‘A groundswell of change within the company’: Wave’s Kirk Simpson on what it takes for software companies to offer banking and payment products

The following was produced by Tearsheet Studios. We worked with Wave, a financial software company for entrepreneurs and small businesses, to create a three part podcast series on what micro businesses and solopreneurs really need now from their banks, financial service providers, and financial software. See other episodes from the series here and here.

Personal finance app Mint inspired a lot of things. As an early fintech, it showed users the potential of what it could be like to successfully manage your personal finances. For entrepreneurs, Mint also was inspiring, showing the power a financial services app could have to amass millions of users.

Mint inspired other founders to launch their own offerings in the space. It definitely inspired Wave’s Kirk Simpson. He was especially interested in its pricing model: free.

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The following excerpts were edited for clarity.

Kirk Simpson, Wave: I am Kirk Simpson. I'm the co founder and CEO of Wave. We build software for small business owners.

We started the business in 2009 and got serious about it in 2010. If you remember back then, there was a new player on the scene called Mint. They were aggregating your banking data to create a new, easy to use personal finance tool. And James Lochrie and I, the two co founders of Wave, looked at what was happening with Mint, and thought that there was really something there. The new bank aggregation tools that they were using at the time through Yodlee looked like they could make small business accounting much more easily and readily available to folks than it ever had been before.

And so we started Wave with the aim of making accounting and invoicing really easy for small business owners. We were heavily influenced by Mint from the standpoint of the fact that they were offering it for free. They were aggregating the data and offering new credit card products based on your data. We thought that was super interesting.

As we continued to build Wave, it became clear that that kind of model wouldn't scale in small business. And so we were looking around the curves on what was happening, and how we could monetize the product, and really started to see that payments would be a big driver for us. We could embed payments right into invoicing. And really, that was the start of what was happening in the fintech revolution. We were drawn to it -- we thought there was a huge opportunity for Wave and that proved to be true. Fast forward to today and we've started to see the rise of banking within software products. And again, we're at the forefront of that with our new product called Wave Money.

Let's zoom out a bit and talk about the trend in general. We call that 'embedded finance' at Tearsheet -- the idea that you have banking infrastructure companies that are empowering both financial and non financial brands to launch banking and payments products. So can you talk about how software continues to move into the banking space? And what that might mean for small businesses?

Kirk Simpson, Wave: If you look back over the last, call it five to eight years, payments was the first sort of financial technology that started to make its way into software as a service companies. And today, that's become a well known playbook. You've seen companies like Shopify turbocharge their overall revenue story and the average revenue per user that they're getting out of each one of their customers by embedding payments within their software.

And it was clear, as you looked at that trend, that it didn't need to stop at payments, that there were many other things that you could embed into software, once you become the operating system for, in our case, small businesses. And so over the last couple of years, you started to see the banking infrastructure companies start to emerge. And that's given companies like Wave a great opportunity to start embedding many more financial products, including a core bank account, into software. And we think we'll see that sort of rise, just as we've done with payments, within the banking functionality as well.

That makes sense from a platform provider's or software provider's perspective to provide banking and payments functionality to SMB customers. What did your business customers get out of tying together finance with accounting software?

Kirk Simpson, Wave: I think you know that you can only grow these types of products if there's some value for the customer. It has to start there. When you talk about sending out invoices and sending a billions of dollars of invoices, in our case, really the hook for the customer was, why not be able to have your customers seamlessly pay you on those invoices? And in fact, when you look at the data, when you embed payments or payments on invoices, our customers are getting paid three times faster. So there's got to be some hook and real reason why a small business owner would take that service from you versus getting it elsewhere in the market.

I think for us with Wave Money, the vision here is imagine a customer of ours can send out an invoice, get paid by their customer three times faster, have access to those funds, and smooth out their cash flow, within 15 seconds of getting paid, spend on the card, and have it seamlessly book, capped and be ready for tax all in one stop. For a lot of small business owners, the dream is to get all of the accounting and tax and all that kind of stuff out of their way, so they can focus on their business. And that's really what we're trying to bring to life.

That's a powerful model. You mentioned that you knew your revenue model, since you went with free, was a bold move. You knew that your revenue model, at some point, needed to include some type of money movement. So can you take us through the discussion behind scenes? How were you aware of that? What were the plans initially? Have those plans evolve over time?

Kirk Simpson, Wave: Many startups that go out with a free product in the consumer space, at some point, need to figure out, okay, we've got a large audience, people seem to like the product -- now, how the heck are we going to monetize? And we certainly went through those growing pains. At the beginning, we thought we would monetize through offers to our customers based on personalized data. We quickly realized that that was not going to be a good model for a variety of reasons, including privacy. So we needed to look around and say, okay, how are we going to monetize this space? How are we going to make sure that the product that we offer drives value for our customers? We started to see the rise of Square and the rise of Stripe and others, and quickly realized that we had a huge opportunity within the payment space.

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The question at the time, and the question that a lot of software companies need to ask themselves, is how much of the stack do you want to own versus partner? I think many people choose the partnership route -- it's easier, it's faster, it's less complex, you have to worry less around security and compliance and that kind of stuff, because oftentimes, the partner will take on much of that. But you also sacrifice the user experience, and for sure, you sacrifice a lot of the economic impact that your business can have through it.

