Do “paying for meals and drinks” apps actually pay off?

About two months ago, OpenTable launched a pilot program here in San Francisco allowing customers to not only book a table, but also to pay for their meal directly from their phone. Customers see their bill populate on their phone as orders are added from the restaurant’s point-of-sale (POS) device. When ready to pay, the customer simply includes a tip amount, and charges the bill to the stored card on file. No waiting for the check or having a waiter come back for the signature on a credit card receipt. Pretty cool, right?

It’s something that Yelp and PayPal are talking about as well, and some aspects of this concept are already underway at both of these companies.

However, this is not a new concept…

• TabbedOut — integrated with restaurant POS systems so customers can pay for their meal as well as get discounts from their phone. Started in 2009 with a total to-date raise of $14M.
• Cover — a newcomer to this space, and also enables customers to pay for their meals directly from their phone. The sell to restaurants is that they are reducing their cost of payment processing. Started in 2013 with a total to-date raise of $1.5M.
• Dash — similar concept with marketing tied more closely to bars, but the idea is the same. They’re charging bars and restaurants a flat 1% for payment processing. Started in 2011 with a total to-date raise of $1.2M.

And then there are the ones who started and failed. Flowtab, a start-up that enabled customers to order and pay for drinks from their phone, started in 2011 and closed shop in September 2013 and their current website tells a great story on what worked and why the idea ultimately fell apart.

Flowtab’s business model was a combination of a percentage of total revenue from the bar plus a per transaction cost ($0.25) to the consumer. Further along the road, they would remove the $0.25 charge to the consumer and replace it with in-app advertising. In terms of bar acquisition and conversion, the founders tried a few different channels to acquire new bars, but each bar was also required to use Flowtab issued iPads to view orders. The team ultimately called it quits because they couldn’t bring on enough bars, competition increased, there weren’t enough regular customers using the app, and there just wasn’t enough money coming in.

While there are clearly some things that Flowtab could have done better, it begs the question: Was Flowtab really any different than all of the other start-ups entering this market? How much revenue is there in this game, and who should actually be playing?

Where’s the money? — There are a few places to make money:

1. A cut of the total revenue. Hands down the easiest place to get money. Sit in front of the money, and take a little piece of the action. Dash is charging 1% and Cover is promising lower than typical processing fees. Even if you can make the case to a bar or restaurant that you are providing incremental value, how much money can you realistically bring in? Payments processing is a low margin/high volume game, and individually on-boarding establishments for such a small (and potentially negative) amount of money is either for those who hope to get acquired or have a high threshold for pain.
2. The customer. Would I pay a little more not to get up and stand at the bar for a drink or wait for someone to bring me a check? Yes. How much? Not much. It didn’t work for Flowtab, and I don’t think it will work for most.
3. Advertising. In-app mobile advertising is a simple way to make money… you just need an audience to make any real cash, especially off of all those pennies…
4. Loyalty and discounts. This is where incremental value can be uncovered and delivered both to the bar/restaurant as well as to the consumer. If some of these apps can take a larger share when someone cashes in on a discount or comes through the door more than X times, that’s a triple win (merchant gets more business, customer pays less and start-ups get more money off the transaction). It’s exactly what LevelUp is trying to do, but they have $48M and a rock star founder to keep up the momentum on customer and merchant adoption.

For Yelp and OpenTable, it seems like a me-too play. Sure, it sounds great to be in front of the money, but if there’s no real money in it… then why bother? What problem are they solving for the merchant and the customer? Do I want to be able to pay my bill from my phone and bypass the waiter? Sure. Does the merchant really care? Maybe a little, but what do they get? Without good answers to these questions, we end up in a place where it doesn’t necessarily make sense to be a payments company when that’s not what is at the core of your company’s value proposition.

Overall, this is a payments play that requires either an established base or a truly innovative model that incrementally creates value. Unless there are acquisitions along the way, it’s going to be a lot of blood, sweat and tears for Dash, Cover and TabbedOut with minimal revenue before they can truly see that hockey stick growth. Flowtab is not the only app with this type of business model that had to close its doors (BarTab and Coaster are among some of the others). From where I sit, the ability to see your bill and pay for it, sounds more like an additional piece of functionality that should be a part of a wallet like PayPal, Square or Google. And entering the wallet wars at this point is probably not the most advisable thing to do…

Originally Published April 2014