Episode 3: Payments as a Commodity and the PayFac-as-a-Service Model

Episode Transcript

Ernest Rolfson: 0:03

Hey, this is Ernest Rolfson, the CEO and Founder of Finexio. Welcome to b2b cash flow conversations, the podcast dedicated to sharing insights and innovations in business to business payments, working capital and cash flow management, and FinTech entrepreneurship. In each episode, my guest and I tackle questions in the ever evolving world of FinTech and payments, an industry that's rapidly evolving and of great interest to investors and businesses alike. Looking forward to having this conversation. So hey, today I'm talking with Caleb Avery, the CEO and founder of Tilled, a PayFac as a service company, enabling software firms to become their own payment facilitators. Caleb's been in the payments industry for nearly 10 years and has founded another company prior to Tilled in the payments industry, while he was still in college, which is pretty neat. So Caleb, great to meet you. Again. Or re meet you I should say. Nice to see you, I know that you have not changed the backsplash in your kitchen since we talked.

Caleb Avery: 1:05

So they're gonna have the downstairs bar ready. So I've got the cigars and the cocktail machine ready to go.

Ernest Rolfson: 1:12

Oh, perfect. Okay, what's next, once we sell our companies we can we can start the drunken podcast, which may be more interesting to others. We don't have to, you know, do this, do this grind here every day. But that's great. You're at the ready. You're beating me.

Caleb Avery: 1:31

I am. It's only 9:30 in the in the morning. Ready to go.

Ernest Rolfson: 1:37

So how I do have my coffee. Yes. So how did why don't you tell me more about how you did get started? in the in the space here?

Caleb Avery: 1:49

Yeah, so I got started in the payment space by co-founding a credit card processing ISO while I was still in college. So, between my sophomore and junior year of college, I kind of had this this idea where did I want to apply for internships? Or did I want to try go out and, you know, work for myself and the latter seem much more appealing. And so, my partner and I started by just going door to door talking with small business owners in the Greenville South Carolina area. And, you know, surprisingly, they were willing to talk to us, and trust us with their payment processing services. And so, it really started out with us just going out with the idea of like, hey, if we could save these guys money and offer them a better solution, would they be open to talking with us? And you know, that has really exploded, since you know, founding that back in college. You know, at this point, we're processing billions of dollars a year in payments, you know, through that, that ISO, but started out with, you know, very humble roots, just going door to door talking with these small business owners.

Ernest Rolfson: 2:52

Nice. Well, I guess, did you then eventually evolve into larger companies to be able to get into that, the billion zone? How did that? How did that kind of transition happen?

Caleb Avery: 3:06

You know, we built up a sales force about 120 agents that have been going door to door but as time went on, we started getting

Ernest Rolfson: 3:13

around these, these are all 1099,

Caleb Avery: 3:15

Correct Yeah, 1099 agents, in 22 states across the country. But we started getting brought down on these consulting projects, with larger software companies anywhere between about 100 million up to about a billion dollars a year in annual payments volume. And oftentimes, we were brought in by like the fractional CFOs of these businesses who were trying to make sense of, essentially the credit card processing statements to start with. And so, you know, historically, credit card processing statements are made to be this, you know, complicated, you know, obfuscated thing where, unless you have the expertise, and you've looked at 1000s of these statements, they're intentionally designed to be, you know, difficult to read. And so, these fractional CFOs, would bring us in to say, you know, Hey, guys, can you help us figure out what's going on? Like, what are we paying? How much?

Ernest Rolfson: 4:06

This positioned you as the good guys to help understand navigate this and save some of these people money. Is that was that that? Is that the way this is sold in the past?

Unknown: 4:16

Yeah, for sure. So for a lot of the smaller software companies or you know, 100-200 million in annual payments volume, they're using Stripe or Braintree, when they're on that flat rate pricing model of, you know, 2 to 9% and 30 cents, or, you know, 2.75% of all my money. Yeah, they really have no idea if that's a reasonable rate. And so they're basically calling and saying like, hey, am I getting a good deal? You know, I went through this negotiation process, you know, with Stripe and I got them down from 2.9% and 30 cents to 2.7% and 25 cents. They're like, how did I do because I have no idea. There's no transparency with that that flat rate pricing model because you have no idea what the underlying interchange costs are from the card brands and so You know, having looked at 1000s of these statements, and, you know, knowing in these different industries, what the interchange costs should be, we were able to tell them like, actually, you know, sorry that the cost is probably more like 2% or, you know, 2.1%. And so Stripe is making a lot of money, you know, off of you guys if you're processing 100 $200 million a year in payments. And so they would really look to us to help them figure out you know, how to actually, you know, monetize these payments and stop you know, giving away all this revenue to Stripe and Square and Braintree.

Ernest Rolfson: 5:34

These are your, when you're having this conversation, you're talking about the end user corporates themselves, right, you're talking about some kind of large retailer or some kind of large e commerce company at this point, you're still talking about some of these.

Caleb Avery: 5:47

It was more like b2b2c software companies. So think dental software company, that selling a software, SaaS service to a dentist, who has an end consumer or patient that's paying them money. And so you know, as an example, the dental software company is collecting $100 million in payments across 700 dentists that have you know, all of their downstream customers that are paying them, you know, for their services. And oftentimes, these dental software businesses were just passing along the 2.9% 30 cents, or the 2.7% and 20 cents from Stripe or Braintree, on to the dentist. And so for the for the software company, there's just no revenue. for them. They're just like taking this unreasonable price, and passing along to their customer passing it along. And, you know, the reason why a lot of these software companies start out picking, you know, the Stripe or Braintree is because it's easy to get up and running. And so you know, when they're designing this, the software system, payments is kind of a portion of what they're building, but it's not the core of the business, you know, the core of the business is the dental software, you know, it's the scheduling tool, it's all those aspects that are custom for that industry.

Ernest Rolfson: 7:04

It's the critical infrastructure that the companies need to use the software, and then payments is one little module, but they haven't figured out how to monetize the payments.

