Payments On Fire

Innovation

Episode 154 – Fighting Disruption in Merchant Services with Payments Tech – Kyle Pexton and Nick Starai, NMI

If you want to understand the incumbent merchant services business, the industry that puts payments capabilities into the hands of merchants, take a listen to this Payments on Fire® episode. It focuses on the realities facing the major stakeholders in that portion of the payments industry through a discussion with NMI, a payments technology provider.

Topics discussed include:

  • The evolution of touchless payments from QR to Tap on Phone NFC transactions
  • What a gateway does
  • How a white label provider sells and who uses its services
  • What an ISV needs to think about when considering the role of payments facilitator
  • COVID-19’s impact on merchant and consumer payments

Getting payments acceptance capability into the SMB merchant’s hands is complicated. The merchant services industry, as it’s called, is complex. It has multiple sales channels serving dozens of merchant categories.

Multiple Channels to the SMB Merchant

If you are a merchant or an independent software vendor (ISV) or a value-added reseller (VAR), you have no end of ways to payment enable your business. For merchants, their interest is in payment acceptance at the right cost, with reliability, transparency, and flexibility as major concerns. ISVs and VARs who sell commerce systems, look to offer payments to their customers as an embedded value-added service and also as a way to generate revenue over and above software subscriptions or margins on hardware.

Financial institutions have been a traditional channel for merchant acquiring and revenue, often using independent sales organizations (ISOs) to be the sales channel and often a provider of payments technology to the merchant customer.

Many of the providers of payment services and platforms insert themselves into the transaction flow directly, taking a piece of the payment revenue. Pure-play technology enablement as a service is less usual and for the merchants and ISVs and others who want more control over the payments revenue component of their business, the tech-first proposition is very attractive.

The Value-added Gateway

This white label enablement of payment tech providers is where NMI plays. Its customers, its affiliates as the company calls them, are the ISOs, ISVs, and financial institutions selling payment acceptance to SMB merchants. NMI provides, behind the scenes, the tech stack for those sales channels.

Its strategy has worked. Handling over 1.5 B transactions a year with over $100B in value, NMI has a major role in SMB payment enablement. A quarter million merchants are on the NMI platform.

Fintech Disruption in Merchant Services

The ISO channel in particular has been disrupted by the likes of Square, Stripe, and many others. But these fintechs are not attractive as providers to ISVs or FIs because they take the payments revenue, leaving little or no payments margin for NMI’s customers to make money.

NMI provides a bridge to help its ISOs move to what NMI’s Nick Starai refers to as the NextGen ISO, a software-led company selling more than payment terminals and merchant accounts. NMI tech enables the NextGen ISO and supports its partnership with business focused ISVs selling tools that help the customer run their business.

As with other Payments on Fire® guests over the last year, NMI reports that the pandemic has accelerated adoption of touchless tech and its overall transaction volume.

One adaptation NMI has made to the touchless requirement is support for QR codes. Using NMI’s code, a merchant unwilling to upgrade its POS terminal for contactless acceptance can display a QR code to the customer who scans it with her smartphone. The QR code decodes as a URL that directs the smartphone browser to the merchant’s online payment page where the normal checkout process takes place. If the customer has Apple Pay or Google Pay provisioned NMI’s software detects it and displays the operating system’s checkout and payment flow. A scan and a couple of taps for the customer shifts the transaction to card not present rails.

The line between brick and mortar and online continues to blur because customers have come expect a seamless, touchless payment experience regardless of channel.

George Peabody:

Welcome to Payments on Fire Podcast from Glenbrook Partners about the payments industry, how it works and trends and its evolution. I’m George Peabody, partner at Glenbrook and host of Payments on Fire.

George Peabody:

If you’re a merchant or an independent software vendor or a value added reseller, you have no end of ways to payments-enable your business. Merchants, of course, their interest is in payment acceptance at the right costs with reliability and transparency and flexibility as major concerns. ISVs, on the other hand, sell commerce systems, and look to offer payments to their customers as an embedded value added service.

George Peabody:

And as also a way to generate revenue over and above the software subscriptions or margins they’ve been making on hardware. And this notion of embedding payments capability into their offers has been a huge driver in this space. We have done a number of private equity projects where our client, the private equity firm, has asked us to look deeply into the revenues that the ISVs are making based on the payments component of their overall offer, and it’s been an impressive set of findings. We’ve done this multiple times.

