PEP Episode 055 — Your Biggest Opportunity In Payments: Verticals | Caleb Avery of Tilled PayFac-as-a-Service

Introduction

Caleb Avery (00:00):

One of the trends that we’re seeing is that initially vertical software companies, if I think back to a lot of the consulting I was doing 8, 9, 10 years ago, it was your mainstream markets, it was restaurant, it was retail, it was liquor store, point of sale solutions. And then more and more we’re seeing this expansion into more niche verticals. Not always higher risk, but just niche in general, whether that’s dumpster rental softwares or music studio lessons, softwares or softwares for individual coaches, for T-ball teams, you name it. Even earlier today, spoke to a company CBD vape stores doing almost a billion dollars in volume. This is what I would consider a relatively niche vertical. These guys are doing a tremendous amount of volume, and so you’re seeing large softwares pop up in all of these unique verticals.

Jeremy Stock (00:58):

Welcome to the Payments Experts podcast, a podcast of global legal law firm. We hope you enjoy this episode. Welcome to the Payments Experts podcast, a podcast of global legal law firm today. We’re really excited. We have in-studio joining us managing partner of the law firm, James Huber, as well as our special guest joining us remotely. We have Caleb Avery from Tilde over@tilde.com. Caleb, welcome to the podcast. We’re looking forward to a great conversation today.

Caleb Avery (01:34):

Yeah, thanks so much, man. I’m Michelle. I’m looking forward to it.

James Huber (01:37):

Yeah, Caleb, thanks for virtually joining us in your equally if not more impressive podcast studio. Before we got started, you were bragging about how high tech it was and your tiles and all of that, and then we compared crib notes on the cost of your podcast studio. And Jeremy’s going to be doing some pushups, I think for burning his off.

Jeremy Stock (02:01):

I’ve got some dishes to wash.

James Huber (02:03):

Yeah,

Jeremy Stock (02:03):

I might edit this part out.

Caleb Avery (02:06):

Yeah, we’re a startup working on the startup budget, but I had to get a better setup. So previously I was in my basement and I was listening to some of the first episodes that I did, and in the background you could hear my kids crying. And so that was the inspiration for I need some soundproofing to keep my audio nice on the inside, but you also got to filter out the outside noise.

Jeremy Stock (02:30):

Caleb, we sometimes hear crying as well, but that’s global legal law firm employees,

James Huber (02:35):

Different kind of crying.

Jeremy Stock (02:36):

It’s a different kind of crying. Exactly.

James Huber (02:37):

Opposing counsel.

Jeremy Stock (02:38):

There you go.

James Huber (02:40):

So Caleb, you have one of the more interesting stories in payments. You’re one of the people read about the company that you started in your dorm room. It’s one of the great success stories out there. So why don’t you just give us the high level of how you got started, where you thought you’re going and where you’re at now and where you think you’re going now.

Caleb Avery (03:06):

Yeah, so we were a couple of crazy 19-year-old college students thinking, Hey, we can go sell payments because why not? And so starting out in Greenville, South Carolina, going door to door selling payments, I think at the time there was really no plan or aspiration for exactly what the business would turn into. It was really in lieu of getting an internship one summer, let’s go out and sling some terminals and sell some payments. And over time what we realized was that these small business owners were actually very frustrated by the experience that they were getting from the big banks and from the big processors. And so they were actually extremely willing to trust a couple of college students. I’m not convinced they knew exactly how old we were when we first started, but nonetheless, they were willing to trust us. And I think what I saw as we were scaling up that first business was this transition where in the beginning, the small business owners were really just happy with the terminal sitting on the counter.

