Thriving In The Digital Age: Caleb Avery and PayFac-As-A-Service

Summary

Caleb Avery, founder and CEO of Tilde, discusses the concept of PayFac as a service and the benefits it offers to vertical software companies. He explains that PayFac stands for payment facilitator and companies like Stripe and Square are examples of well-known payment facilitators. Caleb highlights the advantages of the PayFac model, such as instant digital onboarding and streamlined boarding experiences. He also introduces Tilde's role as a PayFac as a service provider, offering a turnkey white-labeled infrastructure for vertical software companies to quickly embed payments within their platforms.

Transcript

Joe Crist (00:01.306)
Hey everyone, welcome to another episode of Thriving in the Digital Age. I'm your host Joe Crist. Joining me today is Caleb Avery of TILD. Caleb, thank you so much for joining us. Can you tell the audience a little bit about yourself?

Caleb Avery (00:13.233)
Yeah, absolutely. So I'm Caleb Avery. I'm the founder and CEO here at Tilde. I started my career in the payment space at 19. So I started going door to door selling payment processing services to small business owners. Probably not what all the listeners were doing at 19 years old, but that was the start of my crazy journey in payments. And as my career went on, I started to see that more and more merchants wanted embedded solutions. They wanted something that did much more than just power the payments.

for their business. And so I actually took a step back from that first company and started doing consulting and angel investing for vertical software companies. Vertical software companies are a solution like Toast that provides restaurant owners with much more than just payments for their business. And so I felt like that was the direction that the industry was heading in. And as I started working with these vertical software platforms, I started to see that there was this bigger opportunity in the space, which is ultimately how I started.

Tilled and built out, know what became payback as a service

Joe Crist (01:14.843)
Could you elaborate a little more on what PayFac as a service actually is and like who would be using it?

Caleb Avery (01:19.611)
Yeah, absolutely. So I think it's always helpful when you're using there's so many acronyms in the payment space. Let's kind of break it down. So let's start with what is PayFac. And so when you think about the PayFac model, first off, it's short for payment facilitator. And well -known payment facilitators that you've probably heard of are companies like Stripe, Square, Braintree, PayPal, Toast. These are companies that have gone through the very laborious process to register with the banks, the card brands.

and the processors to get registers what's considered a master merchant. And so the benefit of this master merchant, sub merchant model, which PayFax employ is that they're able to create an instant digital streamlined boarding experience. That's one of the more notable benefits is, you when you go to Stripe or Square, two minutes later, you know, you could be processing payments for your business. Whereas the more traditional payment processors have very long, very manual, typically PDF or paper based.

you know, application processes. And so there's always been a lot of advantages to that payment facilitator model. It's the reason why companies like, you know, Stripe and Square and others are dominating the landscape. But the problem was always the process to go become a PayFac. And that's really where PayFac as a service comes into the mix. So traditionally it was a two year, multi -million dollar process to go become a registered PayFac, which, know, if you're doing $40 billion a year, you know, of course you can...

you know, go through that process. But for your average, you know, series A, series B, you know, vertical software business, that's not realistic. Your investors are not going to give you, you know, several million additional dollars and wait all that time, you know, for you to go through that process. And so when I started TILD about five and a half years ago, it started with this hypothesis. And the question was, what would have to be true for a vertical software company to leverage the benefits of the PayFact model, but to go live in one week?

And that's the journey we've been on for the last five and a half years.

Joe Crist (03:17.498)
I'm just trying to process that in my head. It takes two years on average for a company not using the service like this to actually have that capability. Yes.

Caleb Avery (03:24.749)
If you're building everything out from scratch and you're building the technology, you're building the team, you're implementing policies and procedures, it's a very, very long process.

Joe Crist (03:35.066)
there's a lot of risk associated with that too, right? Because if you're not building things correctly, you to have compliance issues, things like that. But you already have the system basically, sounds like a week, right? So it's pretty much plug and play.

Caleb Avery (03:37.572)
Absolutely.

Caleb Avery (03:46.213)
Yeah, we've gotten it down. Our first customers took about six months to get up and running on the TIL platform. So still better, but not great. So far this year, we've averaged nine days for the average company to come integrate to TIL. And so we've really created this turnkey white labeled infrastructure to allow vertical software companies to quickly embed payments within their platform and ultimately start generating revenue from those payments.

