Finix Payments’ Richie Serna: ‘The next generation of billion dollar payments companies won’t look like Stripe or Square’

One of the major themes we’ve been exploring through this podcast and through our reporting is this idea of embedded finance or finance everywhere. The idea is that as financial tools become more modular and APIs more powerful, every software company and every brand really can become a financial services company.

We’ve seen this story — a leading SaaS company rolls out payments to tie together its service offering. Well, to do that, it requires a lot of payments engineering, manpower, and a lot of connecting various nodes of the payment systems. Finix Payments is working to change all that. For a software company that wants to own its own payments stack, Finix offers payment infrastructure as a service. Launch time is massively accelerated and as CEO and co-founder Richie Serna will explain, it takes part of the payments ecosystem that used to be a cost center and turns it into a good source of revenue.

We spoke with Richie shortly after Finix announced an investment round lead by Bain Capital Ventures and included Insight Venture Partners and Homebrew.

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The following excerpts were edited for clarity.

Software loves payments

There's a verticalization of payments going on. The next generation of billion dollar payments companies aren't going to look like Stripe or Square. They're going to be vertical-specific software companies with payments layered into them. What you start to see is that payments is seeping deeper into software.

Take Mindbody, a software provider for the yoga and fitness studio industry. They provide software to manage the day to day of these studios -- everything from subscription management to online purchases. They started out with licensing software and eventually layered in payments. Very quickly, payments accounted for 50 to 60 percent of their revenues. Every time a studio sells a mat or a class, Mindbody makes a percentage of the transaction.

These companies like Minbody, Toast in the restaurant industry and Lightspeed with SMBs are transforming a historical cost center into a profit center.

How software companies handle payments

There are a few payments models. There's an ISO model which is where a software vendor has a referral relationship with a legacy providers like Worldpay or First Data. That way, if a merchant wants to use a point of sale system, they have to order it and get it set up. Then you need to go to another third party -- the actual payment company -- to get underwritten for a merchant account. This can take one to two months. It's a cumbersome process. Once you get approved, you can plug these credentials into a POS system and begin processing payments.

In this setup, it's a very fragmented user experience for the merchant. When it comes to customer support, do you go to the POS provider or the payment company? So, what these software companies have done is bring payments in-house, controlling the entire merchant underwriting experience, approving merchants and taking on the risk. Then there's a single party that a business owner needs to deal with. It's a much better user experience.

And for the software vendor, it's a much better monetization strategy. In the fragmented model I described before, you're looking at taking home 15 to 20 basis points on a transaction. If you bring payments in-house, you're looking at 50 to 100 basis points in terms of their take.

The benefits of bringing payments in-house

It's two pieces: bringing payments in-house sees an improved user experience and more profit. We talked about an improved monetization strategy. Payments is now an indistinguishable part of the value proposition -- it touches every part of the end-user experience. For a B2B software platform, they have to give the best purchase experience and merchant experience, managing both sides of the transaction.

By bringing payments in-house, software companies allow for an automated and seamless underwriting process for their merchants and have full control over how often and frequent they pay out their sub-merchants. Some of these software vendors provide a more innovative disbursement mechanism, like Visa Direct and Mastercard Send. They can push out payments to a merchant instantly (or less than 30 minutes), instead of waiting for ACH. They can provide a better user experience for buyers. They provide more robust data to merchants. There's so much to be done by bringing payments in-house.

The challenge of bringing payments in-house

Historically, bringing payments in-house was difficult from a time, complexity, and management perspective. You're looking at two to three years before you can run your first transaction. You're looking at hiring a team of 10 to 15 engineers and a $5 million investment. And once you build it, it's not a set-it-and-forget-it model. The payments ecosystem is constantly changing: there are new acceptance methods, new compliance rules, and data legacy infrastructure issues.

Look at a company like Airbnb. It has over 170 people on its payment team and 110 payment engineers. It's very complex work. Our view is that rather than building out all these internal payment capabilities, companies can outsource them to us so that they can focus on building out what's really core to their businesses and customers.

Going forward

With the fundraising we just closed, a lot of our focus is building the team so that we can speed up product development and new channel partners.

When I think about our continued focus on product, it's about how we continue to extract away much of the complexity that's tied to payments. For a lot of our customers, it's about automating the compliance pieces. So much of payments today is this giant Mechanical Turk -- doing KYC and credit checks and calling out to third party providers.

The more we can automate and codify directly in our API, the better our customers' lives will be and the easier it will be for them to manage their payment stack.

There's a lot of interest across the ecosystem for software companies to become payment companies.