Caleb Avery (04:06):

They wanted to save some money, they needed a new EMV terminal and that was really all they wanted. But as time went on, more and more of these small business owners were coming to us saying, Hey, I talked to such and such vertical software platform that does payroll, invoicing, scheduling, you name it, and has all of these features besides just payments. And they were asking us for our opinions. They were asking us if we could integrate. And so I felt like that was the direction that the overall payment space was headed. And so when I moved to Colorado, this is almost 10 years ago at this point, I started doing more angel investing and consulting for vertical software platforms. And the vast majority of those vertical software businesses were just using Stripe. And so they were passing along the 2.9% and 30 cents from the illustrious stripe onto their merchants.

Caleb Avery (04:56):

And 10 years ago, that was fine. They didn’t realize how much money that they were leaving on the table. And so my job as a consultant was coming in and helping these guys understand you’re leaving hundreds of thousands if not millions of dollars in revenue on the table. And seeing that same story over and over and over again convinced me that there had to be an opportunity to go displace Stripe from some of these vertical software companies. And so that’s really where the vision for what became tilled and what became Pay Fac as a service came from was wanting to come offer these vertical software businesses a stripe like technology experience, a better support experience, and then help them generate revenue on all of those payments flowing through the platform. And that’s what we’ve been building out over the last six and a half years.

James Huber (05:41):

I love it. I want to go back. I have some questions about when you got started slanging this from your door room, how did you even figure out how to go sell this? Because I have a client was just at SEAA and a lot of people are going, Hey, I don’t go to these conferences anymore. It’s all the same players. I’d love to pick up some agents, but where are they? And my client just told me that they had a line of 20 agents waiting to come see their booth and he’s going, Hey, it’s the first time we did a booth because I’ve heard about you guys. You’re the new shop in town. I was going to go to company X, but they look so big and bulky. I’m looking for somebody who’s nimble and looks cool. So how did you guys even figure out, I assume you just were going out and selling for First Data or something, but how’d you put the pieces together of Hey, we can even do this?

Caleb Avery (06:35):

So originally we were a retail ISO under priority payments. And so those guys were a big part of the story helping us figure this out. In the early days, Dustin had some family connections in the payment space. And so that was a lot of the original ideation behind just understanding what payments were, how residual income worked. And just getting started in the ecosystem was hooking up with the priorities over at Priority Payments. And for us in the early days, it was him and I going out and selling and then we thought, Hey, let’s go hire all of our friends. Surely we can teach them how to become great credit card processing sales agents. That was a disaster. They were all awful. I don’t think any of them are still around selling payments here to this day. But the real unlock for us was realizing not only were the small business owners frustrated with the experience that they were getting from the big processors, but agents and small ISO shops were also frustrated with the experience that they were getting.

Caleb Avery (07:39):

And so it became this agent first mentality where we realized that our real customers were the agents and the small ISOs that were underserved and underrepresented by some of the bigger shops. And so if we can offer them a better agent support experience, a better merchant onboarding experience, a free terminal experience, then they can go out and sell to their customers. And it’s a lot of the same principles that we’re bringing to the table here at Tilde where Stripe is really that 800 pound gorilla in the space that’s under serving the vertical software companies and not providing the great experience, not providing enough of a monetization opportunity. And so we’re coming in and offering that more white glove experience. And so there’s really a lot of parallels between the two businesses. It’s just a slightly different customer segment and go-to market motion that we’re serving.

James Huber (08:35):

And you guys were, I’ll say wildly successful I don’t think is an understatement. And the company is still wildly successful and I don’t know if we’re allowed to say it, but it’s hey Bright and we can edit that out if you’d like, but the companies did really well because it doesn’t mess around with the agents and the merchants. When I first, I met Dustin years ago and I’m going, I’ve never heard of you guys and I’m going, well, you must be doing something right then if you haven’t come across our crosshairs. We know the bad players and then we represent some good players, but everybody knows about the bad players and Pay Bright is so big eventually I was going hear about it one way or another, but you really brought that the agent first and it was at a great time because the big processors First Data, this seems to me, and it still seems the case, they don’t care about the agents anymore.

