Investors love the companies in the payments industry, and for good reason.
Visa (V -0.70%) and Mastercard (MA -0.77%) have long been investor favorites. They've built financial empires on a payment method accepted at tens of millions of locations across the world. They're used by billions of people and process trillions of dollars of annual volume. They sport multi-hundred-billion-dollar market caps that have risen significantly in recent years.
In analyst parlance, they have very strong competitive moats. And as open-loop payment facilitators, they can operate at very high profit margins without taking on credit risk of their own.
But let's also look at the other side of the coin. Not everyone loves the credit card companies quite as much as investors.
One group that's a bit less enthusiastic is the merchants who actually accept the cards. Visa and Mastercard charge fees for facilitating transactions. Other fees are charged by the banks issuing and receiving the payments. Merchants have quietly grumbled about losing around 3% of every sale so consumers can have the convenience of using their credit cards.
Altogether, those fees are really adding up. Businesses are now bearing a burden of tens of billions of dollars every year, just to transfer money across our existing payments infrastructure.
"Payments as a service"
As you might expect, an opportunity to disrupt a market worth that much money is attracting innovative solutions -- especially in the business-to-business world, where the magnitude of the invoices is higher and the potential savings are greater.
I even made the case in this piece that the payments industry badly needs a revolution. And it seems we're finally seeing some new contenders for the title of instigator.
One company taking on the challenge is Paystand, which provides a more efficient way for companies to move capital. Its payments platform is building a new underlying infrastructure, one that can support unlimited financial transactions for a fixed monthly cost.
If they use Paystand for credit card transactions, customers are still on the hook for the banks' wholesale rates. But they avoid paying the per-transaction fees negotiated by Visa or Mastercard, and they pay no variable fees at all -- only the cost of the fixed monthly software subscription. Payments processed through the Paystand Bank Network are also recorded on its enterprise blockchain, which ensures that the transactions are free from tampering.
I recently spoke with Paystand founder and CEO Jeremy Almond about the opportunity for a new payments infrastructure. In our conversation Jeremy explains the limitations of our current system, why and how customers are adopting blockchains, and the important role that identity will play in the future of the internet. He also describes several things that investors interested in the payments space should be watching.
The audio and a complete transcript of our conversation are included below.
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Simon Erickson: Hi everyone. Motley Fool Explorer lead advisor Simon Erickson here and we're talking about the payments space this morning. My guest is Jeremy Almond. He's the co-founder and CEO of Paystand out in Scotts Valley, California. Jeremy, thanks so much for joining me this morning.
Jeremy Almond: Awesome. I'm glad to be here, Simon. Happy Friday to you.
Erickson: Happy Friday indeed. Now Jeremy, just to set the scene for this: Something that Paystand has reported is that North American businesses are still exchanging $18 trillion of business through paper checks every year.
Even with everything internet-connected, we're still a paper economy for businesses. And this is costing over a half a trillion dollars of processing and delay fees.
Can you start by telling me about what Paystand is? What this B2B payments platform that you've created is? And how that might make things a little more efficient?
Almond: Yeah, happy to, Simon. So Paystand is a B2B payment network, so you can imagine what Venmo or PayPal might do for consumers to make payments entirely digital all the way through a cashless economy we do for complicated commercial transactions between really the pillar of the economy, these large enterprise companies.
Who today, for a number of reasons, tend to live in a paper world where their revenue cycle and their cash cycle effectively is using pre-internet systems. While they've done a lot of investment, if you look at organizations, whether it's in large industries like manufacturing or insurance or logistics, all of these large industries are rapidly trying to invest in IT to become more digital. The part that runs the business, the revenue and the money part of the business -- for a number of reasons, the commercial banking sector is still a pre-internet infrastructure.
And so we aim to change that. We aim to bring digital transformation into the commercial finance sector to create more efficiency for businesses, create more ROI for organizations, and ultimately to change the commercial financial sector.
Erickson: Okay. So it makes it easier for one company's accounts payable to transact directly with the another company's accounts receivable.
