Toast Inc - Pivot, Growth, IPO and Beyond

Toast has grown at an exceptional pace over the last 6 years and just had a stellar IPO. It has a strong core revenue flywheel but needs to find a path to profitability to justify current valuation.

Firebrand Saints was a restaurant at 1 Broadway on Broad Canal in Cambridge, Massachusetts, known for its large patio and scrumptious burgers, both loved by its patrons. Although it was shut down due to a construction project in 2017, it has an important place in Toast’s history. Toast launched its first app at Firebrand Saints in 2012, though it was a very different app, compared to the software Toast sells today.

Toast is a restaurant software maker that was listed on the NYSE on Sep 22 at a valuation of ~US$ 33 billion, a jump of 6X, compared to the last private round. Toast’s rise and eventual listing is also the story of the rise of software-led payments in the US. In this article, I go deep into what led to Toast’s success and how the future looks. I divide this story into five parts:

  1. Pivot

  2. Software is eating payments

  3. What is Toast?

  4. Toast’s flywheel of growth

  5. Path(s) to profitability

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Boston’s Paypal mafia?

Toast was started in 2011 by Steve Fredette, Aman Narang, and Jon Grimm. All three used to work at Endeca, a data management company based in Boston, which Oracle acquired in 2011 for US$ 1 billion. Endeca had a reputation of attracting the best talent in the Boston area, and its employees started numerous companies such as Infinio (Data Management), Shoobx (equity management platform), Sprout Social (Social Media Software), and LoopIt (online shopping).

Steve Fredette and Aman Narang planned to exit Endeca even before the Oracle deal and were working on a start-up to sell software products to restaurants. Their first product was a consumer app for mobile payments, loyalty, and promotions, integrated with restaurants’ existing POS systems. The app was called Toast (obviously!). Toast app allowed any customer to start a tab at a restaurant linked to her credit card. The customer could divide the tab among several diners, see what is served and its price. It also allowed customers to set the tip amount while settling the tab.

Toast provided an Android tablet plugged into the cash register for the restaurant owner, enabling the servers to enter orders. These orders appeared on the app on customers’ phones. Servers could also get more information on customer profiles such as visit frequency, previous tips, item preference, etc.

The new Toast

The restaurant software industry in 2011 was very different from what we see now. The restaurant software to manage critical operations like order taking, payments, menu management, table management, sales analytics, loyalty, and marketing were closed-loop and suffered from poor inter-connectedness. Just for order taking, payment processing, and CRM, the restaurant owners needed to work with 6-7 different software/hardware vendors.

For instance, the POS vendors (NCR and Micros) did not have any API-based platforms that a consumer-facing app (Toast) could plug into and enable easy payments. The payment gateways allowed accepting credit cards but did not provide any data back to the POS to run sales analytics reports. This made life more difficult for independent restaurant owners who did not have the resources or technological understanding to manage this complexity.

The restaurant software was primarily designed to meet the requirements of large chains. The incumbent restaurant software companies focused on this market segment with incremental innovations aiming to sell better products to their best customers to make better profits.

These enterprise-level features made the POS and associated software very expensive, running into 10s of thousands of dollars. At the same time, the software had poor modularity and, when deployed together, did not meet the performance requirements of the smaller restaurant owners.

Thus, the restaurant software market had a conspicuous gap for a player that fulfilled two conditions:

  • Provides simple software features as required by small restaurant owners at a price they could afford instead of them paying for enterprise-level features that they don’t need

  • Removes the requirement of modularity by taking an integrated approach to restaurant software and providing all required components (POS, table management, loyalty, payments, etc.) as one integrated bundle

The founders of Toast also realized this soon enough. Accepting mobile payments was a much smaller issue for restaurant owners. Also, it was tough for the developers to build an app on top of non-modular on-premise systems.

Thus, they pivoted Toast to a restaurant management software company in 2013, starting with POS, payment processing, gift cards, loyalty, and kitchen display system bundled as one solution. This must be one of the most value-creating pivots in the history of the SaaS market!

