Kitty (00:24): If you're an ISV making money from payments, there's a pretty easy way to convince yourself your payments program is healthy. Merchants are processing, residuals are showing up, revenue is growing, nobody is calling you in a panic. It all looks healthy to me. Except, how do you actually know? When was the last time somebody looked at your processor contract and asked whether you're getting a competitive deal? When was the last time you checked whether your residuals were actually being calculated correctly? Are you optimizing interchange where you realistically can?

Kitty (00:50): Are your merchants priced appropriately? And is your payments product still keeping up with what your customers actually need? Because payments are working and we have a healthy payments program aren't necessarily the same thing. Today we're gonna be talking about how you actually tell the difference. And Jason is joining me because apparently I thought putting two payments consultants on the same podcast was a good idea.

Jason (01:10): It'll be just fine, Kitty, don't worry.

Kitty (01:12): That's reassuring, Jason. Our guest is Brian Abernethy from Straata. Brian and Jason already know each other through Jason's work with Payments Therapist. And while you could probably look at their businesses from the outside and assume they're competitors, their areas of expertise are actually pretty different. So we're gonna take advantage of that today. Brian, welcome to CentsChat

Brian Abernethy (01:30): Thank you for having me. Happy to be here.

Kitty (01:31): And before we start diagnosing everyone else's payments program, Brian, give us the quick version of your background and what you've built with Straata.

Kitty (01:38): You spent years doing this work through Utopia. What made you decide it was time to turn that consulting methodology into a platform?

Brian Abernethy (01:45): Yeah, great, great question. Happy to give you the 30-second background. So I've I've been in the payments industry for about a decade now. and when I first started in the industry, I was in business school and got recruited by someone who had graduated from the same program who was actually intentionally looking for people who didn't know anything about payments because it turns out a lot of us are quite jaded in our experience. And so n now I understand why he did that. so I ended up joining at the time it was TSYS and I landed in what they would call ISV business development. so essentially going after

Brian Abernethy (02:11): Vertical software companies and convincing them to use TSYS products versus our competitors at the time. So kind of cut my teeth that way and ended up taking over that business development team and kind of got to see, dozens or probably hundreds of these partnerships be launched over maybe a five-year period through the global acquisition. So really learned the industry that way and then spent some time over at Clearent, a privately held business now known as Xplor, building out their kind of same thing, ISV channel.

Brian Abernethy (02:35): And essentially the conclusion that I reached over five or six years of doing that was I couldn't believe how frequently ISVs totally got this wrong.

Brian Abernethy (02:43): Like not like they kind of screwed it up. I mean completely fumbling the ball and like complete false start. Which, was frustrating for me as as a salesperson because obviously our commission's tied to live revenue. And at one point we had reached the conclusion it was about seven out of ten contracts that we signed never even processed a dollar, right? So huge amounts of wasted money. And I I'd always felt like there was an opportunity for someone to step in and help the ISVs navigate this really complex ecosystem. and that's really where Utopia was born, about

Brian Abernethy (03:09): Five years ago now, which is hard to believe, with the very simple idea that, hey, this is really complicated, I think I can help. And we were able to turn that into a business that doubled in size every year for about four years, which was great, right? Really, really good business. Jason can relate, consulting can be fun, but at some point.

Brian Abernethy (03:23): the project-based nature of it and kind of always chasing your tail for the next deal can make it a little difficult. And so I've been trying to figure out how would you maybe move from this true service-based delivery to more of a recurring revenue model, probably leverage some AI that we all like to talk about, I'm sure we'll get into today. and that's really where where Straata was born. So it's really kind of just a rebrand of the Utopia

Brian Abernethy (03:42): That we've been operating under and not replacing it entirely, but Utopia, that work still lives on. So all of the contract negotiations, the RFPs, the go-to-market work, the diligence for investors, we still do a lot of that, but a lot of it is now with an eye towards how do we become an extension of your payments team But that's kind of the short version. Short-ish.

Kitty (03:59): is it the ISV that knows it has a payments problem or the ISV that thinks everything is going pretty well before they start talking to you?

Brian Abernethy (04:07): that's a good question. y the usually someone in the room either knows or is willing to admit that they're not sure everything's totally dialed in, which I think is probably fair to say of virtually everybody. Now, whether that's

Kitty (04:16): Yes, I think so.

Brian Abernethy (04:18): that's the operator, oftentimes it's an investor. We're really plugged into the growth equity, private equity community, and so could be a board member who knows because they've seen in other deals they worked that there is more to do here.