Caleb Avery: 7:14

Yeah, and it's not a big deal. In the beginning, you know, when you've got one dentist on the platform, you're not leaving very much money on the table. But all of a sudden, when you've got, you know, 300, 500, 1000 dentists, you know, on the platform, you're leaving a lot of money on the table. And I think as the software companies start to scale, they start to realize, you know, you know, this, this is a lot of money, you know, that I'm paying to whether it's Stripe, or Braintree or Square, whoever their processor is, you know, it's a lot of money. That's, that's kind of flowing through the system. And when they're not seeing any of that revenue, it kind of starts to give them pause. And I think that's why, you know, a lot of times it was these fractional CFOs that were bringing us in because they were looking at the p&l and saying like, you know, Hey guys, why are we not making any money off of you know, $100 million that's flowing through the software system. And so that's where we would come in.

Ernest Rolfson: 8:06

Got it. Got it. So you started then specifically targeting the software companies.

Caleb Avery: 8:12

We did and really where the idea from Tilled, you know, came into play. One of these clients in particular was processing about a billion dollars a year in payments. And so they had already figured out how to monetize their payments. They had a couple of different processors

Ernest Rolfson: 8:27

with like a Stripe or Braintree or someone

Caleb Avery: 8:30

They had started with Stripe or Braintree like else? eight years back and then they had transitioned where they were referring business do you know the first data's and the big processors of the world and so they were generating millions of dollars on their payments. The problem was the onboarding experience was pretty brutal. So you know, they spent all this money going out....

Ernest Rolfson: 8:54

they had so you're what you're saying the software. So the software company was building the front end and building the funnel, but then it comes to the credit card processing and you're back in 1995. Right, filling out a form, right?

Caleb Avery: 9:06

Yeah, they're like, Hey, here's first data's PDF, you know, can you fill out this four page PDF, and we're going to need, you know, a driver's license a voided check and three months of process.

Ernest Rolfson: 9:15

We're gonna need the void, the void check. There's no other way to check if the bank account is real or not. You need a physical voided check.

Caleb Avery: 9:25

And you might even have to fax us the voided check.

Ernest Rolfson: 9:29

And fax is preferred. It is absolutely preferred because we have to keep we have to keep the fax operator employed. Right. It's like we still have the if you go to the first data office in Atlanta, you'll see they still have an elevator operator, they will press the buttons for you because they got to keep them keep them with a job.

Caleb Avery: 9:48

And that's it the top all that off. You've got to wait you know week to get your merchant account approved. And it's just this process. Yeah, that that as you say is, you know, decades. Behind whereas, you know, you go on to Stripes website or Squares website and you fill out this beautiful, you know, digital onboarding form and three minutes later, you click Submit, and then you're instantly able to start processing payments, and it's just this, it's just this totally different experience than, you know, hey, here's a PDF, and we're going to need all these attachments and like, yeah, give us a week or two, you know, to get your account approved. And so, you know, for this client that we were working with, they really wanted to understand what it would take for them to become a fully registered payment facilitator. And so that that payment facilitator or payback model is really the basis for you know, Stripe and square and Braintree, and PayPal, and all these guys that, you know, you historically think of is having this beautiful onboarding experience, it's really based on this concept of becoming, you know, a fully registered payment facilitator. But historically, that was a two-year, multimillion dollar process to become a fully registered Payment facilitator, where you've got to go through the process of negotiating with a bank and a processor, and it's just a terrible, you know, expensive experience.

Ernest Rolfson: 11:07

that and that, but that this is like, circa what, like six years now, more than six years ago, this is like 10 years ago. Now. Right?

Caleb Avery: 11:16

That the that right back model kind of catered to into?

Ernest Rolfson: 11:19

Yeah, yeah. And it was this this kind of insane and onerous and impossible.

Caleb Avery: 11:26

Yeah. Right. And so, you know, it's, it's been around for well over, you know, a decade now. But there, there still haven't been that many companies that have been able to take advantage of this model, just because of how time consuming expensive, you know, was to become a payfac. And about three years ago, when I was doing this consulting ok was right as companies like finx and finicept you know, pay rates amaryllis a lot of these payfac in a box providers were coming online with their models, and these paid back in a box solutions took the, you know, two year multi million dollar process to become a payback. And they've made it like a six month couple $100,000 process to become a payfac. The problem is, it's still six months, you're still having to hire a team of people.

Ernest Rolfson: 12:10

Sounds like six months sounds like a consulting business to me.

Caleb Avery: 12:14

It is a yearly, like a consulting business where you get to hire them for, you know, 75k, or something in upfront consulting fees, and they work with you through this six month process, to convince you know, a bank and a processor, you know, that you're able to, you know, prove these merchants and they have to design, you know, policies and procedures and hire personnel, and integrate all these systems. And it's complicated, you know, to get all of that in place. And so, you know, when I explained to my consulting client, what it would actually look like for them to go get, you know, registered as a payfac, they concluded in like, 15 minutes, like, there's no way we're going to go down this path. It was just far too much time and money and effort and risk, you know, for them to take on,

Ernest Rolfson: 13:02

yeah, it's not a good it's not a good business plan. So I guess this is all leading us up to what is the better way? What is the way you, you've figured out how to overcome this barrier here that all these other guys, and God bless, by the way, God bless the Finx's and the other ones for convincing people that this consulting business is like a real thing. That should be invested in or pursued. No, no, look, I I'm not trying to slag anybody, if you can make $1 in this space, because of how complex and backwards it is, you know, all power to you but doesn't seem like the right scalable place. For this. In my opinion. What do I know?

