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Becky: Welcome to another episode of the Payment Strategy Show. I’m Becky Copeland, VP of Payments at Rainforest. We’re an embedded payments provider, purpose-built for vertical SaaS companies to help you drive more processing volume at higher margins while making your products stickier. And if you’ve listened to the podcast before, you might be wondering, where’s Joshua? And he’s right here with us. We decided to trade places today and let Joshua answer some questions from the hot seat.
Joshua, thanks for playing along.
Joshua: Of course, happy to do it.
Becky: So let’s start with an easy one. Tell us about your background. How did you get into payments?
Joshua: So I got into payments almost 20 years ago and almost by accident, I was the co-founder of Patientco, which was a health tech startup that ended up turning into a healthcare payments company. We originally started in the mid 2000s and helped primarily large health systems with all of their patient billing technology.
And since a big part of that is not just the invoicing and the billing, but also the payments, we quickly realized that we needed to transform into a payments company. And fast forward over a number of years, we ended up becoming one of the first vertical payfacs, payment facilitators, in the healthcare space. We had built a really robust engine that handled all different types of payments, whether it was tech, online, call center, ACH, credit card.
This was all long before many of the APIs and things like that existed. And so we kind of stumbled into it. And by the time we exited that business in 2021, it turned out that the majority of our revenue was actually from payments instead of technology.
Becky: Yeah, and I’ve seen that a lot too, but so much has changed since you started that. So kind of maybe take us back and take a step deeper into the payments piece of that. What was it like building payments 15 years ago without all the APIs? And like you said, like a step deeper in there.
Joshua: Yeah, we had to do a lot ourselves. There weren’t really real time APIs for anything related to payments. And so we were building raw files, ACH files that we would send to our bank on very specific batch settlement timelines. We had to do integrations into a lot of the legacy processors for card processing. There really wasn’t the developer experience that exists today. And so you were oftentimes trading specifications over, you know, Word documents that were oftentimes dated. Very few people kind of understood the flows because almost nobody had built it from the ground up like we had. So, you know, on the one hand, it took us a really long time to build all of our payments technology at Patientco because we had to do it all ourselves. On the other hand, you know, now in hindsight, 10, 15 plus years later, it turned out was actually a blessing because it really taught me and the team how to build robust payments technology and how this stuff actually works under the covers. But what I find today is a lot of times people who are implementing payments don’t really understand intuitively how things work under the covers. Everything’s been abstracted away and simplified, which is really great when you’re a consumer of it trying to just use it. But when you’re trying to troubleshoot, when you’re trying to figure out why things aren’t working. When you’re trying to innovate, if you don’t have that intuitive understanding of really what’s going on, it’s really hard to do. And so that’s served us well over the last number of years.
Becky: Yeah, I totally recognize that because that was my experience too doing payments that long ago was all the different vendors, the different, you know, trying to mostly try to verify what happened to the payment because you aren’t getting that real time verification. And so you spend a lot of time kind of trying to connect the dots. I totally remember, remember doing that. A lot of painful memories, right?
But we learned a lot as well. So with that in mind, let’s take, you know, if that was the past and look at the future. If you were to do it all over again with all the modern technology, what would you do differently if you built a SaaS, a vertical SaaS company today?
Joshua: Well, certainly I wouldn’t build as close to the metal, so to speak, as we used to, right? There are so many companies that have layers that make things easy and simple today, whether it’s the pricing, the technology.
You know, sometimes I talk to founders and executive teams that are saying, Hey, we want to go be a payfac ourselves, or we want to go build this piece of technology. And I would just tell them, you know, the world has changed. There’s almost no reason to do that today, unless you’re doing tens of billions of dollars, in which case, maybe you can bring some of it in house for some efficiencies. For the most part, you’re much better served just using some vendor out of the box. And so what I think the challenge has evolved into, instead of it being so hard to build, now you need to think about things like portability. Is your data gonna be portable? Are you able to move your merchants? Are you gonna get the service levels that you need? Also, there’s a lot more things you can do today. There are providers that offer ACH and credit card payments on the same stack. It used to all be separate and you had to do two separate integrations and two onboardings and two billings and two reports.
You know, now it’s all together. You have things like Plaid, you have buy now pay later. You have all of these different alternative payment forms. And so there’s, there’s also a whole new world of possibilities of what you can implement. And so it’s really a matter of figuring out how to pick which pieces are going to move the needle. You don’t have to necessarily have every single feature in every single business. And some verticals may make sense to add Plaid because you’re really optimizing for bank rail payments. In other industries, know, credit card and debit card acceptance is really going to be key, not to mention all the mobile options, card present options. So almost now that the challenge is there’s too much to choose from and you don’t want to bite off more than you can chew. Definitely recommend starting small. Pick a few things you think are going to move the needle. Make sure you’re getting the adoption. Then you can start to layer in all the other features that may make it a better payments experience for your clients.
