Episode 5: Payroc | The Evolution of Managed PayFac
Our guest for this podcast is Payroc Executive Vice President Jared Poulson. We discuss the evolution of the merchant services and acquiring industry, from ISOs and agents to managed Payfacs. Jared also shares his unique perspective on the future of merchant payments, including embedded finance and cryptocurrencies.
Read the full transcript below.
Episode 5: Payroc | The Evolution of Managed PayFac
Mike Bradley (00:09):
Welcome, everybody, to today’s episode of the It Pays to Know podcast. I’m your host, Mike Bradley, and I’m joined today by Payroc Executive Vice President, Jared Poulson.
We are going to be discussing the evolution of the merchant services and acquiring industry, agent to ISO to managed Payfacs. Jared’s had more than two decades of experience, and he also offers a unique perspective on the future of merchant payments, including embedded finance and cryptocurrencies.
Really happy to have Jared with us. So welcome, Jared.
Jared Poulson (00:48):
Thanks, Mike. Happy to be here. Looking forward to our conversation.
Mike Bradley (00:51):
Well, Jared, let’s just start with yourself, your background and how you came to end up at Payroc. And I think folks would be really interested to hear about your sort of career and business trajectory.
Jared Poulson (01:04):
Sure thing. Hard to believe it’s been almost 23 years now, but back in the late ’90s, I was part of a startup gateway called iTransact.
We were in the basement at the time, it was the dotcom boom, and we were helping facilitate online payments. And we were able, fortunately, I had a professor at college who was an angel investor. We took him a business plan, and he got us in front of a group that allowed us to raise some money and get out of the basement.
From there, the online gateway company, iTransact, we grew and diversified into merchant services. And it was about 2003, we became an ISO for Retriever Payment Systems. And that’s when I first met Jim Oberman, who is the CEO now of Payroc.
Through the years, we had been through a couple of mergers and acquisitions. About six years ago, when Jim Oberman left as an executive of Vantiv, to take Payroc to the next level, iTransact was their first acquisition.
I came on board with Payroc, and now help lead out the integrated payments channel for the last few years at Payroc. And it’s been an exciting time. Payments can sometimes be a little bit boring, but technology really has helped payments become exciting in the last few years, again, especially with the different models, alternative payments that are coming out, that we’ll talk about.
Now, Payroc, we’ve been through, gosh, since that last six years, we’ve grown tremendously from maybe four billion in processing volume, all the way to over 65 billion in processing volume. It’s been quite the ride, and really an enjoyable one at that, but yeah, a long time in the industry.
Mike Bradley (03:01):
Yeah, interesting, and some parallels with my own career. I started with Visa years ago, and found my way to a gateway company as well, Cybersource, and then, ultimately back to Visa in 2010, when Visa acquired Cybersource. So I think you brought up your company’s evolution from sort of gateway, to also an ISO, and maybe this is a good place for us to start, is just to sort of ground ourselves in what exactly is an ISO model, or at least how it’s perceived today?
I think that’d be helpful for folks, and Jared maybe you can touch a little bit about agency, as well. That is also pretty common, or has been.
Jared Poulson (03:43):
It seems like that was the model in the early 2000s. The place to go was to become an ISO, an independent sales organization, and that allowed businesses to register with the card brands, and represent themselves and their sponsor bank to the payments world, and go out and collect merchant business from the old model that started out as knocking on doors, and then quickly has adapted into more successful referral-based programs.
But as an ISO, you partner with an acquirer, and they give you the permission to represent them to the business market, in trying to acquire merchant services from these folks. And underneath an ISO, an ISO can have many agents that work for an ISO and those agents. Often compared to insurance agents, right? They go out, and through their relationships and hard work, are able to sign merchants for processing deals, and share in the revenue, the merchant processing volume that they do each month.
It’s been a tried-and-true model. It’s still one that has a lot of years left. And although people have written off the ISO model multiple times over the last 20 years, we, at least at Payroc, feel that it’s still a very viable model, and therefore support quite a few ISOs and agents within the Payroc ecosystem.
Mike Bradley (05:16):
Yeah. So what do you think’s changing with the ISO model? What do ISOs need to be thinking about, going forward, maybe, is another way to ask that question?
Jared Poulson (05:26):
Well, I mean, it’s a good question. Because one thing that ISOs have done a good job at is adapt to changing market conditions. What we’ve seen over the last few years is, rather than just being able to represent a payment processor, and go try to sell a terminal, or reprogram an existing terminal, a lot of businesses in the last few years are turning to software to power their business. So successful ISOs that don’t have their own software in a particular vertical that they chase, they are left trying to find or partner with acquirers that can provide them these types of partnerships.
