Episode 4: The Intersection of Payments and Software

Ernest Rolfson  00:03

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Hey, this is Ernest Rolfson, the CEO and Founder of Finexio. Welcome to B2B Cash Flow Conversations, the podcast dedicated to sharing insights and innovations in business-to-business payments, working capital and cash flow management, and FinTech entrepreneurship. In each episode, my guest tonight tackle questions in the ever-evolving world of FinTech and payments industry that's rapidly evolving and of great interest to investors and businesses alike. Looking forward to having this conversation. So today, we're meeting with Dan Geraty, the Founder and Chairman of Clearent, a  full service payments processor and merchant services provider. Dan has over 30 years experience in the payments and software industries, and was named Entrepreneur of the Year in 2017 by Ernst and Young. He's been credited with Clearent's unprecedented growth since its launch in 2005. Good to be with you, man.

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Dan Geraty  00:55

Thanks for having me on, Ernest. It's good to be here.

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Ernest Rolfson  00:57

How you doing?

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Dan Geraty  00:59

Oh, great. I'm great. Spring is in the air. Vaccines are in the air.

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Ernest Rolfson  01:04

I was gonna say there's still virus in the air as well. The vaccine in the air is countering the virus in the air. Where do our friends and listeners find you today?

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Dan Geraty  01:19

I live in St. Louis. So that's where I am today. You know, I look forward to spending more time traveling around again, as we're as we're starting to come out of it.

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Ernest Rolfson  01:30

Yes. St. Louis isn't necessarily known as a payments hub. Is that correct? Or do we think that's a fair statement?

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Dan Geraty  01:43

MasterCard does have a big facility here. It's mostly a big data center. But there they have I don't know, maybe maybe a few 100 people or more out here. But no, you're right. It's not really a payment hub. Except that you know, Square came out of St. Louis. Also Jack Dorsey's a St. Louis native, we've you know, so we've got some we've got some payments in our DNA.

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Ernest Rolfson  02:10

Absolutely. So how did the idea for Clearent come about? And were you were you in St. Louis at the time and decided to build the company there?

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Dan Geraty  02:24

I wasn't really actually. I had been working in a telecom software company in New Jersey, of all places. But I'm from St. Louis. And we had sold the company, the telco company to Cisco Systems. And so I had some, some time to think about what to do next. And I was networking in different places around the country. But I grew up in St. Louis, I still have five siblings that live here, a bunch of nieces and nephews. So you know, it's definitely home for us. And I was fortunate to meet a group of people who had been in the payment space, I really didn't know anything about payments. You know, I just thought Visa, MasterCard did everything. I didn't know how large the ecosystem was. And so I've met folks like a gentleman named Norm Tice, who was on our board. It was an industry, he had been on the MasterCard board for 17 years. And, you know, he introduced me to payments and the payments ecosystem. And we met some technology folks who had built one of the first payments gateways, and they were out of St. Louis. And so just through networking, got to know people in the payment space and got to know more and more about the payment space. And I found it really, really interesting. And as you know, back in 2005, when we started there really wasn't much innovation in payments, especially on the merchant side. It was it was really considered a cash cow. A lot of the processors were bank owned, and there wasn't really there wasn't really much new investment going on. And that's really why we saw an opportunity to jump in and build a new and and much better platform than what was out there for folks at the time.

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Ernest Rolfson  04:04

Got it. That sounds the more we talked the more it sounds like St. Louis is a payments town. We were we got it wrong that we got it wrong. Yeah.

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Dan Geraty  04:14

Yeah. Like it's your brother. I mean, there are a lot of payments folks here right on my board. I had a St. Louis and who was the CFO of payment tech. I mentioned Norm. And then we attracted other folks from outside of St. Louis to the board as well.

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Ernest Rolfson  04:29

Got it. Got it. Taking a step back. I mean, how would you describe Clearent as a business? or How would you describe it today? Maybe for folks that aren't necessarily familiar?

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Dan Geraty  04:41

Yeah, sure. I mean, we're the merchant acquirer or so we stand between merchants or card acceptors on the one side, and Visa MasterCard on the other side, and we move around all the data and the money associated with credit and debit card transactions. So when you go in and you swipe your card at a at a restaurant, you get this authorization that that transmits our network goes to Visa MasterCard, to determine whether the card is good. And then you get this authorization, your transaction goes through the end of the night, all those transactions are batched. Up, they come to us. And basically, through a settlement process, we make sure that the merchant, the restaurant gets their money, but then everybody along the chain as well gets their slice of that transaction. So that all comes down to to Clearent to do that was was there. So we do that now for about 60,000 customers.

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Dan Geraty  04:51

Got it. It was there. When when you were getting into this, as there a specific problem that you were solving? Or was it more like, there's a lot of white space here?