Caleb Avery: 13:46

They're just kind of approaching the problem from a fundamentally different direction than we are a Tilled. So from, you know, these payfac in a box providers position, their view is that every one of these software companies should be a fully registered payment facilitator. And, you know, in my experience, I just don't believe that most of these software companies actually want to be they fully registered or need to, I think they want the benefits of the payfac model, which is the instant digital onboarding experience, and, you know, a nice revenue stream off of your Which is really at the end of the day isn't that beyond all payments. But the question is, what's the best way to get there, in my opinion, the best way to accomplish those things and get the benefits of the payfac model is through what we call payfac as a service. And so the idea is that you can come to Tilled, and you can launch in a couple of weeks, not six months, you don't have to hire any new employees. You don't you don't have to take on any additional liability. You just plug into our API's and SDKs and let us handle all the complex, you know, back office operations, the underwriting the fraud, monitoring, the compliance, the things that you know, add overhead and risk and cost, you know, to the to the business. But the kicker is that we're still paying the lion's share of the revenue to the software com any, and I think that's really the beauty of the mod l is that we're giving them, you know, the turnkey solution, when they're still making the lion's share of the revenue on all the payments that are, you know, processing through their platform. this other table stakes instant onboarding, everything isn't the revenue piece, the big nugget here, that's been the blocker and that's what we're Stripe is massively greedy and won't give you a cent. It's a big one. So, you know, if you're doing, you know, 100 million dollars in payments, going back to that, that dental software, you know, example from earlier in the conversation, that's, you know, there's let's say 80 basis points of margin, if the dentist is paying, you know, 2.9% and 30 cents strike was making 80 basis points. So $800,000 a year, you know, in profit on all that.

Ernest Rolfson: 15:53

just, I guess, for the listeners, too, that are less familiar with that, I guess that probably on average, in the industry, it's probably like three to 4x, the average of the industry, right, in terms of basis, point margin, in my experience.

Caleb Avery: 16:07

yeah, so like, on the on the, like, traditional ISO side of the business, you're right, kind of 20 to 30 basis points is more than the average that we would see, you know, on those like brick and mortar accounts that we're signing. And so, you know, this idea of making 80 100 120 basis points is, it's pretty uncommon, you know, outside of the software space, but, you know, it's really the norm that we're seeing with a lot of these ISVs, where they're, they're adding a lot of value on top of just payments. And so they're able to justify a higher price point, you know, for the payment services, because they're not just coming in and providing, you know, a terminal to process the payments, they're adding, you know, scheduling tools and invoicing and reconciliation and there's a lot of value out on top of just the payments element of their of their software.

Ernest Rolfson: 16:59

Yep, yep, that's what we're doing here with like Finexio on that outbound payment side, too, right? It's like, hey, the payments itself is a commodity. But you know, we can make over 200 basis points here, because we're doing all the high touch value, add program management, turnkey support to get the software companies to embed payments in the door, and that's where, hey, we'll, we'll be able to share that with you. And drive the top line together, which is what if you're smart, and you're an investor, your business, and if you're a software company, and you're trying to do payments in revenue, it's all about top line growth right now.

Caleb Avery: 17:36

Yeah, no, it is that I mean, there's a lot of, you know, benefits to, you know, being able to add this additional revenue stream, you know, into your business, I mean, think about the benefit from a from a valuation perspective, you know, if you've got these, you know, 700 locations, and you're making, you know, $100 a month on your on your SaaS fee, what if you get out 100 or $200 a month in revenue, through, you know, payment processing, revenue, all of a sudden, you're doubling, or tripling, you know, your average revenue, you know, per unit on all of the locations that you've signed up. And I mean, that's tremendously, you know, beneficial to not only your bottom line, but your valuation if you're fundraising or if you're looking to exit the business, you know, investors are really, you know, wise to the benefits of having this recurring revenue stream, you know, that you can you can get from payments.

Ernest Rolfson: 18:32

Yep, let's, let's, I don't want you to share, certainly your secret sauce, but I mean, what is it that you're doing differently here around making this so easy that you can take advantage because this is something we've looked at, even at our company, and I think you and I will find interesting ways to work together here, as we both grow our respective firms is that you know, you can't even offer the credit card processing because A you can't get any of the you can get the revenue is not worth your time and effort. That's been a big blocker always for us, B the only other way you can do it is via referral, or doing a handoff and going through that paper form PDF situation, which also is a disaster. So, surprise, surprise here at Finexio. Even though we're talking to 1000s and 1000s of merchants a year we find limited success with credit card processing, it's not our core focus, we don't find the success because of the pricing and because of the high friction. And there's not a turnkey offering. But knowing you know, I'm really close with the founders of we pay where I have no stress, I get in touch with anyone we want to get to the bottom line and why we got connected is there's no real offerings out there. And so what is the thing that you're doing that you've overcome to make this simpler that the market needs to really know about? That you're addressing is it that just the bank suck and these big companies suck is it they just don't want to because there's so much money on the table, they you know, they want to make it impossible. Don't you know, maybe it's a combination of things, but I'd love to hear what it is to the extent you can share, what is the approach you're doing here? That is the kind of the aha.

Caleb Avery: 20:11

Yeah, no, certainly happy to share. And so, you know, from my perspective, it's a combination of technology, you know, business model, but also our backend partnerships. And when you think about, you know, the technology side of this, we spent almost two years building out the, the core API's and the core platform before we ever processed our first transaction. So I think, you know, you can't kind of understate how difficult it is to build out, you know, this type of technology, and, you know, the thought of spending, you know, two years before you're ever generating any revenue, and, you know, ever processing, you know, any transactions, it's kind of hard to do the fathom.

Ernest Rolfson: 20:51

Do you have and forgive me, do you have outside investors? Or did you self fund this thing, just as a side note,

Caleb Avery: 20:58

it was primarily self funded to get to the point where it was operational. And then we brought in an outside seed funding round last November. And then, you know, we've got some exciting announcements coming soon. Going to be announcing here for you on the fundraising side.

Ernest Rolfson: 21:18

No, that's great. We're, we're rooting for your success there, obviously, I think it's a be a no brainer, based on what we're learning. But where I was just gonna say, I'm very sympathetic with you is, and I probably didn't do myself a favor earlier on, I thought we'd be out of the gate faster. But I think in the payment space, it is fairly capital and time intensive. And it takes multiple years of investment and funding and development to get a robust platform and system before you can even move dollar one. Because we're in the business of trust and safety and high repeatability. Right, and we have to get the dollars to the right place. Most of the time, you know, barring some various things that might happen, my business is a little bit different than yours, we're dealing with paper checks in the USPS, and all sorts of randomness that can occur. But you know, long story short, we're in the business of moving money, you and I, and the investors really need to have the patience and wherewithal to understand that a lot of time and energy has to go in upfront, you can't just like, flip a switch, and all of a sudden, it's like magic beans here. So I, raised a important point, you know,

