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Podcasts > Episode 2: Stax | Data is the New Oil; ISVs are Payments Companies

Episode 2: Stax | Data is the New Oil; ISVs are Payments Companies

 

Our guest for this podcast is Menda Sims, Chief Payments Officer at Stax. We chat about two main topics in this conversation. The first is why we say that “data is the new oil,” and how that mantra relates to an evolving payments ecosystem where nontraditional banking and innovative technology are complementing the need to manage risk and compliance. The second is understanding why “ISVs are payments companies; they just don’t know it yet.”

 

Read the full transcript below.


 

Episode 2: Stax | Data is the New Oil; ISVs are Payments Companies

 

Deana Rich (00:09):

Welcome to It Pays to Know, a podcast brought to you by Infinicept. My name is Deana Rich. I am one of our co-founders and co-CEOs. Today, my guest is Menda Sims, chief payments officer at Stax. We are going to chat about two main topics today. The first, “data is the new oil,” and the second, “ISVs are payments companies; they just don’t know it yet.” And without further ado, please enjoy my conversation with Menda Sims.

Hey, hello everybody. Thanks for joining us today. Today, I’ll be speaking with Menda Sims, and we are going to be talking about embedded payments and embedded payments offerings, and sort of how it used to be cool to be your own boss, now it’s cool to be your own payments provider. But there’s so much that goes with that. Menda Sims has been in the industry for quite some time, so she’s going to be talking to us about how she sees things, and as the chief payments officer of Stax, there’s lots of things you’ve seen in the payments world. Menda, as we talk about payment facilitators, and you look at the people that are coming in to become payment facilitators, how is that enabling or growing our payments industry?

Menda Sims (01:36):

Yeah, that’s a really great question. It’s so exciting in our payments time right now. One of the things that our CEO and co-founder of Stax says often is that “technology companies are payment companies; they just don’t know it yet.” And that was a cool little tagline, but now I think they’re beginning to know that and wanting to become payment facilitators, but there’s a stairstep to that. There’s lots of responsibilities to their business, to the consumers. There’s a lot of regulations around it. And so one of the beautiful things about payments is that we continue to evolve and grow. And so there is a step from being an ISO to being a payment facilitator where you’re in that middle ground as managed Payfac. So a lot of these companies are understanding that they can find additional revenue, but they can also provide better customer experience because they know their customer and they can help them from a business management perspective.

And we talk about the internet of things (and we’ve coined internally when I talk the payments of things), but then it’s evolved more to business management, and payments just happens to be a part of the overall business management. And so a lot of our technology and fintech companies have the opportunity with their platforms and with the help of companies like Infinicept to really own that end-to-end experience for a merchant, but also for a consumer to give them a better experience. And so when you pull all of that together, it just allows for such an amazing opportunity. So you’re seeing a rise in payment facilitation. You’re seeing more people lean to that understanding that that is truly the way that the industry is going now. So I’m really excited to see all the things that come with it. At one point, it was a group of us where I say this is a very incestuous industry where we’ve worked for a handful of companies, but now we’re being pulled out into other spaces into some of these tech companies to build out payments on their behalf.

But to think about it a lot differently, too, is so how do we take payments, how do we take technology and expand upon that so that there is truly more of a business management to it? So how do I expand that and allow my customers to continue to grow, meet them where they are? So you may be a small customer today, and I think that the pandemic really helped us understand what we have often thought as “omni” has not really been an omnichannel and an omni solution. So payment processors, ISVs moving into that payment facilitation space truly can provide that level of offering to a consumer and to a merchant that allows them to continue to grow no matter what’s happening in the ecosystem. So whatever’s happening with the economy, what’s happening because of things like COVID, they’re still able to continue to do business and grow.

Deana Rich (04:48):

There is a lot there, and there are two things I want to pull on the string of a bit. First of all, I’m going to take, and I’m betting that was Sunny that said that, and I’m going to take her saying that “ISVs are payments companies; they just don’t know it yet.”

Menda Sims (05:04):

Absolutely.

Deana Rich (05:05):

And one of the things that goes along with that, though, is ISVs don’t always understand the risk side of things or the compliance side of things, but what they do know is their customer in a way payments companies haven’t in the past. So I’d like to dive into a little bit how ISVs knowing their customers can actually make them safer payments companies than a pure payments company.

