaurants that are part of the Toast platform are stuck navigating the market dynamics introduced by the 99-cent surcharge — namely protecting their own margins and the risk that their customers defect to surcharge-free establishments when ordering online.

There are a few headwinds these restaurants will face.

Consumers don’t like paying merchant surcharges, particularly not the first time they are presented with one.

For decades, card networks prevented merchants from adding a surcharge to cover their processing fees when consumers pulled out a credit card at checkout. They retreated as a result of settling or losing lawsuits. Today, only two states and one territory prohibit merchants from surcharging, and POS systems now allow merchants to activate that option more easily.

According to PYMNTS research, more than 80% of customers have paid a surcharge to cover credit card processing fees, but more than half of customers (65%) are at least somewhat likely to switch to a merchant that does not charge extra for using their preferred payment method — with 44% of these consumers  very likely to switch merchants. Not surprisingly, consumers with more payment options are less bothered by surcharges since they have other payment options to use when presented with a surcharge on a credit card transaction; those who don’t have a higher propensity to be dissatisfied. More of those consumers (45%) also say that they would seek other options in the future.

Also not surprising: even though merchants can charge that surcharge, the vast majority don’t. PYMNTS data shows that approximately 8% of consumers were asked to pay a surcharge when they visited a restaurant, which suggests that few restaurants add surcharges to credit card transactions when the bill for service is presented.

Death by a Thousand Cuts

One of the great things about the evolution of payments in the digital economy is the ability to monetize features and services in new ways. Digital makes it easier for new services to be developed and deployed. “As-a-service” business models help to expand access to many who want and need critical services and for providers to be paid when the services are consumed. Billing practices are more flexible, fluid and capable of aligning consumer needs with payment options.

“Being nickel and dimed” is a century old idiom used to explain the annoying accumulation of tiny little fees over time that become big expenses that never go away. It’s also the basis for the war on junk fees that the White House and the CFPB are waging on merchants whose hidden fees can sometimes turn a $150 purchase into a $205 purchase with taxes, service charges and other “as-a-service” fees tacked on.

Behavioral economists and marketing scientists say that drip pricing — where the fees get added on at the end of the shopping journey — works because consumers (like the one in my hypothetical example) have spent a ton of time getting to checkout and don’t want to start all over. That’s why some merchants continue to do it.  What those studies ignore is that many merchants choose not to do this because they know that may be the last shopping journey the consumer has with them.

My sense is that increasingly, consumers are getting tired of being “nickel and dimed.” Whether it is being charged for returns or paying a surcharge tacked on for special handling after the product and shipping services were already paid for, consumers are starting to push back against the “nickel and diming” they perceive now when engaging with businesses.  For restaurants in particular, tipping now is regarded as an embedded cost of the restaurant experience — not a surcharge per se, but part of the expense of eating out. PYMNTS data show that nearly all consumers (97%) tip and generously when dining in a restaurant where they are served and a little more than half (53%) also tip at QSRs. Essentially adding another “tax” to the online ordering experience may be a breaking point for some

Before Toast went public and during the dark days of COVID, Toast slashed 50% of its workforce while investing in several initiatives intended to help restaurants weather the storm. Like other POS platforms, Toast leaned into the online ordering trend by helping restaurants compete with the aggregators, capture better economics and keep the customer relationship.  The commission-free online ordering experience is promoted as a way for restaurants to grow their first-party online business.

Now it’s possible that Toast’s 99-cent decision could unravel all that goodwill — and potentially the viability of its entire platform.

The money is material — but that’s not why it could become a fatal flaw. When Toast went straight to the restaurant’s customer — the consumer — to charge a fee paid by the consumer to Toast, it violated the restaurant’s sacred trust.  Restaurants might be left to wonder what’s next — and whether there are more things planned that might leapfrog the restaurant and go straight to the consumer.  It’s platform economics 101 to never, ever do that.

Even if Toast comes out this week and says, “No, never mind, we heard you and we messed up,” that doubt will likely remain. Whether that’s strong enough to drive Toast restaurants into the arms of the many competitors who are now very likely reaching out to them is a chapter yet to be written.

In the meantime, Toast might want to have a Plan B for how to pave its path to profitability.