George Peabody:

Many of the payments service providers, and payments platforms insert themselves into the transaction flow directly, taking a piece of the payment action. But pure play technology enablement as a service is less usual these days. And for the merchants and ISVs, independent sales organizations and financial institutions, banks who have traditionally made a good bit of revenue from their merchant acquiring services, finding pure play partnerships has been challenging.

George Peabody:

So getting this tech first proposition from a payments platform provider is pretty attractive. And to talk about that approach and the technology behind it, I’m joined by Kyle Pexton, who’s president and CFO of NMI. And I’d like to welcome back to Payments on Fire, Nick Starai, who is NMI’s chief strategy officer. Just to quickly level set, NMI is a payments platform provider servicing software developers, merchants, and others. So gentlemen, glad to have you here, Nick, welcome back.

Nick Starai:

Yep, Thanks, George.

Kyle Pexton:

Thanks, George for having us.

Nick Starai:

Yep. Pleasure to be here. Thanks. Happy to be back.

George Peabody:

Good, good. Nick, when we spoke a year and a half ago in episode 105 of Payments on Fire, NMI was really positioned, at least the takeaway I had was really as a pure play gateway, connecting merchants, ISVs, value-added resellers and others to process their payments systems with a pretty strong orientation towards E-commerce, towards what we at Glenbrook called the remote commerce domain. And you had some physical terminal capability in place, but it looks like you’ve been growing that.

George Peabody:

And I know you’ve been growing, I know you’ve been doing well because just looking at your website, I see you’ve got some great stats out. There’s 1.5 billion transactions a year and 100 billion in value flowing through your systems. So that puts you as a major player in payments enablement. And if a quarter million merchants are using a platform too, that’s just another proof point.

George Peabody:

So a couple of things, actually, why don’t we start with this discussion about who it is you’re serving. I know you’ve had a big acquisition recently, but let’s talk about who you serve first because I think that’s particularly interesting. So I said merchants, I’ve said ISV, and we’ve also said ISOs. ISO being the independent sales organizations that have really been selling payment acceptance to merchants for decades. You’re helping payment enable those guys. Let’s talk about those.

Nick Starai:

Yeah, let’s do that. At our core, NMI is a payments infrastructure company and one of the core tenants from day one was offering a white-label payments solution, where we allowed our partners to upload logos, change the look and feel, change the colors and even generate and attach an SSL certificate on the platform itself. So we enable our partners with a gateway technology that they view as their own. So when they go to market with this technology and their merchants log in to the platform, they see their look, color, logos, which is really a way that we can enable them with their own technology.

Nick Starai:

So early on Ecommerce was our strength. We launched early, 2001 or ‘2, which was the wild west of .com. So this is the time when people were like, “Hey, you can register a domain name and you could start selling something and make money online.” So we had attracted lots of Ecommerce merchants at that time. So you’re right, that was kind of our strength early on. And as this concept of omnichannel and engaging with sellers at the point of sale and any ways that they’re selling, which could be mobile, unintended, online or retail, we continue to adapt our platform to highlight the strengths of our different payment channels.

Nick Starai:

And at this point, we’ve really kind of doubled down on this omnichannel discussion where we have strong Ecommerce tools for enablement, we have strong retail devices, kind of the most modern retail type integration terminals, as well as in mobile. And that’s the four payment channels that we look at as a proper unified commerce enablement platform to enable our partners with all of those different technologies.

George Peabody:

Cool. Let’s talk about your partners and let’s start first with merchants. What are the merchant categories that you’ve found most of your success with?

Nick Starai:

Kyle, you’ve probably got those verticals into your head. You want to take that one?

Kyle Pexton:

Yeah, sure. We’re a horizontal platform that enables our partners to go vertical. So our primary customer, our primary partners are, as you said, ISOs, ISVs, financial institutions who have a broad swath across the entire economy. But when you look at our partner base, it’s primarily SMB merchants. But we also have very deep footprints in other really important verticals.

Kyle Pexton:

We have a very large presence in medical and dental. We have a large presence in specialty retail. We have an emerging and expanding presence in quick serve restaurants and other types of food related outlets, as well as traditional Ecommerce types of business. And Nick touched on this briefly, we also have a really robust tech stack that can  simplify complex payments channels within the industry.