Menda Sims (05:36):

One of the things that has happened in the past was really the rise of the ISO side of the house, because they had relationships with the merchants. They were embedded in the communities where they were. That was a really, and has been for a very long time, a successful business model. And using that same business model into the payment facilitation side of the house, I think what happens is as they’re selling whatever their software is, they have already collected a lot of that information. So they are looking at many of the same things that we’re looking at from a risk and underwriting perspective, from a credit worthiness standpoint, is this customer really good? And they’re pulling and getting the same information that FinCEN is requiring, that the Patriot Act requires us to collect. So they have a lot of that information already in their ecosystem when they are signing them up as customers.

And so now they can take that information and apply it to the payment side of the house to immediately when you become a customer, I’m also now taking that same information to approve you for payment processing. And I think that really is a great experience when merchants are setting up businesses, whether they’re new to the business or they’ve been doing it for quite some time. If there’s a new piece of software that they have now, they know who they’re doing business with both on the payment side and on the software side of the business. And I think that just helps keep that customer long term. And then as you start to embed additional things, in your intro, you talked about embedded payments, but there are so many things that are payment-adjacent, that ISVs have the ability to embed and to add into their ecosystem that truly provides that great customer experience.

I mean, merchants, consumers, everyone is looking for a true customer experience and they’re expecting more from all of us. And they’re expecting more from the payment processor, which gives to your point, payment processors haven’t necessarily known their customers like ISVs have, which is where they have that right to win, if you will, when they start to think about other things outside of just that software side of the house and expand into, I call it, we say payments but commerce, right? Because commerce comes in a lot of different ways. It’s no longer just credit card. You have NFT, you have all these other things that consumers want to be able to pay and use goods for services.

And so as ISVs move into the payment facilitation side of the house, they really have an opportunity to keep customers for a very long time. I remember when I ran the ISO channel for a large processor, we had a lot of our ISOs whose customers had been with them 10, 15, 20 years. And I remember looking back about five or six years ago at our portfolio. And I was like, man, do I see a ZON Jr?

Deana Rich (08:45):

Oh my gosh.

Menda Sims (08:47):

That is a piece of equipment that can’t be right. So they’ve been customers of this particular ISO for so long that you could go back and see all of the equipment that they had purchased along the way. And when they moved away from hardware into more of a digital space, they had just been with that ISO for so long. And we had several really good and large ISOs who had customers for a long time because they were really customer-forward, and ISVs are the same way, and they have that ability to really win business and keep business for a very long time.

Deana Rich (09:23):

ISVs being customer-forward really is complemented by the sponsoring entity or the banks that are compliance-forward. So when you combine an ISV who can be innovative and come up with new things and help their clients know they don’t have to keep that ZON Jr forever, they can become compliant. They can process faster. They help them do that. And when they partner with the banks, you sort of get this protect-to-grow event. Banks are helping the ISVs be compliant. The ISVs are ensuring that all of the new technology gets made available to their client. So again, this protect-to-grow, I’m stealing words from a past conversation we’ve had, those are your words. Can you add more to that?

Menda Sims (10:17):

Yeah. I mean, when I came on board at Stax, the thing that I was excited about was the technology. And I continue to use the term “right to win.” I thought we had a lot of the solutions in place and that were really near term that gave us a right to win and continue our triple-digit growth. But we also had a mindset of when you grow and when you expand, you know there’s risk associated with that. So how do we protect and grow? So that became the mantra for our strategy for ’22 and beyond, as we started to look at how are we going to do this in ’22, ’23, ’24, so that we can continue that trend. And so it really is about making sure that we have the right relationships and knowledge and being able to pass that on to our ISVs. I think Infinicept is another… You all do a really great job with knowing your customer, and I think that’s really big.

There’s a lot of regulations and things that ISVs are… They don’t want to become payment companies and processors in the regard of, “Hey, I need to have all of the compliance, regulatory knowledge that is deep and embedded like banks.” So when providers like ourselves, when you’re going into managed Payfac, then we are the ones who’s taking on that. We are partnering with the right vendors, building out the right technology, building in AI and different things like that so that we truly know our customers. And that’s where that open banking comes in. There’s so much data. And then the API and the edge where you build in that risk mitigation. If it is card not present, which is really where everything is going is digital, then you have to make sure you know who’s behind that computer, who’s behind that phone.

And so we focus really hard on building out our risk management solutions so that when we open that up to our managed Payfacs, that there is a level of comfort in being able to do business because we have that in place. But we’re also spending time educating those guys on how to look for those trends, look for things, to make sure that they’re doing the right things and they know their customers as well. I think security is absolutely key and important as you continue to scale your business, because the bigger you get, the more marketing you do, then you catch the eye of fraudsters and hackers and those guys, and you’re on the radar. And once you’re on the radar, they test your systems, they test your resolve and your ability to stop them. So we’ve got to be able to ensure that we’re protecting and we have those right things in place as we start to scale and grow, because that allows us to truly accelerate that growth. And that’s really that protect-and-grow mindset that we have.