For instance, if you traditionally would go after a gym merchant, and go in there and say, “Hey, let us give you a bid on your merchant processing, and we’ll reprogram your existing terminal.”
Well, nowadays, most gyms are run by a software that manages the gym and their members, their marketing, et cetera, and most softwares are turning towards embedded payments as a part of the software offering. So it’s difficult for an ISO now to walk into any business and say, “Let me do a bid on your merchant processing,” without also having to keep in mind that they’re probably running on a software platform.
If their acquirer does not support that particular software platform, it’s very difficult to get that merchant to switch over, because that means more than just switching their payments. They have to switch their software completely around.
We’ve seen in the ISO world, a huge shift to ISOs coming, at least to us at Payroc to say, “Hey, you guys have some partners. You are integrated with a number of software providers in certain verticals, and can we have access to those software platforms, and resell those software? Or at least, when we’re out doing a bid for a particular vertical or a particular merchant, we have something to bring them?”
Rather than just, “Let’s try and swap out your terminal, or try to save you some money,” it’s much more of an entire platform play.
Mike Bradley (07:48):
Yeah. That’s certainly a real secular trend that we here at Infinicept have observed, and frankly, our strategy, our go-to-market strategy is to support that change. Software-led payments is a term we strongly believe in.
Jared Poulson (08:05):
Well, and Mike, in addition to that, the good ISOs traditionally had strong referral partnerships, entities that would refer merchants in on a consistent basis. And those referral partnerships often now are software companies.
That’s where the merchants are coming. They’re coming to a restaurant software. In order to do payments, these referral partners are saying, “Hey, we need to embed payments.” And so often ISOs will refer software companies now as the referral partner to say, “These guys need to monetize payments, and can we help them?” So it definitely adds that additional layer of complexity and technicality to the traditional ISO model.
Mike Bradley (08:49):
Yeah, so if we reflect on what those change agents, those drivers of transformation, I mean, it’s really about the software platform, specialized software platforms and merchant verticals, payments being embedded in those software platforms.
That has had implications for ISOs to evolve and adapt, probably becoming more, leaning more into tech, understanding how to integrate payments into business processes, supported by those software platforms. And I think that leads into the next topic is, if we look at both ISOs and their relationships with software platforms, or the software platforms themselves, we’ve started to observe the rise of the interest in a payment facilitator model, and also, a model, I think the industry has recently started coining, is “managed Payfac,” “PF lite.”
Maybe that’s worth drilling into a bit more. Jared, what have you observed with the evolution of a payment facilitator, and this concept of managed Payfac?
Jared Poulson (10:00):
Yeah, it’s been quite the change. When payment facilitation model kind of hit the scene 10, 12 years ago, I actually, back at iTransact, set iTransact up as a payment facilitator through Vantiv. And we were essentially just an ISO and a gateway, but we had a couple verticals that just needed quick onboarding.
So we set up that relationship, and we have seen, that over the last five, six, seven years now, the push towards payment facilitation. And what most software companies do a good job at is building their software, building their core competency in software.
And they often, either at the leadership level or the board level, will then say, “Well, we need to become a payment facilitator, as well.” And they’ll reach out and have these conversations with us, and say, “Well, our board says we need to become a payment facilitator, or we need to monetize payments. What do I got to do?”
After a brief conversation with them, though, I would say nine times out of 10, most of them do not actually need nor want to become a full registered payment facilitator, and take on all of the risk, all of the compliance, all of the complexities, the funding, the settlement, in addition to the support that’s required to be your own registered payment facilitator. And instead, what they’re really looking for is some slick onboarding.
“How do we board our merchants quickly? How do we make sure they transact smoothly? And then, how can we get some sort of reporting on that, that we can then pull back the data into our own platform, for our clients to go in, and manage and work with?”
Those three things are now what we call a managed Payfac, which is, “We want the boarding experience, the transacting and reporting experience of a Payfac, but we don’t want to take on compliance or risk, or underwriting, or settlement or funding.” So a managed Payfac will now, or a software company, will come in and have a much easier time entering embedded payments through a managed Payfac as a stepping stone to, as they grow, and if they hit certain volumes, then, down the road, it might make sense for them to transition some of those roles and responsibilities in-house, and become a full payment facilitator. But it is a definite good stepping stone to start as a managed Payfac.