Caleb Avery: 22:28

it's tough. And, you know, the reality is, it wasn't a problem that you could just solve with technology. And I think that's probably been the almost the bigger roadblock to preventing someone from attacking, you know, the model that the way that we have is that not only did we have to spend all this time and money building out this, this, you know, really elegant technology, but we also had to go convince, you know, banks and processors of this new model in this, this new kind of underwriting methodology and flow of funds. And you can imagine, as you know, startup with no balance sheet, and no website, and no pitch deck and a small team, like going to a $10 billion....They're not exactly thrilled. You know, when you tell them, hey, it's not costing you time and money, you know, to go build out, you know, the solution and work with us. And for us, you know, it took over a year to get those partnerships in place. And the risk that that I took was like building the technology without any of the partnerships in place. And it was really, this, you know, almost blind faith that like, of course, I'm going to, you know, find a way to make this work. But, you know, you can imagine during that year, there were points in time where it's like, we're spending a lot of money on, you know, developers, you know, building this thing out, and like we still didn't have any of the back end arrangements, you know, in place.

Ernest Rolfson: 23:58

One of the things I in my early days, and I've given this advice on other, probably a podcast or two is I said kind of the feeling of doing what you're described, because I've done exactly what you had to do. And it is miserable and painful and a lot of sleepless nights. I say it's kind of like, you know, you're getting punched in the face 100 times over and over again. And you just have to keep plodding forward. And it's like, is that bank or is that big processor going to partner with me? So I can go and do this, you know. So kudos to you. But I don't think what the market understands and investors certainly is the tremendous, tremendous barrier to entry that these businesses have. Payments is a big business. There's a reason why there's like five big companies or 10 big companies and only just a few public companies in these spaces. It is incredibly difficult to break into these businesses. And you have to have not only the smarts you have to have really good technology and everything, but it's about knowledge. It's the knowledge in the world. relationships and you cannot replicate that. And it's like, oh, why can't pay pal start, Caleb, why can't pay pal do this tomorrow? You know, why, isn't Google doing this? Isn't Google just take all your business or PayPal? I've read about PayPal? Don't they do payments?

Caleb Avery: 25:22

It's hard man. And I think, you know, when we were fundraising that was, you know, a question that that came up pretty often is like, you know, why? Why doesn't you know FiS and first data, you know, offer these types of solutions? And the reality is, yeah, it's, it's hard. And, you know, for a lot of these big institutions, they have the price point, to make it interesting. But the actual, like, practical reality of building technology that's easy to implement and easy to work with. It's just not just not in their DNA, you know, oh, yeah. Com on in and implement our API in two weeks. No way, it's never gonna happen.

Ernest Rolfson: 26:04

Now, they've got like a semi unionized employee base, as well as the issue at some of these companies, you know, so that's the biggest thing is in payments, like anything else, you're dealing with people. And if there's no incentive for these people to move and do some innovation, with the cool startup around some new business idea that's there, why, why are they going to work on it? Right?

Caleb Avery: 26:24

I agree, and, you know, touching on that kind of barrier of entry point, you know, the conversations that I was always having with these guys is like, oh, come back to us, when you've got a billion dollars in volume. It's like, everybody wants to talk to you when you've got a billion dollars in volume. But it's...

Ernest Rolfson: 26:37

like when you don't need my help. Come back. Hey, I'd love to get the money come back when you don't need my money. And I'd love to give you some. Yeah. How's that sound to you? Caleb?

Caleb Avery: 26:51

Sounds great. Yeah, whenever, we don't need the help, I'll gladly come back and ask for some help.

Ernest Rolfson: 26:56

Absolutely. Love that.

Caleb Avery: 27:01

So that's what we were faced with. And so a lot, a lot of fun conversations. But you know, obviously eventually figured out, you know, the recipe, you know, and brought it all brought it all together.

Ernest Rolfson: 27:16

Totally. So now this is really can be, what you're really enabling, I guess, to paraphrase is now creating a new real revenue strategy for these businesses, and to create some real differentiation and flexibility for the software companies to provide payments. Without exactly becoming a payments company themselves is what I'm hearing.

Caleb Avery: 27:42

Yeah, our core vision is to help software companies monetize their payments. I mean, it's that simple. Like, that's the vision for the business.

Ernest Rolfson: 27:50

It's not just that it's, it's to monetize the payments of their customers. Right? Which is, that's the tough part. Yeah, yeah. It's like kind and how can they think about it not to define your company free? But how can they think about it is your point, it is their payments? They're enabling those payments, right? Your partners or software firms are enabling and creating those payments? How can you do better solving...

Caleb Avery: 28:13

They're selling the customers, you know, they're bringing the opportunities to the table, they're signing up the businesses, they've written the software, like, they're, they're really providing, you know, the lion's share of the value. And so in my opinion, they should be earning the lion's share of the revenue, you know, and all the payments that are ultimately flowing through their software system.

Ernest Rolfson: 28:32

Yep, yep. So is there a sweet spot for this now, in terms of SaaS, and in specific verticals, where you're excited about payments or integrated payments is one word for this? Or maybe embedded finance is a kind of a buzzword that this kind of touches on? Where are you? What are you excited about in terms of SaaS kinds of companies and partners are going after or other big kind of plays here?

Caleb Avery: 29:00

Yeah, the way the way that I think about the market there, there's kind of three chunks to the market, there's like zero to $50 million in annual processing volume, there's this middle segment that that's like 50 million to about 2 billion in annual payments volume. And there's companies that are processing north of $2 billion. And in that zero to $50 million, you know, a year segment, Stripe, and Braintree are really the dominant solutions. You know, those are the startups that are getting started, they're finding product market fit. And paying 2.9% 30 cents is, you know, frustrating, but it's not, it's not going to kill the business. And you can probably get started, you know, with those platforms, and then kind of north of 2 billion, that's where, you know, I really feel like these payfac in a box, you know, providers have their, you know, sweet spot for the companies that want to become fully registered payment facilitators. And I put that caveat in there because for a lot of businesses, doesn't really matter how much volume they're processing. They don't really ever want to become, you know, a fully registered, you know, payment facilitator and we've got clients, you know, processing well north of, you know, $2 billion that just don't want, you know, to ever become a fully registered payment facilitator. And so for us, you know, we really view the sweet spot in this middle segment in this kind of 50 million to 2 billion, you know, segment of the market that I call the payback wasteland, because pre Tilled, there really wasn't a great solution for these clients in this middle segment of the market. And so they were turning to, you know, the legacy processors, the thesis, the first data, the card Connect, Alibon, all of these guys that have, you know, what I would consider antiquated solutions that are difficult to integrate into, they have, you know, pretty painful boarding practices, and it's really just not, you know, a great setup. And so for us, we've really, you know, concentrated on this middle segment, of the market, where you have, you know, enough payments volume, to make it a substantial revenue stream, you know, for the business, and it really doesn't make sense for you to become a fully registered Payment facilitator, because you can actually generate more revenue working with Tilled

Ernest Rolfson: 31:05

Just the point was you can make more money with Tilled.