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Software is eating payments

Before understanding how Toast works and makes money, it is essential to know how the payments industry in the US works and how it has evolved over the last ten years. Toast is one of the early starters of the ‘software is eating payments’ trend and one of its biggest beneficiaries.

Note: If you are already well aware of the payment value chain and players involved, you can skip to the section ‘Evolution of the Merchant Acquirer’.

Payments value chain

The table above captures all the key participants of the payments value chain. To understand this better, let’s look at a typical credit card transaction.

Before a merchant can accept credit cards, it has to be onboarded. The Merchant Acquirer undertakes the task of onboarding a merchant onto a payment network. The merchant acquirer convinces the merchant that accepting electronic payments is good for her business, underwrites the merchant through the acquiring bank, and connects the merchant with a payment processor. Merchant acquirer often sells the POS to the merchant and provides professional services to configure the POS system. The merchant acquirer and payment processor can be the same entity (Global Payments and First Data are merchant acquirers and payment processors), but it is not necessary.

A payment transaction has two parts - payment authorization and payment settlement.

Payment authorization

  1. Card data capture: Customer swipes the card in merchant’s POS or enters the detail in the checkout page in case of online order. POS captures the card credentials and transaction data.

  2. Authorization routing: The POS transfers the data to the front-end processor, which sends the data to the card-issuing bank (Customer’s bank) through one of the payment networks (Visa, Mastercard, etc.)

  3. Transaction authorization: The card issuing bank authorizes the transaction through the card issuer processor (ensuring there’s enough credit, fraud check, etc.) and sends confirmation back through the payment network to the front-end processor.

  4. Merchant confirmation: The merchant gets confirmation from the front-end processor that the transaction is successful and completes the sale.

Now let’s look at the payment settlement process.

Payment settlement

  1. Credit fronting: To initiate the payment process, the card-issuing bank (Customer’s bank) fronts the credit on the customer’s behalf, which is routed through the payment network to the back-end processor

  2. Payment settlement: The back-end processor settles the net outstanding balance between the card-issuing bank (customer’s bank) and the merchant acquiring bank

  3. Credit card statement: When the credit card statement is due, the customer pays the outstanding amount and balances the transaction (many times, customers don’t do this, leading to interest payments on the outstanding amount)

To further understand how the different entities involved monetize the payments process, let’s take a transaction of US$ 100 and sample take rates of various entities.

  • Merchant: The merchant receives the amount paid by the customer ($ 100) less the Merchant Discount Rate (MDR) that is the fee paid by the merchant to access the electronic payment facility. For our example, we assume MDR at 250 bps (which is similar to what many payment processors charge)

  • Front-end processor: Front-end processor collects $ 2.5 MDR, and the calculations for the amount it keeps look like this:

+$ 2.5 MDR

- $ 0.15 Merchant network fee (paid to the network like Visa, Mastercard)

- $ 0.05 Back-end processing fee (paid to back-end processor)

- $ 2.05 Interchange fee (paid to the card-issuing bank)

= $ 0.25 Acquiring Spread

- $ 0.05 back-end acquiring fee

+ 0.03 network rebates

= $ 0.23 net

  • Network: The network gets fees from both the card-issuing bank and the merchant bank and, as part of the contract, provides rebates to the front-end processor and card issuing bank. It is important to note that while the issuing bank gets the interchange fee, the network sets its percentage.

+$ 0.15 Merchant network fee

+$ 0.10 Issuer network fee

- $ 0.03 Acquirer rebate

- $ 0.03 Issuer rebate

=$ 0.19 net

  • Back-end processor: Back-end processor gets $ 0.05 as a back-end acquiring fee

  • Card issuer processor: Gets $ 0.03 flat fee per transaction

  • Card issuing bank: Card issuing bank takes the biggest slice out of the $ 2.5 MDR in the interchange fee.

+$ 2.05 Interchange fee

- $ 0.10 Issuer network fee

- $ 0.03 Issuer processor fee

+ $ 0.03 Network rebate

=$ 1.95 net

This is also shown in the table below to make it more clear.