Brian Abernethy (04:28): and they kind of push the platform to go and look. But I'd say generally our customer is someone who's doing something with payments today, has kind of gotten, a bite at the apple, they see the revenue, they know it's not dialed in, they don't really know what to do yet, and we try to meet them there and figure out what that looks like.

Kitty (04:42): Now let's establish something before we get into the five areas. If I'm running an ISV and payments are processing, my merchants aren't revolting, and I'm getting a residual every month, what should make me question whether my program is actually healthy?

Brian Abernethy (04:54): That's that's a really good question. we could probably record the whole episode just on this. But I think there's there's

Kitty (04:58): Mm-hmm.

Brian Abernethy (04:59): a handful of things. I think first and foremost is just understanding

Brian Abernethy (05:02): what's actually driving the growth in your portfolio? I think that's really important because everything you just described could absolutely be describing a healthy program. It could also be describing a dying program and you have no idea. so for instance, we've had a couple clients recently come to us with exactly what you just said everything on the surface looks okay. Residuals are going up month on month, they're not getting a ton of calls from angry merchants, When we get under the hood, well, maybe you actually do have a pretty giant attrition problem.

Brian Abernethy (05:28): problem that's being paper macheted over by price action from your partner to make it look like you actually have a healthy growing portfolio when reality merchants are leaving in droves and the ones that are left are eventually going to leave because they're being price gouged. if you're not looking at the right depth of reporting or if you even don't have access to reporting, that's not something you would ever really notice, right? So first things first, what's actually driving the growth in the portfolio? And then I think broadly speaking, what is your agreement kind of look like? What are you doing? What is your partner doing? And is that a fair

Brian Abernethy (05:57): A fair kind of deal because where you're at today, depending on where you are in your contract cycle, probably dictates where you are for the next 12, 24, maybe even 36 months. And so understanding if there needs to be a change at some point and does that change necessitate what you do today? Because unwinding, the bigger the program gets, the harder it is to unwind down the road. So those are just a couple things that come to mind.

Jason (06:16): Yeah, Brian, I think you kind of hit the nail on the head with some of that. It's, payments is complex. A lot of the ISVs that both you and I have worked with, payments is kind of an afterthought for them, right?

Jason (06:27): they added payments because in order to have a compelling product in the vertical they're going after, they had to support accepting money. And they don't have a full time

Jason (06:38): Payments team, right? If if you look at a lot of the ISVs who have grown up to become true payment facilitators or PayFacs they have an entire team that is paying attention to payments around the clock. we'll talk more about the semi-annual card brand updates, I'm sure, episode.

Jason (06:54): But for smaller ISVs where payments is a afterthought,

Jason (06:59): You can't operate on a set it and forget it and just hope everything is going according to plan and wait for the CFO someday to say, Hey, our numbers used to be this ratio and now they're this ratio. What happened?

Brian Abernethy (07:14): it's such a recurring revenue and hockey stick business that unfortunately a lot of the work and the effort you have to put in for a successful payments program doesn't necessarily throw off immediate results, right? So I think you've gotta understand the inputs, trust that they will work, but give them time to breathe and kind of to take life in the portfolio. and I think because the inputs day to day are so disconnected from the outputs in the P&L and what the CFO might see in that example, Jason, it

Brian Abernethy (07:37): can be really hard for someone to have a lot of conviction in making a decision, especially if they're not an expert, right? And if we think about the number of ISVs that are out there in the market, thousands of them, and then the supply of experts or GMs of payments consultants to work with them, that's a huge gap. It's probably, for every 10 ISVs, there's maybe one person who's qualified to help them. And so what do the people who are in the other 90% do? And that's something that we're trying to answer through Straata.

Kitty (08:01): So if we're gonna give an ISV payment program a report card, you've basically got five subjects you wanna grade them. Now we're gonna go through them. And the first one is the processor contract, because this seems like the thing everybody negotiates very seriously once, and then they put it in a folder somewhere. What makes a processor agreement healthy? And how does an ISV know whether what looked like a good deal three years ago is still a good deal today?

