Understanding and Managing the Risks of Moving Money, Part 1
In the third episode of PayFAQ: The Embedded Payments Podcast brought to you Payrix, Host Bob Butler interviews Billi Jo Wright, Chief Risk and Compliance Officer of Payrix. This is part one of a two-part series on understanding and managing the risk of moving money.
Billi Jo Wright has been in payments for over 25 years. She first spent 10 years on the issuing side and moved over to the acquiring side of the business with stops at Worldpay, MerchantE and Elavon over the past 15 years.
It is good business for software companies to monetize payments and own the customer experience, but there is a lot of risk associated, which can be very complex. According to Billi Jo, there are at least six categories of risk including underwriting, fraud risk, transactional risk, chargeback risk and then regulatory risk and compliance. As a payments company, you are responsible for every transaction and every merchant that you process payments for.
Billi Jo goes on to provide a brief description of each kind of risk and states that the biggest risk is underwriting risk – where there are a lot of regulatory and compliance requirements to assess the overall financial viability of each and every merchant.
Please join us for Episode 4 where Billi Jo Wright continues her discussion of understanding and managing the risk of moving money.
Learn how Payrix can reduce your payments’ risk and take on the regulatory and compliance challenges, by connecting with us today.
Transcript
Bob Butler:
Hi everyone. Welcome to the PayFAQ Embedded Payments podcast brought to you by Payrix. I’m your host Bob Butler. And today I’m going to be speaking with Ed Mastrangelo, the VP of Business Development here at Payrix. We’re going to be talking about leveraging payments to fuel your growth and transformation with a focus on payment economics. Hi Ed, welcome to the show.
Ed Mastrangelo:
Thanks for having me.
Bob Butler:
Ed, can you tell our audience a little bit about yourself and your software and payments expertise?
Ed Mastrangelo:
So, first got into payments in 2003 with a product management focus and really on new payment technology and mobile payments. And I’m not talking about mobile payments built into your phone like we have today. I’m talking about when we put a cellular antenna into a device the size of a shoe so you can take payments at swap meets and garage sale type stuff. And as that’s evolved, we’ve gone in, I’ve worked on Apple Pay, mobile payments there and embedded payments. And now I’m working with software companies, helping them embed payments, and really monetize the volume that they’re already processing through third-party gateways and traditional payment companies.
Bob Butler:
No, that’s really interesting. I obviously remember some of those days, and this was well before the advent of Square and that little dongle device that you could hang on an iPhone or an Android, but can you talk in layman’s terms about how a software company monetizes payments, you hear that term a lot?
Ed Mastrangelo:
So, software companies already have payments volume flowing through their software via third-party gateways. Think of your local gym that uses software to build their customer’s subscription fees or the hairstylist that may use software to keep track of how you like your haircut. But they’re using that same software to process the payment associated with the haircut. These software companies historically have been referring their clients to a payment company, and that leads to a clunky experience with minimal upside related to revenue. We call this the integrated ISV model where payments are integrated into the software, but the companies operate independently. They just have some economical relationship. Typically this is a frustrating experience where the software companies don’t really know how the merchants are getting priced. If they’re getting their fair share based on confusing reports and seemingly hidden fees. These companies can take more control of their payment strategy and embedded payment where they’re monetizing that volume for sharing that revenue with that other company.
And, you know, at Payrix, we provide an out of the box solution for software companies to do exactly that with multiple ways they can go to market. We offer the traditional PayFac® model where there’s lots of monetization upside, lots of revenue potential, but it also takes a lot of work to set up and it can be expensive to manage from a risk and compliance perspective where that’s not always a core competency to the software companies. Payrix also offers a hybrid approach where we offer PayFac-as-a-service. We view this as the best of both worlds as it provides increased monetization with all the upside of a PayFac® without the headaches of dealing with the risk and compliance that some people just don’t want to deal with. With either approach we offer payment experts to be your guide along the way and help you increase your revenue while offering your merchants a best-in-class experience that people are really demanding.
Bob Butler:
Ed, we often hear it said the more risk a software company takes on the more money they can make. Can you speak a little bit to that?
