Episode 16: Datacap | Evolution of the Payments Ecosystem
In this episode we’re welcoming George Hudock. George is the Director of Business Development at Datacap, one of the most respected and proven payment gateways in the industry. Today, we discuss the history of Datacap, the evolution of point of sale payments, transition from standalone payments to integrated payments and, now, to embedded payments.
Read the full transcript below.
Episode 16: Datacap | Evolution of the Payments Ecosystem
Todd Ablowitz (00:09):
Welcome to It Pays to Know, the Infinicept podcast where we dive deeply into unexplored areas of payments, embedded finance and more. My name is Todd Ablowitz, I’m co-founder and co-CEO of Infinicept and today my guest is George Hudock. George is the Director of Business Development at Datacap, one of the most respected and proven payment gateways in the industry. Today, we discuss the history of Datacap, the evolution of point of sale payments, transition from standalone payments to integrated payments and, now, to embedded payments. Without further ado, I hope you enjoy our conversation as much as we did.
(00:50):
George, great to have you here, thanks for joining. Love to hear a little bit about the history of Datacap. I understand it’s 40 years, there must have been quite a few eras in that 40 years. I’d love to hear about it.
George Hudock (01:04):
Absolutely. Well, it’s great to be with you, Todd, thanks for having me. Yeah, so 40-year tenure with Datacap Systems, storied history. Actually started life as a cache register manufacturer with integrated payments technology built in the backend. So, Datacap serviced larger tier one merchants directly, the likes of Fashion Factory, Frederick’s of Hollywood, Ladybug, Eastman Kodak was a big customer, really, we focused anywhere where IBM wasn’t. We quickly came to realize that we had a really robust integrated payments product and we didn’t care so much for the POS side of things, we really had something special with integrated payments.
(01:39):
We actually took it to other point of sale systems like Casio, Samsung, Toshiba and a few others to see if they would embrace our technology and the message we got from them is, “We love what you’re doing, Datacap, but you’re competing with us in the POS side.” So, we actually made the difficult decision at that time to jettison the POS business and lift out the integrated payments technology that we had, which was really our core competency, to develop a solution that we could take and market to other POS systems. And shortly thereafter, our payment technology was integrated to all major ECRs in North America.
(02:12):
That was the origin story, the next era was really Windows. So, 1999, 2000, we saw the explosion in the POS systems building on Windows platform. So, Datacap then developed or took our payments technology and developed and delivered a solution specific to PC-based point of sale so folks would be able to integrate our technology, run on a PC-based platform and service their merchants. This was the inception of Datacap’s NETePay product line. But what’s funny about that is, at that time, it was predominantly dial based so a lot of the processing hosts at that point hadn’t put up IP-based platform. So, it was a Windows-based application still processing over dial.
(02:49):
So, it was really early to mid-2000s where those processing hosts started to put up those IP backends and we’re actually able to deliver a fully integrated IP transaction which was much, much quicker. From then, we migrate and evolve into what I would call the EMV era. We’re looking around 2010, 2011, you saw the liability shift for EMV in Canada. So, that’s where Datacap really cut our teeth with EMV PIN pad development and level three certifications. It was a lot to learn, these take anywhere from six to 16 or 20 months. So, that’s really where we were able to get some really good experience and cut our teeth there for the liability shift that happened here in the US which was around the 2015 timeline.
(03:31):
It was great, we were able to really lean on everything we learned up there in Canada to really be front of the pack there with EMV certifications in the US. So, that’s the EMV era, we’re still obviously working through EMV certifications. That’s what we do at Datacap, we’re constantly working through level three EMV certification so that our integration partners have instant access to all that. So, that’s constantly ongoing. After that, I would call it more of a product architecture evolution or adaptation era for Datacap. If you think back to 2015, 2016, we saw the explosion to tablet browser-based solutions, a lot of POS, ISVs, and VARs. We’re looking for low barrier to entry, more of a direct selling approach, ease of being able to push out updates and fixes.
(04:15):
So, we really had to see what was going on in the market and then evolve our integrated approach to cater to our partners and at that point is when we delivered the omnichannel gateway architecture. So, here, the idea of taking … Instead of a distributed locally at each merchant location, Datacap was able to host their technology now at the gateway level to deliver processor and hardware-agnostic technologies for ISVs. So, if you think about it, delivering a piece of hardware from Datacap or software that they did distribute locally could be difficult for guys that write in multiple operating systems, that browser based so that really required that evolution into the gateway to where we could deliver these kinds of integrated experiences.
