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!