I love the idea of no paper. That's obviously a big win. But we've also got a lot of other solutions out there, right? You've got bank to bank transfers, the ACH [automated clearing house] transfers. We've got credit-card networks built out. We've got digital wallets online.
I've seen previous interviews of you with an excellent quote you had of "Imagine the world not as it is, but as it ought to be."
What are the limitations you're seeing in the current payment infrastructure that we have that's not paper out there right now, and why would blockchains potentially be better than that?
Almond: So I think there's a few things. There's three principles that we built the business on.
The first is this notion of no paper to create a more automated system for an organization. The second is what we say is no fees. And no fees are important because -- while you're right there are credit cards and there's consumer payment and wallet payment options-those aren't really well aligned for the commercial organization. So if you're in an enterprise that has worked with their companies for a decade, they have salespeople who have negotiated contract terms.
This notion that the credit-card payment industry is generally a fee-based industry. The typical company pays about 3% to to get paid over a credit-card payment network like Visa, Mastercard, American Express. That doesn't work when you're sending hundred-thousand-dollars invoices with companies that you've worked with for a decade.
So we think that the reason why, one of the main reasons why these organizations are still living in a paper-check world is the business model of payments, of these sort of large gatekeepers fundamentally not aligned with enterprises.
And so for us, we think that new technology like cloud, and particularly blockchain, enables infrastructure where you can take out the gatekeepers. You can take out the middlemen. And from the business perspective, you can create a vastly more efficient network that's faster, cheaper, more automated and without fees.
Erickson: I'll get back to the blockchains in just a moment because I think that's important.
But just to touch one more time on the existing infrastructure that we have -- as investors, we know there's huge switching costs for any of those payment platforms that companies are currently using. Jeremy, you've talked to a lot of customers over the last year. I know you have a very extensive resume in financial services and payments.
Who is interested in Paystand? What kind of customers are the ones that are taking the leap? And what criteria are they using in selecting you as a vendor?
Almond: We tend to work with high-growth, mid-market companies and large enterprises in a number of traditional industries. And generally what we see is these are companies who invested in their IT spend because their systems of record -- these things you might know of as an ERP [enterprise resource planning] or CRM [customer relationship management]; so companies like a Salesforce and Oracle -- so that these companies have invested in making their business more digital by their very nature, their DNA.
And so the question is, if you spent, you know, whether it's six figures or seven figures on having your financial operations being entirely digital but you still have humans that are chasing down your paper checks, you're still doing manual billing -- they'll come to an organization like us to sort of complete the last one. We generally find your fast-growing organization in a number of sectors and number of industries: You've spent money on your ERP, you spent money on your CRM. You've got an Oracle, you've got a Salesforce. But you've got a bunch of humans trying to track down late payments and you don't want to give up your margins to basically receive capital. Paystand's a great fit for an organization like that.
Erickson: Yeah. So companies are willing to invest to be more efficient and get away from the methods that they've used for decades.
Almond: That's right.
Erickson: Talking a little bit more about the blockchains that you mentioned. If I'm correct, Paystand is built upon the Ethereum blockchain. Is that right?
Almond: That's the primary infrastructure. Though we use a sort of a fork or a hybrid of it. We also use a number of areas.
So Paystand's been basically betting on blockchains since the beginning of the company. The company started in 2014. We think it's a large-scale change so that we think it's sort of akin to something called cloud, which is what most enterprise software companies are built on today. We think it's the next cloud.
And what that ultimately means is financial service companies can build better, cheaper, more efficient infrastructure the way enterprise companies could in the cloud era a decade ago.
So for us, that doesn't necessarily mean one blockchain. We think that the blockchain world is evolving very, very fast and certainly is very different than it was when we started the company. Ethereum didn't exist back then. But Ethereum is certainly one of the best infrastructure use cases of enterprise financial software right now. And so we spent some time there. Most of our infrastructure is on Ethereum today. We do have some other sort of flavors as well.
