This episode of the Fintech Layer Cake podcast features a deep dive on the payment processing space with Jareau Wadé, Chief Growth Officer at Finix and co-founder of Balanced, who’s had a front-row seat right from the start.
Fintech Layer Cake is presented by Lithic and hosted by Matt Janiga, our general counsel, and Reggie Young, our product counsel and author of the Fintech Law TL;DR newsletter.
Highlights
What was it like starting a payments company 10 years ago?
Reggie: I think everyone would think starting a payments platform company is a no-brainer today given Plaid and Stripe’s valuations. But what was it like pitching to investors with this idea before those companies were a sure thing?
Jareau: Everyone just assumed PayPal could be used for everything, and I don’t know if you have looked at PayPal’s API. Certainly in 2010, they were not great. But the idea of a developer-friendly experience for payments was not that well-known at the time. And this seems silly now because that’s what everyone is moving into. Obviously Stripe’s successfully popularized this idea. But at the time, we were one of the first to do that. We just wanted to move money quickly.
We started to realize that there was also not necessarily a lens on exactly how transformative financial services and digital payment tools would be to the majority of humans on the planet. So that’s one reason that we wanted to build more infrastructure so that other experiences could be built on top of that. But at the time, I don’t think the VCs really got that idea.
What was it like before all these APIs and other service providers?
Jareau: On the payment side, it was very different. There weren’t really APIs or, if they said they were, they were not up to even modern standards at that point. But we used Stripe. I think we were part of the first 100 customers of Stripe. They were called dev/payments. Didn’t have what we needed. I remember getting 80-page PDF specs from some of the bigger processors and banks and working through those. But it was slim pickings. It was not clear how to build it. So as a result, we built a lot, not only the integrations, but some of the internal services ourselves so that we could build on top of them to create whatever experience we want with our API.
How did Balanced initially find a processor?
Reggie: We’d love to hear more about finding a processor and that whole experience. It feels like the biggest chicken and egg thing for payments companies is like, at the time, you need to work with a bank like Wells Fargo and JPMorgan. But they probably won’t talk to you until you’re big and have your own team, controls and everything set up. So how did Balanced deal with that cold-start problem?
Jareau: It was difficult because we were getting market signals and growth. So we were starting to have real customers and real volume. But we were too small to be underwritten by a large payment processor. So we had to do the resourceful, scrappy start-up thing, which is just find a way to make it go forward and deal with the next problem as you get there. So specifically we set up a series of merchant accounts through various ISOs, and we processed payments on those. So it was like buying T-shirts. So say we had a T-shirt company, that’s what Balanced was, a hypothetical story. And we were screen printing them, but we were getting our inventory from Costco.
When you were at Balanced, what kind of customer education did you have to do?
Jareau: So the biggest thing that we found is that customers would come to us for their hair-on-fire problem. We’ll start at marketplace. We need card acceptance. They might go get a solution then. It might be a traditional merchant account. It might be Stripe at the time, Braintree, whatever it might be. And then they would be making manual payouts through PayPal or writing checks or something like that. Over time, they started realizing, hey, we can’t scale, either for compliance reasons or for just manual operational reasons. We can’t scale the payouts like that. So we actually started positioning ourselves.
We had three things. We had processing, escrow, payouts. But we started positioning the payouts piece first because we realized that was the best way to meet the customers where they are. And then eventually we would sell them on the full stack, the full solution. Similarly we would often find people would get cards in their mind first, and then we would sell them on bank payments and then cross-sell them into cards. So part of our model was educating folks on the different payment types, the different payment models of a platform is not just accepting cards, it’s also disbursing.
What was your experience interacting with regulators as you were growing Balanced?
Jareau: A lot of the acquirers like the Chase, the Wells Fargo, etc., Vantiv, they got spooked by what was going on in the treasury department with Choke Point and often there were questions. Is there payday lending? Not aggregation per se was in the sites but there was a lack of visibility and granularity into some of the aggregated payments volume. And so when the processors would come up empty-handed about who was the actual underlying recipient, I think that’s one of the things that spurred on the development of the payment facilitator process.
There was some collateral damage though. As far as I heard, Chase actually went in and just kicked off a bunch of aggregators except for the big ones like a Square or an Intuit.
What did Balanced do exceptionally well in the early days?
Jareau: So just in general, being a bit more open to diving into the industry earlier versus trying to just completely ignore it. That’s the main thing. The one thing that I think we did do well, which I would recommend to others, is we ended up being forced to build really modular and extensible infrastructure and then eventually partnerships, so that we could move between different providers and partners who would say yes to a certain funds flow or to a certain MCC or whatever it might be.
That allowed us to be very, very agile in terms of not stepping over any lines because we work with a partner or an underwriter or a bank or a processor who said yes to a certain model. So there’s some complexity in that, both operationally and technically, but it’s manageable. And I think because we were engineers, we thought of that first. And then eventually, that actually turned very beneficial for things like PCI compliance or moving processors or things like that.
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About Fintech Layer Cake
Fintech compliance. It can be complicated and overwhelming — even if you've been in the industry for a while. But what if there was a podcast that made learning about it a piece of cake? That's what Fintech Layer Cake is about.
It's hosted by two popular fintech lawyers, Matt Janiga and Reggie Young. In each episode, they use their experience from working at companies like Lithic, Stripe, Square, and BlueVine to break down some of the toughest topics in fintech.
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