Joe Crist (04:12.218)
That's fast. That is very fast. That brings up another question. Obviously, there is a need for this. What challenges are you seeing for companies who need a product like yours or a service like yours?

Caleb Avery (04:25.585)
Yeah, I think for me, when I look at the space as a whole, there's been this gradual shift that's been happening where merchants are really clamoring for these ISVs or vertical software solutions. But really over the last few years, what we've seen is that more and more of these vertical software companies are realizing that they have to start monetizing these payments. They can't afford to give away all of the revenue to Stripe and just pass along the 2 .9 % and 30 cents.

from Stripe onto their merchants. And so the real existential question for these software companies becomes, well, okay, who do I partner with? How do I actually get this thing to market? And I think for a lot of these vertical software platforms, the only question that they're thinking about initially is how do I get the integration completed and how do I get to that day one of payments? But I think the bigger challenge is actually how do I scale the payments on my platform? How do I make sure that I can get all of the merchants utilizing my underlying

software and all the new customers that I'm signing up every month to actually transition to this integrated payment solution. And I think that ends up being one of the bigger value adds that TILD provides to our partners. And one of the biggest lessons that vertical software companies that are trying to monetize payments for the first time learn is that it's much more complicated than just that initial integration and launch. The actual go -to -market and scaling piece, a lot of times is actually the bigger hill to climb.

Joe Crist (05:49.53)
You know, so you got me thinking, right? So I've done a lot of implementations over the years of different technology. And one of the biggest challenges I found when implementing any sort of new technology or service, it's existing infrastructure. Are there typically requirements that you have of your clients where they say, hey, you need to have this set up in order for us to actually do what we need to do?

Caleb Avery (06:12.177)
Yeah, I think one of the things that we've learned in several years working across 100 plus vertical software businesses is the companies that are most successful coming and implementing TILD have already implemented a prior processing solution, already have existing customers processing on their systems. I think for us, when we've had companies coming to us trying to build new greenfield,

integrations or implementations, it's a bit harder. Those are companies that are actually better suited to use something like a Stripe, where you want all of Stripe's opinions on how payments can work, whereas our solution is really designed to give you more flexibility, more customization, and the ability to really tailor a solution. But if you've not actually had payments as a part of your platform before, a lot of times you don't actually know what you want. And so those can become more complicated.

implementations, you know, versus someone that's just swapping out, you know, Stripe for till. That's a, that's a really natural fit.

Joe Crist (07:11.981)
interesting here.

Joe Crist (07:16.9)
When it comes to these challenges, you're making that transition, So it takes about, you said nine days, right? So what kind of performance difference is there from, say, to tilt?

Caleb Avery (07:30.649)
Yeah, I think when I look at the reasons why someone is going to make that transition and come over to TILD, I think the first thing that a lot of people think about is pricing. And that's certainly one of the benefits of TILD, but it's not even, I think, the primary driving factor for folks. But certainly, we want them to be able to generate more revenue on every payment that's flowing through their platform. I think one of the things that we really put a lot of emphasis on is driving the attach rates. And when we talk about attach rates,

It's the idea of like what percentage of your customer base is actually using that integrated payment solution. I think that's one of the bigger areas where we focus a lot of our time and attention on to say, hey, how can we get to 70, 80, 90 % of your clients leveraging this integrated payment solution? So for us, that's where we're leaning in, not just on the technical side helping you through the integration, but how are you gonna price this? How are you training your teams? Do you have the right collateral?

the right resources. Do you need to make changes to your onboarding process? Do you need to make changes to your website? Do you need some battle cards as your sales team are trying to sell this new powered by Tild solution against Stripe or Square or whatever your existing merchants are losing? And so I think that's where we're really putting a lot of emphasis in that planning process is solving for that go -to -market motion. And a lot of that's really

consultation on our part. We are the payments experts. We've done this before across many, many platforms over the years. And these guys are coming to us because they want help in this part of their business. And ultimately, when you think about what the goal is in most of these companies, it's trying to drive more revenue from payments into their business. And the two sides of that coin are you can get the cost down or you can increase the overall volume that you're processing.

and ideally both. And that's really the allure of something like Tilt is let's get you in a sensible price point. But hey, if we can go increase your top line by four or five X compared to where you were, that's really where those transformative gains are going to come from.