Erickson: We've seen a lot of consumers seem to have a bad taste in their mouth for cryptocurrencies. The volatility of Bitcoin alone has gone from $20,000 a Bitcoin to $3,000 and then back to $10,000 just in the last 18 months. That volatility is huge.
But again, that's the consumer realm. You're working in the business realm. Do you think that businesses trust blockchains, even with everything that they've seen in Bitcoin? Or has the volatility of Bitcoin impacted the trust that they have of blockchains?
Almond: We work with CFOs and CIOs and COOs primarily are who implement our software. And what they care about is getting their revenue faster, cheaper, more efficiently. The capital efficiency is critical to them. And so at the end of the day, you know, we don't bet in cryptocurrencies or volatility. What we're trying to do is create more efficient financial infrastructure. So we operate in dollars and euros and pesos because that's what our organizations operate in.
We think blockchain needs to move more toward a concept of cloud and a little bit less toward a concept of Crypto. At least in the enterprise space. And so we can take the advantages of a trustless, decentralized, secure, immutable network that blockchain does and marry it with how a traditional financial executive works today.
Erickson: And on that note that you mentioned about dollars and euros and pesos. Is the cross border aspect of this one of the key selling points for a blockchain for businesses? Where it doesn't matter with a national border of one country starts and another begins, but it's all on the same blockchain no matter where you are.
I know it's expensive to send money around the globe for global remittances. Is that a selling point for businesses? Do they care about that?
Almond: Yeah, so that's a great example. If you take out the crypto aspect for a minute, the reality is the financial infrastructure in the U.S. is dated. Then you marry that with financial infrastructure in another country. So we'll give Mexico for example. Those systems don't talk to each other. They're entirely different banking networks. There is no universal standard between those two countries.
So if you're a global organization, how do you move money back and forth? Again, it's not about a crypto question or volatility question. It's simply a logistics question. If I'm a supplier and I'm trying to move money from my boat that's bringing goods from Latin America and then they're bringing them into the U.S., there's not an efficient way to do that today.
So blockchain can be the plumbing and the glue between these large enterprises that operate in pesos, they operate in dollars, they're doing all of the things that they do with their existing banking relationships. But they need to move money without trying to sort of have to deal with expensive manual costs, wire fees, and an infrastructure that wasn't built for a global borderless world.
Erickson: Jeremy, Paystand has an interesting new project you're working on called Blockchain Assurety. Which you're describing as verifying other events outside of just transactions. So events, actions, identities, other things like this.
What does this mean and why are you doing this?
Almond: We've been using Assurety for our own payment network in house for quite some time. So when a payment runs through our network, what happens is we want to ensure that the payment records can't be changed, they can't be modified. Because in an era of data privacy, an era of data concern, how do you have verifiability along the supply chain that a payment actually happened?
And so we've been using it along our own network for quite some time. And so what we want to do now is we've battled tested it. This is not something in a white paper or lab or just some PR announcement like a lot of organizations do. We've been using this at scale, quietly under the radar. And so now what we're doing is saying, "Look, there are other use cases that might be viable for other organizations outside of simply payments."
So let me give you an example of how organizations that use Paystand today would have had to deal with verification problems pre-Paystand.
So a friend of mine is the CIO of a mid sized bank. One of the things that they have is manual controls in the bank. When a payment basically is over a certain size, they'll manually check it. What he told me off the record was relatively recently, they got flagged a manual payment from one of their enterprise customers that was a pretty typical payment for this enterprise. It was nearly $10 million. And what happens is at a certain size, the banks will manually check to make sure that the payments go into the right place.
Now, the existing infrastructure today in the banks, that infrastructure is using something called ACH. ACH is these old checks and routing numbers that used to live on your checkbooks. And someone from their customers -- so this is a large enterprise -- had their systems hacked. Not their computers, not the banks, not the infrastructure. But just one of the staff members had their email phished. And as a result, the invoice that the staff had, someone went and changed those little 16-digit numbers on that invoice. So instead of sending it one location, they accidentally sent it to another location. Now that location happened to be a bank in Bermuda.