Caleb Avery: 31:09

That was the summation.

Ernest Rolfson: 31:12

Beautiful, I think we got it loud and clear there. But what was there a specific, you talked about the horizontal, is there any verticals you like, or you think specifically for payments and, and embedded payments and kind of helping, is there any, any reason around vertical, we talked a lot about medical, which I'm interested to talk with you further on, but any other spaces, you found success, surround payments and needs around, you know, payment consumption, and having an embedded in the software,

Caleb Avery: 31:41

I think one of the really interesting trends that we're really, you know, writing here at Tilled was just this verticalization of payments, where, you know, historically, the, the big processors serve, you know, every vertical and they were really the only game in town, you know, if you go back 10-15 years, there was no one like Toast or Mindbody, you know, in the space that that had created these, you know, vertical specific niche, you know, software businesses and kind of fast forward to today, were seemingly in every vertical, whether it's barber shops, or you know, pool maintenance software, or rent collection software, or nonprofits or healthcare or whatever the vertical is, like, you can pretty much find you know, a software that's tailor made for you know, that type of vertical, and you know, at Tilled, we're really looking at almost any vertical that we would consider kind of low or medium risk. So we're not getting into, you know, cannabis and CBD and some of the higher risk businesses, but within the amount of low and medium receptors, you know, we're working with clients across, you know, pretty diverse, you know, group of verticals, and the economics are pretty similar, you know, across all of these verticals where there's, there's money to be made, and in some cases, you know, more money to be made in payments than even on you know, the core of their business.

Ernest Rolfson: 33:07

Understood, a little side note, who I mean, we talked about and uniformly agree that literally everyone sucks and don't work with them, they make it impossible. And that really is the situation for the listeners to understand. I'm not even in your business. I'm not in the credit card processing side. It is miserable. The industry sucks, it makes it impossible. So good on you for doing what you're doing. I'm very sympathetic is it is shockingly bad, shockingly bad. Who is the who was the best of the worst? Is it just is it Stripe or Braintree? I mean, because they are good Stripe and Braintree are good. I think they've made it so easy. They're just taking everybody to the tool shed and taken all their money. And no one else has been able to figure out an alternative. That's why just for people that don't know, that's the situation. And they're just so much better than the other jokers out there, which is literally everybody else, that they're just dominating. And that's why Stripes worth $93 billion, because they're the only ones they've got a couple millennials there that just figured it out, that are just modern, that use mobile phones, right. But people like me and you that's the answer. But is there a best of the worst out there?

Caleb Avery: 34:23

I would say that Stripe is probably the company that we get the most positive feedback from customers that are looking to leave, but are saying yeah, we've loved Stripe, you know, the technology is fantastic. We've had a great experience but like, it's just expensive. And their, their technology is so good that they have you know, this cult following amongst you know, the startup crowd and I understand it, you know, quite frankly, like we send you know some of the smaller customers that come in to Tilled. You know, we occasionally recommend Stripe, you know, to some of these guys where it's like hey, you should go use Stripe You know, for the next 6-12 months, and then circle back to us, you know, when you have that product market fit, you know, and enough customers to justify, you know, coming on board with Tilled.

Ernest Rolfson: 35:13

Exactly. The thing is everyone out of the gate wants to be a player and thinks they want to be able to keep all the interchange and do all this stuff, right. And that's where Stripe, I think does a really good job of coming in and say, Look, we're gonna give you something its gonna work. And you can feel good about it. I think that's what they're good at.

Caleb Avery: 35:31

Yeah, well, I think as well, Stripe has a lot of like prebuilt UI elements, where you don't have to build out your invoice or you don't have to build out your right checkout page and some of the...

Ernest Rolfson: 35:42

They're in the program management business.

Caleb Avery: 35:45

Yeah, yes, as a startup, you know, they have these assets that, you know, if you want to launch your business in two days, yeah, go to Stripe, and plug in their, their pre build, you know, onboarding form, and their pre built, you know, checkout tool, and, you know, it all works pretty well. But like, as you scale up your business, and you've got a team of, you know, 10 developers saving that, you know, week or two, that you get by, you know, using the prebuilt Stripe elements is really no longer an advantage. And arguably, it's a real disadvantage. And I think a lot of the clients that come to Tilled are excited about our API first approach where they have the flexibility to build what they want, and make it look like their brand, their look, their feel, and they don't have to compromise on Well, hey, this is what Stripe has, and there's, you know, limited, you know, configurability to, you know, their pre built UI templates.

Ernest Rolfson: 36:37

Yep. So here at Finexio to just kind of switch it over here for listeners is like we're doing this strategy of Tilled and Stripe, right. So we've got the program management, the websites, the portals, the landing pages, and just give it to you and you can white, label it and take it and do whatever you like, you know, and go and run with it and use our API for back end outbound payments, or for the more sophisticated customers and you want to get more of the revenue and do other things, you can come and just use our API, right. And we've done that with a company called Veem. That their CEO, Marwan is a buddy, he'll be on the podcast here soon, where that worked great for them, they've got a lot of volume, they've got the front end, they know what they're doing. They just needed a really solid API for US domestic b2b payments, right? Somebody else, your prototypical customer, they don't know what they're doing. That's where you need the Stripe like assets and other these turnkey things. And we realize that this was a big gap in the market. So we're kind of AP is so different, and so much more of a backwater than your space, which is now so much more developed, that we have to actually do both models, because the customers are at so many weird different spectrums of the of the sphere here, it's, it's amazing.