Mike Bradley (12:34):
Yeah, I like how you put that. I mean, it’s really about creating an experience for their merchants, that many of these companies are seeking. Whether or not it’s a payment facilitator model, I think you get into issues and questions about readiness and willingness to invest in those operational needs, right? Risk and compliance.
Certainly, in our experience at Infinicept, there’s certain payment volume thresholds where it starts making sense for these companies, if they’re really looking at payments as a strategic plank to their business. But yeah, certainly the managed PF model is one that is really, really logical for companies looking to evolve their, maybe existing foray into payments, and absorb more opportunities, and control over the experience they give their downstream merchants.
Jared Poulson (13:31):
Yeah, absolutely.
Mike Bradley (13:32):
Yeah. So at Payroc, you touched a bit about your experience, but as you guys view the market, what are some of the big trends or opportunities that you guys are seeking to address, with respect to either managed Payfac, or full Payfac? What is it that is on the forefront of your radar, in terms of servicing market opportunities?
Jared Poulson (13:55):
Sure. At Payroc, we fill a pretty good niche in the market where, while we’re a top 10 acquirer in the U.S., we aren’t as big as say, Worldpay, or Fiserv or Global. Great companies, they’ve done amazing things in this industry, but they also often are looking for larger opportunities.
Payroc has filled a pretty good void there, where, as I mentioned before, software companies coming in and saying, “Tell us about the Payfac space, and what do we got to know, and where do we want to start?”
And we have employed this crawl, walk, run strategy and scenario with these software companies to say, “Look, at the basic level, you can simply refer clients over to us, and we’ll handle it from there.”
The next step, obviously, is more of a managed Payfac, where you take our APIs, integrate your software to those APIs, so that one, we are transacting through your software platform. And two, we’re boarding.
You can send us the merchant data through a boarding API, and we return a merchant ID, and then we can do the same with reporting. In that step, you don’t have to take on risk, compliance, underwriting, funding. And then, as you grow, we are more than willing to help you grow into that full registered Payfac and take more roles and responsibilities.
I think we’ve found a real void in the market in being able to, one, be creative, but then, two, be flexible with the type of program we build, so that they can almost a la carte pick and choose certain features and functions that they want to bring in-house, when they’re ready, until they have become a full Payfac themselves, and are often, in running, doing it all themselves. That’s one way that Payroc has differentiated ourselves.
In addition to that, I would say that we definitely built our reputation on relationship. And usually, each of our software partners that come to us, they develop a relationship with an executive like myself, who helps oversee that entire process, while we’re also assigning solution architects to them, and partner managers, to then guide and be escalation points for them, to help them grow in their journey with embedded payments.
So we see that opportunity only growing. I think it was actually Deana Rich at Infinicept who, in an industry meeting a month or so ago, mentioned that 75% of new merchants being boarded come through some type of Payfac relationship, which is astounding.
I mean, that just shows you the strength in this type of model, and the fact that the future is very bright for the Payfac model. If we can start as a managed Payfac, and give them there, that’s the goal.
Mike Bradley (17:10):
Yeah. I think that’s so critical, that ability to provide an evolutionary path for a client, right, or a partner. They have at various times, and oftentimes, regardless of their size, in terms of revenue or staff, they have varying appetites about what sorts of business processes they’re willing to take on and be responsible for.
In our worldview, we’ve seen very small companies become very successful Payfacs, and we see very large companies being quite content to have a managed PF business.
Jared Poulson (17:48):
Right.
Mike Bradley (17:48):
I think that’s very, very differentiating, and I think one that the market certainly is demanding. I think the other point you mentioned, Jared, about the relationships and providing that guidance, getting into payments?
If your core business is software platforms for running hair salons or gyms, understanding the world of payments can be really, really challenging. So having a structure and a business that helps folks, A, get educated and, B, have a partner on a journey, is significant.
Jared Poulson (18:27):
I think you hit the nail on the head there. We’ve seen that there’s a pitfall for software companies that come in and try to do too much in payments too quickly, because their core competency is their software. And if you are a salon software, focus on that, and be the best you can be there.
And yes, embed payments, have that as a part of your offering, but do not become a payments company right away. I mean, make sure that you establish yourself first as an excellent software in that market, and in that vertical, and never lose that focus. We’ve seen companies lose focus there, and they end up transforming from a great software and a great vertical into a payments company, and become beholden to payments, to power their business, rather than software.