(04:54):
So, really, trying to reduce the dependency on local hardware and software, the newer integration paths then evolved to applications that live directly on PIN pads that talk directly to our gateway. So, Datacap is constantly focused on removing that friction for ISV partners just to give them the quickest path to market so they can go out and satisfy their merchant. So, we really have the benefit too of a large number of ISV partners that leverage our technology and they’re constantly driving that feedback. We’re seeing what they’re seeing in the market, it helps us to fill in roadmaps so that we can make sure we’re catering to these guys.
(05:27):
So, Datacap, still independently owned and operated, we’re one of the last agnostic gateways out there, no VC funding so we’re able to really focus on our mission of serving the ISV in the market and giving them, really, the tools they need to punch back the big guys like the toast and the stripes of the world.
Todd Ablowitz (05:43):
So, let’s look through those areas that you went through and let’s now look through the lens of the sales channel. So, in the beginning, you were selling cash registers directly to merchants and, if I heard you correctly, you made a conscious shift to get away from selling to merchants and to go through the channel. Did I hear that correctly?
George Hudock (06:04):
Absolutely, that’s right. So, when we were servicing large end users with a point of sale system, we needed a direct sales force, we needed a large support infrastructure because you’re dealing with end user calls, questions and support. When we decided to jettison the POS business, we decided to lift that integrated payments technology out and then sell that value more B2B through the ISV. So, drive the value to the ISV, “Hey, Mr. ISV, you want integration into Datacap, it’s going to open you up to all the processors, all the devices, everything that we support in our side.” So, we actually ended up getting integrated to their technology and take into market however they distribute.
(06:36):
So, we have ISVs that sell directly to end users and then also through a channel of VARs or resellers so they became our customers. So, Datacap is, I won’t say able to scale back but, our support, we’re more of a tier two support level at that point. We rely on our partners to handle everything downstream as far as tier one support. They know the POS, they know how it’s integrated to Datacap, they know how to take that first call from the merchant before they triage out to Datacap for help. So, that’s exactly right. So, we’ve been able to really scale the business in a way that leans on our integration partners and they want to be that first call, they want to control that messaging to the end user being the merchant.
Todd Ablowitz (07:12):
I remember Datacap early in my career being the cash register and I also remember, and correct me if I’m wrong, but you had a very big integrated payments partner launch in the very early 2000s, right? Can you talk a little bit about that story?
George Hudock (07:28):
Yeah, sure. So, taking it back, it was early 2000s and it’s really when integrated payments got a lot of traction. So, we partnered with Mercury Payment Systems essentially to turn ISVs and VARs to think about resellers for merchant processing. So, the status quo in the industry at that point was feed on the street ISOs who were going out and just simply quoting rates, dropping standalone terminals and trying to gain processing that way. So, the idea here was, well, ISVs and VARs are intimately involved with merchant, they understand, they’re a consultant to the business, they’re a natural fit to be able to consult on merchant processing as well.
(08:04):
So, the idea was let’s let those folks be the sales salesperson, they’ll earn some revenue from the merchant processing and they’ll take it to market and it was wildly successful. We have some metrics on this too, everybody in the value chain wins. An integrated installation lasts 4.1 years versus non-integrated which was about 18 months. So, it’s just the merchant experience was better, distribution was better, everybody in that value chain benefited from that model.
Todd Ablowitz (08:28):
So, now, here we are. Integrated payments is ubiquitous. There’s no ISV, typically, or payments player that is not participating in some sort of integrated experience. What we’re seeing a lot is this transition from integrated payments to embedded payments and we have a definition of that. I’d love to hear yours, we can compare notes a little bit on what embedded payments is and then what you’re seeing, what’s happening right now in that evolution from integrated to embedded.
George Hudock (09:01):
Yeah, yeah. So, integrated payments, still very strong with a lot of our partners that focus on the SMB space and it’s important to conceptualize the two. For us, integrated payments is simply having a POS that has an integrated approach, that seamlessly sends an authorization transaction to whatever processing host they want to leverage. And then, generally, these guys are okay with having multiple hands in the pot, maybe referring merchants off to a processing partner that we’re working with. But what we saw then with Mercury Payments and a few of the other strategic partnerships we had was POS quickly discovered what kind of revenue is on the processing side.