Evolution of the Merchant Acquirer

In the early days of merchant acquiring, large banks started subsidiaries to leverage the vast network of bank branches for merchant acquiring services. Bank acquirers such as Chase Merchant Services and Bank of America Merchant Services (BAMS) sold directly to the merchants. These bank acquirers found it easier to sell their services to large enterprise-level merchants like Macy’s and Walmart but many of them struggled in the small business market.

The first evolution in the merchant acquirer model was the emergence of Independent Sales Organizations (ISO) that targeted the SMB merchant segment. ISO are ‘feet on the street’ companies and referred SMB merchants to the bank acquirers and payment processors. The ISO sales rep would convince the merchant to sign-up the electronic payment acceptance contract, sell that merchant a point-of-sale (POS) machine and introduce the merchant to a payment processor such as Global Payments or First Data. Before accepting these payments, though, a merchant would need to be underwritten by a bank acquirer. This process took weeks, or even months, to complete creating massive friction. The merchant also had to interface with the payment processor directly to set up the payment integration.

Almost ten years back, there was another evolution in the merchant acquirer ecosystem. The merchant acquirers recognized the importance of selling payment solutions embedded in technology to merchants rather than standalone payment solutions. In this model, a Value Added Reseller (VAR) approached the merchant to sell a POS device (such as Mercury Payments, PAR, or Micros) which would be integrated with the merchant’s ERP and CRM systems by the VAR. While this model increased the Average Contract Value (ACV) for the VAR, the merchant would still need to be referred to a bank acquirer to be underwritten and connect with a payment processor to complete payment integration.

Today, bank acquirers, legacy ISO, and other merchant acquirers still control ~90% of the market, but another segment of ISV (Independent Software Vendors) is growing rapidly (referred as Integrated in the image below).

Software’s payment bite

The traditional merchant acquiring model has some inherent disadvantages. Firstly, the model isn’t economically viable for acquiring micro-merchants such as a flower shop making say $ 40,000 to $50,000 annually. The model still relies on feet on the street, which doesn’t scale cost-effectively.  Secondly, the micro-merchants cannot afford the upfront payment of the POS system and don’t have the resources to integrate 6-7 other software for sales analytics, CRM, etc. The merchants are looking for value-added functionalities such as sales analytics, CRM, loyalty program, etc., to come from a simple integrated offering.

These trends have led to the rise of ISV (Independent Software Vendors) such as Square and Stripe that are software companies offering a host of solutions to customers with payment processing embedded into the software. For instance, Square provides a software solution for retail merchants that includes POS (in-store and online), inventory management, CRM, Account Payables, lending, and white-labeled cards. Thus, when Square approaches a retail merchant, payment processing is a wedge to onboard the merchant onto the software stack - Come for the payment processing, stay for the experience, and analytics for decision making offered by the software. In fact, Square has payment plans to provide online payment processing software for free and charges only for transactions.

ISV or software-led payment processing model has many advantages over traditional ISO or VAR-driven sales.

  • Cost-effective sales: If the retail merchant already uses the company’s software, then the CAC for upselling the payment processing is nearly zero as the merchant is familiar with the company. Also, the primary task of ISO/VAR of bringing the payment product to a customer’s door is done much more effectively by the internet for merchants willing to undertake a self-service model.

  • Faster merchant onboarding: In the ISO/VAR model, a bank acquirer underwrites a merchant, a process that typically takes weeks or months. The process is demanding for both the merchant and the bank that doesn’t has a direct relationship with the merchant and doesn’t have its credit history. In the case of software-led payment processing, the merchant onboarding happens in a few minutes. In this case, the ISV (for instance Square) acts as the merchant of record and onboards the retailer as a sub-merchant. This adds to Square’s compliance requirement of underwriting each sub-merchant and be responsible for any risks such as money laundering, illicit activity) these smaller merchants may engender.

  • Better merchant onboarding: The ISV has a data advantage over ISO/VAR due to access to the merchant’s transaction and financial history. This allows ISV to underwrite the merchant better by assessing its risk. Also, the ISV doesn’t have to underwrite merchants upfront; instead, they underwrite merchants as they continue to process transactions for them on an ongoing basis.

