HOW TO BUILD A SUCCESSFUL PAYMENTS NETWORK FAST
Four Rules To Get You There
Dan Rogers, CEO
I see more and more startups building bespoke “payment networks” in their specialized verticals. I’ve experienced this a handful of times in the last 15 years and taken stock of the winners and losers. Payments is a volume business, and while there is a lot of great new technology you can bring to accelerate payments and build new payments connectivity, founders tend to value the speed and ease of the new methodology setup and forget about the importance of volume. So here are my rules for building a specialized payment network.
- USE EXISTING RAILS AND INFRASTRUCTURE WHEREVER POSSIBLE. Test your use case on well-worn rails. Existing rails are compliant, stress-tested, and bank grade. Some examples of existing rails include: credit rails (Visa, Mastercard, AMEX, and Discover), PIN debt (Jeanie, Star, and NICE), and closed-loop rails (gift cards). I encourage startups to think of their initial launch as a minimum viable product, as opposed to the “build it and they will come” approach. Prove you have a viable product that delivers exceptional value and inspires payment dollar volume: and only then invest in custom infrastructure. This approach saves time and investment dollars in proving your business case.
- FIND THE VOLUME. Profitability in payments is all about payments dollar volume. Successful payment networks spread their infrastructure and operations costs over billions of dollars of payment dollar volume. This is how payment networks add value at very low margins (3%-5% gross margins). If you’re operating a payment network at higher margins, eventually your customers will find a lower cost alternative to move funds. The best way to accomplish massive payments volume is to find the 800 lb. gorilla in your segment, and partner deeply. PayPal became the default option for eBay customers, Amex found American Express Travelers Cheque customers, Visa started with Bank of America, and Discover leveraged Sears customers. The most successful payment networks are actually started by big companies with vision, opportunity, and a ton of customer cash to move. Find your partner that has the most to gain from an innovative payments approach, and win 100% of their volume. Once you have achieved that goal, expanding across your ICP becomes a lot easier.
- INVEST IN COMPLIANCE. Compliance is really expensive and many startups look at the investment as overhead. If you’re building a regulated Fintech and expecting to move cash, it’s not optional. I encourage everyone to think about compliance offensively. At the end of the day, compliance spending is all about product acceleration and sales enablement. Companies that fail to invest in compliance have slower product rollout and problematic growth. More and more, the failure to invest and implement appropriate compliance programs leads to products and companies shutting down. Regulators are actively looking at Fintech companies for non-compliance, so if your business has had any success, you’re already on the radar of regulators. Do yourself and your investors a favor: invest in a good compliance program.
- DON’T FORGET TO RECONCILE. Most founders with exceptional motivation and vision have never heard of reconciliation. They are appropriately focused on delivering an exceptional experience and unseen value. At the same time, the very simple task of reconciling the inbound and outbound cash of your payment network to the penny every day is an absolute necessity. The role is typically assigned to a staff accountant or settlement operations specialist – the lowest FTE investment on the team – and involves matching bank transactions and unsettled transactions with your system of record. A startup doesn’t need a CFO or EVP of Reconciliation, but they definitely need a respected team member to reconcile that isn’t afraid to raise their voice when the cash flow doesn’t match up. Time and time again, FintechForce’s biggest clients are startups that failed to reconcile their payment networks. The cleanups are long and expensive, and could have easily been avoided with one capable hire.
Fast, reliable payments have been around for a long time, and startups can leverage them easily. Every existing payment network executive wants to support your new, innovative payments volume. Go to an ETA event or a prepaid event and talk to anyone. Find a great partner in your vertical with lots of customers. If startup founders and product teams can leverage these four rules, they can benefit from a proven path to success and grow with less risk. Startups can also get to market and validate their MVP that much faster. Good luck!