(09:33):
So, guys are continuing to focus on that revenue and we’re seeing a blend. So, now, all of a sudden, ISVs and VARs are turning into ISOs and it’s getting very cloudy and that’s how, I think, you’re seeing a lot of consolidation into this space as well. So, as things are evolving here, these guys are trying to figure out what they want to be and that’s where enter PayFac or enter PayFac enablers. The way we look at this is lowers the barrier of entry to folks that might not have the stomach or resource to stand up a wholesale ISO or want to take on full responsibility here, they’re looking for a path to market to where they can really own the whole stack. They want to own the experience, they want to be able to quote rates, they want to really be able to monetize the payments piece.
(10:12):
So, that’s where we look at the integrated approach, guys who are okay working with multiple parties then we look at these larger entities that want to really step in, own the whole experience and build it out and go to market.
Todd Ablowitz (10:23):
So, I think that aligns pretty well with what we see. Embedded payments, we see this concept that the sales channel is really taking over as opposed to just a marketing approach with a lead going over the fence to a processing partner in the integrated payments world. In the embedded world, they’re the sales channel, they’re the servicing entity, they’re right there saying, “Hey, come to us. We’ll take care of it. It’s our brand, it’s our service teams.” That’s what you see as well, right?
George Hudock (10:52):
That’s right. And it’s speed to market too, whereas, historically, it might take up to a week to set up a new merchant. With PayFac and PayFac enablement, these guys want to be able to own the process and be able to light accounts up very quickly. So, that’s what we’re seeing that. And it’s a certain type of business, it is more that direct selling ISV, the guy that really wants to build this into their model and go to market. So, we’re seeing a healthy dichotomy. We see smaller ISV and VAR who wants to maintain multiple relationships and then we see people that do want to verticalize, own the whole process, white label it, brand it and go to market that way.
(11:23):
So, yeah, we’re seeing it, for sure, and that speaks to the partnership between Datacap and Infinicept and how we’ve been able to really pair together to deliver that turnkey approach for folks.
Todd Ablowitz (11:32):
Well, let’s talk more about how you look at that. So, how does Datacap want to participate in this ecosystem? Where do you see yourselves? Where are things right now from an embedded payments perspective at Datacap?
George Hudock (11:47):
Yeah, yeah. So, we at Datacap want to continue to focus on our core competencies. So, that’s delivering processor flexibility for our partners, it’s continually adding new OEM device support, so we’re agnostic at that level too, we’re not tied down to one hardware OEM. Continual functionality improvements, new transaction flows, ways, we cover all major verticals. As you can imagine, there’s a lot of different flows going on in things that we need to take into account to help our partners succeed. The whole security aspect, so think about all the PCI PA-DSS regulations and compliance that needs to happen there. Again, our partners can lean on us for that because we’re the ones that are going through all those certifications.
(12:23):
And L3 EMV processor certs, it’s very hard to do, we’ve been able to do a really good job of maintaining multiple L3 processor certs. So, we’re always cranking out these payments development so that our downstream ISV partners can work with who they want to work with. So, we see the value in continuing it with an agnostic approach that can bolt in nicely to a strategic partner like we have with Infinicept, you guys share in the DNA of agnostic, allowing people to own their data, own their relationships, being able to move things around based on business model. So, we say buyer beware too, a lot of the integrated and embedded approaches now are owned or owned entities or a single-threaded pathway.
(13:03):
So, what’s important for Datacap is to continue with the innovative integrated payments and allow folks to bolt into our architectures and strategic partnerships to be able to do what they need to do for their business.
Todd Ablowitz (13:14):
So, let’s unpack that a little bit. What you’re talking about, if I’m hearing you correctly, is Stripe or Square or, many times, even the big processors, if you’re using their embedded payments options, you can have it any color you want as long as it’s black, right?
George Hudock (13:30):
That’s right. And that’s always been in Datacap’s DNA and business model. It’s essentially the Switzerland of payments, integrate our technology, realize our value and then go work with who you want to work with. So, we just say beware of walking into a situation where there might be a dead end or you might not be able to pull your data or your business or any of that portfolio that you’ve built and being able to transition it to another entity, another platform. You just need to be careful going in on the front end to understand what you’re working with.
Todd Ablowitz (13:57):
So, it’s like thinking about Apple being all controlled and managed and in the walled garden of Apple’s universe versus Android where it’s a much more open ecosystem. And there’s not a right or wrong, I don’t think, on these things, it’s just do you want … In the world of payments, if you’re an ISV, do you want to be in a position where you’re pretty much committed to one entity for the long term versus having options? So, with Datacap, you can pick to change your processor, you could have multiple processors, that’s one of the main value points, is it not?