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Dan Geraty  05:51

Yeah, I mean, it's just as you know, payments, especially, you know, as they continue to become electronified. I mean, it's just kind of amazing that this is still going on after, you know, Visa and MasterCard have been in the market for 50 plus years. And there are still plenty of cash transactions, plenty of check transactions that can be turned into an electronic transaction for the benefit of almost everybody involved in the, in the in the ecosystem. So it is a giant market. But again, what we saw was just a lack of innovation. I mean, it was, again, the the folks who do what we do were almost all bank owned, or, you know, big companies that were not investing in their platforms. And the customer experience as a result was generally terrible. I mean, you wouldn't find anybody that said they love their merchant acquirer as a partner. So that's why we really thought there was an opportunity to to build a better platform, both for the benefit of our own salespeople, our channel partners, and of course, for the for the merchants that we work with.

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Ernest Rolfson  06:53

Got it? Got it, I want to ask how things are kind of different now than when you started. But if you kind of just touched on something, it was like, yeah, I wasn't around these days. But when merchant acquiring or credit card processing first came out, it was actually seen in some respects is kind of helping the the merchant, right helping accelerate receivables helping increase ticket size. And now over the years, maybe that the light of the customer has dwindled. And it's now seen as a commodity in some respects. And, and it's about well, how cheap can you give it to me and seen as okay, I don't want to pay a fee for taking the card. And now discounting heavily all of those other benefits, you touched on around eliminating the paper and the waste and inefficiency. So I guess around that, like how is selling credit card processing? Your Merchant Services merchant acquiring? How is it different now back from back when you started? Because I think there are some pretty fundamental changes.

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Dan Geraty  08:00

Yeah, for sure, there are I mean, a lot of what was happening. And when we started back in the, you know, early 2000s, was simply it was all terminal base, you know, even in a restaurant, there was a terminal in the back that somebody was swiping the card. And you know, now it's much more about integrations with software, it's about, you know, I think it was actually Jack Dorsey who said it, but if you didn't, he shouldn't have that, you know, really payments should disappear into the background, the transaction shouldn't be about the payment, the payment should just happen without people thinking about it. So while that sounds easy, there's a ton of sort of changes in mindset changes in technology to enable that. It is, as you say, that, you know, if you're just out there trying to sell a terminal, or somebody already has a terminal, it's really it is a commodity, and it's hard to win. You know, we try to win based on service and a better platform, etc. But it's really this, you know, acceleration towards payments, disappearing into the background, that, that that's, that's really driving a lot of the innovation and making it easier on the merchant so that the fact that they have to pay for card acceptance, you know, you get they see more value out of it as a result.

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Ernest Rolfson  09:11

What you know, we say, Here, in terms of paying with car, when we get asked that question, why would people take the card is like, well, they're, they're willing to pay for it, if they see value in it. If it's solving a problem for them, they're gonna they're gonna pay, right. I mean, it's like, what is free in life?

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Dan Geraty  09:30

There's an expectation on, there's an expectation on the part of their customers that they're going to be able to pay with card. And so, you know, if you're in the business of delighting your customers, you're not going to end that experience when they go to pay and say, Well, you know, what, we only take cash or check and that's just not what your customers want to do. And particularly even now in the pandemic, you see this acceleration towards electronic payments. Even less cash has been used over the last year and a half. Yeah, yeah, you have to consider, you know, both sides of the transaction. When you think about whether or not you know, there's a value proposition in payments. It's not just that the merchant sees value and allowing people to pay with the card. It's what you and I see when we when we use our cards, right. So some people are all about the points.  And like chargeback protection doesn't really exist if you pay with cash, right. So there's, there's value on both sides of the equation. And you know, cards are here for a long time to come.

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Ernest Rolfson  10:37

I think it's moving as the industry is investing, much mentioned on the software integrations, so much more emphasis is now being created on that experiencial factor. And it's the wow factor, whether it's the Goldman Apple card, which is this beautiful virtual card dynamic thing. Or even you know, I bought a pair of slippers, I've got a hole in my slippers. Oh, so I bought a new I've got these Italian wool slippers. I've they're these luxury wool slippers. I bought them from Facebook ads, and all ecommerce, right? And now I've worn them. You know, these are expensive slippers. I'm wearing them till they're literally falling apart. You know, I want to get my last dollar of value out of these slippers. So I had to give in today. And it's all Google pay. Plugged right in and it's like it's two clicks. It's beautiful. You don't even have to do anything appears and it's like it's awesome. Shoes you're wearing. I'm wearing I am wearing slippers. That's I'm wearing Italian wool slippers handmade in Portugal with a hole by the pinky toe. And I've got a bunch of just put some duct tape that have been yeah. And there's a bunch of mulch in them because my dog went crazy. So I got a bunch of mulch in my slippers. So that's, that is I'm wearing my next co branded t shirt. I don't know if you can see that here. And very fancy slippers. I am wearing shorts as well. just round it out. Yeah. Great. Great. So what we can kind of think from here, because you mentioned the software, you mentioned the integration, you've been, you know, buying or investing in different businesses there. Were there any, are there any software specific? You know, the strategy around this had implications around an integrated software approach around selling and delivering payment services to whether it's a business or consumer?