Kyle Pexton:

So when you think of things like unattended, think of things like transit, tap on tap off of transit, which is primarily in Europe, is where our state of that business is. And then also to parking and unattended vending, we have a large presence in those segments as well. So we really have touch points across multiple components of the merchant ecosystem.

George Peabody:

How do you get to those merchants? Do you have direct relationships or are you working exclusively through ISOs and at ISVs?

Kyle Pexton:

Yeah, really good question. From the beginning of NMI’s history, NMI has always been a very partner-friendly business and has built its tech stack with the affiliate partner in mind. As Nick indicated, part of our initial DNA was to enable our affiliates to go to market under their own brand. And NMI very much has been an engine behind a significant amount of commerce, but we’ve always stayed behind the curtain and allowed our affiliates to brand the technology as their own for various reasons that benefit the affiliate for loyalty, stickiness, as well as brand identity associated with the affiliate.

Kyle Pexton:

And so our touch point to the merchant is through our affiliate channel and it’s been a very, very healthy business proposition for us. And we have multiple channels that we work through, whether it be the ISO channel, the ISV channel, or the financial institution channel, who leverage NMI’s technology branded as their own, and thus enable their merchants to accept payments in various verticals.

George Peabody:

Okay. I totally get and believe that your tech stack has been super helpful to this channel, and this channel also, particularly the ISO and the financial institution channel really needs it. Because they’ve been radically disintermediated by the likes of, in the physical world, likes of Square. And of course, you’ve got Shopify and others, and of course Stripe is in there. The archetypal picture of those folks is there.

George Peabody:

A bunch of guys running around on the street trying to sell card acceptance, and the world has shifted now where the game isn’t about the payment, as much as it’s about how do you help the company run its businesses better? And Square’s done that. How are you helping the ISO? I can imagine how the ISV picked, we’ll get to them, but let’s talk about the ISO, how are you helping ISOs better?

Kyle Pexton:

Sure. Really the fundamental component for ISOs to thrive in today’s environment is to ensure that they’re a tech-enabled ISO. That they are able to enable the merchant with a full suite of products, not just the merchant account. Historically, the merchant account, and today the merchant account is very much a price competitive environment to compete on price. But when the ISO comes to the merchant with a full suite of technology products like NMI’s that has the ability to really solve each one of the payment case studies that that merchant is looking to solve for.

Kyle Pexton:

Whether it be card-present, E-commerce, omnichannel, unattended, mobile, even payment facilitation enablement, NMI’s tech stack has the ability and the robust tech stack to accommodate each one of those case studies. And so really the fundamental component that ISOs need to adopt and are understanding the importance of adopting is to have a robust tech stack. 

And we believe that NMI’s set apart from any other player because we enable that ISO to brand the technology as their own, and to go to market and establish that relationship and that technological stickiness and that identity between the merchant and the ISO.

Kyle Pexton:

And George, you also touched on another really important point as well when you look at how the payments industry is evolving in general, and you also talked about financial institutions. There have been disruptions and continue to be disruptions in the payment space with entrants into the space from the likes of Stripe and Square, for example, and particularly Square, where Square has moved upstream by registering as a financial institution themselves and has begun offering traditional bank services to the merchants.

Kyle Pexton:

Well, this is an incursion on the most valuable customer that banks have, which is small business merchants. And in many respects, the banks have been caught flat footed in this environment. 

And where NMI comes into play is, NMI has the robust tech stack that the banks can integrate into their own ecosystem to enable them to compete directly with the Stripe and Square and maintain the relationship with that small merchant in such a way that they’re able to keep the merchant in the banking ecosystem and continue to provide those services in an environment where the merchant feels comfortable with their bank, and the bank goes to market with sophisticated and robust cutting edge payments technology.

George Peabody:

Got it. Nick, you mentioned the term void before we began recording. I get that you have a great horizontal stack that no ISO is or ISV for that matter is going to use all of it. They’re going to take what they need. But when you’re competing against Square, and I don’t think of you guys as competing with Stripe and Square,ut Square is bringing not only payments acceptance, it’s also bringing all these other value added services to help the merchant run their business better.

George Peabody:

The ISV, that’s their stock and trade. The independent software vendor is focused on a particular vertical. It comes to you to get the payment capability that is needed in a robust fashion, and then they dive deep in helping that merchant run their business. The ISO has always been in the horizontal space, payment acceptance. So what’s encouraging you that they’re getting it? That they’re going to be able to compete with these specific small business verticals with beyond payments?