Caleb Avery: 37:52

Well, it gives you a lot of flexibility to sign up the smaller clients as well as, you know, the larger clients by having that, you know, diverse product offering.

Ernest Rolfson: 38:01

Exactly, exactly. So, uh, where to go, where to go from here, we've covered a lot of ground, um, you know, or was there anything you wanted to touch on that we did not on, you know, some of the some of these kind of core concepts we've touched on and differentiators and otherwise, because if there's anything you don't think that was important, around just some of these key concepts that we've been kind of exploring having good convo on, I'd love to talk to you about any of your views on b2b payments.

Caleb Avery: 38:37

Covered pretty good ground so far. So I'll turn it over to you

Ernest Rolfson: 38:42

No, I'm just curious, do you is there do you have clients that are doing b2b payments? Do you see, you mentioned b2b2c is so much of this consumer to business? Do you see any use cases in b2b? Have you thought through any of that, or their customers coming to you, I'd love to just hear where you see integrated payments and receivables and payables around me to be which is kind of my home. And I can sure I can jive off whatever you share on based on what we're seeing in the market as well.

Caleb Avery: 39:14

Yeah, I mean, I think COVID in general has been just an accelerant on, you know, a lot of the trends that were happening, you know, pre pre COVID where, you know, businesses that were historically you know, paper check, you know, processes are trying to find ways, you know, to digitize their payments. And, you know, one of the things that that we, you know, quickly, you know, adapted to a Tilled was offering a ACH as an additional, you know, payment method within our API. You know, when we launched, it was just credit cards. And we had, you know, it was like the first 40 customers that that we talked to there were probably eight or 10 you know, that just needed ACH and like without ACH processing like we just wouldn't win those deals. You know, I guess that was a miss on my part, you know, not, you know, understanding the needs of the customers, you know well enough that we were able to get that integrated pretty quickly.

Ernest Rolfson: 40:11

And just pause there. That's, that's really, I want to just ask you the reason they're just to make sure I understand, but listeners understand too is that really hard, although you can make great money on the card payments is still only a portion of your customers revenue stream or payment stream, I should say, right and transaction. So what you're talking about is you've had to be nimble during COVID, to say, we've got to help support these customers, we've got to think more about holistically their payment flows. So we're going to integrate and offer more payment methods and your case more ways to receive payment and do business and transact. Because more businesses moving digital, that's really what you're saying, right? We need to we need to think as we're not just a card payment company, we need to put on our solve a problem for a CFO and more like how do we expand the aperture of facilitating multiple types of payments? Is that what you're saying?

Caleb Avery: 41:03

100%. And especially in b2b payments, that are oftentimes much larger, you know, dollar amounts and tickets, then in consumer payments, when you're paying a $10,000 invoice, the cost, you know, of the credit card, processing fees, relative to ACH can be a pretty large difference. And so for a lot of these, they'll take it easy, you know, for sure, and I think people are willing to pay the credit card processing fees and a lot of instances, but they really want to offer that multiple methods of payment to try and encourage that lower cost of payment acceptance, by paying with ACH and so you know, what we've seen some platforms do is like pass along a convenience fee for paying by credit card, but it's free to pay by ACH. And so when you go to pay that, that invoice, it pops up with the two options, and you can pay, you know, 40 bucks, or whatever it is to pay by credit card or it's free, you know, to pay by ACH just as a way to encourage, you know, the end user, whether it's a business or a consumer to use that, you know, lower cost method.

Ernest Rolfson: 42:15

That makes a lot of sense. Two things to tease on here, I think one, as you may or may not recall, I really grew up in this space at working at MasterCard. And the answer was and is always the card that that's the best way to pay that's now evolved as they've evolved their strategy as a multi rail company, senior executive and EVP at MasterCard is on our board of directors. And we've had a close working relationship with MasterCard as a customer, so think very highly of them. But one of the things I find myself having to explain is why card is such a good option. And why merchants and suppliers see card is so valuable and why buyers want to use card. Given that you're on the other side of the transaction, I'd love to hear in your own words, What do you see is the core value proposition and key benefits of card? And why are people willing to pay so much money for these card transactions? That's something that I think there's a lot of misunderstanding about I'm sure you've had to tell that story to investors. And I constantly shake my head and say, You fools you don't understand how valuable this product is, and some of the key challenges, but I'd love to love to hear from you or from where you sit. Why do you think it's an important product? Yeah, and what problem what problems? Is it solving? I guess? Or what are the benefits?

Caleb Avery: 43:47

I think, for business owners, some of the allures of you know, taking the credit card payments. For one, you're meeting the customers where they want to pay. And so from a from a consumer perspective, you know, they get their points or their rewards or their cash back, you know, by it by paying with credit card, but they also have more consumer protection from a chargeback perspective, to ensure that, you know, the business owner is going to hold up, you know, their end of the bargain.

Ernest Rolfson: 44:20

Thats like a safety and a fraud... Right, you're paying for peace of mind, right?

Caleb Avery: 44:26

Yeah, and so I think that's one element of it. The other is from a business owners perspective, you know, if you're checking out on, you know, an e commerce store to pay for, you know, shoes, if you're paying by credit card, you instantly know if you know that card has, you know, available funds and you place a hold, you know, on the on the account and from a from a business owners perspective, you know, okay, the, the funds are good, you know that money is going to come to me and you can do all that instantly. Whereas the way that ACH is set up today, there's this huge lag in In the kind of authorization and approval and movement of funds, and for a business owner you can either take the risk and say, Oh, well, you know, plaid told me, you know that they had money today. So when I go and pull that money, you know, later today or tomorrow, it should be there. But you're taking that risk that, you know, the money was there, when they authorize the transaction, but then they pull the money out. And you've already sent the goods. And so there, there's this disconnect between the kind of time of transaction and the time of the money movement, which in my opinion, is like one of the big issues with ACH today, which I think, you know, with, like, push the card and RTP type solutions, they're trying to find ways to solve for, you know, some of those big gaps, you know, within ACH today, which I think prevents it from being a more dominant, you know, payment method. Especially in more consumer transactions.