James Huber (09:33):

I don’t think they even want them anymore. They bought Card Connect to handle the agent program, but then Card Connect is treating their agents horrible too. And priority is so big, and they went public probably since the time you guys went to ’em. They don’t really care either and tease, they don’t care at all. I was just negotiating an agreement with TSIs and it was all of a sudden they’re like, oh, there’s this 9 cents fee. Don’t worry about that fee. It doesn’t even apply. And I’m going, well then how about we just take it out of the contract? Yeah, if it

Caleb Avery (10:06):

Doesn’t matter, why is it in here to begin with?

James Huber (10:09):

Yeah,

Caleb Avery (10:10):

There’s been a lot of consolidation that’s happened in the space as well. And so even a lot of the mid-sized ISO shops have gotten rolled into iser and Worldpay and tesis. And so there’s fewer and fewer independent options that are available to agents, ISOs, ISVs to go partner with that don’t have the bureaucracy and the risk of some of the bigger guys.

James Huber (10:34):

And that’s the whole thing is that these companies, they get so big that you forget your little agent. This firm, I always, I don’t joke, I tell you this is very seriously our first client that we picked up at a conference. We have this booth with this pixelated banner and we’re doing it and this guy comes up and he’s going, Hey, I ran and sell Vietnamese hair salons five 10 a month. I think it was about a year ago. He got a 36 million offer for his company. And so if

James Huber (11:09):

You foster these relationships just like we do as a firm, we really like to meet the agents that are out there hustling. You can help these guys become humongous. Pay Bright, started in your dorm room and despite all your Best Friend’s help became this huge company. And I still believe anyone can do that, but it’s a lot harder these days and you need to be partnering with companies like perhaps Tilled. Why would somebody want to partner with Tilt? Why don’t you first of all tell us what is FAC as a service? You have to answer that a hundred times a day. What is that?

Caleb Avery (11:52):

Yeah, I’ve given the spiel once or twice. But for us, the idea behind PFAC as a service is that for a lot of vertical software companies, they’re looking to have this streamlined pay fac onboarding experience for the small business customers that are signing up with them. So they want to click to agree application, they want an instant onboarding experience, but it’s really more than that. And I think for us, the technology is really at the heart of everything that we’re doing. And so we’re an API first company, we want to create a Stripe like developer experience for the vertical software companies that are coming and integrating to Tilt. And that’s a lot of the reason why we’ve been as successful as we have been is because we’ve made it easy for the technology side of the house to say yes to partnering with Tilt. Because oftentimes the CTO is not the guy who’s going to say yes to the new partnership, but he is absolutely the guy who can say no.

Caleb Avery (12:50):

And for a lot of the ISOs that come and partner with Tilt, a lot of them have tried to sell to ISBs. Maybe they’ve tried to sell NMI or authorized.net or Card Connect or whatever gateway solution, the processor that you’re partnered up with for your direct merchant side of the business has available. And all of a sudden when you send those API docs to the CTO of that ISV that you’re trying to sell, they just say no. They’re like, that’s going to take us six months to go integrate into that solution. And it doesn’t have web hooks, it doesn’t have a reporting API, the consoles can’t be white labeled. And so they give you this list of all the things it doesn’t do versus if you send that same CTO the till documentation, he’s like, oh, this looks familiar. A lot of the concepts sound exactly like the Stripe API that we’re already integrated into.

Caleb Avery (13:40):

They have metadata, they have a reporting API, we can white label the merchant onboarding experience. We can white label the consoles. And so you take the biggest objection and turn it into your biggest asset in the sales process. And so what that means is that you as an ISO can go out and sell more ISVs upfront in the sales process and then tilled will actually help those customers scale. And so we talk a lot about this idea of putting your portfolio on autopilot. And so if you go back to that example of the guy going and selling 10 salons a month, well, he probably had to go talk to 50, a hundred businesses door to door to actually get to 10 of those guys signing up. And so that’s 30 hours a week or something going out cold calling door to door knocking to get to 10 sales a month. Or you could go sign up one IASV that does a hundred deals a month and you get paid on every single one of those opportunities. You haven’t talked to a single merchant, you haven’t knocked a single door, you’ve closed one deal with a vertical software business, and then your residual every single month is going up and up and up as that ISV brings more deals to the table. The IS V is happy that agent or ISO is happy and we’re happy. It’s a win-win for everybody involved.