Nick Starai:

Yeah, that’s a great question, George. And I think you’re right, we painted the picture of that early on. The ISO was really about selling merchant accounts and selling merchant services. They were selling terminals and or merchant accounts for E-commerce. Those were the two ways and many years ago, there were very two clear lanes. You had a card-not-present or card-present, and really that’s it. As you know, the industry has evolved, some of the things that we’ve done that I think have helped the ISO community start embracing software a little bit more is truly building out an omnichannel platform.

Nick Starai:

Because again, oftentimes the merchant might use vendor A for their card-present and vendor B for their E-commerce. That still is very common today. But now that we’re enabling our banking partners, our financial institution partners in the ISO community with a true omnichannel platform that they can engage with a merchant. And if that merchant needs to sell stuff online, needs a mobile app in the field and has a retail store, and also has a little kiosk outside their store. We can enable all those different use cases and our partner can bring that to market.

Nick Starai:

If it’s a restaurant that is finally embracing curbside pickup or online ordering, we have tools that can enable that. And if you rewind just a few years ago, most technology partners that were enabling payments in retail didn’t really have that omnichannel or they had experience fully baked. So I think we’ve shored out the omnichannel scenarios. We’ve also added more third-party integration, so it’s not uncommon today for an ISO to come to a merchant and say, “Okay, you’re doing Ecommerce and retail.

Nick Starai:

Well, if you’re doing retail, I can recommend this point of sale that’s already connected to the gateway platform. And for E-commerce, you can use a big commerce solution or a shopping cart and weave it all together. So we’re arming the ISO community with more than just the transaction switch. It’s a fully functional omnichannel experience with third-party tools that can tie it all together.

George Peabody:

Cool. So you’re giving your ISO and bank partners a bigger story to tell when they go out there on the street.

Nick Starai:

Yep. You got it. And for those ISOs that have more and more been embracing software and using software as their lead in what we’ve been calling software-led payments, for that ISO community that’s leading more with software first versus payments. That is something that we’ve called a NextGen ISO, where we’re seeing and we’re trying to help evolve the more traditional ISO sale for merchant services to more of a software-led payment.

Nick Starai:

Which is very similar to what the ISV community has been doing. They’re selling softwares and payments are kind of secondary. And we’re seeing both the NextGen ISO and the ISV both heading in the same direction.

George Peabody:

Some of your partners are supposed to be blessing your existence given what happened a little over a year ago, particularly in the physical world where suddenly for them to survive through this pandemic, or at least try to make some money, they had to go online. And of course, in the card world online has very different chargeback rules and fraud liability. So did you have tools to help them do that? And what kind of fraud management were you able to apply?

Kyle Pexton:

With the pandemic, and all of the calamity that the pandemic brought, what it did do is it did accelerate adoption of enhanced payments technology, and that’s really where NMI came into play. And we were very fortunate to have the level of robust platform that we had, that we could ensure that our affiliate partners and merchants had the technology necessary for them not only to survive, but in many cases thrive through the pandemic.

Kyle Pexton:

And what we found, and I believe what will be a lasting result of the pandemic is that the lines between Ecommerce and brick and mortar are not only blurred, but they’re almost imperceptible now. And notwithstanding the fact that there are different chargeback rules and in many respects, different pricing schemes for Ecommerce versus card-present transactions. The reality is, the world has come to expect the ability to have an Ecommerce experience and a physical world experience really in a manner that is seamless to the consumer.

Kyle Pexton:

And then to augment that and take that even a step further, they’re also expecting merchants to have the technology that was initially incorporated to keep them safe and contactless, but now is becoming ubiquitous and expected by the consumer for effectiveness and efficiency. And so when you mix all of that together, NMI’s tech stack was uniquely positioned to address all of the needs of the merchants that the pandemic brought to pass.

Kyle Pexton:

And so our expectation is, moving forward, those lines between card-present, card-not-present, mobile, in-person will continue to be blurred and NMI’s technology will have the ability to solve all of those cases.

