Co-Founder, Adi Ekshtain, is interviewed by Boris Agranovich, Producer of the Risk Management Show podcast. They discuss payment facilitation, risk management, and the payments industry. Listen to what Adi had to say in the podcast below.
Boris Agranovich: Hello, ladies and gentlemen, and welcome to our interview with Adi Ekshtain, a Co-founder at Amaryllis Payment Solutions. During his career, he scaled many e-commerce businesses and he is also a prolific blogger and Forbes contributor where he writes about his ideas in the payment field. Adi thank you for coming to our interview today.
Adi Ekshtain: Thank you for having me. Happy to be here.
Boris Agranovich: Absolutely. In today’s interview, we’ll do a deep dive on the topic of merchant underwriting and risk management for payment facilitators. Adi, can you tell us a short story about your unique path in the industry and what brought you to where you are at this time?
Adi Ekshtain: Yes, absolutely. So I started my way in the payment industry 20 years ago, it was my first job straight out of college. And I was very lucky to be part of a very small team that invented mobile face-to-face payments, which was the precursor to what, you know, today as Apple Pay. And back then, the phones were very basic. There were flip phones and Nokia phones, no smartphones, no app stores, no Internet on phones. And we found a way with a patent to put a payment app on the phone. And we commercialize that with Orange Telecom. And we were the first in the world to have people actually walking into stores, restaurants and paying with their phone, getting a receipt and then walking out with the goods.
Boris Agranovich: Yeah, well, so why I don’t know your last name in the same way as we know Elon Musk and other guys because the first payment in mobile payments should be kind of a big deal.
Adi Ekshtain: Yes, that was before Twitter and Facebook. So different times.
Boris Agranovich: All right. So can you tell us what is a payment facilitation and why it is such a hot trend right now?
Adi Ekshtain: Yes, of course, so a payment facilitator, also a PayFac in short, is a company that provides many payment processing services, so to speak. They get permission from and real payment processor to accept payments on behalf of all of their merchants. And in the process, they get to decide and underwrite who they are going to do business with. They can sign up their merchants very quickly and also monetize the payments, charge a fee for each transaction running through their system. So just a couple of examples. Everybody knows companies like Mind Body and Shopify. Mind Body is a software company that manage fitness, wellness and beauty services, probably over fifty thousand merchants. And Shopify is an e-commerce platform that powers online stores for millions of businesses worldwide. And the interesting thing about both of these examples, both of these companies, is that after they started facilitating the payments of their customers, their merchants and large portions of their revenues come from the payment monetization part and not from their software subscription fee. So if we’re talking about the benefit and why this is becoming so popular, I can name three, the three top benefits. The first is creating a new revenue stream. Right. As a payment facilitator, you get to tap into and charge a margin, a fee on all payments of all the merchants that run through your platform. So that’s one. Number two is speed up merchant onboarding. Today, if you enable payment for your merchants, the websites or the stores, you either have to send them to a third party like Stripe or others to apply for what’s called the merchant account. Or you collect all that information yourself and then you hand it over to a payment processor and wait for an answer and maybe additional information and so forth. In the process, you have to collect a lot of sensitive personal information like Social Security numbers, bank account details, a lot of information that you may not necessarily want to keep in your system or you have to keep it in a very secure way. But when you become a payment facilitator, you get to make that decision very quickly so you can underwrite and onboard your merchants in an automated fashion in a much better way than how traditional payment processors are doing it and give them a much better experience and the whole payment experience become better. And then lastly is the business valuation. Once you tap into the volume of your merchants, your business valuation goes up, in some scenarios you can book it as topline revenue on your books. And that’s very significant for startup companies, companies that want to make the next big thing in IPO and so forth. So these are the main reasons why payment facilitation is very trendy right now, especially for software companies.
Boris Agranovich: For example, we as a global community, we’re kind of a network community, but we also have some online products like courses, subscription, events, but we mostly use PayPal, Stripe. So probably this solution is only for high payment volume generators. Right. Not for small guys like us at this time.