James Huber (15:00):

Yeah, I mean the first time I heard ISV, we’ve got a client in the space and he’s going, I’ve got the best job in the world. It’s a long sales process and a harder sales process, but once you get it, it just grows upon itself. It’s the greatest MLM scheme ever. But the issue that I see ISVs running into is the consolidation. So any ISV company, any technology company, typically their goal is grow this up and sell. So I’ve got so-and-so dog salon software and the idea is sell it, right? And then when the person sell it, one of the biggest assets, not one of the biggest assets, but a large asset is the processing. And I don’t want to say it’s a kickback, but there’s usually some kind of revenue share or it’s the deal you’re getting, but they want the volume. And so when they sell, they go, yeah, we’re terminating this and I see it a ton over at Card Connect where they’ll just terminate that card connect and then they’ll just put it on another card Connect portfolio. And I get into all sorts of fights with them of like, well wait, it’s still at Card Connect. That’s still my deal. But how do you guys navigate that space? Because I’m sure you’ve run into it.

Caleb Avery (16:20):

Yeah, I think for us, the way that we look at it is for Tiled, we are the technology provider. And so for the way that we structure a lot of our contracts is that you can choose to use the tiled processing relationship or bring your own processing relationship, but here’s the terms of how you’re going to be partnering with til. And we’ve had partners that have transitioned from a more referral relationship with us to becoming their own retail or wholesale registered ISO on their end. But the reality is that contract still stays within the Tilt ecosystem and that referral partner is still getting a piece of the pie, whether it’s under the referral deal, the retail deal, the wholesale deal. And so trying to structure the contracts in a way where it allows for an evolution of that partnership over time, but we’re still involved in the relationship, I think is something that is really critical in the contracting process. But we also have pretty strict contracts with our upstream partners that contemplate for those sorts of relationships where you can’t bypass our relationship with this customer and go sign a direct contract with them. Even if you do, you’re still paying us those economics. And so there’s no real incentive for them to be a bad actor getting paid either way.

James Huber (17:45):

So what you’re saying is even if you consolidate, you are fine, they take the processing away, but your referral partner is still going to be getting a piece of the tilled action, which by this point you’ve got so many hooks in them that it wouldn’t even make sense to leave and fine get the processing because I haven’t seen it where when you’re buying a software company, you’re going, well scrap half the software they’re using. I want to use this software because there’s not a lot of companies out there that do what you do. Am I right on that?

Caleb Avery (18:21):

I was going to say, for us, the consolidation can actually end up being an opportunity where we’ve had smaller customers get bought by larger platforms, the larger platform CTO comes in and looks at what we have and is like, well, we own these other four softwares. Could they all come use til? And obviously for us, that’s a win-win on our end. And so a lot of times we’re seeing these as opportunities for us to get into bigger opportunities with Upstream partners.

James Huber (18:53):

And if I was the agent that referred you that deal, would I get a piece of that action?

Caleb Avery (18:58):

Almost certainly.