Nick Starai:

Thanks, Kyle, and maybe just a tiny bit more color. Some of the actual tools that we were well positioned for to help that retail experience go online, as you know we had some really savvy, hosted checkout pages that we’ve recently launched. Collect.js is a tool that has this kind of super easy drop in JavaScript library that gets merchants online quick with very, very little to no development. So that was one of the things where we saw a lot of surging as these retailers started going online.

Nick Starai:

And then we have an in-house fraud tool, fraud tool called iSpyFraud, which is focused specifically for Ecommerce fraud. That again, those retailers, some of them moved online for order ahead or just online sales. We also launched a QR component, so our clients could take a retail experience, generate a QR code and quickly change that to a contactless style transaction without having to upgrade their POS system.

Nick Starai:

So QR codes, host the checkout pages and fraud tools were three of the examples that we held during the pandemic of retail volume surging online.

George Peabody:

If I baby step that, wanted to just add, Nick was that with your QR code, rather than making them buy a new terminal that’s contactless capable, you said, “We’re going to give you the ability to have the customers scan the QR code that the merchant is displaying, and then be able to make a payment based on that”?

Nick Starai:

Yep, you got it. That’s exactly right. The end consumer or the customer would scan the QR code, and on their phone, it would essentially launch a hosted checkout page that they could very easily type the transaction. So we’re kind of calling it, converting a retail transaction to an online transaction. You can do that in-store without having to buy $500 plus contactless terminal.

George Peabody:

And I got to ask, does your SDK, software developers kit also go and look to see whether Apple Pay or Google Pay is loaded?

Nick Starai:

It does, yeah. Absolutely. See our hosted checkout page that fully supports Apple Pay, Google Pay, the kind of Ecommerce online version of it, as well as an app if it were to be a mobile app where they scan the code.

George Peabody:

The swift deployment and easy deployment that you’re talking about, putting the QR on the merchant’s terminal that then on the customer side and folks Apple Pay turns it into just a couple of clicks beyond their way out the door.

Nick Starai:

Absolutely.

George Peabody:

It’s a card-not-present transaction, but that’s still okay.

Nick Starai:

Mm-hmm (affirmative).

George Peabody:

All right. Cool. I definitely wanted to talk about QR codes. Glad we did that. Earlier, y’all had a pretty big event in February, Kyle, where you acquired another company called USAePay, which had a lot of presence in the physical world. Timing is intriguing, what’s up with that?

Kyle Pexton:

Yeah, that’s right. That’s correct. End of January, the first part of February, we closed on the acquisition of USAePay. And USAePay has been a player in the payment space for many, many years and has really built a great reputation of providing innovative payment products to their customer base. And really what made the acquisition of USAePay or the coming together of NMI and USAePay very intriguing was the fact that we had a lot of complimentary services for our customers, number one.

Kyle Pexton:

But number two, we complimented each other from the fact that we expanded each other’s diversity in our merchant base. Historically, NMI had been primarily from its beginnings an E-commerce payment platform. And to really understand the strategy behind USAePay acquisition, I think we need to take a step back about three years when we did an acquisition of a company called Creditcall, which is based in the UK.

Kyle Pexton:

And the thesis behind the acquisition of Creditcall was to bring NMI’s best in practice card-not-present solution together with Creditcall’s best in market card-present functionality. 

And Creditcall had more EMV certifications across more devices to our knowledge than anyone else in the space. And so bringing NMI and Creditcall together and then stitching together our platforms to bring a full omnichannel solution to the market was something that we worked very vigorously to accomplish.

Kyle Pexton:

Well, now we go back about four months or so with the acquisition of USAePay, and the acquisition of USAePay further complemented our strategy of bringing Creditcall and NMI together, because USAePay had a pretty robust set of card-present merchants in their merchant portfolio. And bringing together those card-present merchants along with NMI’s omnichannel solution opens up a significant amount of opportunity for us to offer more services and products to those USAePay merchants.

George Peabody:

Got it. Nick, this is a geeky question, so I’m going to turn to you. I’ve had this thesis that, and I don’t think it’s particularly brilliant, is that in the physical world, what we’re seeing is a shift from, and it’s going up market too, a shift from where a payment terminal is peripheral to a computer system like a PC-based system, but it’s a really intelligent device still, even if it is a peripheral off of a PC. That’s sort of been the model that’s been around for some time.