Ed Mastrangelo:
Anytime you deal with payment processing, there’s a risk associated with the transaction. It could be related to a customer trying to return an item to a merchant that went out of business, or traditionally people are aware there’s chargebacks and disputes, and sometimes there’s other losses that can’t be recouped from a merchant. That loss typically falls under the payment processor. So as the software company may share in that risk, they can negotiate lower pricing or a higher rev share. Many software companies don’t have the expertise nor the desire to manage this, especially given new and changing regulations around Know Your Customer and anti-money laundering for underwriting. So, we brought in an incredible team of risk experts to do the heavy lifting on software company’s’ behalf while still offering great economics that drive the profitability. It really goes back to the models I discussed previously and what level of effort you want to put on payments and the overall experience. With the legacy integrated referral model you can make some revenue with minimal effort, but you lose control and frankly make less money. Full PayFacs® probably have the most upside, but that comes with cost as you have to build a payments team to manage sales, support, and most importantly, that risk. For that reason, we think it typically makes sense to become a PayFac® once the volume going through a software’s platform gets to about $750 million annually. Then there’s the PayFac-as-a-service model where you can make more money than the referral, maintain more control of the experience without any of that additional work associated with registering as a full PayFac® and with Payrix you can convert to a full PayFac® seamless experience to your merchants if it ever makes sense. From the merchant perspective, the next time they log into the platform they’ll be with updated terms and conditions they can click to agree. And once they do that, the merchant account is transferred from our hierarchy to your hierarchy. So full control of the experience along the way, the entire time with Payrix.
Bob Butler:
What are some of the other factors that drive the amount of money a software company can make on payments?
Ed Mastrangelo:
You really want card heavy and understand your mix of card type based on the overall interchange and things like that. You can drive monetization by showing that you can save merchants time on reconciliation of payments with good reporting and invoice tracking. There’s serious value there, especially if you can speed up accounts receivable, convenient checkout options that merchants are willing to pay a premium for such as contactless payments and mobile wallets like Apple Pay or Google Pay. The ability to deliver bills and invoices to consumers via text and email with the ability to pay via card-on-file can really speed up the accounts receivable process. And that’s a huge value to these small and mid-sized merchants. It’s basically taking the Uber approach of embedded payments where it’s just so simple to order a ride and extending it to different industries.
Bob Butler:
Does the way that a software company price payments to their customers matter in that equation?
Ed Mastrangelo:
We give software companies complete control on their pricing strategy with an incredibly flexible billing engine built into the platform that allows software companies to price the way they want. Most things we see is the 80/20 rule where most merchants prefer a flat based pricing structure based on standard pricing that had been set by some big names in the industry. Others, maybe they have more volume and they want to negotiate pricing and that’s okay too. And what we recommend is these software companies have an SME who provides in-depth payments training, demo support, technical solutions, and custom quotes for the merchants that require that, and then build out a sales compensation plan to help drive both the adoption of payments within the portfolio, as well as some higher rate structures. And then based on the data we see across our portfolio of software companies, we help our partners create the right strategy and mix that works for them.
Bob Butler:
Ed, what does Payrix do that is unique or different when it comes to the economics for embedded payments?
Ed Mastrangelo:
I think what we do better than anyone else is we offer full transparency into the fees. And I mean, the fees associated with interchange in processing the transactions and also give software companies control over their merchant pricing. Our flexible billing technology has over 45 ways to charge supporting flat rate, tiered, interchange plus options. We can even create modifiers so charges apply to certain card types or scenarios such as charging an additional premium for reward cards or Amex cards that typically have higher costs and interchange associated with them.
Bob Butler:
Ed this has been a great episode. Any final thoughts you’d like to leave with the audience?
Ed Mastrangelo:
We’re just at the start of embedding finance. People are looking for new and innovative ways to pay as evidenced by growth of Apple Pay, contactless payments, companies like Affirm offering interest free installment options. And it’s only going to continue to other banking products like lending to merchants, digitally enrolling in bank accounts, et cetera. It’s really an exciting time with the digital transformation that’s going on in this world. And now is definitely the time to start to build your embedded finance strategy that includes payments to take advantage of all the upcoming revenue opportunities.
Bob Butler:
I couldn’t agree with you more, Ed. I really appreciate you being on the show today and thank you so much for your time.
Ed Mastrangelo:
No good. This was great, Bob. Thanks so much for having me here. This was awesome.
Bob Butler:
Here at Payrix, we want to be a trusted resource for software providers who are out there trying to make sense of embedded payments. And we want to help you get the education you need to make the business decisions that your customers and key stakeholders will thank you for. This is Bob Butler, and this has been the PayFAQ embedded payments podcast brought to you by Payrix.