Becky: I couldn’t agree more. I mean, running into the same boat. In fact, you know, kind of the way you and I met was as consultants, which is what you did after after patient co and I’ll ask you another question about that. But definitely advising platforms on what to do, there was definitely this push to like, go be a payfac and go do all the things and you realize, you know, do a couple things really well and own your data. And own your customers and you can build from there. You can get stuck in kind of this perfect scenario you’re building and don’t go anywhere. But speaking of and kind of thinking about your consultant days, I know we’ve already shared some stories, but let’s share some with some other folks too. But what was the most surprising situation you encountered when you were consulting?
Joshua: Yeah, you know, there’s certainly a lot of material to choose from. You know, as a consultant, who had been in the space for a long time, I was often brought the more complex problems, right? If you just needed someone to help you negotiate pricing on a contract, a lot of consultants that could help you do that. Really where my firm specialized was more complex problems. And so there’s a couple of examples I’ll provide. One was on the fraud side. I got called in urgently from another CEO in my network saying, we’ve got a big problem with fraud. And I said, okay, well, big are we talking? And she said, well, it’s up for six figures today and it’s getting worse by the day. I said, you know, that’s a big problem. And it turned out that they had some fraudsters that figured out that they had some weaknesses in their system and they weren’t doing all the checks that they needed to when they were onboarding merchants and running transactions. And they were just burning through accounts left and right very quickly, kind of with losses mounting.
Becky: Wow.
Joshua: And I think the worst part of it, you know, and I’ll never forget kind of the, the, the, the look on her face and the situation she was telling me about when she didn’t realize that they were actually on the hook for it. You know, it turns out they had been working with a payments vendor that wasn’t really transparent about who owned the risk. And when everything’s going well, you don’t think about it. And then all of a sudden there’s losses. And so they’ve got a payment vendor calling and saying, Hey, if you want to keep processing, we need a big reserve amount because we want to make sure you’re good for it.
Becky: Right.
Joshua: So I’d say that, you know, anytime there was fraud is always challenging because I find that vertical SaaS companies don’t typically do a great job with knowing how to manage fraud. It’s just building software and managing fraud on an operations basis, just two very different skill sets. So that’s one. You know, I think another was a fully registered payment facilitator working with a top five or six bank. Pretty good scale. And they called me in because they were having lots of challenges with reconciliation and they had all the funds flowing through some different accounts at the banks. And instead of doing what you really should do, and certainly what we did at Patientco and what we’ve now done at Rainforest, which is make sure you’re balancing your accounts to the penny every day, they weren’t exactly doing that. So you know, a variance of a couple thousand dollars starts one month and then it balloons into 10,000 and tens of thousands another month. By the time they called me in, because they were having trouble fixing it themselves, there was already a deficit of almost a half a million dollars. And so they, you know, basically were saying they had more customer money than they had cash in the bank. And they were trying to figure out where it went. You know, we hear about these stories in the news today about FBO accounts and Synapse and others not keeping track of ledgers, they’re far from the first ones to have that problem. And those are always really tough situations because to try to go back through hundreds of thousands or even millions of transactions over a very long time period to start figuring out where those differences are is really, really time consuming, really expensive, and takes a really specialized skill set.
Becky: Right?
Joshua: I definitely based on those experiences, recommend that SaaS companies stay out of money movement, leave reconciliation challenges to the professionals. And really for the most part, stay out of the risk game. There’s so many companies today that will handle risk and fraud monitoring and compliance for you and not for a very significant cost. It’s a very cost effective option. And it’s definitely one that I think most SaaS companies should take.
Becky: I think what’s toughest about those scenarios specifically is oftentimes senior leadership and investors didn’t know that they had that kind of risk on the table and not just they didn’t know they had liability, they didn’t understand from the FBO perspective and those kinds of things. And so they’re facing a scenario that they just were flat out not anticipating, which is tough. While we’re on the subject of mistakes, when you think about payment provider selection, which is a lot of what we helped customers do or clients do when we were consulting. Like, what’s the mistakes they make on that side in terms of implementation and go to market when they’re thinking about payment provider selection?
Joshua: Yeah, it’s a good question. You know, I think one of the big challenges or mistakes that the people make is not getting the planning right. I think a lot of people think sign the contract, make sure the pricing’s right, and then go into the implementation and you’re done. That’s really just the beginning, right? You’ve actually got to get the volume migrated over. You need to get the merchants using it and you need to have a high attach rate.