Adi Ekshtain: Yeah, that does bring up another question, what’s a good fit to become a payment facilitator? And typically there are three main payment monetization models in the industry. The first one is not even a payment facilitation model, it’s a payment referral model. You refer merchants to a payment processor and you get a referral fee. That’s the easiest, but you don’t get the most of the benefits, of course. And then under payment facilitation, there is what’s called managed payfac or payfac light or payfac in a box. These are for companies who are not really ready yet to become full payment facilitators, their volume, their payment volume is too small for that, but they can partner with a third party that gives them the entire umbrella of payment facilitation and the modern technology. Of course, they collect a smaller fee, but they get most of the benefit and they are not taking any risk, which is important for them. And then lastly, for big companies, definitely companies over 200 that are doing over 200 million dollars a year in payment processing, these are companies that are fully ready to become payment facilitators and then exploit all of the benefits of that model.
Boris Agranovich: So how can companies become a payment facilitator? Is there a requirement?
Adi Ekshtain: Yes, so the first thing you need to do, an analysis of your business and how it fits within the three payment models I just mentioned. What is your payment volume. Typically, companies that are doing less than 50 million dollars annually in payment processing, they will find it hard to justify becoming a payment facilitator. But there are exceptions to the rule. For example, well-funded startups that are on the trajectory to become bigger companies can definitely start early and start getting a competitive advantage in the market. The other thing you may want to do is consult with an attorney that specializes in these fields because there are many gray areas, you need to comply with various rules, some of them of the card brands Visa, MasterCard, Amex and Discover, some of the federal rules. Some of them are state rules, some of them are just guidelines. So you really want someone who knows the ecosystem to guide you in the right way. You may also want to consult with an accountant and definitely pay attention to security standards because you will have to comply with PCI, for example, when you become a full payment facilitator.
Boris Agranovich: OK, so, for example, what risk management plays in this space, because we are mostly community for risk managers. What is the best way they can approach this field?
Adi Ekshtain: Yes. So the first thing to understand is that once you become a payment facilitator, you are becoming a payment company and as a payment company, you are taking the risk of your merchants. So in a good scenario, the merchants are processing payments, selling goods, services, good products and very little refunds and chargebacks and everything going well. But if something goes wrong, you’re liable for those payments. So, for example, if you decide to bring on board the merchants that cannot deliver the product. So they will get a lot of requests for refunds and chargebacks. They may not have the funds to pay you. You’ll need to start collecting from them. That’s a big risk. That’s one example. And most importantly, the biggest fraud you can get is from merchant fraud. I know a lot of people think that a credit card fraud is the biggest threat. And it is a big threat, but it’s a small percentage. You are trying to stop individuals that bind with fraudulent cards or then disputing the transaction, saying it’s not them, this fraud exists, but it’s very marginal. The biggest fraud you can get is when you work with the fraudulent merchants that knowingly or unknowingly selling goods and services and then disappears and you’re left with the liability of that merchant.
Boris Agranovich: In one of your articles, you said that to accept aspiring risk manager candidates, they have to start playing a game called among us. So if they eliminate all the posters and they complete the task, then you should hire them. Right. So how does it play in real life?
Adi Ekshtain: Yes. So in real life, one big advantage that payment facilitators have is that typically they are a new software company. They have modern technology and they don’t have a legacy of procedures and paperwork that they need to adhere to so they can really sink in a smart way of how to automate and apply rules that make sense to check their merchants. So automation is key. Today there is a lot of technology options to automate most of the checks that you want to do. Check negative balances, check negative databases, check the IRS, check credit scoring, a lot of things that in two or three seconds you can get all the information and make a decision. And then also, that’s where a good risk manager can play an important role, apply common sense, look at the merchants. What are they doing? Check their website. Does it make sense what they’re selling? Does the price make sense? What is the track record of this business owner? What did they do in the past? You can apply common sense in a way that no computer can do and make a very good decision, just looking at the data as is and trying to see if that owner or that business, does it make sense? And could there be a possibility of fraud here? And just remember, typically the best frauds look the best. They don’t look like a fraud. So that’s what you need to be smart about.
Boris Agranovich: Yeah. So what exactly is payment facilitators need to know in order to reduce merchant risk? Do you have maybe some examples of high profile cases involved in this type of risk?