James Huber (18:59):

Alright, well there you go. And I have clients who are, they’re like, well, we’re just with Card Connect because of their technology and their ISV channel because they led the path. I’ll say a little bit on ISVs, obviously what you mentioned Square Stripe, but you can’t sell square stripe. So if I’m an agent, yeah, you’re at Card Connect and they’re going basically, I’m stuck. No other options out there, but there are options out there and there are options of one of the co-founders of company that has a tremendous track record of treating agents. But if I’m going, all right, I’m done Card Connect, I’m going to tilt, that’s because of what’s happening today. Right now, what are the challenges that you see coming up and how is Tilt anticipating

Caleb Avery (19:51):

Those? Yeah, I think for me, when I look at the broader agent ISO space, I’ve talked a lot over the last three, four years about this idea of the death of the iso. And I’ve given a couple of presentations on stage, whether it’s SCAA or some of the other acquirer shows. And over the years, originally I was always talking about it as more of an opportunity than a threat. And I think increasingly you’re seeing this ISV category becoming more and more a threat to the traditional ISO way of business where if you look at some of the data just since the start of COVID, so over the last four or five years, there’s been a massive acceleration in the adoption of vertical software technologies within the small business landscape. And so if you’re an individual agent or an ISO that’s out there selling payments to small business owners, you are increasingly competing for a smaller pie because more and more of these small business owners are going and signing up with these vertical software solutions.

Caleb Avery (20:57):

And so the message to the agents and the ISOs is you have to start thinking ahead about where the business is going. And really it’s the demands of the small business owners are pushing the category towards this vertical software model. And so there’s a number of ways that you can participate in this industry. You can go try and sign the vertical software platforms and partner with someone like til you can sign up. I know James Shepherd and the Full Stack Payments guys are recruiting agents and ISOs that are actually partnering with the vertical software platforms to go sell directly to the small business owners. And so there’s a lot of ways to get involved in this category, in this space as a whole, but you have to wake up and recognize the reality that you have to do something here. You can’t continue on the journey that you’re on unless you want to get into lower margin, more competitive ecosystem. My view of where the space is headed in the years to come,

James Huber (22:00):

Even in the high risk space, I was going to go, well, either the lower margin or the really high margin short term, even the guys selling stuff online, I see them starting to use software. I mean, I have a client who developed a software for CBD merchants online tracking the COAs and all of that stuff. And I’m going, you have to be using this. How could you not? So thanks Chair. I mean, it’s always been this way in payments. You have to adapt. And I always say it is one of the reasons we love working in this space because it’s working with smart people that are probably smarter than us in many ways. Obviously not every single way, but you’ve got your head on a swivel and you’re finding out new things. So how does Tilt specifically address the challenges that you see coming down the pipe?

Caleb Avery (23:01):

Yeah, I mean, I think for us, to your point about the high risk category, one of the trends that we’re seeing is that initially vertical software companies, if I think back to a lot of the consulting I was doing 8, 9, 10 years ago, it was your mainstream markets, it was restaurant, it was retail, it was liquor store, point of sale solutions. And then more and more we’re seeing this expansion into more niche verticals. Not always higher risk, but just niche in general, whether that’s dumpster rental softwares or music studio lessons, softwares or softwares for individual coaches, for T-ball teams, you name it. Even today spoke to a company CBD vape stores doing almost a billion dollars in volume. This is what I would consider a relatively niche vertical. These guys are doing a tremendous amount of volume. And so you’re seeing large softwares pop up in all of these unique verticals, but it creates challenges for us on the technology side in terms of the feature functionality that these guys are looking for, the terminals that they want to have access to, but also on the regulatory and compliance side where we need to partner with additional processors or we need to partner with additional sponsor banks that have an appetite to go into some of these medium or higher risk verticals.

Caleb Avery (24:28):

And so for us, a lot of our time is really trying to think about what direction is the industry as a whole headed in. And I use the term where is the soft spot in the defense in terms of where is the opportunity going to be two, three years from now? Because there are opportunities, whether it’s going into new geographies, going into new verticals, finding new sponsor banks that take time planning and resources to make sure that when that opportunity arises where there and we’re ready to service that opportunity. And to me, beyond that geographic and vertical expansion, one of the biggest opportunities that I see in the years to come is the desire for vertical software companies to move beyond just embedded payments. And so if you look at some of the bigger examples of the Shopify MINDBODY toasts of the world, the service titans, the big guys that have really gained incredible market share in the vertical software space, almost every single one of them has moved beyond just embedded payments.