So simply compromising an email and by simply changing a couple digits on an email, nearly $10 million was compromised. And the bank didn't catch it until five days later, because the way that the system works, ACH is not real time, and the banks do a manual process.
Now the happy ending of the story is fortunately the attacker did not actually walk into the bank in Bermuda and go collect the money. But the money was actually sitting in the compromised account. And so it obviously would have been very, very bad news for all of the parties involved.
So why did that happen? Well, A) the banking infrastructure is not real-time. It's not automated. It's not digital. But it's also at risk for cases where someone might compromise the data. So that's obviously very, very risky.
What the blockchain can do is actually create an assured record. Think of it like a notary. Where when an invoice or a payment or any infrastructure that's critical comes through, there can be a validation step to ensure that it has not been changed or modified.
And so this is very, very important in today's day and age where trust really matters. Whether it's a case of Enron or otherwise, how do we ensure that that data has not been changed where it needs to not be changed.
I have heard a colleague recently say we need to move from a world of "don't be evil" to "can't be evil." And so, you know, I think the blockchain is the way to do that. We've been doing this and the payment side for for quite some time. Now we want to open that up to other software platforms, other enterprises who might say, "Great, we could use this along our supply chain to verify goods and services along the supply chain are accurate all the way through and there's provenance of record. We want to be able to assure insurance records haven't been changed or modified. We want to be able to assure that contracts are what they say they are."
So we think there's a lot of amazing use cases. It's been tested at scale now in our own payment organization for quite some time. We're excited to open it up to other folks.
Erickson: And it's interesting, like you mentioned the evolution of blockchains over the last couple of years. Because data privacy has just become such a huge topic right now.
In the early days of the Bitcoin white papers, you had these cypher-punks that wanted full anonymity. You know, nobody wants to know anything about what the transactions are, just to verify that they actually happened. But it seems like businesses have embraced more of that permissioned blockchain that has the transparency and the verification like you mentioned.
Do you have any thoughts, Jeremy, about the future of identity in blockchains? This is a huge topic that could go a zillion different directions. But do you have any thoughts about what is important for identity with blockchains?
Almond: What I would say is I think the thing that for those of us who've been in blockchain for a long time are trying to solve there is if you look at, for example, Facebook's in the news right now with Libra. What they're trying to do is a good thing, which is help drive blockchain to be more mainstream.
But one of the challenges, or the ironic thing, is the whole idea behind the trustless and verifiable network to combat the issues that have plagued Facebook in the last years is very much a real issue. So how do you deal with privacy? How do you deal with data in a way where they're not stuck behind these gatekeepers?
I think actually blockchain is intended or can solve those issues if sort of used rightly. I think identity is in a similar area, right? Who owns our identity? Is it large organizations? Or do we have an ability to own and take back control of our data and our identity?
So I think the blockchain at particularly the consumer level has the ability to innovate there. And I think that's some of the power of decentralization in general. So we're kind of at this crux where blockchains can be open or they can be closed. Just like 20 years ago or 30 years ago, the internet could be open or it could be closed. It could be an AOL, right? Or you know, a closed garden. Or it could be an open garden.
I think we're right in the middle of that journey right now. And I think there's a lot to innovate and I'm excited to see where it goes next.
Erickson: Do you think that open garden is what Facebook's trying to accomplish? Is this something for consumers to just pay for things online? Is that what they intend for it to be? For Facebook's Libra, I should say.
Almond: I think it's a good thing that they're moving the ball forward and making blockchain more mainstream. Because blockchain is transformative technology. We now have the president and the Congress talking about it. So I think that's overall a good thing because the narrative of discussion should be happening. Who owns what? How do we deal with privacy? If you look at what they're intending to do, there's this notion of moving toward open.
Right now it's a bit hand-wavy. If you look at the white paper, there's not a clear path for it. There's a goal toward it.