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Dan Geraty  12:48

So you mean it at Clearent? Are the acquisitions. So yeah, yeah, yeah. I mean, we, we were eager to partner with software developers, you know, to enable payments as part of their value prop, which is, you know, great for them, because they get this additional revenue stream in payments, also good for their customers, because the, the experience of payments is much more seamless. And so we've been partnering with software companies for a long time, to, again, enable payments for them. And back in 2017, you know, we came across or met a company called Spot have in all things dry cleaning store management software, right, super sexy. But the idea was that almost everybody pays for their dry cleaning with a credit card. And we like the space and we like these guys, because they were the dominant player in their space, the the founders were ready to retire. And, you know, this intersection of payments and software we thought was, we still believe it is, is a tremendous opportunity, because software makes payments stickier because software is so sticky, right? So so we acquired Spot, and we move their customers to Clearent for payments, which was a much better solution for their customers, by the way. And so we were able, we were able to pick up you know, revenue synergies associated with payments as part of the revenue stream. But we were also able to really improve their business and improve the experience for their customers. And that transaction went, you know, so well, that we, we realize that, you know, as we as we go out to partner with software companies, from time to time, there'll be verticals that we really like, where we want to acquire a company as a platform. And so we we've done that in other vertical markets as well. And now, I don't know if you did you see the announcement of the merger with TSG and the creation of Explorer, which is, which is which I think when the announcement went out a month ago.

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Ernest Rolfson  14:54

No, no.

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Dan Geraty  14:57

So TSG was also an ad that bet company out of the UK, Australia, New Zealand. And they follow a similar strategy to clear that they are owned a number of software companies and verticals like child care and health and fitness. And so the two companies are coming together. And the new name is Xplor. And so we're gonna continue that strategy, we now have, you know, a global platform to continue that strategy of acquiring software companies in verticals that we really like, in addition to partnering with software companies, you know, that we don't know. But that we can improve their payment experience.

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Ernest Rolfson  15:39

I you know, I did see this, but it looks like there's now a whole detailed strategy out there and in a release, so so there's some specific verticals that you you guys really like? It turns out. Is that because verticals are reliant on some specific software to help run their businesses that you think payments fits nicely into?

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Dan Geraty  16:00

Yeah, we like to buy platform companies where the software is mission critical. So you know, the first one I mentioned spot, I mean, you run your entire dry clean,

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Ernest Rolfson  16:08

you can't use you can't run the dry cleaning, if you don't have the software. And if you run the dry cleaning operation, you need payments, payments comes with the software, you turns out you bought payment software, you didn't even know it.

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Dan Geraty  16:21

Yeah, there you go. And then, you know, we like other verticals. So we've, we've acquired a couple of companies in the field services space, right. So think about companies that have you know, 10 to 50 trucks on the road servicing HVAC, customers, we really like that one, because you know, it's a, there's a lot of whitespace for the software. A lot of those folks use Excel and Google spreadsheets and things like that to do their scheduling, or additions. Yeah, big opportunity for software, further penetration into the market. And the other thing that was happening at the same time is the whitespace, around payments, it used to be all those guys would bill you, you know, 30 days after they came to fix your HVAC. Now they have a tablet, and after they finish, they want you to give them a credit card right at your door, right at the point of service. And so a big whitespace around payments, that's that's expanding really quickly, as more and more of the Field Services folks expect to be paid by card and expect to be paid when they do the service.

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Ernest Rolfson  17:22

Got it got it so that they're actually that these folks are walking up, they've got a tablet of some sort with their scheduling software and billing software. Now they're able to just turn around and give it to the consumer, right and just swipe their card in the tablet. Is that the kind of experience we're talking about here?

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Dan Geraty  17:38

Yeah. And the software is much more rich than sort of a point of sale. I mean, it does, you know, truck routing, and scheduling matching technicians with jobs, etc, etc. So it's, again, it's mission critical to the field service solution provider.

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Ernest Rolfson  17:54

I mean, is this, is this the biggest change in the landscape? You would say, since you've started? I mean, is this did you see this kind of trend coming? I don't know if you saw it, that you'd be in a business of buying and owning vertical specific software businesses and the like.

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Dan Geraty  18:12

I wish I could tell you I had that much for you back in 2005. But no, no, we didn't. We didn't anticipate this. But you could see it starting to happen right back with. You know, openedge was one of the first companies if you remember them that the global bought, where they were doing a lot of integrations with software companies and growing like a weed as a result. And you can't help but take notice, as you know, you know, in the merchant acquiring space, attrition is just a challenge, right? Yeah. Unless you're, you got a real hook. And the software is the hook. And the software is even more of a hook when you own it.

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Ernest Rolfson  18:52

Right, right. Just for listeners too that may be familiar with a company like a Stripe or something like that. Like how is maybe what you're doing different than that. It seems like it's in the general trend area of right, having credit card processing available to developers, you can embed into the software.

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Dan Geraty  19:14

I mean, Stripes, Stripes, a terrific company, they've done a great job of making it really simple for people to integrate payments into their software solution. What we find is that, you know, Stripe does, it's a little bit more of a one size fits all kind of a solution. And while software developers when they're smaller, you know, Stripe is like kind of the go to when you're just getting started. As this software company matures, as the business matures, we find a lot of them are looking for a different solution with more support, more support for their customers, different pricing solutions or different pricing options. So you know, they're a terrific company and they seem like they're taking over the world with their valuation, but you know, it's a little bit like Square where it's not a one size fits all. Not everybody can be a Square merchant when complexity starts to enter the equation.