Brian Abernethy (08:25): Yeah,

Brian Abernethy (08:25): gosh, l loaded question, but happy to tackle it. So I think first things first is just being crystal clear on what exactly is it that you are responsible for, you as the ISV, versus your partner. so there are certain things that need to take place

Brian Abernethy (08:37): To certain inputs to a successful payments program, things like underwriting, KYC, customer support, sales, all of those different things. there are various operating models that let ISVs either completely outsource all of those. Maybe it's kind of a hybrid in the middle where they do some of those, but they outsource some of them, or they could go all the way, as Jason mentioned earlier and own all of those things. And so I think understanding what are you actually doing it informs what the economics should roughly look like. And so from there,

Brian Abernethy (09:02): I think the combination of a revenue share percentage and buy rates is the most important thing. And we should take a second to dig into those because I think a lot of times people are so caught up on the percentage split of their agreement, when in reality it's actually the last mathematical thing that determines how much money you make, right? First and foremost, it's how much adoption do you have of the solutions, how much volume is going through through the platform, what price premium are you able to command for whatever integrated solution you're offering.

Brian Abernethy (09:28): How are you retaining those clients through attrition? And then, yeah, finally, after all of that, you get a percentage split of whatever that pie is. But I could easily show you an example of someone who's got a 75% split who makes a lot less money than someone with 50% who's got a more dialed-in program. And so once you figured out what swim lane you're supposed to be in, what are you responsible for, and what is your partner? I think it's about understanding your end market and does this contract allow you to go to market and sell? So another way to look at this is.

Brian Abernethy (09:54): What are the expectations of the end merchants that use your software? we have clients who have your traditional SMB merchants and they can go to market at a blended rate of 2.9% and 30 cents, and there's plenty of margin to go around and everyone's happy. We also have clients who have enterprise level merchants who are expecting to pay Interchange Plus five, 10 basis points in five or 10 cents. And when you look at the popularity of some of these operating models like PayFac-as-a-Service, where a lot of the clients I work with, I'm sure Jason worked with, they end up landing.

Brian Abernethy (10:20): Those are 100% revenue share deals, meaning that the partner, your vendor, has to make all of their money before you make any. Okay, so if you have 100% over a buy rate deal and you have enterprise merchants who are expecting to pay very, very low interchange plus pricing, those two are incompatible, right? So you actually have a structural issue here where you actually cannot sell any deals because you're underwater on them, right? So all of those things need to be taken into account. It's not just chasing the percentage.

Brian Abernethy (10:45): Because again, we just gave you an example, 100% sounds great until you can't sell anything and it's not so great anymore. there's a lot of dimensions to measure this on. I think the one common denominator is that there isn't really a public source of truth on what good looks like here. And that's one of the value propositions that Utopia had and Straata has is a database of contracts across different providers, different operating models, different volume sizes, different geographies. We know what good looks like. We know what the processors are willing to concede in negotiations.

Brian Abernethy (11:11): And we can help you make sure you've got the right deal.

Jason (11:12): Yeah, Brian, just to piggyback on that, I think this is probably one of the most critical and overlooked decisions that an ISV makes. I like to use the analogy until you've had a car with cooled seats, you didn't even know that was an option, right? But once you have it, you'll never go back, especially if you live in Florida. I couldn't.

Kitty (11:31): gonna say, says the guy who lives in Florida. know

Kitty (11:34): if he's having that issue.

Jason (11:35): I couldn't imagine driving a truck without cooled seats in July in Florida. But seriously, it's this is why for an ISV who is looking to get more involved in payments or someone that already has a payments program, bringing a team like yours, Brian and Straata into that has seen every feature.

Jason (11:56): knows all the bells and whistles, knows what is out there in the industry and can help an ISV pair their solution and in the market they're going after with the best processing partners and the best features that they offer is critical, right? Because if if you don't know to ask for it, you're gonna figure it out after the contract's already signed.

Jason (12:19): And you're talking to somebody at some trade show two years down the road, and you're like, Man, I wish I knew that when we made this decision. And changing these relationships is hard, right? It's not easy. So doing it right the first time will save you a ton of pain down the road.

Brian Abernethy (12:35): Yeah, no doubt. well said, I've got if I had a dollar for every time someone said, I wish I met you six months ago, unfortunately. Yeah, it happens. And one other aspect to throw in here real quick around the contracts too is, we obviously the commercial terms are what gets, a lot of the attention, but I think equally or probably more important in some cases are the actual kind of the qualitative or actual words in the agreements, talking about exclusivity, talking about contract minimums, right, talking about non solicitation periods and

Brian Abernethy (13:00): liquidated damages clauses, right? we still see contracts to this day that have a lot of those things in there when I would say a market rate contract has largely negotiated those things away. Like we would never encourage a client to sign an exclusive agreement today, which is just it's not really a market norm. But you if you don't know any better, you say, Okay, this looks like a good deal and I don't really intend to move until to your point, Jason, two years down the road, payment technology takes another huge leap.