And so I think one of the things we're trying to do is ensure that there's this notion from the very start when Paystand's building blockchain tech to create open infrastructure. We think that financial services in general need to be open, and so how do you do that? Those are actually really hard problems to solve.
So if you trust their narrative, and I'll leave it up to the readers to decide, there is a goal to make it open on the Facebook side. There's not a clear technology path to do that yet for them. And I think personally, we've tried to ensure that anything we build, there's a clear technology path to leave things open. Because that is effectively the power of the blockchain. The power of the blockchain is to help democratize some of this infrastructure. It's to put checks and balances on organizations.
And so if you take that component out, all you're doing is just respinning up a sort of newer technology to do the same thing and we think that blockchain actually can be a force for good and a driving force for change.
Erickson: That's a perfect segue for the last question that I have here for you, Jeremy. Our audience is individual investors. We are not experts in the payment space like you are. But we do want to look for companies that are innovative and put capital to work to support them.
But it seems like this digital transformation is kind of capturing all the headlines, right? There's a zillion buzzwords flying around out there. Every company now is a tech company, no matter what industry they're a part of.
Can you help us separate the signal from the noise here? What are a couple things that individual investors like us should be watching to really determine who's actually being innovative out there on the payment space? Either customers that are deploying payment solutions or are in the payment space itself.
What are a couple of things you would recommend that individual investors be watching?
Almond: There's obviously a lot of consolidation in the public markets around the financial services in general right now.
The good news, I think, for individual investors is digital transformation has touched a bunch of industries. The Internet has transformed a number of industries. Financial services in general have been one of the last. The reason is sort of obvious. By nature, financial services needs to be more conservative. So what you're seeing is a number of the innovations that I would say happened over the last decade are just beginning to happen in financial services. I think there's a lot of room for growth in general.
Two things are happening at the same time. One is the old guard players in financial services are doing a lot of consolidation right now.
And then the second thing is that the new fintech companies are coming and they're digitally native by their sort of nature.
So what you'll see is there's been a ton of growth in enterprise in general. So if you look at the SaaS [software as a service] index, for example. That kind of transformation is basically played out in the Salesforces of the world in a number of sort of traditional industries. You will see, I believe, a whole class of companies and financial services that are going to see massive, massive growth and it's happening in the private markets. It'll soon happen in the public markets. Where these organizations are bringing digital solutions to things that were traditionally banks. The banks' services have now been unbundled. Those services are now digital by fintech companies. They're growing very, very rapidly. And so private market investors have access to some of those companies now. But many of them are getting close to being public organizations. I think that's very, very early innings.
If you look at the size of the financial services industry in general, it's very, very large. And it's still very much a non-digital industry. I think look for digitally native companies that are attacking a clear problem in the existing industry that the banks can't move fast. Because the banks are very good at what they do, which is creating sort of regulatory trusted depositories. But they're not software companies. And so I think the software companies come in, there's a lot of value to be created.
Erickson: Yeah. Digitally native. So you mentioned SaaS, which is "software as a service." There's a lot of companies that have made a lot of money off of embracing cloud computing out there. It's been a great sector to invest in the last couple of years.
Are you thinking that blockchains companies who embrace blockchains are going to be the next wave of innovators?
Almond: Yeah, so our thesis there is blockchain is the new cloud. It's cloud 2.0. You effectively, a decade from now, if a financial service organization is not on blockchain, it's effectively like an enterprise company today that's not on cloud. There is no enterprise company that is a high-growth organization today that's not a cloud company. It's table stakes. You don't even ask.
In a decade from now, we fundamentally believe because it's more efficient infrastructure, you will not see category-defining companies that didn't bet today on blockchains.
Erickson: Follow the efficiency. I will keep that one in mind!
Jeremy Almond, again, is the co-founder and CEO of Paystand out in Scotts Valley, California and doing some really innovative stuff. Their website is www.paystand.com.
Jeremy, thanks very much for the time this morning.
Almond: Awesome. Really appreciate it, Simon. Have a great Friday.
Erickson: Yes, indeed. Thanks for tuning in. We'll see you next time.