Due to these advantages of the ISV model and shortcomings of the traditional ISO model, the ISV or software-led payment segment is expected to grow 2X of the merchant acquiring market.

Vertical SaaS meets payments

SaaS companies like Hubspot and Salesforce provide solutions that serve the requirements across functions and can be used in any industry. Vertical SaaS companies, on the other hand, focus on meeting the requirements of a specific industry. For instance, Toast is a vertical SaaS company for the restaurant market, Mindbody caters to gyms and salons, Procore works in the construction industry, and Veeva is a vertical SaaS company for life sciences. The vertical SaaS companies have taken the ISV-led sales model of payments a step ahead as it adds to their Total Addressable Market (TAM) and helps them reach venture-level scale.

Till a few years ago, VCs were reluctant to invest in vertical SaaS companies. They believed that the TAM is constrained and vertical SaaS companies can not generate venture-level returns.

In 2020, a SaaS company needed US$ 200 million in ARR with a 40% YoY growth rate to go public. This means a vertical SaaS company needs to generate US$ 80 million of incremental sales every year either by finding new customers or upselling existing customers (SaaS companies rarely increase prices).

Due to the vertically constrained market and competition from new/existing players, adding new customers hits a local maxima at some point of time. And a company can upsell its customer until its subscription fees reaches the Gross Margin of its customer, post which the customer will refuse any upsell. Upselling is especially difficult in industries like food and restaurant that operate on wafer-thin margins.

This is perhaps why, when Steve Papa (former CEO of Endeca) called Bessemer Venture Partners that three of his best engineers were working on something exciting and Bessemer should invest in it, Bessemer did not consider it till 2015. Papa put US$ 500,000 of his own money into Toast.

Vertical SaaS companies identified payments processing as one of the critical ways to expand revenue and TAM. Taking a percentage from every transaction completed on their platform means that instead of generating a fixed revenue from merchants every month, their revenue could grow as the merchant grows. Vertical SaaS companies are also uniquely positioned to offer payment processing to merchants. They already have an ongoing relationship with merchants as their software is already embedded in merchants’ workflows. Thus, selling a payment processing facility is an easy upsell.

There are primarily two ways in which a vertical SaaS company can offer payment processing.

Partnering with a payment processor

In this model, the vertical SaaS company ties up with a preferred payment processor and refers its merchants to the payment processor for a referral fee. For instance, Mindbody refers its merchants to TSYS. The benefit of this approach is that the software company doesn’t have to invest money and time in building payment processing infrastructure.

Credit Suisse estimates that it can take a SaaS company 12 to 18 months and US$ 3-4 million in upfront costs, followed by millions of US$ every year on an ongoing basis. The downside is that the software company has no control over the merchant’s onboarding experience or payment experience. Monetization is also limited as the software company only gets a referral fee from the payment processor.

Becoming a Payment Facilitator (PayFac)

Toast (and Square) follow a model where they became a payment facilitator and took on the role of merchant acquirer, front-end payment processor, and back-end payment processor. This model provides a much better monetization opportunity, as shown by the recent details from Lightspeed POS, which is a Toast competitor and launched Lightspeed Payments in 2019 (For nuance sake, Lightspeed used Finix that provides the Payfac-as-a-service, an emerging third option for vertical SaaS companies.)

As the image above shows, by becoming a payfac, Lightspeed improves its revenue 2.6X and gets much better control over merchant experience. However, given the upfront investment required, this model may not be for every vertical SaaS company. Finix (that provides Payfac-as-a-service) estimates that software platforms require at least ~$50 million of card volume to recover the costs of becoming a PayFac.

What is Toast?

Now let’s come back to Toast. Toast provides restaurant management software to ~48,000 restaurants in the US. It clocked ~ US$ 1.1 billion in revenue on a TTM basis though it is yet to make a profit. I have shared below a quick snapshot of its quarterly revenue and net loss.

Toast offers software and hardware products for restaurants that cover both front-of-house and back-of-house operations. The following graphic from Toast's website summarizes its offering for restaurants.