George Peabody:

Now, what we’re seeing is of course a smartphone or a tablet or a PC, but what we’re doing is we’re pulling more intelligence into that device and just looking for some specialty hardware that secures or enables a card transaction. First of all, do you agree with that thesis? And second, I’d love to hear you talk about a little bit, how you see this hardware peripheral evolution taking place. What are you seeing there?

Nick Starai:

George, I do agree with that. And you’re right, if we rewind 5, 10, 15 years, maybe we started 15 years ago, you had point of sale systems that were very, very proprietary. They were special manufacturers, custom built. They were touchscreen, they were very, very expensive and they had some sort of terminal attached to them. And with the advent of lower cost PCs, maybe 10 years back, you could maybe get a laptop or a lower cost Dell computer that could run your front desk at a restaurant or a store.

Nick Starai:

Maybe it was running Windows software, a lot of it was on-prem most of it. But you still had a Verifone, Ingenico or some sort of terminal tethered to it as an auxiliary device. And in the last few years, you’ve seen more and more empires or mobile point of sale style solutions at SMBs. And you’ll see that, now the Square device has grown up and as a standalone service, you’ll see the Clover device, which, yeah, those are essentially tablets that some of them have like hard readers molded into them. And that’s how that evolution is happening.

Nick Starai:

Now, at the same time, the Ingenicos, the Verifones, the PAXes, the more traditional terminal manufacturers, they’re actually putting Android OS on their terminals. All the latest, greatest payment terminals are running Android mobile operating systems to run the terminals, which means, yes, those payment instruments and payment devices are getting much, much more intelligent because they’re actually running operating systems that you can write apps on and do all sorts of logic on.

Nick Starai:

Now, if you take that even further, one of the things that we’re exploring right now and we have this pilot going with MasterCard, this technology called Tap on Phone, where you essentially take an Android phone or smartphone that has an NFC reader built into it, and you write software so you can literally download an app and turn that device into a payment acceptance device for contactless transactions. So that even takes a step further away from traditional terminals and flattens out this concept of a tablet/phone/payment device.

Nick Starai:

It’s kind of all becoming the same thing. It’s a lower cost device that has a lot of horsepower running like an Android OS, for example, and you can write all sorts of software, including a software that will turn that device into a contactless payment acceptance device. Now, in the U.S., market contactless payments aren’t fully prevalent. Roughly, 40% of cards issued are contactless cards.

Nick Starai:

We know that the pandemic has caused an acceleration of contactless issuance here in the U.S. market. According to MasterCard and Visa, they think it’ll double again next year. It doubled between 2019 and 2020. I’m sorry, doubled between, yes, 2019 and 2020, and they believe it will double again. So they’re kind of shooting for roughly 60, I think 63% was a number that I heard, but maybe don’t quote me on that, as far as contactless issuance penetration.

Nick Starai:

And we think that in the next few years, as contactless really becomes fully prevalent in the market here, that then the Tap on Phonesolution where you literally get a low-cost Android device that has built an NFC, they all do nowadays. And you just download your software to that product, that can become the payment device. Because everyone’s going to be able to tap their wearable or phone or their card to that device. And you don’t find an external portal.

George Peabody:

What about for a contactship, because that’ll still be around? You’re seeing anything that’s a simple, cheap, peripheral type?

Nick Starai:

We do have a number of empires, external Bluetooth connected, lower cost readers that could be used as a backup chip. But again, we’re looking towards the future, maybe two, three+ years. We’re not so sure that all cards will have fallen back on them. We think that it’ll be a low cost option for insert for sure. We look at what happened in the UK market, which we’re well-established there. I think over 90% of those transactions are contactless EMV now.

Nick Starai:

We’re looking for an ecosystem like that here in the U.S. market. And we’re starting to play with some technology that’ll help us get there.

George Peabody:

I think you’re right. One of the truths about the payments industry these days is that while a lot of what we’re talking about is technology-based where startups, new companies, ISVs are able to do things that they couldn’t have done five years ago, even given the spread of cloud and APIs, and gosh, the ability of one FinTech to call on the resources of others to accomplish what they need. It’s really become astounding.

George Peabody:

That said, there’s a business model called payment facilitation, which is also a piece of innovation. It’s been around of course for decades at this point with PayPal. But the idea with payment facilitation is where the payment facilitator has the ability to onboard a whole bunch of sellers, risk-manage them, and then aggregate all their traffic and connect it up through the payment facilitator’s own acquirer.