Ernest Rolfson: 45:59

Sure, but in B2B as well. Right? That takes three days to settle.

Caleb Avery: 46:06

It's a long time.

Ernest Rolfson: 46:06

It's one of the things about checks that there's one of the things about checks, why checks sucks so much, not only are they expensive, and you need to use a human being to get them out there is you got a piece of paper in the mail, if the USPS gets it to you in this day and age that is a dice. It's questionable, it is absolutely questionable. It's a piece of paper, and you don't know if there's money backing it. Would you really want somebody to send you a piece of paper, you don't know if there's going to be good funds behind it or not? Is that really what you want? You're not willing to pay to make sure you're getting your money.

Caleb Avery: 46:40

It's just inconvenient. I mean, I think that's kind of the biggest reason why cards are so dominant is that it's convenient. And people are willing to pay that price. That's the thing.

Ernest Rolfson: 46:50

It's convenient for the buyer and seller. Big time. And I think you touched on I mean, I again, I don't think most people realize how much ACH sucks and as a garbage product. And there's a reason it's super cheap. And it's like, oh, hey, it's like only like 10 cents. It's only like 10 or 15 cents. Okay, great. Why isn't it 100% adoption? Why are there still 12 trillion b2b checks? Why are there still trillions of consumer check? Because ACH sucks. Nobody likes ACH, that’s a secret. It's a garbage product.

Caleb Avery: 47:25

There's just a lot of drawbacks. You know, and I think, you know, we're trying to make ACH better. And, you know, a lot, a lot of these, you know, solutions are trying to make ach better, but you can't solve the just fundamental flaws. You know, yeah. with the, with the approach, and I'm hopeful, you know, that that, as you know, RTP, and some of these other, you know, faster money movement methods, you know, start becoming more and more mainstream. It helps and encourages, you know, wider adoption. Yeah, right. Right. Now, there's just a lot of problems with ACH.

Ernest Rolfson: 47:59

You don't see the real time payment thing making any major impact anytime soon, from where you said, what it sounds like. So nice idea. Nice concept.

Caleb Avery: 48:12

Yeah. I'm hopeful, but I'm not optimistic, I think is probably the best way to sum it up.

Ernest Rolfson: 48:19

Right, right. Yeah, I've had conversation like, oh, RTP, we're gonna make all our money in real time or real time payments are going to just kill the cards. And you're like, not unless it solves all the benefits. We talked about the security and the guarantee element and the chargeback protection, the fraud all this other element that consumer convenience or pay your convenience factor, and they solve the size of limits, and you get all the new banks on a new platform and all this other fun stuff that it's like, I hope I'm retired by the time RTP is out there and all this stuff. That's I think that's where we'll be. candidly, because I last time I checked, the banks move at a certain pace, which is like a melting glacier, or moving glacier. You know, so to believe that RTP suddenly is going to come and kill and change all these other things. You have to believe that there's this fundamental step change difference in the way that massive financial institutions move and roll out new things that are just which is just never gonna change entity. Hey, there's an opportunity. Oh, they'll just oh, they're gonna do it. Obviously, they're just gonna do it. It's all just gonna roll out. Right? Of course. jamie diamond is going to be there's going to be pushing the coffee is going to be pushing the, the tray right over the, you know, it's like, No, no, he's going to be counting his money. He's going to be counting his money. Looking at the cash and the accounts as these funds take three days to clear and they're collecting their floats and they're very happy. So people forget how banks make money. Is the fun is that kind of comical, fun, fundamentally Just sitting not sitting on your money fundamentally, banks want to sit on money, fundamentally. I don't know, I don't know, I'm trying to get my head around modern economic theory, modern monetary theory, which is zero interest rate world banks do have to figure out how to move things differently and make money differently, especially with all the spending plans and everything we're doing, you know, having said that, how much money could you charge for real time payment, that's going to offset the zero interest rate environment world, you can't charge enough. And people are not gonna pay? Probably businesses and payments, right is like the next new thing comes out. They're not willing to pay 10x more.

Caleb Avery: 50:44

Right. I agree. I mean, I I remember when we, when we I say basically tried to launch instant payouts for merchants, this was like, I guess it was maybe like four or five years ago. It was like 1% was the the cost, you know, to get it, it's your payout. And the the business owners like, so I could get my money right now. And it would cost me 1%. Or I could wait until tomorrow morning. It'd be free. And we're like, yeah, I'm okay. I'm okay.

Ernest Rolfson: 51:18

Yeah, they're good. That's that they actually passed remedial math.

Caleb Avery: 51:24

They really don’t even make sense to me. Yeah. No, thank you.

Ernest Rolfson: 51:29

Yep. Yeah, yeah, it's, it's we started a Supply Chain Finance business here. And we went and raised about $15 million from a nice, some nice people in New York City. So we could get payments like 30 days faster, where you can charge about one to 2% that's, that's where the markets at there.

Caleb Avery: 51:50

So that's more reasonable than 12 hours faster. Exactly. 30% more.

Ernest Rolfson: 51:59

So the payments industry has a ways to go and learning about how you know the time value of money works and how businesses perceive it. But that's the next big thing I believe. And that's why we've ahead of the curve there. In my opinion, so check with me in a few years, see if see if I'm an idiot or not. We'll see. You know, I don't know the jury's out. So but as our friend Wayne Gretzky says, To go back some Wayne Gretzky stuff, You've got to skate to where the puck is. Didn't know that one. You didn't know Oh, that's Wayne Gretzky his most famous quote, actually, there you go. Yeah. So I'm not I know nothing about hockey or Wayne Gretzky, other than he was in a Saturday morning cartoon series growing up with Bo Jackson and Michael Jordan, did you even know that was the thing. Now I'm a few years older than you there was literally a cartoon series where it was like the current sports stars of the day and age on Saturday morning nonsense cartoons after like Ninja Turtles. Wonder if that's on amazon prime. It may be I'm an elder millennial. So, I have this like a weird analogues kind of story set that I can pull out on you where I remember I had to get up to like, change the TV manually, you know? And but then I can also talk about Instagram and some other things to some reasonable degree of I can like it's passable. It's passable. So I guess going forward, but uh, you know what, what's next for you in this industry? Where do you see tilde really going? payments b2b payments what's kind of the next wave here? what's next for your company? What are you stoked about?