These products are aggregated into four revenue streams:

  • Subscription Services: Fees charged to customers for using the SaaS products such as POS, kitchen display system, invoice management, digital ordering, etc.

  • Financial technology solutions: Fees paid by the restaurants to facilitate payment transactions. Toast recognizes revenue on a gross basis inclusive of all fees and costs paid to issuers and card networks. Toast also includes revenue from Toast Capital in this but currently it is less than 1%. Toast Capitall offers working capital loans ($5000 - $100,000) and earns fees through marketing and servicing the loan.

  • Hardware revenue: Proceeds from selling terminals, tablets, handhelds, and related devices and accessories.

  • Professional services: Proceeds from installation and configuration services for new locations joining the Toast platform and new products added by existing locations.

Toast offers hardware and professional services at steeply discounted rates and considers it a merchant acquisition tool. It adds the net cost of hardware and professional services to its Customer Acquisition Cost (CAC). The financial technology stream primarily drives Toast’s revenue.

SaaS market has a rule of thumb called the ‘rule of 40’ that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable trajectory. Toast hasn’t met the rule of 40 in most of the last 10 quarters.

Toast’s flywheel of growth

After its pivot Toast grew at an amazing pace. It signed up its 1000th customer in 2015 and increased its customer base by 48X in just six years. To achieve this growth, Toast captured market share from legacy on-premise POS players (NCR, Micros, PAR) and successfully grew faster than other vertical SaaS companies (Lightspeed, Upserve, Touchbistro). In the subsequent sections, I look at how Toast has achieved this hockey stick growth.

Toast is a payment company that thinks like a software company

In their Toast investment memo (2015), the investment team at Bessemer Venture Partners wrote:

First off, the sheer amount of software the team has built in a short span is impressive – feature for feature they are already much more in the class of the >20 year old enterprise systems than the next gen Bistro players, and so for restaurants with any level of sophisticated feature requirements they win easily.

This provided Toast an edge over the other cloud-based POS companies as feature-to-feature it was better than them. This early focus on building feature sets can also be attributed to the background of its founders. All three of them came from Endeca that made enterprise-grade database management systems. Steve led Endeca’s mobile web commerce platform, Aman was a product manager working at the intersection of the web and mobile commerce and Jonathan was a software solutions engineer.

Like a true software company, Toast launched APIs in 2016 (within a year of first venture fund-raise), allowing integration with apps operating in parts of restaurant operations where Toast wasn’t present.

Another way to look at this is Toast’s consistent investment in R&D at 10-11% of its annual revenue. If you compare this to PAR Technologies (on-premise POS provider), its R&D expense in 2015 (when Toast hit 1000 customers) was just 4.4% of revenue. This investment allowed Toast to emerge as a leader in the restaurant POS segment as noted by multiple agencies like G2 and Forrester.

Also, Toast decided to utilize Android-based architecture for its POS when almost all of its competitors were selling iPad-based POS. The use of Android decreased the cost of ownership for restaurant owners and allowed more flexibility in hardware choices.

Unlike its cloud-based POS competitors, Toast made upfront investments to become a payfac and sold its POS integrated with payment processing to restaurants. This allowed Toast to monetize the transactions more profitably than its competitors and provided a competitive advantage. Its revenue moves in tandem with the revenue from payment processing, while the subscription revenue doesn’t impact the total revenue.

The payment processing revenue for the last ten quarters is at 3-4X of subscription revenue. This changed slightly in March 2020 and June 2020, when the Gross Payment Volume declined due to COVID.

However, subscription revenue is 2.5-3X more profitable compared to payment processing revenue. Toast’s gross take rate remains around 2.5%, and its net take rate has increased from 0.4% to 0.51% over the last ten quarters. One reason is the increase of ‘card not present’ transactions for online delivery and curb-side delivery due to COVID. These transactions have a higher net take rate due to the higher risk of card fraud.

Being a payfac from day 1 provides Toast with a revenue flywheel that its competitors do not have. This flywheel, to a large extent, explains the ability of Toast to scale customer acquisition rapidly. There are three parts to this flywheel - Retention, acquisition and data.