George Peabody:

And the beauty of that is the acquirer doesn’t have to go through expensive onboarding and risk management and underwriting steps burping on those sellers, many of them who would never have qualified for a merchant account. And the beauty of it for the facilitator is that they’re suddenly seeing transactions very quickly from a whole big body of sellers and it’s been a win, win, win all the way along.

George Peabody:

That said, there’s some sophistication you have to bring to that role. And I know that NMI has a number of ISV customers who themselves want to make money from the payment flow that they’re seeing from their own merchant customers. Where do you fit into the payment facilitation model at this point?

Nick Starai:

I can give you some feedback on that one, George. NMI has a platform called FACe, which stands for facilitator enablement, and it’s similar to enabling our ISO and bank customers with technology. What our FACe platform does is it also can onboard payment facilitator submerchants at the two major acquirers that approved pay facilitators. So traditionally what happens is an ISO might provide a merchant application to a merchant, the merchant will fill it out, include a bank statement, voided checks, et cetera.

Nick Starai:

The ISO or the bank does an underwriting on it, and if they approve, they generate a merchant ID. And that merchant ID then gets boarded on a gateway platform like NMI. In PayFac’s world, that’s condensed down because you get approved as a master merchant or payment facilitator, not all acquirers do it, but some do it. And once that payment facilitator gets their master MID, they can plug that into NMI’s FACe technology.

Nick Starai:

And then what happens is when that PayFac wants to create a seller or create a submerchant, we actually can send a real-time dynamic request to, again, the two payment facilitator, acquirers, the two major ones, and we can basically do a merchant creation realtime where they do a realtime KYC and a few other checks. And it comes back with essentially a virtual merchant ID, which we can then track all transaction activity for all of the submerchants and bring any chargeback ends for each one of the submerchants.

Nick Starai:

So the FACe platform is all of the standard tech that we’ve always had plus some additional tools for PayFacs, which allows a payment facilitator to focus on their software and plugging their master merchant narcissist, and to help them stand up pay fac. Another idea would be Payfac-in-a-Box.

 

Kyle Pexton:

And George, I just want to add one thing. One thing that you mentioned as you were introducing the payment facilitation component of this discussion is that ISV is often find that there’s a lot of complexity associated with being a payment facilitator. Well, most of that complexity lies in the tech stack because oftentimes one of the large acquiring banks who offer payment facilitation will underwrite and give approval to the ISV to be a PayFac, but then the ISP is on their own to figure out the technological components associated with being a PayFac.

 

Kyle Pexton:

Well, that’s NMI steps in, because as Nick just described, our platform is modularized and designed to provide that technological component to the ISV so that they have all of the functionality necessary for them to become a payment facilitator, including managing all of the funds flows associated with submerchants and so forth.

George Peabody:

Are you adding like-risk management tools so that the payments facilitator has got a way to monitor the behavior of its individual seller?

Nick Starai:

Yeah, we do have some risk tools built in the platform. So things like max ticket, maxi monthly, we have iSpyFraud, which is a fraud curbing utility. As far as overall risk management and chargeback and ongoing risk, that’s a combination of the acquirer as well as the ISV. And to Kyle’s point, technology is a big part of standing up PayFac that most ISVs don’t understand, but it’s also not for everybody. Payment facilitation is not for everybody because by definition you will own the risk of what’s in your portfolio of your submerchants.

Nick Starai:

So our ISVs do have to have some level of expertise on managing the risk of the verticals they’re in, but we do have some tools to help them do that. But still ultimately it’s their risk that they’re on the hook for with the acquirer that approved them.

George Peabody:

Which means they have to have staff to run that business.

Nick Starai:

Exactly.

George Peabody:

All right. Great. Guys, as we wrap up here, take me out five years, where do you see this picture evolving for NMI? You guys are very strong in the U.S. and the UK. What else is on your screen?

Kyle Pexton:

I’ll take the first stab at that. As we look out into the future, first of all, we see the payments landscape is being very dynamic and very ripe for continuous innovation and continuous opportunities. And we feel like NMI is very well positioned to continue to take advantage of that. We often talk internally that NMI as an organization, as a culture, we punch way above our weight class.

Kyle Pexton:

Because we have an incredible tech stack that enables us to serve as everything from a PayFac and a micro merchant to enterprise level merchants, solving for some of the most complex use cases in all of payments. And so we really see the horizon as being very promising and we feel like we’re very, very well-positioned to continue to enable our channels with the most innovative payment technology in the world to service their customers.