Joe Crist (09:42.884)
That's huge right there. Yeah, when you're really able to scale it up effectively. So that brings up an interesting question too, is mean, obviously payments is anything with money, right? There's a lot of regulation, right? Like what kind of like regulations or even risks, you know, should someone to be looking for when it comes to actually using a service like this, or at least have awareness of.

Caleb Avery (10:01.698)
Certainly, I mean, I think there's a number of things to consider. If you're going and becoming your own fully registered pay fact, you're gonna be beholden to the sponsor bank policies. So are you going through and doing the proper KYC and KYB? Do you understand what MCC codes or categories that your companies are processing in? So there's some basic kind of tick the box stuff, but really the risk comes in when people actually start processing payments. Are these fraudulent payments?

Should we be asking more questions? Should we be requesting invoices on these? And for a first time payment facilitator, the expected losses are about 10 basis points on their volume in the first year, which a lot of people are not factoring that cost into the mix when they're considering other providers where they're going and taking on all of this liability. so partnering with someone like TILD that's implementing PayFac as a service, you're not having to assume

Joe Crist (10:40.484)
Peace.

Caleb Avery (10:56.057)
all of that liability. You're not having to handle the day -to -day risk questions. You're not having to handle the day -to -day underwriting. You're focused on your core business, not payments. I think additionally from a regulation perspective, PCI is another regulation that people should certainly be aware of. And I think from a PCI perspective, a lot of folks are aware of PCI requirements from an underlying merchants.

perspective, but lot of the platforms that we work with haven't really thought about their obligations from a PCI perspective. So if you're touching sensitive cardholder data, if you're seeing the raw card numbers, that's big liability for your business. And so one of the advantages of implementing something like TILD is that we have a solution called our TILJS, which is a JavaScript embeddable element that you've probably worked with from some different providers over the years, but that really helps minimize the PCI scope.

for our partners and their merchants, you know, when they're, they're implementing tilt. So those are probably two of the things, you know, to think about is who's taking on that liability for risk underwriting and charge backs. And then, you know, how are you managing or mitigating your, your PCI scope.

Joe Crist (12:10.395)
So that leads me to the next question, right? So, I mean, obviously there's a lot of things that people have to consider when they're going to pick a tool like this. So what opportunities or even like actions can early software companies actually take when they want to really bring on a service like that? I know you mentioned having like a service like Stripe, like what else is there? Right? Because I mean, obviously you need money to grow a company.

But that is truly the million, 10 million, $50 million question. It's what do we need to start doing today to get us to the position where we can actually hit tomorrow or hit our goals?

Caleb Avery (12:52.155)
Yeah, absolutely. think one thing if you're not ready to come implement, you know, a solution like Tilde or another PayFac as a service provider is really understanding how your data is flowing to whoever your current partner is, be it Stripe or, you know, otherwise. We see a lot of folks that come to us that have partnered with, you know, legacy providers like a WorldPay and they think, great, we're going to be able to transition all of our customers over to another partner. And then all of a sudden they realize we don't actually own our customer data. We don't actually own

the tokens and the payment methods, you know, with this existing processor. And so even if you're not considering for years, you know, switching to another provider, understanding who owns your customer data is an incredibly important step that you should take today that can protect you, you know, in the future, whether you're selling the business or implementing, you know, a service like TIL. So that's a kind of word of caution, you know, for those that are out there. It's definitely something to pay attention to.

Joe Crist (13:49.806)
Yeah, that brings a really good question too. So if another, if your current provider is holding on to customer data, how hard is it to actually get that data?