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Ernest Rolfson  20:07

Right? Okay. So it's everyone has its has its place or its specific focus, essential

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Dan Geraty  20:16

It's just gigantic. Right? The global payments market, is huge.

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Ernest Rolfson  20:22

It's stupidly large. Absolutely, absolutely. I'm excited for. Now, Stripe has so much money now they can just start buying islands. They have all the islands around Richard Branson is gonna be like, Hey, we're all these people that own these islands here. Yeah, maybe that Red Bull Island? Unbelievable. Yeah, well, I look, I see the same, the same trends, you're not to talk about my book too much here. But it seems like you know, the parallels that we're seeing and credit card processing, and how the shift to getting the processing into the software. That's, that's actually what I'm betting my entire company on is that, you know, CFOs are not going to be buying paint outbound payment processing anymore, out sourced check printing anymore, or having their back office staff be making payments over the phone with a credit card anymore. They're buying procurement software, or AP software to run their business. And the expectation is they're pressing one button that says buy this good or service. And it's not only writing to the accounting software, but it's also making the payments for the minutes an embedded part. And payments is pretty confusing and complicated. And pricing can be opaque. You know that you've seen these interchange tables that grow with complexity every year. So I think it's easier to not engage with it. And if you can delight a customer or solve a business problem, it's actually very elegant to get the payments in there. And once you're in, it's very hard to get pulled out, especially if you've got some kind of vertical integration or vertical focus are some series of vertical partnerships. Like your example with the laundromats were very heavy in the hospitality and higher education. verticals, for instance.

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Dan Geraty  22:19

Yeah, it seems like in b2b, it's what we, you know, have seen happen in on the merchant acquiring side over the last 15 plus years, is, again, this idea that you have to make it seamless, basically make payments disappear, because people don't want to deal with payments. Like he said, they don't want to engage with payments, they just want it to work like a utility. And it's not easy to just make it work, right.

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Ernest Rolfson  22:42

It's actually the complete opposite.

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Dan Geraty  22:46

Right, right. It's totally right. So, you know, again, people talk about payments and commoditization of payments. Well, again, if you're swapping out one clunky terminal for another clunky terminal, yeah, that's, that's pretty much of a commodity sale. But if you can really delight your customers by making it so super simple for them and for their customers. That's real value.

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Ernest Rolfson  23:08

Yep, yep. The grass seems to be always greener on the other side, doesn't it? Especially when you're swapping out one clunky, you know, not to disclose any kind of confidential info, but and then going a bit off? off topic? I mean, around that point, I mean, when you think about you've actually did become yourself a merchant acquirer, right, not just an ISO o or a super ISO, you actually develop their no one, develop the infrastructure. So maybe it'd be interesting for you to mention about, like, when and how did you decide to make that investment? And it always seems to be like that feels like it could be a commodity piece for like, oh, I'll just change merchant acquirers are all just change processors. And I'd love to hear from you why you think that's not necessarily so easy or smart. And if you've got a partner in place, you know, that's a pretty big undertaking, making the switch and the risk and complexity and customer service. So I just threw a lot at you. But I, it's interesting, because you did make that jump. And that's not a common. That's not a common move, I would say, considering the years many, many 1000s of credit card processing and ISOs in this country, and growing only so many very big ones of which your company is one of the few very meaningful ones globally.

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Dan Geraty  24:32

Yeah, so it's interesting you would ask that. Part of it is a little bit that we were not coming from the payment space. And, you know, like a lot of entrepreneurs were like, well, we could build this back end settlement system in six months might cost us about $5 million. And I thought I was being really savvy when I said, Well, we better just double that estimate. Because because everything's harder than you think it is. So let's say it's gonna take us a year.

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Ernest Rolfson  24:59

that was probably pretty astute, though. But you were probably still off by double that. Right?

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Dan Geraty  25:03

I was still off. Yeah, I needed like club, quadruple it. Because it's like you said it's complicated. They're like 450 Interchange rates, you know, so yeah. But our strategy right from the beginning was to build the full stack, you know, payments processor, because what we wanted was control. And we want to control, you know, partly for our own business, because we wanted to control our costs, right. But we also knew that if we didn't control the, you know, user experience, we didn't control the roadmap, we didn't control features. And we were subject to using, you know, one of the big, you know, mega platforms that's out there, right, right, then it'd be impossible to differentiate, right? You're just basically everybody's selling the same loaf of white bread, because the backbone of what they're using is the same across all right, different ISOs. And so, so we, we build that processing platform, right from the beginning, it's funny how many times I would go to like to an ETA and describe the people what we were doing, and they would just like shake their head, like, that's just, that's just not a good idea. It's a commodity, why would you want to do that it's not a good idea. But we really felt like, you know, if you're going to differentiate yourself, the differentiation starts from the technology platform. So that's why we made that investment.