Kyle Pexton:

And also as we think about expansion, we have a very, very deep penetration into the UK market, and with our acquisition and Creditcall, we have a beachhead into the EU to take advantage of the opportunities on the European continent as well. And so significant opportunities here in the U.S. as well as ripe opportunities both in the UK to deepen our penetration there and enter the European continent.

Nick Starai:

Thanks, Kyle. From my perspective, I think as far as channel development, I think more and more of the ISO community is going to start embracing software. And I think we can help them with our technology to help bend them more towards this concept of NextGen ISO enablement. I think we’ll see and start servicing more and more ISVs as the software companies and hopefully the ISOs embracing those software companies and being the distribution layer of the software and the payments. And we intend to enable that regardless of the channel.

Nick Starai:

As far as pure product technology,I’m thinking that contactless and contactless EMV is going to continue to be big, and certainly in an in-person world. As people start getting back in store, a lot of the merchants that we’ve talked to have kind of retooled some of the systems and pretty much all have contactless EMV, whereas a year and a half, two years ago, very few had contactless. And we know the issuers are helping on the front end with that by issuing contactless cards.

Nick Starai:

Contactless payments in-store, for sure. I think that will continue to be more and more prevalent. We think that Tap on Phone or Tap on Mobile, where you just simply take an off the shelf Android device, download an app and turn it into a payment acceptance device. We think that that’s going to be big as we continue to see into the future. We’re also really excited about transit. We didn’t really talk too much about transit today, but NMI is enabling quite a few of the major MTAs or mass transit authorities.

Nick Starai:

And again, they used time during the lockdown to retool, upgrade their fareboxes, put contactless readers on the buses, and they’re preparing to start accepting what we call open-loop contactless cards.

When you go to your local transit place, you buy a card, you load value onto it, and then you use that to access the bus. The networks have green-lit this open-loop transit technology where you can literally take a contactless card or digital wallet or wearable to access the bus train, et cetera. 

And we’re pretty excited about a few of those things that we’re working on. So I think from my perspective, lots of contactless enablement in the next five years, better form factors and innovative experiences. And we hope that we can enable it in all of those different scenarios.

George Peabody:

It’s come down to touchless, hasn’t it? One last geeky question, then I’m going to roll you back to your Ecommerce roots. But as we talk to our merchant clients, one of the big areas of concern in Ecommerce in particular is authorization optimization. How do you raise that number? As sometimes it’s… If I go down one acquiring path that goes to a particular issuer, I’m going to get declined way out of range from what I should. But if I go down the other acquiring path, I do better.

George Peabody:

That’s sort of an enterprise level concern. How do you address that or what’s in your quiver for auth optimization in this SMB space?

Nick Starai:

I can make a comment on that too. I think one of the real important things is just maintaining compliance. It sounds pretty obvious, but as a gateway vendor or a transaction switching technology, it’s really easy to let some of the Visa, MasterCard, Amex and Discover card mandates slip a little bit. But things like the card-on-file mandates, the things like there’s lots of different ways to indicate things correctly, whether it’s a recurring transaction, whether you use tokenization, whether it’s a card-on-file.

Nick Starai:

Those matter when it comes to approval ratios, they really do. So we just always make sure that we’re doing regular certifications and we’re compliant with all of the regulations that the card brands associate. Number two, one of the core features early on was this concept of multimedia capabilities that our platform supports. Our merchants can have multiple different merchant IDs within the gateway platform and we do have some intelligent routing capabilities.

Nick Starai:

So depending on different regions or different scenarios, there are methods in which our transactions can be intelligently routed to best optimize approval ratio. So that, in conjunction with making sure that you’re staying compliant is something that I think is super important to optimize approval rates.

George Peabody:

Cool. Thank you. I know Visa and Mastercard thank you as well. Staying up-to-date with all of their regulations and rules changes is no simple task, so well done guys.

Nick Starai:

You got it.

George Peabody:

Guys, thank you so much. Really appreciate you joining me on Payments on Fire. Nick, glad to have you back for a second time. Kyle, look forward to seeing you in the future.

Kyle Pexton:

Great. Thank you, George.

Nick Starai:

A pleasure. Sounds good. Thanks, George. Take care.

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