So make sure, as a word of caution, to avoid those pitfalls. We’ve seen that from time to time, and those that are successful, they focus on their software. Like you said, that’s their core competency. Be great there, and then take on payments as that allows.
Mike Bradley (19:35):
Yeah. I’m interested to get your perspective on, as we look out in the future, it approaches us very quickly. So things we think that might happen three to five years, we start seeing demand, and/or opportunity for it, in the immediate term.
But how do you view those traditional players, the FISs and Fiservs, relative to maybe some of the up and comers. I mean, there’s so many fintech players. Off the top of my head, I can’t recall what last two quarters of funding in fintech, but it’s certainly in the tens of billions of dollars. How do you see that ecosystem playing out, between some of the traditional players and the new upstarts?
Jared Poulson (20:21):
Yeah. It has been interesting that fintech has started to become more “techfin,” right?
Mike Bradley (20:29):
Yeah.
Jared Poulson (20:30):
I think we’ll see that continue for the next few years. The payments market is so attractive, especially in times like this, where there’s some contraction in the economy that potentially even could become recessionary, in other world events that make people quite nervous. But the payments industry has always been such a strong source of durable cash, that it’s always going to attract investment. I think that we’ll see further consolidation over the next few years.
It may have slowed down this year, but there’s still plenty of capital to be deployed in this space for players that, one, can capitalize on embedded finance, as well as demonstrate an ability to execute. For us and ourselves, not only are we working on with software companies on embedding finance or managed Payfac, but we’ve also invested in plenty of them.
If there are verticals, and if they’re a management team that we believe in, we’ve been creative that way, to really secure a partnership in saying, “Well, not only will we help you with payments, let’s help your business in general,” and see where it leads from there. I think, given maybe a little bit of a time out here this year, if things can recover nicely, which we all hope they will, and are confident that they will, that we’ll see, at least over the next few years, more technology-driven payments continue to dominate this space, along with further acquisition. And partners who can execute on those embedded payment strategies will start to stand ahead and shoulders above the rest.
Mike Bradley (22:23):
I agree with a lot of your thoughts. I just think back to my own career, and how much economic volatility we’ve experienced, both of us have, in the same generation. And yet, the payment industry continues to find new opportunities for growth, really driving efficiency in economic transactions. And there’s still, as you well know, a ton of friction to be solved for, particularly an acquiring processor, world, cross-border, still a lot of friction, and a lot of opportunity, to bring down a cost of payment and reduce complexity.
But you touched on something, a comment you made, Jared, around embedded finance. I’d love to double-click on that. What’s your view of embedded finance and how that relates to payment providers? I mean, obviously, we’ve got great examples of Square/Block or Block/Square, and Stripe, really leaning into this, but is this a segment that you see as a sort of table stakes for payment providers?
Jared Poulson (23:34):
Absolutely. And with embedded finance, it starts to become more than just a transaction, pulling money and depositing money for a sale. Embedded finance now, we start to see that, well, I think we’ve all seen that big push in the buy now, pay later space.
We’re seeing alternative payments come out. We’re seeing real time payments come out. We’re seeing push transactions, where you’re pushing money through the OCT platforms at Visa and MasterCard, to somebody’s card. Also, virtual issuing, card issuing, kind of completing that whole circle.
With embedded finance, it’s really completing a life cycle of a payment. It can start with the traditional transaction, but then, who’s going to settle that, and where are they going to settle it? Are they settling it to a checking account? Or are we pushing it to a card? Who issued that card?
Are they doing it now? Are they splitting it up into four installments? So embedded finance, really, it’s giving the consumer, one, more options, but it’s also giving the software companies who do integrate it in embedded payments, more options on where to fund and how to fund, and how quickly to do that, and what types of payments that they want to take. So I see embedded finance as the next step of just the traditional payment space, evolving into some of these areas that really facilitate transacting back and forth, rather than just one direction.
Mike Bradley (25:15):
Yeah, absolutely. And I don’t think any conversation about the future of payments, and actually, quite related to embedded finance, would be complete if we didn’t touch on a topic I know that you’re very, very invested in, I’ve spent a lot of time researching, understanding, and that’s crypto, in the world of decentralized finance or DeFi.
Apart from the epic meltdown we’ve seen over the last week or couple weeks, I think listeners would love to hear your perspective on crypto and DeFi. I know you’ve mentioned to me, you’re sort of the internal luminary over at Payroc, but yeah, I’d love to have you share your thoughts with that.