Caleb Avery: 53:49

I think one of the feature sets that I'm most excited about is our omni channel solution. And so when I say omni channel historically Tilled has been a card not present platform helping people move money online which is now face to face theory right not on face to face. But you know as the world is opening back up for you know a lot of our customers the vast majority of the money is actually moving you know in person so like dental software you know, as an example the dental software company may only be collecting 25 to 30% of the actual revenue for that dentist because the dentist still has a terminal so when you go to get your teeth clean, you know, you give them your credit card, you know when you're in person to get to be able to take that payment and so you know, we're pretty excited to be rolling out our omni channel solutions to be able to help these software businesses both handle the card not present payments, but also these in person, you know, physical payments, which is the world opens back up I just truly believe is going to be you know, where the big growth, you know, opportunities are, you know, both retail but also for our customers and their customers. You know, to be able to solve that that pain point as well.

Ernest Rolfson: 55:03

So you're going to be going a cart more card on file type businesses, consumer type businesses and these kind of omni channel where you've got an online payment but or in person retail kind of payment. And so yeah, the retail and consumer face to face transactions are not going away anytime soon. Long story short.

Caleb Avery: 55:23

certainly not. Certainly not. I know I'm ready to get out of the house and see people and travel.

Ernest Rolfson: 55:31

no, absolutely. And our one of our big verticals here is hospitality and hotels. And we're seeing the spending pickup it's not quite at pre COVID levels and still below. So I have an enormous tailwind in my business here. Because of this, some of our partnerships and hotels, customers we've got, but I was just on vacation, which is weird. Just like the Oh, we're actually out in public with people as strange. And we were at, we were at some we were at a resort, lunch in another hotel. And I was shocked to hear that they're like, Oh, yeah, we're at like, 90% capacity, or like, we've been busier than we've been in years. So like people are coming from California and from Texas and all this stuff. And I'm like, that's great for the economy, this is awesome. We'll still be dealing with this COVID stuff for some more time is the other side of the coin, because people are out and about, they'll keep spreading. But on the other side, people want to get out and spend and do business, you know, and folks are eager to do it. So I think good for your business good for my business. Obviously, spending is picking up so we got in at the right time, I'd say.

Caleb Avery: 56:39

Yeah, we've had a couple of like hotel booking platforms and like short term rental platforms that have reached out to us because they're just exploding. Yeah. Now we're a lot of these guys. You know, I've been hesitant to invest in any technology until they started to see the revenues pick back up. But you know, as you said, it's really, really starting to explode where people want to travel, they want to get out and about, you know, the people that are getting vaccinated or are able to do that now.

Ernest Rolfson: 57:05

Absolutely. And there's so much cash sitting around because of folks that are traveling especially for leisure that they've just been sitting on a pile of cash has been growing and growing and growing and their personal bank accounts because they've not been able to spend it. So you know, you're not going out to a fancy dinner or taking your family to Disney World during global disease state. No, not but the minute you can. I'm pretty sure you will write along with everybody else on the planet. Those long lines at Disney and hot the hot burning sun of Orlando will be there waiting for you with those high prices. It'll be right there. They'll be happy to wave you and

Caleb Avery: 57:46

it actually sounds pretty good right now.

Ernest Rolfson: 57:49

Sure, you'll get a Mickey Mouse ice cream or ice cream

Caleb Avery: 57:54


Ernest Rolfson: 57:55

I'll tell and that's a fair price. That's a fair price for that ice cream for that nickel ice cream cone. Well any other parting thoughts here or anything we didn't touch on that you want to let our listeners I'm talking like I'm still working for the mouse here or visitors or any of our guests here one here about anything we didn't touch on? It's been a great Convo and we've touched on a real breadth of topics I think in in detail where people will be like, how do these youngsters know about this stuff? I'm putting myself in that category. I don't even know how old you are. But let's consider ourselves the next generation here.

Caleb Avery: 58:36

I think so

Ernest Rolfson: 58:37

we're below 50 How about that we're under 50 and in this industry it is

Caleb Avery: 58:45

no I agree.

Ernest Rolfson: 58:46

Wonderful. What else do we need to what's any major point we need to get across here or parting shot across the bow if you will?

Caleb Avery: 58:56

shots across the bow i think we've taken our fair shots you know at the at the competition, but I really enjoyed the conversation today and really appreciate you having me on the podcast today. This was fun.

Ernest Rolfson: 59:09

Absolutely. Absolutely. And just by the way, for the listeners, where are you? Where are you based? Where's your company based?

Caleb Avery: 59:15

I am based in Boulder, Colorado. And so our office is here in Boulder, Colorado. But as you can imagine with the pandemic we've been hiring, really nationwide. And so now we've got employees in five states and right now we've got five open roles on the on the team across product engineering, sales, marketing support, and we're hiring nationwide. We really feel like we just want to get the best people you know on the team regardless of where they're located. But anyone that is in Boulder Colorado we do have a nice little setup.

Ernest Rolfson: 59:54

Well look man great talking with you really fun conversation. I got smarter here, learned something and we got to each talk on some things we're passionate about. So, look, I'll be looking forward to tracking your growth, but more importantly, staying in touch and seeing if we can work on a few things together. So thanks for your time, man. We'll be talking more soon. It was it was a lot of fun and informative.

Caleb Avery: 1:00:18

Yeah, no, no, thank you very much. I really enjoyed it. I appreciate the opportunity.

Ernest Rolfson: 1:00:22

Thanks, man. Talk to you soon. Appreciate it.

Caleb Avery: 1:00:24


Ernest Rolfson: 1:00:25

Thanks for listening to b2b cash flow conversations. This is Ernest Rolfson, the CEO and founder of Finexio. I welcome your questions and comments. You can reach me at podcast@Finexio.com You can also find us on Twitter @Finexiopayments. To subscribe, you can go to Finexio.com/podcast. Be sure to check out my new episodes on Apple podcasts, Spotify, or wherever else you listen to podcasts. Thanks, and talk with you again soon.

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