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Ernest Rolfson  26:20

And I think this is a good lesson for the investors too. And you must have had great investors on board to see that vision because it takes a massive investment, and so much time to build something of real meaningful, like infrastructure type value in this space. And most investors don't have the time horizon, to be able to withstand that, because now years later, your company, I don't know that it's partly on public, your your company may be worth billions of dollars at this point. But it took a long time for you to get there and building that that was a, you know, you probably had to go back to your investors multiple times and say, taking longer and more money than we thought is Yeah, I'm not putting words in your mouth, sounds like that's what happened.

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Dan Geraty  27:05

Yeah, we did for sure. And we went back five different times, although we were pretty capital efficient. I mean, we only raised like $25 million, only, you know, yeah, before we had institutional investment. Yeah. But almost 100% of that money came from, you know, individuals and family offices. So it wasn't until 2015, when FTV joined the cap table as a minority investor, that we actually had real institutional money at the table. And there were pros and cons to that, as you might imagine, like, you have a lot of individual investors, which, if you treat them right, is a great network for you. And, and that's how we felt, I mean, we had almost 100 people on our cap table. But But I liked that process. Even though it sounds unwieldy to have 100 people on your cap,

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Ernest Rolfson  27:56

I think we're about half that. Now. And I've been certainly gotten some criticism for doing it. But that's the way that you did it. And But to your point, you foster some of those relationships, you work with people, as advisors, you ask them for advice. And the strategy for me has been to try to find people like yourself that have done it before, that can not only give the council but can also help it I think it's the ultimate smart money, right? people that walk the same path in the same kind of shoes, versus that institution, where the love you until they don't now FTV or, you know, blue chip that their top class, that's how me and you got to know each other through those guys, but they're the, you know, probably the best investors you could get for your company.

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Dan Geraty  28:49

They were for sure at that phase, because they're, you know, the they know all about payments and their growth investors. And still, you know, that was, you know, we were very much looking for a growth equity partner at the time. But yeah, it's, I did have a really great group of investors. And as a result, we were able to have a, you know, I thought was really important to have a real board, you know, real governance and have people on the board that understood the business. And so, effectively, we ended up with seven independent directors whose interests were all around the company, not that it was divorced from their investment, but that were mostly about trying to solve the problems for the company. And so that worked out well for the for the beginning phases of Clearent.

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Ernest Rolfson  29:35

The these were these were these truly out some of them, were outsiders, truly or were they on your cap table, but they wouldn't be willing to run our cap table. And had payments experience. Yeah, no, that's great. I've done similar. It's kind of cool that we share even some of the same investors like David that got involved with them early on, and involved with us early on to so?

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Dan Geraty  30:03

Well, there's a lot of investors who've done very well in payments and are always looking for another. Another good opportunity.

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Ernest Rolfson  30:11

So why don't we, since we're stumbled onto that track? I mean, you are an investor, at Finexio and an advisor. I mean, what did you see here that you liked? And what thoughts do you have on b2b payments, specifically, that you might want to share?

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Dan Geraty  30:32

Well, let's start with that with b2b which is just that it's a gigantic market, you know, it's just huge. And it's just the early innings of, you know, becoming like, or moving to electronic payments. So love the size of the market, you know, as we said, whitespace, I mean, we love the idea of whitespace. And the opportunity to grow and that there can be multiple winners in the space, it's by no means a winner take all kind of a market. Yeah, as you said, I've known you for for quite some time, I don't know, we went to an FTD conference together, maybe seven or eight years ago, right. And I spent,

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Ernest Rolfson  31:08

I was in I sent out into Napa, they tried to close off the valley, but they could not get me out. So I told my way did the straight you're not a portfolio company, and you're not a limited, but they just let me let me and they they liked me enough to let me in. I had a few interesting things to say, yeah.

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Dan Geraty  31:25

Well, and I think that that's part of it, right, you have been living and breathing the b2b payment space for a good part of your career, and you've been championing the next CEO for I don't know how long it's been five years, the last five years have been building the company, right. As a result, you have a company and a platform that's, you know, five years mature, which is, you know, I like when to invest in that stage when there's a platform that's out there that has differentiation. And also, to return to another theme that we've talked about earlier is just this, this idea of making payments simple. And the flexio solution, I believe is super simple, right? You know, all of the AP people have to do is, is create that AP file and then give it to you and like what could be simpler for them than that. So love that the company is helping to speed the process of making b2b payments, simple, seamless, and customer focused.

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Ernest Rolfson  32:25

We started what you know what one of the ideas was, let's let's just get the data in like an Excel file like an a CSV, it's like we're like every company can do that, from the shoe manufacturer to the real estate company to law firm. And, you know, no it No problem, right? It's like, Hey, can you get your back office worker if you had to generate an some Excel file. And, and this is kind of when Dropbox or Box or Google Drive is kind of coming out. And we're like, you know, file transfer is great. And we had this vision for integrating into procurement and AP software. But we said to start, we have to make something were to just take advantage of this, because we saw the barriers with banks having this arduous crazy implementation process and three month cycle form on cycle of getting somebody live and up and running or like, just be able to get the staff to move a CSV into a web page, and start making payments as a way to start and so that we still have not seen that really replicated yet. And b2b payments, the technology exists. So just that idea of how do you make it simple? And how can you get adoption and traction? And I was thinking about how can we deliver payments where, you know, again, 12 trillion checks, half of its paper 20,000 or so middle market companies that need this? How do you get your first few customers? How can you get some traction? How can you show some excitement to write get the investment to build that Bigger, Longer term investment to get into the software space that to your point takes longer and more expensive than you thought? But you can't go to the biggest player in an industry and say, Hey, take my processing solution and plug it into your software when there's no proof points. It doesn't, it doesn't really work, you know?