George Hudock (14:30):
No, that’s right. And building into the Datacap architecture offers cross-platform encryption, tokenization so the portfolio that you’ve built is portable between processing entities. So, as long as you’re leveraging that Datacap technology stack, you can work with who you want to work with and, if that needs to change for your business, and businesses are all different, as needs change, Datacap offers flexibility here and that’s what we like about the Infinicept approach as well is owning data, owning book, graduating and being able to move where you guys need to move. So, we’re very big on that open architecture idea at Datacap.
Todd Ablowitz (15:00):
Do you put the software in the device at Datacap or do you use the native software from the manufacturer and then you put a kernel in? How does that work?
George Hudock (15:10):
Yeah, yeah. Well, so very layered discussion. With EMV, there’s an EMV kernel that lives there, that’s what we develop to and certify and that’s where we do the level three cert against each processor and each card brand individually. But as it relates to integrating and driving these devices, sometimes we have some custom software, sometimes we use more off the shelf forms that a lot of these guys generate. But it’s an interesting question because it leads into the state of the state right now. What do we see happening in the industry? What Datacap really likes, what we’re seeing, and this pairs off of your Android comment as well, is a lot of the OEMs now are opening up the PIN pads into open Android approach. We love this, it’s no longer proprietary hardware.
(15:49):
So, now, any Android developer being a Datacap or any of our software developers can now meet the customer in different ways, develop applications that live on the PIN pad, that could be a full-blown POS, it could be a companion app, but it really opens the door for a lot of functionality, a lot of customization, the ability for custom forms, logos, remote management, RKI. So, we really like what we’re seeing in that space around Android OEM terminals and we’re seeing a lot of others offer the same in their next generation of devices.
Todd Ablowitz (16:18):
And RKI is remote key injection and that’s actually where I was going next. So, when I have keys in my device, and this is something for novices who haven’t done a lot of card present work, this key thing can be a real surprise in ecosystem. But let’s say, for whatever reason, I’m moving down the road, I get acquired or something, am I able to change the keys out? And even if I want to deconvert off of Datacap for whatever reason, maybe I have an acquisition situation and I need to make a change, are those things accessible and changeable or is it locked down in the device once the device is out there?
George Hudock (16:56):
Yeah, great question. So, RKI is now a reality, we’re actually delivering shortly here a new version of terminal management that will handle all this stuff via API or via a portal from Datacap. So, there’s two keys on the device, there’s a PAN key which protects the card data and then there’s the PIN key which encrypts the PAN. Anybody leveraging our NETePay hosted gateway has the same PAN, it’s always the same PAN regardless of processor. So, as long as it’s processing through our architecture, it’s portable. If we’re in a merchant category that requires a PIN, a PIN based transaction that is specific to the backend processor. So, if we’re switching processors or making some moves, that PIN key would need to be injected but that’s all going to being able to be handled remotely at this point.
(17:35):
Acquisition discussion, Datacap’s pretty friendly to work with. If folks have … We import and export token data all the time. So, if people have a book of Datacap specific tokens and they need to move them, we take care of all that within our contracts and architecture to where you can pull that token data out to migrate to other platforms if need be. So, that can all be handled remotely. Again, we’re always thinking about reducing friction for the ISV and for the merchant partner. How can this be done remotely, how can this be done easily and frictionlessly, so our downstream partners, a lot of constituents being used in a Datacap deployment. So, we need to think about how all these constituents play and how does everybody win in that ecosystem.
Todd Ablowitz (18:12):
The reason I’m unpacking all this, and I think this goes right down the same path as what you said a while back, we really believe at Infinicept that the ecosystem should be open, that we shouldn’t be locking in ISVs, software companies that is or their merchants, we should do a great job, make them really happy, make them thrilled to be working with us and committed to working together if there are ever problems but not lock them in, not let anyone feel like they’re in jail. We have the Embedded Payments Bill of Rights that we put together and we have a lot of signatories onto this and we just think it’s so important not to be operating in a world where the merchant is stock or the software company.
(18:57):
So, this is one of the things that our partnership, it seems like on both sides, on the transaction processing side which is your side of the fence and on the payment management side, if you will, or payment operations side, Infinicept. And especially with Launchpay which is so much more accessible to the smaller or earlier stage ISVs that, in the past, really only had the choice of integrated payments because they just didn’t have the infrastructure to be able to manage a payment operation, now they can get the best of both worlds with our partnership.
(19:31):
So, let’s talk a little bit about omnichannel and card present dynamics, card not present … What’s going on in that space? What are the exciting areas and do you have anything you can talk about where you are, where you’re going in that area?