Deana Rich (13:10):

So you opened this particular segment by discussing open banking. And I think that’s an important concept that is growing as we speak, sort of that open banking, nontraditional banking of which PayPal in the late ’90s sort of opened our eyes to some of the things you can do when you’re innovative. So how does open banking, non-traditional banking fit with your risk and compliance and protect-to-grow mantras?

Menda Sims (13:45):

Data is king. Data is like the new oil. You’ll hear that tagline continuous. I think everyone is using it and taking it because it’s true. It allows us to move faster and quicker, but it also puts us at risk. Being able to protect the customer’s information, protect the transaction when it’s in inflow, the flow of the transaction is so important. So open banking is primarily a regulatory framework to foster competition among banks. For so long, you had the traditional big banks, the Chase, the Bank of Americas, and some of them move faster than others to opening up to APIs, to give fintechs an opportunity to expand and for them to find additional ways to get revenue as well. And when that happens, there’s always risk associated with that. And so understanding that there’s this risk, that’s where certain things it’s so important that you are leveraging third-party apps and building out technology.

Because the one thing we know about fraud, there is no one solution that’s going to solve it. So it has to be a multi-layered approach. It is the upfront, making sure that you know your customers and you’re getting the right information in order to make some determinations. And then having those right tools that allow you to do it in an expedited way because customers are demanding more of us, but they want us to do it faster. So beforehand where it was, if we got an application in years ago, we would process it by end of day, the next day. That was fast. And today it’s: I want to be able to submit a new application via the API, if you will, for merchant processing. And I want that to be approved within 20 minutes, an hour. And how do you make that happen where you’re decisioning it very fast? But also protecting yourselves by understanding who you’re opening up processing for, because I’ve always said credit card processing or enabling commerce is like an unsecured loan.

And so as fast as you’re processing, settling and funding, you need to ensure that you know that the funds that you are depositing or sending out is to the right person and that the merchant, the card, or however the transaction flow happened, that it happened in a really good succinct way. And so it’s important that we have all those tools in place. Are you looking at things like man in the middle, when it’s digital and online, do you know that the device that is submitting for your goods, to pay for services and goods, that that device is a good device? So are you looking at all those various pieces? And those are the things that are important as we start looking at things like open banking, because it just opens us up to so much fraud.

Deana Rich (16:52):

So can you dive into open banking for the people that are listening today and give them a little more of a definition of what that means?

Menda Sims (17:00):

Yeah. You think about front-end versus back-end, so embedded finance versus open banking. Essentially open banking allows customers to share their financial data with authorized third-party providers using their APIs. And so when you do that, you expand your customer base and the way for them to be able to actually transact without it being a physical card. So because everything is so digital and we’re going in that… We are not going, we’re there now. I think COVID pushed us to that digital transformation that we have been for, call it the last 10 years trying to get there. So being able to have banks primarily have a regulatory framework to foster that, is really important. Opening up their data encourages better service for their customer, and banks have been losing out on those new account setups. And so this is a way for them to expand and get additional revenue, but also for fintechs to be able to really provide more services for their customers. And so I think the open banking or banking as a service is huge in the evolution and the new trends and things that are happening today.

Deana Rich (18:18):

Thank you for that. That’s helpful. And the open banking concept, as I see it, it’s very, I’m going to say age-specific, but maybe more generation-specific, where the older generations aren’t as keen on it, if you will. And the younger generations couldn’t imagine transacting without it. Is that what you are seeing as well from a trend?

Menda Sims (18:44):

Oh, absolutely. The Generation Z, they are thinking about finance a lot different than we did. I think when you and I talked before, I used the analogy of getting on the college campus and all of these little booths and tables around with credit card companies trying to get you to sign up for cards, or you got into your room and it was already on your bed, and they were enticing you with a sweatshirt or a blanket. And many of us at that time didn’t understand the ramifications of just going out and getting credit. And I think the new generation is looking at that a lot different than we are, because they have all the information they experience from what we have, what we did in the past. And so now they’re requiring a lot from the merchants that they do business with. So they want to be able to have multitude of ways.

That’s where “buy now, pay later” is so important because I think you spoke about that a little bit earlier in the conversation. They’re thinking about things like if I can split this in four transactions or in four payments, then that allows me to save a little more because I’m not getting additional financing on it. There are some new expanded pay later options that expands it over the four payments into perhaps a year with a much smaller cost associated with it. That’s built into the payments and spread out over those 12 months for you. But now they’re looking at that as a means of, “Hey, how do I save and not spend so much?” And they’re thinking about things a lot differently, and they are pushing the envelope and as a result pushing us to innovate faster. And that’s where a lot of times innovation happens really quickly before regulation happens.