Caleb Avery (14:02.947)
It depends on the partner is kind of thing one. I've found that asking questions earlier on in the process when the relationship is good, it is a much easier process than typically when you've gotten to that point where you're looking to leave, you know, a partner. It's not the best relationship. There's been some arguments. There's been some, bad blood. And so asking for a favor at that point in time where there's not necessarily much to gain, you know, for, for your current provider, I've seen some folks really

you know, fight tooth and nail over that data. Whereas, you know, folks that I either consulted with before TILD or, frankly, just folks that, you know, listen to us talk about this, that have gone out and proactively had those conversations with their existing, you know, processing partners. When they think there's upside in their relationship and they think there's more to gain, you know, from you as a partner, that is actually the time where you have some leverage, you know, to go, you know, ask for that in your next contract negotiation. I think the...

the problem is most people don't even know to ask. And so when they're going and signing up, you know, for this contract with WorldPay, they don't even ask the question. And frankly, it's probably because they just assume that their partner is taking a reasonable stance on sharing their customer data, but not every provider takes that approach.

Joe Crist (15:19.258)
That's a really good point too, right?

If you don't know, you don't know. You can't just assume things, right? Especially when it's something that's so critical to your operations, right? Having your customers' data, right? It's your customers' data. It's not the vendors. So by actually being able to really clarify that with them, you're like, hey, because, right, when the relationship's good, people are a lot more willing to just give things out, right? It's like, hey, we want you be happy because you're going to stick with us. I mean, we want you to stick with us. But once you hate us and we kind of know you hate us,

It becomes a whole thing as like, how can we keep them longer? Right. And that puts everybody in a really like very awkward and somewhat compromising position, right. Where it's just like, well, are we going to lose this data? Yeah, that's, that's a, that's a huge deal. Right. I'm, I'm sure when it actually comes to switching, yeah, you have to potentially rebuild. And I imagine there's probably some compliance issues with that too, if you have to go recollect customer data.

Caleb Avery (16:07.259)
Yeah.

It's a big issue.

Caleb Avery (16:21.137)
It's more a risk of churn. So if you think about, let's say you're a dental software platform, you've got 500 dentists and downstream of those dentists, there's 10 ,000 clients that each have their credit card number stored for recurring transactions. If you actually have to go back out to each one of those customers and ask them for their credit card detail, you are going to guaranteed see pretty significant churn.

I think the gym industry is probably the most well known for this. Like how many gym memberships have you signed up for that you ended up paying for way longer than you ever actually used the gym? And if that gym called you and said, hey, Joe, we changed credit card systems. Can we get your new credit card data? You're like, well, actually I haven't been in six months. I'm gonna cancel. And so that's a huge, huge consideration for partners is understanding what that transition.

Joe Crist (16:59.822)
Yeah, funny.

Caleb Avery (17:18.831)
you know, process looks like for token migrations, which we do, you know, weekend and week out. And, you know, certain partners like Stripe are very easy to work with. You know, a couple of days we can do, you know, a token migration and then there's other partners. Hopefully this this podcast is not sponsored by Worldpay because we'll keep throwing them, you know, under the back tire. they're they're the partner that we've seen the most instances, you know, of them really kicking up a fight, you know.

and not sharing their customer data without a battle.

Joe Crist (17:52.398)
comes up, yeah, they'll fight to keep the nail to keep you. Yeah, that's one of those unfortunate realities, right? Where it's just like, if it's not specified early on and it's not in writing, then you know, could be dealing with anything. So I'm thinking about this now as, know, if I were running a software company, obviously I'm doing a lot of payments. I will just say a hypothetical.

Caleb Avery (18:07.867)
Yeah, unfortunately.

Joe Crist (18:20.644)
my company, I own SAP, I really don't, I'd be wonderful if I did, but say I SAP, right, they have a lot of services that people are paying for, right? So is it possible, so say that if somebody's using SAP and SAP is using what you guys have, is are you able to essentially...

Joe Crist (18:42.508)
I forgot where this the company was using SAP and then They were using this payment software would you guys be able to integrate the two or would it have to be done separate?

Caleb Avery (18:56.165)
Yeah. So, the way that integrating to TILD typically works is that we are contracting with the software partner. like SAP would actually end up being the TILD customer. And so we would work with them to complete, you know, an integration to TILD. Our typical model is not going direct, you know, out to merchants, making sure that we've got integrations to all of the systems that we're using. We're typically approaching the actual software system saying, Hey,

do you want to generate a revenue stream out of all the merchants on your platform that are processing payments? And so we would work with them and their team to get that seamless integration in place. And what's unique about TILD is that oftentimes it's not actually a TILD branded experience down to the end, small business owners. So if we're working with average Joe's gym software, it's gonna be looking like it's average Joe's payments to that actual.

you know, gym owner. And that's one of the big advantages of, you know, the way that we built the infrastructure here at Till is that we're giving our vertical software partners the ability to put their brand front and center with their customers to the point that 90 % of our software partners actually white label the Till platform.