George Hudock (19:46):
Yeah, we could talk about it from a Datacap perspective. It’s interesting, we, primarily a card present shop. Everything we’ve done over our 40-year history has been really dedicated to card present integrated payments until recently when we developed the gateway architecture. So, we’re quickly learning the e-commerce space, we’re able to deliver an omnichannel solution to our ISV partners. And if you think most of our partners are those card present guys that now just need some light above store works and e-commerce based functionality. So, it’s interesting, you’ll see too … What we see is guys coming from the other end of the spectrum.
(20:16):
So, there’s some e-comm only platforms that do a really good job on e-commerce but now they’re coming in and they’re trying to figure out the card presence space. So, again, it all comes down to the ISV and what they need, it’s interesting. Card not present is not easy but it’s somewhat formulaic so we’re learning and we’re feedback driven and, as our ISV partners require this stuff off us, we’re building it out as we go. But it’s really a matter of what that ISV needs, are they mostly an e-comm shop and then just have a little bit of a need for card present or is there a real heavy need for card present payments with just a little bit of above store work.
(20:49):
So, we consult ISVs a lot on the Datacap side, we consider ourselves consultants, and that’s where we qualify these guys and see what they really need. We do see the real benefit of working with an entity like a Datacap is we’ve managed these card present intricacies for decades. So, do you need card present or do you need a card not present? The other thing we’re seeing is COVID exploded the need for above store payments so we call it breaking the silos too. If you think about it, people need online ordering or a QR code, text to pay and they just went for disparate systems. They had a point of sale but it’s not connected to the online ordering piece whatsoever.
(21:25):
So, now, by us being able to deliver this omnichannel solution, we can bring all that together. We can bring the reporting, we can bring the processing together, everything is aggregated versus having all these disparate systems. So, COVID was great because it drove a lot of innovation there but it wasn’t done in a very integrated approach. So, we talk about going to market for Datacap, that’s what we’re very focused on, building out this omnichannel architecture which exists and starting a transaction online, finishing in store, vice versa, it’s all there. So, you’ll see us continue to build out that side of the house, 35 plus years of experience on the integrated side for card present and now we’re really jumping in and delving into the card not present side as well.
Todd Ablowitz (22:03):
So, tell me where it’s going. What’s next in the world you see? What do you see as the next big thing?
George Hudock (22:10):
I think embedded payments is going to continue to grow that’s why strategic partnerships like we have in place with Infinicept are great. We’re all focusing on our core competency, we’re able to deliver really good payment technology and then deliver partnerships that can help with the processes and the tools to enable PayFacs very quickly. So, we think embedded payments is going to continue to increase, we’re seeing a lot there. Other than that, we’re focused on omnichannel forward-thinking payments. We talked a little bit about Android terminals now, being able to write applications that change the way folks meet the customer at the PIN pad level.
(22:45):
So, we’re just focused, we’re gathering that feedback, whether they’re contactless payments, if they’re app based, unattended or in store. We’re just continuing to make sure that we can cover all these use cases that our customers bring our way. And as I mentioned, we have 850 ISVs that leverage our technology in some capacity so we have a road-
Todd Ablowitz (23:02):
Say that again? Say that again? How many ISVs?
George Hudock (23:04):
Yeah, so we have 850 plus ISVs that leverage our technology in some capacity for payments today. So, as you can imagine, we get a lot of feedback, we build our roadmap but then they help us fill a lot of holes and we’re constantly hearing about new technologies, new transaction flows, new things that we need to build out to cater to our partners. So, a lot of our roadmap is feedback driven.
Todd Ablowitz (23:25):
Very, very cool. George, thanks so much for spending the time with me today and really enjoyed the chat. I’d love to do it again sometime.
George Hudock (23:33):
Yeah, it’s always a pleasure. Thank you, Todd.
Todd Ablowitz (23:41):
Thank you so much to George Hudock for joining us today. I learned something as always and I hope you did too. It’s going to be fun watching this evolution, especially the rapid conversion of card present and card not present, also known as omnichannel payments. As always, many thanks to our awesome listeners for tuning into the It Pays to Know podcast. To hear more from us, go to infinicept.com where you’ll also be able to learn more about our PayOps platform and how we get payments going your way.
(24:07):
We especially want to highlight our newest product Launchpay which helps software companies get the PayFac experience with all the transparency and openness of becoming a full PayFac but without the expense and lift. As a founding member of the Embedded Payments Bill of Rights, we’re 100% committed to doing payments right. For Infinicept, this is Todd Ablowitz, thanks again for tuning in and we’ll pay you another visit next time.