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Dan Geraty  34:19

Yeah. Yeah. The other nice thing about your business is the demand side is clearly there. Like they definitely want to offload this process. And again, you you, to a certain extent, benefited from the pandemic. And that's to say, yeah, let's accelerate this move to having somebody else do the actual payments, we'll just deliver the file. And so from an investment standpoint, I think that the opportunity on your side to do to make everything simpler once you receive that file to invest in the technology, once you receive that file to make it all just work beautifully on your platform. That's that's the kind of investment that can be made and you can just keep getting better and better. Now that you know that demand is for sure there on the part of the payors.

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Ernest Rolfson  35:02

The demand is there. I mean, we've seen probably a five year and I think this speaks to digital transformation. Generally, I think right now it's a great time to be a software company, even a better time to be a software company selling something to the CFO, where we've seen like a five year acceleration of a push to digital transformation, around outsourcing, payments processing, workflow automation software, we're targeting all those factors in one, which is nice. And so I think that now that companies have had to work from home for so long, and almost overnight, go digital. That barrier of Oh, yeah, it's a priority. But you know, digitizing our payments is in the top priority. It's so much more obvious now for companies to go and do this. And they're looking for ways to I hate to say it, the companies did layoff people and reduce their footprint due to rabid so now they're like, how do I not go back to that old cost structure? How do I not hire people back? Others are just like, I like the efficiency we got working from home being digital. How do we continue that? Yeah. So it's, it's been it's been pretty amazing.

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Dan Geraty  36:22

It's Norm Tice. So again, gentlemen, that was on my board and was a made a lifetime banker on the MasterCard board for 17 years wonderful guy. He used to talk about when EDI was first, you know, the technology was first invented, so was back in the 1970s. And he said, I remember, we were all in a board room. And, you know, we had, we had managed to create this EDI solution, bank to bank and somebody proudly proclaimed that this is the death of the check and help us like 1970s. And it seems like it's just impossible to kill the check. But maybe we're starting to finally.

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Ernest Rolfson  37:03

It is it is dying, it's slow as death. You know, and there's somebody at Chase listening to this podcast, and they're in a room, they're in a check printing room, someplace in the bowels of Chase and they're just hanging on to make sure that they're that they're the last person there, they're going to flip the light switch off. 30 years from now, they'll be in that room. Now. There's that one light bulb, you know what the string, they're gonna pull that string and close the door. And that's that that'll be the end of the movie, but I think we've got a ways to go there. That person in probably in Ohio, or knowing Chases footprint, they're probably in a giant 100,000 square foot facility in Ohio that is some bunker.

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Dan Geraty  37:43

Well, that's great. That's that's the demographic that all the podcasters are after Ernest.

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Ernest Rolfson  37:51

I'd like that person raise the prices on your commercials I'd like he or she to be listening in and and they can they can write in and tell us what what they're doing. What we're on. Absolutely. Now, it's crazy. Even digital check. E-check is is fairly slow to adopt. It's it's still gaining some ground, we've had a lot of success with that. We we have a client. It's about a 200 year old college called Amherst College, up in Massachusetts. And they had an very interesting COVID problem, which is that a school is closed, and they've got heavy international student component, right? So now all of the Chinese students, well, those poor kids, they can't even go back to China. They've been stuck in random places, wherever you can find them. Other countries in Africa, kids in Europe, and at the college, they only had their dorm address. And so now they've got to refund tuition. They've got a refund room and board. They have no way to get them the money. And so first we thought well, maybe we do some crazy, international money transfer thing. These people are all overseas. We've got a partnership with Veem and they're a client of ours are really excited about that and our work with them Marwan their CEO is going to be a guest here soon. And it turns out it was actually although that's an awesome solution. probably overkill for this what we realized was we had all the student emails, so we're like, Can we just send them a check or just send them a picture of a check digitally, and now they can have the freedom and wherewithal deposit that wherever and however they want so using the check, you know 21 technology and everything but just kind of digitizing the check a new form factor. That was a great way and some of them I'm sure use Pay Pal to convert it. Some of them use something in their home country to convert it and little dicey there is we kind of figured this out and there was high intensity by the school and college around helping get these students get their money but Interesting implementation and way to use some kind of newer tech to solve some old tech problem. And I realized that wasn't necessarily a b2b use case, we're a b2b company. But again, if you're embedded with a company, they like you, you're solving their problems. You've taken them from paper to digital. The next time they have a payments problem that pops up, they're not calling their bank. Who are they going to call their bank that's going to help them with this right? They get a call. That's right. They're gonna tell me next that movie was actually written and founded by a man in St. Louis. But I don't think that's the case on that one. St. Louis, the payments capital of the Midwest. That's, that's great. Now good to share some of these, some of these war stories here. So I wanted to just find out from you to, uh, you were on the Inc 5000 fastest growing companies for like eight years in a row and Nelson report hedge is one of the top us merchant acquirers. I mean, what? What was the secret sauce here? You were EY Entrepreneur of the Year? You know, what advice? Yeah, you know, for people like me, others, a lot has to go. Right, in your favor, certainly. But this also doesn't seem accidental something. Tell me your secret.