And then you need to make sure that the merchants are running the majority of their payments through you. And I’ve seen in a lot of industries where maybe checks was the main payment method. People struggle to get that paper check to digital conversion. Certainly that was something that we spent a lot of time with at Patientco. As you might imagine, healthcare is one of the slower moving verticals for digital adoption. And so we spent millions of dollars in many years trying to figure out how do you get patients to stop requesting a paper statement and to use an electronic bill, whether it’s a text message or an email. And then I was always amazed people would get the e-bill and then they would still mail a check and they’d print out the bill at their home printer and then mail it in. You know, there’s, kind of that consumer behavior that you need to consider on, terms of how consumers are going to choose. So when you’re doing that planning, it’s really important to think through how are going to get the merchants? How are you going to get the consumer or the payer behavior to change? And putting that into a plan. And that goes into how you negotiate your pricing, because there may be minimums involved. There may be certain overhead fees that you need to contemplate. As well as from a technical perspective, you need to decide which pieces of the implementation to do.
We talked earlier, Becky, about the different features. And choosing which ones to start with as kind of your phase one or your MVP and which ones you can maybe add later. And that I think is all really important for the go-to-market. And then I think the final piece on go-to-market besides doing a really good job planning, making sure that the product set is right is making sure you have cross-functional buy-in because this is something that’s not just product and technology. It’s not just finance, but it also probably involves operations. It may involve sales and marketing. It might involve customer service or customer success, those types of functions. So making sure that you’ve assembled that team early on so that they have been brought along for the process instead of just getting assigned tasks at the end. A lot of times you may have a head of payments that is running a project and gets to the very end and says, okay, I need you to do these five things in sales and I need you to make sure you’re selling this to every merchant. And that’s just really tough when you haven’t been brought along for that journey. So I think that cross-functional collaboration is a huge, huge missing piece.
Becky: Yeah, I think most folks think about payments as being a technology play or a technology task. And I agree. I think that’s where it starts. But I think it kind of happens and needs to happen throughout the organization and think about all the different moving parts there in order for it to be successful. So totally agree. I think one of the things that folks don’t think about in terms of that go to market or launch strategy is thinking about onboarding.
And I know there’s kind of a debate in onboarding, right? Like progressive onboarding, optimistic onboarding, staged onboarding. There’s kind of a lot of phrases folks use to describe kind of the scenario of do you fully validate the merchant on the front end or do you do it in pieces as you go? I know you’ve posted a little on LinkedIn about this, but can you maybe dig in there a little bit and tell us kind of your thoughts about progressive or optimistic onboarding and why you think it’s problematic.
Joshua: Yeah, it definitely is a hot button topic. You know, I think some payment providers out there really saying that real time onboarding is absolutely critical. And what I’ve seen is generally the people who need real time onboarding instantly are the fraudsters. They’re the ones who typically care about it most. know, normal merchants don’t kind of get out of bed and say, I need to take my payment this very second, you know, having a few hours delay or even a night, not typically a big deal in most use cases. And so when you look at the level of importance of that versus getting their core product design right, you know, I think the onboarding piece is one that the people kind of overrate as this is critical when it just typically isn’t as important. The other thing that people forget is it can actually create a lot of dissatisfaction when you are onboarded, you think you’re good to go. And then the payments provider comes back later and says, wait, we need all this additional information. And it can actually be kind of jarring because the average small business owner doesn’t really understand what’s going on behind the scenes and what all these compliance and regulatory requirements are.
And so they might actually think they did something wrong. And it’s like, well, wait, why are you asking me for all this information? Did I do something wrong? Is there a problem? I generally find it’s best to get the administrative piece done upfront, get it out of the way, make sure you have smooth sailing afterwards and you’re good to go versus creating that negative experience, especially after it’s going.
I’ve heard some argue, well, it’s much easier to get merchants to give you their information, maybe their tax ID or certain, you know, their demographic information. Once you’re, once you’re holding your money, holding their money, because then they have an incentive to give it to you. And, know, I’ve been a small business owner myself. I’ve been a big business owner myself and like neither of those situations, do I ever want someone holding my revenue hostage for me to give them information? I think it just creates like a really negative, feeling and incentive versus working together. And so.
I’m a big proponent of make onboarding as frictionless as possible, make it super easy, but get it done out of the way early on. Don’t kind of come back with death as a thousand cuts, asking for pieces of information after piece of information after piece of information.
Becky: Also seeing, I’m curious if you’ve seen it as well where this kind of staged onboarding also leads to like transaction holds or risk holds in kind of an increased way. Is that your experience as well?
Joshua: Yeah, absolutely. I think a lot of bigger payment providers today will let you take your first X thousand dollars of payments or X hundreds of dollars of payments without much information. And then all of a sudden you get your first five thousand dollar or ten thousand dollar payment and everything just shuts down. They need more information. They need backup about why you’re taking the payment. They need your demographic information.