Joe Crist (20:14.714)
That's very cool. I can definitely see why this is such a movie. There's already a lot of companies in the space already providing similar services. So to you, what does the future actually look like when it comes to payment facilitation? How do see the landscape really changing?

Caleb Avery (20:34.939)
Yeah, I think when you look from a macro perspective, there's been a pretty big acceleration in the last five years of this transition to what we consider software -led payments. And so that transition is going away from the legacy ISO agent model. So the world that I started in where you've got, you know, boots on the ground, college students going out there, you know, slinging terminals to merchants, that has been the predominant distribution model for payments for decades. And we are seeing a rapid acceleration of the shift

to software -led payments where vertical software companies are powering the future of digital payments on behalf of merchants. What has yet to happen are all of the legacy payment providers acknowledging that shift and making a meaningful improvement in their technology solutions to be able to provide a compelling solution to these vertical software companies. And so the big guys that have been dominant for decades because they had the distribution through ISOs and agents,

are waking up to a new reality right now where that distribution model is shifting in favor of ISVs and vertical software companies. And unless they improve their technology by building, buying or partnering, they are going to be left in the dust in this new reality. And so my expectation, if you look kind of over the next five years, is that you're going to see, you know, all of the top, you know, 20 guys in the payment space, either building, buying or partnering their way to having a better solution.

in this ISV vertical software payback, you know, as a service ecosystem. And we are certainly, you know, positioning ourselves to be at the forefront of that shift where we already have multiple partners that are working with us and actually white labeling the entire infrastructure that we've built out. So some of the biggest names and payments that wanted to make this transition to payback as a service, but they didn't want to spend tens of millions of dollars and five and a half years building it like I did. They wanted to, you know, approach me and get market in a couple of months.

and have a fully branded solution. So that's one of the things that I expect to see over the coming years as these guys getting more competitive in this ecosystem.

Joe Crist (22:41.546)
And that does make sense too, right? It's one of those things where you have to adapt or die. So one of the things I think of too is you obviously have these like very large legacy companies that have been around for a while, right? And they have, and they do dominate a lot of the space. And obviously since they have such a strong brand, people are likely to go to them. Now, what's the impact if they just, they're like, hey, if they take like say the Toys R route, right? Or the Blockbuster, or they don't really update.

their technology, they don't update their infrastructure and their practices. Like what happens to their customers?

Caleb Avery (23:16.687)
Yeah, I mean, right now, I think there's still, you know, several more years where we're in this transition period between these two distribution models. And so I've given a couple of talks at conferences where I talk about the death of the ISO and it's typically to a room full of ISOs. And so it's a bit tongue in cheek when I'm talking about this, because right now I believe it's more of an opportunity than a threat. And so I feel like the players that actually get out ahead of this and acknowledge that that's the shift.

you know, is happening and proactively go make investments have the ability to actually go capture market share away from some of their competitors. So that's the opportunity. The threat is if you wait too long to acknowledge that transition, make the investment and invest in the technology, you are going to continue to see that market share drop, drop, drop in favor of, you know, solutions like Stripe, Adyen, you know, and others that have prioritized these investments in the experience for their partners.

Joe Crist (24:12.782)
Absolutely. Yeah, and then it's gonna be even harder to actually make that transition too, because you're not gonna be, you you're not gonna have a capital to actually start investing in this technology, to invest in the process, even invest in the people who can actually bring this new capability to your company. Yeah, and that's a very challenging thing too, because those who stick with those companies who aren't making the transition as well, they're also gonna feel the effects, right? They're going to have...

Most likely compliance issues are going to have performance issues and they're even going to have cost issues, right? Because for those legacy companies to really survive, they're going to have to increase, the longer they delay, the more they're going to have increased costs just to try to stay alive, right? Until they get acquired. Yeah.