Jared Poulson (25:58):
Right, so you want to take the red pill, is what you’re saying. I like it. Yeah, and when the crypto markets crash, I don’t look so luminous as when things are going up.
But what’s interesting is, I mean, being in payments for as long as I have been, I’m always trying to keep my finger on the pulse of what’s out there, what’s coming, what do we need to pay attention of? So it was about eight years ago that crypto kind of hit the scene, and we had Coinbase on a roundtable discussion at the ETA, when I was on the Tech Committee there.
That’s what got me into that as an alternative payment. And it’s been a lot of fun, personally. I guess I like risky stuff. I don’t know. It’s definitely more entertaining than traditional markets.
However, what we’ve started to see now, is institutions have come in, and been getting involved in cryptocurrency as a form of investment. And now, Bitcoin, I think has a 95% correlation with the NASDAQ. I mean, it’s just viewed as another tech investment.
That being said, Bitcoin is horrible for transacting. However, there are plenty of cryptocurrencies out there. I can think of a few off the top of my head, whether it’s Dash, or Bitcoin Cash, or TREEB, that are focused on the payment mechanism of cryptocurrency.
While it will be years and years before there’s substantial erosion of the traditional payments rails, I do believe that alternative payments, such as cryptocurrency, or real-time payments, or some of these other mechanisms for transacting, will start to carve out a niche. And we’re seeing that in certain countries already, we’re seeing that in certain verticals that have a difficult time with merchant services, whether they’re high-risk or awaiting some additional government regulation.
But it’s fascinating to see, because for me personally, I mean, the math doesn’t lie, and there’s definite value that Visa and MasterCard bring, and will continue to bring, to the payments ecosystem.
But there’s definite value that some of these alternative payments bring, aside from being fun and volatile, or gut-wrenching and volatile, depending on the week, and the card brands have seen this, and they have been getting involved. I was just at a crypto conference that MasterCard put on in San Francisco last month. And there are a lot of use cases for this form of alternative payments, and Visa and MasterCard are getting involved because one, they can help guide the narrative.
I think that’s great, because crypto does not have a lot of safety mechanisms, or comfort mechanisms, that frankly, Visa and MasterCard have and excel in. And in order for those alternative payments to gain a lot of purchase, there has to be some of that, that takes the risk out of the hands of the merchants, or out of the hands of the consumer.
So we’ll see a lot of these new killer apps, I think, come out in the next few years. And I wouldn’t be surprised if it’s the traditional payments players that are heavily involved in helping guide that narrative forward.
Mike Bradley (29:38):
Yeah, that perspective is really grounded in what’s happening. And I think, to your point around, they can be fun and gut-wrenching investments, but the number of use cases that serve ledger-based technologies and serve crypto, the inherent attributes of these alternative stores of value provide, they can take a lot of friction out of the system. They can increase access.
Also, I think it’s something you and I chatted about a few weeks back is, there’s just a generational, almost demographic component to the interest, in demand for almost alternative economies, in a way.
Jared Poulson (30:19):
Oh, absolutely. In fact, Web3, the generation that’s coming up will know Web3. When I say Web3, for instance, that’s having a digital wallet as an extension in your browser, that if you were going to go play a video game, that video game’s connected to that wallet extension, and you can transact with a digital currency.
This is becoming second nature to the rising generation, which is why I say, I think it’s only a matter of time, because they become more comfortable with that, and if we can find ways to allay the risks.
Also, I think that there’s a case to be made, to have some pockets of regulation, to help protect consumers. Things will really, really start to see more mass adoption there, in time, as we go forward. Because it is becoming just a part of the narrative, in that ecosystem now, of Web3.
Mike Bradley (31:26):
Yeah, absolutely. Well, listen, Jared, this conversation’s been really fascinating.
You’ve had such an intriguing career, and offer such a unique perspective of both the legacy and the new. We’re really fortunate to have you within the Infinicept fold, and really appreciate your time this morning.
I do hope that many folks get to listen to your perspective, because I think it’s been really, really valuable. So at this point, Jared, I’d like to thank you again, appreciate your time.
And that’ll be a wrap for this episode of It Pays to Know podcast. Thank you.
Jared Poulson (32:12):
Thanks so much, Mike, pleasure to speak, as always, and we’ll talk to you soon. Thanks, everybody.
Mike Bradley (32:13):
Cheers. And that does it for today’s podcast. Thanks to Jared for joining us today.
You can learn more about embedded payments at infinicept.com, as well as stay tuned on our blog, and other resources available there.