Caleb Avery (25:32):

They’re offering a capital product. Maybe they have a banking solution, maybe they have an issuing solution, maybe they have disbursements. So they have a lot more than just an embedded payments approach on their platform. And where we feel like the space is heading is that more and more of the mid-market vertical software platforms are wanting these solutions, but for the same reason that they’re not going and becoming a registered payment facilitator themselves, they’re probably not going to go get a credit line and open up their own embedded lending program and do the underwriting and do all of that themselves, but it doesn’t mean that they don’t want all of these solutions. And so we’re positioning ourselves to be able to offer that entire suite of products so that the ISVs can have that full solution to go out to their merchants. And then as a partner of Tilled, all of a sudden you’ve got five different revenue streams that you’re participating in instead of just payments. And so it becomes substantially more profitable portfolio.

James Huber (26:31):

Yeah, absolutely. I mean, they always say, Jeremy, we went to this one. It was for MCA companies, and they’re going get another hook in them. Get your merchants into a cash, which was worst thing possible because I think they had a presentation on stacking. They’re like, well, you just get ’em in another, get ’em in another one. And I’m sitting there for the payment side. We’re like, well, now the merchant’s out of business. That was no good

Caleb Avery (26:56):

For me. Yeah, now they’re underwater

James Huber (26:57):

Now. Absolutely. That was the last one. We went to one of those, I think that was the first and last.

Jeremy Stock (27:02):

It was the first and Laugh

James Huber (27:05):

And MCA is still out there, but what you’re talking about is these more traditional lending products,

Caleb Avery (27:12):

Term loan for

James Huber (27:12):

Merchants loan, right? Yeah. Just payday loans all day. No, I’m just kidding. So yeah, I mean, look, I was really excited to learn about your company. I think that a lot of ISOs, any size would be interested in talking to you. How would somebody get in touch with you?

Caleb Avery (27:35):

Yeah, so I’m certainly super active on LinkedIn, and so if you want to reach out directly to myself or anyone on the team on LinkedIn, happy to do that. tilt.com is a great place if you want to go learn more about the product, the offering, the different ways that you could partner together, specifically from an ISO perspective, you mentioned that it’s really ISOs of any size. We have a couple of different programs, and so folks can come in and just refer opportunities to us and get a little piece of the pie. We also have more embedded programs where if you want to white label the entire tiled technology experience, you can come in and brand the APIs, the consoles, and go sell our program to ISVs as though it’s your own program. Then we also have an enterprise model for more wholesale ISOs or direct processors where you can actually pay us to integrate to your backend processor of choice. So these can be your merchant relationships, your sponsor bank relationships. If you have your own risk and underwriting programs, we can plug into those tools as well. And so I think a lot of folks don’t realize the breadth of ways that we can partner with folks, but being a technology stack, we’re very flexible in the way that we partner. And so if anyone’s interested in reaching out and learning more, we’d certainly love to talk.

James Huber (28:54):

Excellent. Alright, Caleb. Well, thanks for joining us. It’s been great.

Jeremy Stock (28:58):

Absolutely.

Caleb Avery (28:58):

Yeah. Thanks for having me on the show.

Jeremy Stock (28:59):

Caleb, I got to say, I think after this podcast, James is going to have me order a global legal law firm neon sign for the back of our podcast studio.

James Huber (29:09):

It does look cool.

Jeremy Stock (29:10):

It does look very cool. Alright, Caleb, thank you very much. Oh, really? Is that what it is? Awesome. Thank

Caleb Avery (29:17):

You. That’s the way to go.

Jeremy Stock (29:18):

That’s right. Thank you for listening this long to the Payments Experts podcast, a podcast of global legal law firm Caleb Avery from tilde.com. Please go visit him today. Thank you for listening to this episode of The Payments Experts podcast experts, a podcast, a global legal law firm. Visit us online today at global legal law firm.com.