Caleb Avery (24:55.131)
Yeah, you get into this death spiral. Yeah, you get into a death spiral where you're not signing new customers, so you increase the pricing on existing customers, and then you have more churn, and then the spiral continues.

Joe Crist (25:04.634)
Yeah, it's a lose, lose, lose situation. Nobody wins here, right? Where your customers are really paying the ultimate price, where you're doing everything you can to keep them around, and meanwhile, your company's just dying.

Caleb Avery (25:23.653)
Yeah, I'm excited to see kind of how this plays out over the next couple of years where I think you'll see the shift from the big guys just consolidating legacy distribution channels to actually looking at how can we invest more proactively in our technology.

Joe Crist (25:39.418)
that's a big thing too. So when it comes to investing, right?

Joe Crist (25:44.74)
So payment facilitation as a service, right? When it comes to like, know, technical or investing in technologies, especially learning to like AI and machine learning and a lot of other technologies are really coming out, where do see the future there?

Caleb Avery (25:59.035)
That's an awesome question. You know, when I think about the experience that we're providing with our partners, I typically think about it in three segments. There's the onboarding piece, there's the actual payment component, and then there's reporting. And I think there's areas of opportunity across each one of those segments for AI to provide roles. If you think about that initial upfront boarding process, how can we get access to more data, cleaner data, and make more intelligent decisions so that we can...

improve the percentage of merchants that we're instantly approving. So we want to improve as many merchants as possible in a three -minute window. Well, pre -AI, there's a limit to the amount of data sets, the amount of data that you can process within that window. Whereas now, let's go pull on as many data sources as we can and make more informed decisions. On the actual payment piece, when you're looking from a fraud monitoring perspective, there's a number of just tremendous...

AI tools that have come out that are far more capable than, you know, a human in real time of evaluating, you know, the potential risk of fraud, passing back a score, and then you can make, you know, those real -time decisions. And then on the reporting side, anything that you can do, you know, to help improve the reconciliation experience, you know, for merchants is huge. And so I feel like across the entire stack, you know, there's areas of opportunity here.

Joe Crist (27:23.364)
makes perfect sense too. So I do have one last question for you, Caleb. So obviously you've been in this space for a while, right? You've learned a lot, you've experienced a lot, right? And there's a lot of entrepreneurs out there who they're really trying to put it all together, right? And get those insights that really are going to help them make competitive and also, you know, hopefully change the world, right? So if there's any one piece of advice you could give the audience, what do think that would be?

Caleb Avery (27:27.835)
What do you got?

Caleb Avery (27:49.153)
Yeah, I think we've spent enough time in the weeds of payments, so I'll try to give some advice that's a little more generic to all founders out there. But the reality is, regardless of what business, what industry you're operating in, we are all in the business of people. And for me, having scaled up my first business and now having scaled up till, one of the big lessons that I've learned is the power of feedback. And so as you're building up your team, is incredibly important for you as a founder and your leaders

to be incredibly gifted at delivering especially difficult feedback. It helps level up your team. It helps level up the leaders around you and ultimately helps the business operate faster. So don't sleep on the power of feedback.

Joe Crist (28:32.882)
I absolutely love that man. Yeah, I think that's one of the best pieces of advice I've actually probably heard, right? And I think that's helped me a lot too when I have leaders give me feedback, but also leaders who take feedback, right? I think that really does.

Caleb Avery (28:46.341)
When you're comfortable in that difficult moment, providing that message, because ultimately it's a gift. If you're needing to deliver that feedback, it means they are not meeting a need or not meeting an expectation that you have for them. And the faster that you're able to communicate that difficult feedback to them and they're able to level up, the faster the business is able to execute and move.

Joe Crist (29:08.772)
Yeah, absolutely, man. That's amazing, amazing advice. I could not agree more. Caleb, thank you so much for joining us today and to those listening. Really hope you enjoyed this. And once again, Caleb, thank you. This is Caleb from Tilb. It's a payback as a service company doing really amazing things. Stay tuned next week for another exciting episode of Thriving in the Digital Age. Thank you, everybody.

Caleb Avery (29:33.253)
Awesome, thanks Joe, appreciate it.