And so again, you have the joy as a business owner of getting this revenue, you’ve actually got someone to adopt your new payment system. And then you’ve got this jarring hold that’s put on it as well as this information that’s being requested. So definitely I’ve seen that quite a bit.
Becky: Yeah, and I think some of the most difficult calls to take from merchants are ones where their money is being held hostage or unexpectedly declined or held. So definitely a difficult situation. But let’s move to something a little more friendly, a little more fun. There’s a lot of popular payment features out there that look really appealing on the front end, but are actually pretty problematic. And I know we’ve both seen a handful of these, but I’m curious, kind of your thoughts, like what comes to mind when you think about these surface appealing payment features that aren’t as good as they look.
Joshua: Yeah, mean, one that immediately comes to mind is interchange plus billing for merchants. So interchange, just for anyone who may not know, is basically the wholesale costs that Visa and MasterCard set for different types of card payments. And a debit card payment is generally cheaper than a high-end business rewards card and so on and so forth.
Um, there’s really two models. One is a flat rate where you may be paying 2.9 % and 30 cents. And another would be where you’re paying interchange plus X basis points and Y cents. And I often hear from platforms that they want to offer interchange plus pricing because they think they need it. And while that does offer some additional transparency to the merchant, it also creates a really tough challenge for the platform as they want to increase monetization and revenue because they really don’t have many levers to pull. They really only have two typically. It’s number of basis points and a number of cents that’s the markup. And so when they do things like interchange optimization, which is actually driving costs down, the platform doesn’t get the benefit from that at all. Also, a lot of times merchants are really confused by interchange plus pricing because instead of knowing that you have certainty of every payment I take is going to be 2.9% and 30 cents and the math is really easy. You might end up with a bill that has dozens or even a hundred different interchange categories. And as a small business owner, you have no idea what qualified and non-qualified and platinum rewards cards and Visa Infinite and all these different categories are, nor should you need to.
Becky: Yeah.
Joshua: Because ultimately at the end of the day, you really care most about your overall cost of acceptance. And so how you get to that overall cost of acceptance number, I recommend to make as simple as possible for merchants because that way the merchant has certainty of what they’re paying. The platform has the right incentives to help optimize that experience. So that’s one I think where, you know, there certainly is a lot of complexity that can be added. I don’t know that the benefits worth it.
I’ve also seen situations where people add so many different options to the checkout tab that it looks like a Chinese menu. You have PayPal and all the different card brands and Zelle and Venmo and 55 different digital wallets. And you actually end up really hurting your checkout rate when you do that because consumers don’t know how to deal with it.
They have decision paralysis and instead of just making the payment and being done with it, they’re forced to choose among all these different options. And I’ve seen this especially in some airlines, for example, where they just have so many options that they think they’re helping consumers. But in reality, most of them aren’t used very often. And when you look at the number of carts that are abandoned, meaning people were about to pay and then they just left the site, versus the incremental payment acceptance you’re going to get by all these long tail payment methods, it’s generally not worth it. So big believer on my side of trying to optimize for the masses. Certainly look at some more innovative payment capabilities, not saying don’t innovate, but remember at the end of the day, payments should be easy. I give the example all the time of Uber. It’s as simple as closing the door and your payment’s made.
That’s experience that I would encourage vertical SaaS companies to try to achieve.
Becky: Yeah, totally with you. Simple is better is a mantra I always use in those scenarios as well. Great. Well, let’s wrap this up with one final question. And love to hear your thoughts. If you had to distill kind of all of your experience and learnings, it’s kind of a big question, into one piece of payments advice for SaaS leaders, like how would you distill that?
Joshua: That’s hard. There’s a lot to pack into one. But what I would focus on is really the value. Payments oftentimes is looked at as a revenue stream. It can help with client retention, makes it stickier, a lot of things like that. But look at it from the point of view of the merchant and potentially even the payer, the consumer or business that’s making the payment. What’s the real value for them? Are you making their lives easier? Are you making it have less friction, are you improving the reconciliation and posting capabilities? Are you making it a faster experience? If at the end of the day, you are able to achieve a lot of value for both the payer and the merchant, everything else tends to work itself out. You can always figure out the risk. You can always figure out portability. You can always figure out great vendors, but if you can’t get that value equation right for the merchant and for the payer, it kind of doesn’t matter because you’re not going to get the adoption.
Becky: Yeah, could not agree more. Anyways, thank you so much for playing along with us today and sitting in the hot seat. Appreciate all of that you’ve offered here today and it’s just been a great time talking with you. So thank you.
Joshua: Absolutely.