As more restaurants accepted electronic payments and increased online ordering, Toast could monetize these transactions better than its competitors who weren’t payfacs. This payment processing revenue allowed it to invest in building more software, services & hardware and embedding more deeply in restaurant’s workflow, increasing retention. Higher retention led to more transactions, leading to more payment processing revenue. This becomes a perpetual revenue source.


Toast could use the revenue from the right side of the flywheel to fund the left side - acquiring new restaurants by investing heavily in sales and marketing.


More data and presence in more steps in restaurant’s workflow provides Toast with high quality data. This allows Toast to better underwrite new restaurants more efficiently and lesser risk.

In subscription-based revenue, every future upsell incurs customer success/sales and marketing costs. The advantage of payment processing revenue is that it can grow without any sales & marketing investment once the restaurant has been acquired. However, as noted earlier, payment processing itself is a commoditized offering. Hence, Toast‘s software acts as a wedge to acquire the merchant, and then the integrated payment processing provides it with a constant stream of revenue.

Toast’s customers

Before looking at Toast‘s customers, let’s get a quick understanding of the US restaurant market. As perToast’s estimate, there are 860,000 restaurants in the US. Other industry reports put this number anywhere between 700,000 to 800,000. Chains account for ~50% of restaurant sales in the US, but ~45% of US restaurants are independent (only 1 location).

Now let‘s look at a typical Toast restaurant. Toast has 47,942 locations across 29,000 customers. This means every Toast customer has 1.6 working Toast locations.

Toast estimates each of its locations to have an ARR of US$ 10,000 in 2021 (estimated in Q2, 2021). This includes subscription revenue and payment revenue (ignoring hardware and professional services revenue for this calculation). Assuming the ratio of subscription services revenue to payment processing revenue in Toast‘s total revenue (1 : 3) will also apply to an individual restaurant, the subscription services revenue component per location comes out to be US$ 2500 (per year). Restaurants in the US spend ~3% of total sales on software. Assuming that Toast is the only software company at each of its locations, the average annual sales of one location using Toast come out to be US$ 83,000.

Both of these data points, 1.6 locations per customer and annual revenue of US$ 83,000 per location, imply that a typical toast customer is a micro restaurant with 1-2 locations. This dovetails with the earlier observation that Toast pivoted to disrupt the lower end of the restaurant spectrum. This customer base provides Toast with three unique advantages.

Faster acquisition: Decision-making is straightforward at independent restaurants as it’s usually the restaurant owner who is the decision maker. As Toast’s POS and other software meet the feature & experience requirements, Toast’s sales reps can close deals much faster than chains where decision-making is complex, and deals can take many months to complete.

Higher stickiness: The independent restaurant owners are also expected to have higher stickiness once they buy a POS, provided the POS meets feature & experience requirements. The owners want to focus on running the restaurant rather than revisiting cumbersome IT decisions every year. They are also happier to sign longer-term contracts if it reduces the upfront cost (such as getting free POS hardware), improving the retention contractually.

Profitable payment processing revenue

By targeting independent restaurants, Toast has access to higher-margin payment processing revenue. The chart below from Credit Suisse shows that while the volume of card-based revenue is much higher for mega merchants, the margins are much higher for micro-merchants and SMBs. This chart is not specific to the restaurant industry, but it’s not difficult to see that the same structure applies to the restaurant industry.

Ability to raise venture funds

Before it went public, Toast raised US$ 800 million from VC firms. Compared to this, its cloud-based POS rivals raised much lesser. Touchbistro (started in 2010) raised US$ 209 million, Lightspeed (started in 2005) raised US$ 527 million, and Upserve (started in 2009) raised US$ 40.9 million before being acquired by Lightspeed in December 2020.

One may argue that Toast successfully raised more funds because of its superior growth. Still, in a market where achieving scale faster than competitors is a competitive advantage, the ability to raise funds to support growth is an excellent skill to have.