Adi Ekshtain: Yes, so the more the payment facilitator deals with a vertical industry, the better chance they have. For example, if they are only selling software to fitness centers, then they have a good chance of knowing the fitness industry. You can go to conferences and you can attend events. You can interview people who know the industry. So when somebody new comes in, first of all, you can look at them and you can ask everybody else, do you know these people? Does it make sense to you? So the more you focus on an industry, the better chance you are. You have to identify fraudulent merchants. A good example, if you’re asking something that I wrote in an article for Forbes is the fyre festival, a very high profile event. You can watch the documentary on Netflix. So essentially it’s people who didn’t have experience organizing music festivals, organized their first music festival. What they did do right, they knew how to do all the publicity and how to sell the tickets so that they did very well, but they didn’t know how to produce well. There may even be a case of intentional fraud there, but essentially people were left out without attending the festival or attending and having to leave. And of course, those people went home, called their credit card issuers, and issued chargebacks. And worse than that, they even filed lawsuits. So, yeah, you have to be careful.
Boris Agranovich: OK, so I would like to ask you a personal opinion. What is a commonly held belief or misconception in this merchant payment field that you strongly disagree with?
Adi Ekshtain: I think one thing I would disagree is going back 20 or 30 years and looking at how we did merchant underwriting back then and looking at what we’re doing now and some of the things that big payment companies are still doing things from 30 years ago, that may not necessarily make sense. So first of all, it doesn’t help them score a merchant or see if the merchant is good or not. Second, it gives the merchant a very bad onboarding experience. They need to provide all kinds of paperwork that is not beneficial and they don’t want to provide, with a lot of sensitive information. And that’s the real opportunity for the new payment facilitators because they can come in and say those things don’t make sense, all we need to ask for is A, B, C, and D. These are things the merchant is happily going to give us. They’re going to fill up a very short form. One page will take them maybe one minute. And it’s a great experience for everybody. And then the other thing I can suggest for anyone listening is that in the old days it was one process. We collected all the information upfront, it could be dozens of pages and then we underwrite it and make a decision. But today there is no reason to do that. Sometimes you underwrite a merchant and spend a month and then they don’t even start working with you. So there is a shift to what I call progressive underwriting, where you can ask for very minimal information upfront. And then as the merchant proceeds, processing their first transaction, getting into five hundred dollars in transactions, then you can ask for more information on whether it makes sense. I’ll give one example. You ask the merchant for their bank account information. A lot of merchants don’t want to give it up front. They look at it as sensitive information. Also, remember, the person filling up the application from the merchant may not know that information. They may be in the role where they can just apply and only the business owner can approve or know the business account. So perhaps you don’t have to ask for the bank account information upfront and wait three months until you get it. Wait until you owe the merchants money. Then they’ll happily give you the bank account so you can wire them the funds. So these are some of the new things you can do that makes a lot more sense. Reduce your overhead and make yours and the merchant experience much better.
Boris Agranovich: For example, if I am somebody, I’m just imagining, if I become this evaluating risk merchant, what is the best way I can screw up this job?
Adi Ekshtain: The best way (to screw this up) is just to accept the data they provide, as is, whether it’s the bank account information or Social Security number or name, and then only do automated checks because that data may check out correctly. It may be a good Social Security number. The name matches, the person has an account, without looking at the business as a whole. So those checks are much more difficult to make. You need to maybe go to their website, maybe purchase something on the website and see what happens if you get the goods. It’s very hard to do. A lot of people don’t want to invest the effort, but that’s where you will really find what you’re looking for. A lot of the time the dry data checks out perfectly and doesn’t give you any indication of suspected fraud.
Boris Agranovich: Yeah. So I ask this question to all our guests because I’m running a global risk community, online community for risk managers. And what, how can we contribute to the process of a better understanding of this complex world of risk from your perspective?
Adi Ekshtain: I think our community can do a very good job facilitating conversations and putting risk managers together so they can continuously discuss all the issues related to fraud, all the latest trends. So the information flows in a much rapid turnaround and people are exposed to it. I think that can greatly help because a lot of the data is not public and you need conversations to facilitate that.
Boris Agranovich: Right. OK, so that’s all my questions. Is there anything that I forgot to ask you and you would like to add that will benefit our audience?
Boris Agranovich: All right. Thank you Adi for your time. It was great to know you and hearing your opinion and hopefully we can meet in a few months and discuss your progress.
Adi Ekshtain: Thank you very much, Boris. Appreciate the time.
Boris Agranovich: Thank you.