HOW TO WIN THE TALENT WAR
And Why Investment Banks Are Currently Winning
Nelson Rogers, Princeton University, Class of ’25
Two friends and I spent a weekend in a library study room in the fall of 2021. The 400
Investment Banking Interview Questions & Answers You Need to Know was our bible. Our super-days at a few banks and private equity shops were that week, and we weren’t the only ones. Those of us who studied economics kept tabs on one another: who was interviewing where and who had signed with which firms. Of course, offers were being extended not for the coming summer, but the summer after. In the fall of 2021, we prepared with the hope of receiving a job in the summer of 2023. The common feeling when one received a coveted offer was not excitement, but relief.
HOW THE BATTLE STARTS. Timelines moving earlier every year is a symptom of competition: banks and firms wanting to attract and lock in the best and brightest talent before the others. It’s only rational. But in doing so, the undergraduates who compete for the prestige and compensation start on a track with blinders on. It’s not uncommon for a promising undergrad to intern with a firm the summer after their sophomore year, again after their junior year, then sign the return offer for after graduation. They probably at no point considered recruiting: they worked for the only firm they ever considered. But with the staggering number of firms and companies that exist today, one has to think they could have been better off elsewhere.
The percentage of the employed Princeton Class of 2022 that went into finance or consulting is astonishing: nearly 40%. If we extrapolate the Princeton statistic to elite universities, it becomes evident that a given company’s greatest need – highly motivated, educated, connected talent – disproportionately chooses finance and consulting over entrepreneurship. Banks are depleting the very ecosystem they serve.
HOW IT CONTINUES. The thought of what could be if these students chose to lead, contribute to, or start businesses instead of serving them is humbling. But among Ivies and elite universities, access to lucrative internships and analyst roles are too easy. (While access is not objectively easy, the process is made frictionless enough that hardly anyone stops to consider other paths.)
What are even more remarkable are the reasons underpinning the phenomenon. Compensation, at least for internships, is nearly irrelevant. If a top bank offered an internship at no pay (in the hypothetical), it would not be conjectured to say most prospective interns would seize it without blinking. To top talent, who know that of themselves, a role is worth only as much as its present value. Paved paths into the core of finance make the task of estimation and discounting easy. And when the protracted value of a position is clear, the exercise of hunting for success becomes novel.
There are corporates and startups with the cultural and economic capital to compete. When the firms that pay the most are also the firms with the greatest reputations, they trap newcomers on both sides – the vice of wealth and prestige. And given the relative surety of a successful career beginning in banking or an equivalent, there exists no rational reasons to leave.
HOW TO CHANGE THE COURSE. Much to the dismay of corporations and startups seeking bright, connected newcomers, I tend to believe the solution lies in values and goals propagated at the university level. There are few who arrive at an elite school with a lucrative career in investment banking or consulting in mind, and there are many who arrive with the desire to work in an industry or a vertical, whether it’s sustainable technology, aerospace and defense, and fintech. Yet these aspirations fall prey to ease and guarantees.
The cultural definition of success at elite universities in many ways is the surety of banking. But without newcomers to business willing to take a “risk” on a non-traditional career path (by which I mean anything but banking, PE, and consulting), business and financial ecosystems suffer. It’s unfortunate especially for startups, for whom volatility is a fact of being. Perhaps there is a way to assuage this fear if startups demonstrate they associate with such reputable firms (but do not rely on them, perhaps contrary to reality).
HOW TO WIN. If you leave with one thought, let it be this, the beginning of the solution: the fear of unimportance and uniformity singly outweighs compensation and reputation. Elite talent joins banks because they believe banks will launch standout careers––careers that trounce even others in finance. Yes, they have wealth and prestige, but they’re in an intern class of hundreds at one of dozens of banks or shops. Appealing to elite talent’s innate desire to do something unique is, as I see it, the only way to punch above one’s weight.
There is something to be said that banks and buy side firms strengthen the financial ecosystem which, in turn, improves life for other verticals and startups. At the same time, if all the best and brightest go to supporting the markets, few of them are in the markets – where they could be imminently successful and drive radical innovation for which they trained.
When a starry-eyed undergrad looks to the future, they want assurance that the investments they’ve made in themselves will be rewarded. If a company or startup succeeds at this arduously difficult task by proving their value lies in their individuality, then perhaps they will succeed. But until corporates and startups leverage symbolic value as much as compensation, the banks will continue to win.