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Dan Geraty  41:38

to say it's what everybody else tells you. It's that you have to hire really great people, you have to give them an environment in which to be productive, where they want to work where they, you know, you know, feel like solving problems together is a really rewarding experience. You know, so culture is just, I mean, it's just incredibly important that you're building this idea that it's, you know, you know, we're in this doing something special together. And we're attracting as many smart people as we can to go solve problems. So, so there's nothing, nothing surprising about that. And then I just, I really firmly believe on the power of a platform. So not only the platform that we built in claret, but when we go out to buy companies, we're looking at the power of their platform, and the differentiation that the platform gives them. And so I think those were, you know, two of the most important reasons for our success. We surrounded ourselves with good advisors, good board members, good partners. You know, it's we certainly made mistakes along the way. And there are things we would do differently if we had it all over again, but but love the team that we built, and I firmly believe that it was the, you know, that team and the people that that got us to where we ended up.

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Ernest Rolfson  42:51

Yeah, and you spoke heavily about your board and getting the right advisors and board members there as well. So I'm sure partly kind of avoiding some of the mistakes that they made in their past was, yeah, probably something,

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Dan Geraty  43:06

Do your best to never, like when you're hiring somebody never settle for good enough, always go and strive to find the best possible person that pays huge dividends.

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Ernest Rolfson  43:17

Absolutely, we've seen that.

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Dan Geraty  43:21

So I think every entrepreneur has,

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Ernest Rolfson  43:23

so let's just talk here about, you know, you did eventually grow the company large enough to sell it or sell a majority piece. And now there's another combination here, and exit, but what what was your like? How did that investment that was with Advent? How did that change the company's trajectory? You know, what did that free you up to do? Or think differently about how to grow the company? Was there a specific payments opportunity or growth opportunity you all saw together that you want to pursue?

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Dan Geraty  43:57

Yeah, for sure. So as you know, I have that it's probably been more successful in payments than any equity firm out there, you know, creating, you know, worldpay. And then they've owned a lot of assets around the world in payments. So incredibly smart, talented group of people. And, you know, we had done the Spot acquisition, you know, saw that it worked well, and wanted to go out and buy additional companies. And so we just needed a sponsor that, you know, could help us do that both, you know, operationally, as well as with deeper pockets. And so admins fund their current fund, I think it's like $17 billion.

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Ernest Rolfson  44:38

Just enough, as it turns out

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Dan Geraty  44:40

Just enough to go buy a few companies and so, so bringing them to the table, you know, brought all that expertise, all that knowledge, all that execution ability, and you know, pretty fat checkbook, I shouldn't say checkbook, electronic payments.

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Ernest Rolfson  44:54

It was a digital wallet, and he was a digital

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Dan Geraty  44:57

Exactly, and he was an E wallet to buy company. This is pretty impressive.

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Ernest Rolfson  45:01

Got it? How do you think in terms of payments, it has been white hot, you've benefited from that it's a great time to be a seller right now, it's actually worse time to be a buyer and an investor. And you hear about the valuations, we've seen, like in the b2b payments space, there's only just a few public names right Wex, fleetcore, an argument could be made about Koopa. Bill.com, Repay, soon to be Avid exchange will probably get a $10 billion valuation here, just there's no way to really invest publicly in b2b payments. Some of these other areas in payments are a little bit more accessible. However, the prices are still very high. Valuations are pretty eye popping Visa and MasterCard stock has gone through the roof. There's been a big recovery in payments since COVID, there was an initial dip, and then actually people did reasonably well, because of this shift, you mentioned to ecommerce and this digital transformation shift we've been talking about where probably more paper was eliminated due to COVID, then business prospects being down due to reduce spending. So So when you're making an investment making an acquisition around payments, are you how concerned? Are you about the price you're paying? versus the market fit and strategy? I'm sure it factors in but just kind of curious about how you in some of the top minds in payments, PE are thinking about, you know, investment strategy around this just at a height, you know, high level General, general terms?

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Dan Geraty  46:41

Yeah, so I, you know, we've tried to be very disciplined about it, I think what you're seeing these days is, you know, software companies, were the ones who used to talk about being valued on a multiple of revenue. And that seems to have crept into the payments sector as well, where people want to be valued on a multiple of revenue. Sure, do. You know, once you get to see, of course, everybody does. Once you get to a certain scale, though, you're you're going to be valued by a multiple of EBITDA. So we had to be really disciplined and continue to be disciplined about what we buy, because we have to be able to see, you know, taking something that we might have to buy on a multiple of revenue and being able to look out 12 to 18 months and know that on a synergized EBITDA basis, it's going to be an accretive acquisition. So that does mean that the number of companies out there that are, you know, fit into those parameters is is smaller. But, you know, it's just the fact of where the market is these days.