Path(s) to profitability

Toast is yet to become profitable after ten years of operations, which is not unusual for a growing SaaS company. However, it is essential to understand some paths to eventual profitability for a public company to keep investors interested. My hypothesis is that Toast’s path to profitability goes through payments and financial services rather than subscription revenue.

That said, subscription revenue has a vital role to play in Toast’s future success. By expanding its software offering, Toast will get embedded further in a restaurant’s ecosystem, making it much harder for a restaurant to move to a competitor. This enhances the stickiness of restaurants and has a compounding effect on the financial services revenue. A quick look into the restaurant software shows a few areas where Toast is not present and could be on its roadmap for future software development.

Operating leverage through payment processing revenue

Toast’s payment processing revenue can provide it with operating leverage. Once a restaurant has been acquired, the payment processing revenue increases without a significant increase in sales & marketing, R&D, or administrative expenses. This is because the revenue is a margin on the GPV processed by Toast. As the restaurant payments are moving towards electronic payments, the revenue can grow like a perpetual motion machine on its own. The payment processing revenue provides Toast operating leverage and expands revenue without a proportionate increase in cost.

In the last five quarters, the gross profit from payment processing revenue covered on an average ~70% of the operating expenses, compared to just 32% in the five quarters before it. This increase also coincides with the 3.5X expansion in the GPV processed by Toast in the last five quarters. Thus, payment processing gross margin is already covering up a large part of operating expenses, and there’s a high likelihood it with overtake it soon.

Embedded financial services

The most significant value unlock for Toast is in the distribution of financial services. Toast recognizes that while it has solved the POS and payment problem, the restaurant owners have more financial needs. Here are a few ways that are adjacent to Toast’s current capabilities.


Toast has already launched Toast Capital that provides working capital loans to restaurant owners through a partner bank. As Toast has deep insights into the daily restaurant transactions, it can underwrite the loans much more efficiently and with lesser risk than any other financial institution. The direct revenue from Toast Capital may be limited as Toast only gets marketing and servicing margin. Still, these working capital loans allow restaurants to scale up and service more orders, which has a compounding effect on Toast‘s payment processing revenue.


Issuing cards to restaurant owners is the next logical step to lending, as a credit card is essentially a pre-approved loan. This will allow the restaurants access to funding on demand and have a compounding effect on Toast‘s payment processing revenue. Toast can white-label these cards and work with the card-issuing bank on an interchange fee model (per transaction fee) model.


Payouts are also a logical next step to working capital loans where the restaurant owner gets access to its revenue upfront before funds settlement. This could be monetized as a percentage fee on the volume of payout.


Insurance could be one of the biggest pieces in the financial services revenue for Toast. Restaurant industry has high complexity in assessing risks such as workplace hazards, regulatory requirements, structural safety, etc. Toast can leverage its data to underwrite insurance better and improve the customer experience. It can monetize insurance by receiving % of premiums sold instead of charging referral fees. This could be workman compensation insurance, general liability insurance, etc.


Almost all of Toast‘s software solutions target restaurant owners. However, with the acquisition of StratEx (payroll management software), Toast now also has access to employee insights. This allows Toast to significantly expand its financial services footprint by providing services to Employees (E of B2B2E). Toast notes in its S-1 form that over 500,000 restaurant employees use its software, providing a massive market with financial pain points.

Payday loans: Allow employees early access to their paychecks that can be monetized as interest on the loan, directly recovered from employee’s payroll.

Benefits: Restaurant employees often find it extremely hard to access benefits such as health insurance due to the unpredictable and contractual nature. The payroll data collected by Toast enables it to underwrite the employees better and offer them health insurance at better terms than traditional insurers.

Doubling down on financial services drives margin expansion in two ways:

  • Many of these services have a compounding effect on the payment processing revenue that can push it towards achieving operating leverage

  • These are an upsell to an existing customer from a company that the customers already know and trust. Thus, the CAC of the upsell is going to be close to zero, improving profitability.

That’s it!

I hope you found this deep-dive profile of Toast interesting. If this is your first time here, you can get all the future deep-dive profiles in your inbox by joining the mailing list below.