So we started by partnering with Stripe. We were very early in on the Stripe story (I mean, what an amazing story it's been!). But we realized quickly that we wanted to control more of the user experience. We certainly wanted to have more of the economics flow to us. And so we built out a lot of our stacks so that we could control the user experience and own most of the economics. That's been very fruitful for us. But it does take on a lot of risk and complexity around compliance. And you got to make sure that you build that into what you do from day one.

How broad an initiative is moving into banking products, especially as you determined to build that this stack yourself? How broadly did that run at Wave, whether at the entity level at the corporate level?

Kirk Simpson, Wave: I think the first thing is that there needs to be a groundswell of change within the company. Suddenly you've gone from a SaaS company, building software, releasing it 15 to 20 times per day into production. Sure, you want to make sure that you have quality built into it, but you also can very quickly come back, if a release goes bad. I think once you get into money movement and financial services, in general, there is a level of rigor, attention to detail, a mindset that is very different. We needed to go through that change within the company just to build those muscles into the DNA of the company. This is not a move fast and break things model. This is an understanding and a level of empathy that you are dealing with customers' money. It comes with huge responsibility, and we needed to adjust the culture of the company accordingly.

I think, in a lot of ways, the biggest switch that has to be made through the process is the way we always looked at compliance. It was always non negotiable, obviously. But how we do it, and how we make sure that we follow exactly what needs to be done, but do it in an innovative way, so that it doesn't slow us down -- that was really the unlock that our chief financial services officer, Les Whiting ,created in us. Compliance has to be mandatory, and we have to take it very, very seriously. But how we comply and how we innovate around that is the key.

So let's talk about Wave Money. Can you take us through some of the features and benefits?

Kirk Simpson, Wave: With Wave Money, we're excited about controlling the transactions that a small business owner makes on the platform. You can do things that are really, really important to the average small business owner. I'll give you a few examples. One is, by controlling the payments experience on invoicing, we can really speed up the way in which a small business owner gets paid. If you think about the average small business owner, the biggest issue they run into is a lack of cash flow. And we've heard a lot in the market over the last five years about new providers of small business loans. It's good that there's innovation happening in that space. But the most important thing we can do for small businesses is get them paid faster for the work they're doing. That often negates the need for any sort of loan product, if you can get them paid more quickly for the work they do.

The second is on the spending side: how do we automatically bookkeep for the transactions? How do we ensure that once our clients spend on their card, they're automatically ready for tax and have great visibility into what's happening on the expense side of their business? Those two innovations -- on the money in and the money out -- are where we're spending a lot of time to ensure that we can make it easy for them to run their business.

And how has the reception been so far? When did you launch into market?

Kirk Simpson, Wave: We're in closed beta right now. We have thousands of users on the product already. And we're innovating really quickly based on the feedback that we're getting from real users. We're excited about where we're at. But we know that this is a long game -- to bring that type of vision to life is super challenging and difficult, let's be honest. But it's great that we have such a large community of users already within the ecosystem that we can give access to the product, get real time feedback, and innovate at a quick pace.

Given where you are now, which is this closed beta for Wave Money, what would you have done differently in hindsight?

Kirk Simpson, Wave: I think there's many areas of Wave that I wish I had made better decisions, quite frankly. I think, in a startup, especially a fast growing VC-backed startup, it's easy to get ahead of yourself on wanting to take on too much. I think we spread the product too broad, too quickly. And that led to some quality issues. In 2015 and 2016, we really doubled down on our core products and made them better. Now we're in a much, much better place where we're driving really high customer satisfaction scores.

I think if there's one thing that I could have done better over time, it would have been to narrow focus to make sure that what you've got out in market is best in class before moving on to other things. But hindsight is 2020 -- it's ended up working out well for the company and our users. But I really wish I would have narrowed focus early on in the journey so that we could have built better products sooner.

Would you have introduced banking products earlier?

Kirk Simpson, Wave: No, I think the market wasn't ready. And we weren't ready as a company to do that. I think now, quite frankly, is the best time. We're still ahead of the curve. This is in the very early innings of banking within software products. We're excited about the capabilities we can bring to customers, and we think now's the right time to really drive that for small business owners.

Launching payments and our own payments rails in 2013 or 2014 was really early, and was very much the right call. All kudos to Les on pushing us in that direction and the team for executing on it quickly and seamlessly. I look back on that and think without that, the company probably wouldn't be alive today. I think it was really prescient in the market at that time. I think now it's become very much commonplace -- there's a whole group of venture capitalists who just find software companies that have some strong SaaS revenue and drive them to embed payments to really drive up revenue.

Can you give us a preview of what we should expect from Wave in terms of banking and payments products in the future?

Kirk Simpson, Wave: We're trying to solve the universal problem for small business owners of managing cash flow and making the back office much easier to manage so that they can focus on their business. And those are universal truths for small business owners. They've been universal truths for hundreds of years. And there's so much innovation to do to solve those -- whether it's smoothing out cash flow, predicting future cash flow gaps, and how they can get ahead of it, and then helping them to smooth it out. There's a long way to go in terms of making it seamless so that the whole back office for them just runs smoothly and gets out of their way. We want to make sure the two weeks before the tax deadline is not the most stressful time for them in the world. Those are the universal truths we're trying to solve.

That was Kirk Simpson, CEO of Wave, on the role banking products are taking in modern software. It’s part of a 3 part series Tearsheet Studios is running with Wave. Go to our website to listen and read the other parts of the series.