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Ernest Rolfson  47:45

Yep, that makes sense. Yeah. So it's, so it's almost like you can have a payments business, it's growing quickly, you're not you don't have any earnings. But if you can show an acquisition and acquire potential acquirer that your platform or product fits nicely into their ecosystem, and can drive even more value, your odds of getting a deal done and having successful Win Win outcome is, is a lot higher.

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Dan Geraty  48:09

Yeah. And I think that in the, you know, the high growth part of the world, everybody wants to know that your unit economics work. And if your unit economics work, then hey, you know what, let's just pour gas on the fire and build it up. And, you know, we'll be able to sell it, you know, on a multiple revenue later, short, much bigger number short, and so that that actually makes it even more problematic to go out buy things because because a lot of sponsors are still pushing for the kind of behavior whereEBITDA is certainly a distant second priority to revenue care. Sure. But you saidevaluation is so highly correlated to revenue growth.

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Ernest Rolfson  48:48

How much and rate of right I mean, it's so important, but you touched on it. I mean, I think the days of the, you know, the Uber valuations and some other names I can't think of right now or you're just upside down on every transaction you do, or every sale you do, you're losing money, those days are definitely over. And we are in this kind of rapid growth curve, which is exciting because I have a business that's like that, where we're not we're making money on each transaction, despite not being profitable overall. But if you can show the growth and show that there's a big path to upside here, you can keep building and extending your reach. building out your infrastructure, right?

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Dan Geraty  49:27

Yep, that's good margin on every single transaction that you do.

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Ernest Rolfson  49:30

Exactly. So So what's next for you? We talked a little bit about the future of Clearant and they go forward but you personally and also just the payments industry as a whole. I don't know if there's any predictions you want to make, but what do you kind of you personally excited about working on what what other big trends in payments? Are you fascinated by you've mentioned risk and security around payments to me in the past, so I know you have an interest in that. But what are you kind of kind of keeping your eye open towards? And where are you spending more of your time?

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Dan Geraty  50:07

Yeah, so I'm, you know, still involved in Clearant on the board, or I should say on board of Xplor. And so that's, that's an interesting place to be. I've invested in six or seven different new relatively early stage, you know about Finexio stage companies, some in payments, some in you know, FinTech more broadly. And, you know, I continue to think that, you know, things like, open banking is pretty exciting. I think real time payments is interesting, because there are a lot of applications for that, which, you know, where you're providing a totally new value proposition to the recipient. Ecommerce still has so much room to grow. And I think that's a really interesting spot too. And of course, as you know, I think b2b is a great opportunity too. Payments, you know, it's just such a great market, as we discussed, it's big, it grows every year 60%. So no matter why, you know, clockwork and just, you know, if you're part of a market that's growing 6-8% that's, you know,that's a tailwind To start with, that's just great for your business.

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Ernest Rolfson  51:20

That's great. That makes a lot of sense. It just as a final, maybe some kind of Final thoughts here. Any other advice? Maybe someone just trying to start up a payments company, a FinTech company, you mentioned, you know, you mentioned you made some mistakes, things you would have done differently, any, any kind of ways you could kind of pay it forward here, or any kind of advice, you'd even give your former self around how to get something going. And we each have our own war stories about getting things going here, your art in arguably a lot more successful than I've been so far. Hope to be behind you one day.

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Dan Geraty  52:04

Yeah, well, no, we're all we're all rooting for you. Ernest, obviously, you know, I think that we've touched on a lot of the themes, I think that you have to find a place where, you know, you're most in life, just the way I think about it is, you know, what is the platform? What are you doing this differently? How are you making payments kind of disappear? A lot of the things that we've talked about today are the things that somebody starting out in this space should have top of mind. If they're if they're just getting into payments now, because there are really good competitors out there in almost every sector.

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Ernest Rolfson  52:40

Getting fiercer and fiercer, right?

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Dan Geraty  52:42

Yeah. It really ended, you know, it's always been fierce. It's just always the fact that it's such a big market. And that customers, you know, keep moving from place to place to place. And so there's, you know, always an opportunity to pick up a customer from that side, but it's also true. Yeah, but, and then there's always the guys who are, you know, stranded on a legacy platform, there aren't people to innovate. And so there's opportunity to innovate. So, you know, I think there's still so many opportunities for entrepreneurship in the electronic payments ecosystem. Just you just have to be careful about where you pick your battles.

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Ernest Rolfson  53:17

Sure. Well, look, that's um, that was the list of questions slash general dialogue that we naturally stumbled into. Yeah, it's been a delight here.

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Dan Geraty  53:31

It's been good talking with you Ernest.

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Ernest Rolfson  53:33

Thanks for listening to B2b cash flow conversations. This is Ernest Rolfson, the CEO and founder of Finexio. I welcome your questions and comments. You can reach me at podcast@Finexio.com. You can also find us on Twitter @FinexioPayments. To subscribe, you can go to Finexio.com/podcast. Be sure to check out my new episodes on Apple podcasts, Spotify, or wherever else you listen to podcasts. Thanks and talk with you again soon.

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