So as we are innovating, one of the things that we think about is the innovation is happening, but what other things is it impacting? So buy now, pay later is a great example where regulators and the federal government here in the U.S. started kind of taking a look, and not just in the U.S., but everywhere, to say, “Hey, we’re seeing a lot of people use buy now, pay later and it’s getting them in trouble.” So the buy now, pay later came out and the regulations came out later because there are always going to be things that impact. Innovation just impacts and requires us to look at things a little differently, but we have to continue to innovate because the Generation Zs are requiring that of us.

Deana Rich (21:22):

They really are. It’s fun to watch how they don’t accept some of the things the different generations would accept when it comes to slowness or when it comes to traditional credit cards and the interest rates that are on them. And CFPB is kind of all over that right now and they’re starting to look at BNPL as well because of what you mentioned a moment ago. Do you think that BNPL is going to slowly become a traditional credit card, or do you think it’s going to grow a different way?

Menda Sims (21:55):

I think it’s going to probably grow a different way. I do think that a lot of people take advantage of it, but for the same reasons that the regulators had concern, oftentimes when you do it now, you’ve done it with five different merchants and you’re sitting back and you’re going, “Oh, okay. So I have five different things coming out at the same time.” So I think that it’s going to be used in specific type purchases, and we’re going to see it start to be offered in larger purchases. We see it a little bit differently, but it’s usually tied to a credit card, it’s just the payments are split over 12 months, 24 months.

When you think about the likes of Best Buy or a Home Depot, when you make those large purchases where there is no finance attached to it, unless you don’t make the payments at the desired timeframe that’s outlined in the agreement of whenever you make your purchase. But I do think it is something that will continue to grow and expand. What’s going to happen is I feel like we’re going to have to have more paid later-type products. It won’t just be the way we are used to it, which is you go in, PayPal is something that’s available and it’s spread over four payments. I think we’re going to have the pay later. And the buy now, pay later is going to evolve.

Deana Rich (23:18):

That makes sense. And it will be the innovation of the ISV in trying to meet the demands of their client that assist with that evolution while the banks behind them kind of push that compliance side and remind them they need to protect and they need to stay compliant as they’re growing, which seems to be the theme throughout our conversation today.

Menda Sims (23:45):

Yeah, absolutely. And I think we both spend a lot of time on the risk and fraud side, but we’ve also been on the sales side of the house. So being able to wear those two hats, understanding that innovation needs to happen, but we’ve got to always in innovation think about ways to protect our consumers, right? We’re protecting the consumers, we’re protecting the merchants. Oftentimes they don’t know that what we’re doing behind the scenes is to protect them, protect the consumers and the ISV’s side of the house and the Payfac. We’re also protecting the Payfacs as well, because there’s reputational risk, not just revenue loss and a risk from that perspective.

Deana Rich (24:25):

Protecting the ecosystem, the entire payments ecosystem.

Menda Sims (24:29):

Yeah, exactly.

Deana Rich (24:30):

Spot on. Well Menda, thank you so much today. Before I close this out, is there anything you want to make sure our listeners take away with them and understand about the protect-to-grow, and the data-is-king thought process of payments.

Menda Sims (24:49):

I would just say, continue to evolve, continue to grow and stretch yourself. And as you’re thinking about how you’re developing new products and services, think about how could this potentially create any kind of risk for us and how do we now take that new product and service and build in those protections at the same time? So it’s not an afterthought, but we understand that we can’t allow for break to get in the way of good. So sometimes it’s, let’s get it good enough while we’re working toward those other things, but it has to always be top of mind.

Deana Rich (25:28):

Thank you. Thank you very much Menda. I know our listeners have learned a lot today and they have a couple new cliches to take with them and it’s actually “data is the new oil” and “ISVs are payments companies; they just don’t know it yet.”

Menda Sims (25:45):

And we will make sure that Sunny gets the credit for that.

Deana Rich (25:50):

Yes. Well, thank Sunny as well for me.

Menda Sims (25:52):

Absolutely.

Deana Rich (25:56):

Thanks so much to Menda Sims today from Stax for joining us. And thank you for listening to us on It Pays To Know. To hear more from us, please head on over to infinicept.com, where you’ll also be able to learn more about our PayOps platform and how we get payments going your way. For Infinicept, this is Deana Rich. Thanks again for tuning in and we’ll pay you another visit real soon.