Brian Abernethy (13:22): The processor you chose may not be keeping up with the cutting edge and all of a sudden you're at a competitive disadvantage because your product isn't as good as your competitors, right? So making sure that your processing partner has to show up and earn your business every day and it's not just, well, we locked you in and there's nothing you can do about it, that doesn't feel like a great partnership, right? So I think looking at the actual terms of the agreement beyond the commercials is really important as well.

Kitty (13:43): Very well said, guys. Okay, now the second one bothers me, and that's gonna be the residual, because I think most people assume that if a processor sends you a residual report and deposits money into your bank account, the math behind it must automatically be right. Now, how often is that assumption wrong?

Brian Abernethy (13:58): It's an alarming number.

Brian Abernethy (13:59): since we've launched maybe six, seven weeks at this point, we've obviously had a lot of interest from people in this exact topic. I think it's a hot button because it's your money, right? It's your commission. we're finding that it's between forty and fifty percent of the time that we look, something's wrong. Now the degree to which it's wrong, of course, varies wildly, right? We have had some clients where it's it's a honest degree.

Brian Abernethy (14:18): goodness mistake and it's a couple thousand bucks here or there and we're able to square it away. We've had clients where it's several seven figures, right? Multi-million dollar issues that go back decades. And so it's a really a kind of a circumstance. And I would say that, unfortunately our industry obviously doesn't have the greatest reputation for transparency and ethics. And that there certainly are probably some scenarios where where this is intentional and misleading. I

Brian Abernethy (14:42): generally believe that a lot of it is not intentional, that it's it's just structural issues and building processes and incompatible platforms that just, and then it goes unchecked, right? I think s some of the problems are, we have clients where the math in the residual file actually ties out perfectly, right? There is no error. So when we find something and bring it to them, the CFO might be like, well, how? Like w what am I missing? And they didn't actually miss anything. It's just that they didn't have the full picture. The picture that they had with their blinders on looked perfectly clear.

Brian Abernethy (15:08): When you add additional context to it, which is something we can do with our database and kind of showing them what else we see with similar portfolios, maybe on a different processor, maybe with the same processor, there might be something that they're not seeing, right? And if we add that additional context, that's where the issues reveal themselves. So unfortunately it's almost one and two in at this point. So if you haven't looked or if you hadn't had a professional look at it, it's absolutely worth the time and effort to go and audit to make sure everything's is as it seems.

Jason (15:33): I'm gonna give this from the core processor perspective, right? Because that's that's where I focus a lot of my consulting efforts on. One of the things that I see over and over again, and we talked about the semi-annual card brand updates briefly earlier.

Jason (15:48): Every time the card networks change the data requirements and the processors are not keeping up with them, they start incurring transaction integrity fees and their cogs start to change, right? And this is this is the danger of the Rev share model, right? Because anyone can bundle into that expense column anything that they want to and

Jason (16:13): most people look at two seven nine and twenty-five cents. They don't realize the, tens, if not hundreds of data points that go into the actual cost side of that equation that determines what the profitability is and the rev share is going to be. And one of the scary things that I see all the time is the card brands will change the rules.

Jason (16:34): Data integrity fees will start piling up on the processor side of things. And it's easier to sit around the table as the processor and say, hey, our costs went up by one and a half basis points. So we're just gonna figure out how to pad interchange and pass that downstream rather than actually fixing the problem. and then the margins just continue to erode and erode, but they

Jason (16:59): It's like water over a rock, right? It happens so slowly it's almost impossible to notice unless you really know how to rip apart all this data that the card brand update to card brand update cycle, you don't even see it happening. But then you look five years later and now you've got a waterfall where there used to be a little stream.

Jason (17:22): be because of the perpetual erosion. So it's it's really scary what happens behind the scenes that most people don't have the raw data to be able to do that type of analysis.

Brian Abernethy (17:33): it brings up another point I'd I'd love to make just around, getting back to looking at your contract, Kitty, what mentioned earlier, which obviously ties directly to your residuals and dictates in a lot of ways what you are owed. And yeah, just really paying attention to like how is how is net revenue even defined, right? Is it defined? We have some clients, we have contracts where it's very clearly defined. It's a it's defined as anything that's listed in this schedule A. You have your buy rate according to, and it's very straightforward, and those are really easy.

Brian Abernethy (17:57): We have some that have no schedule A and are just kind of it's just our expenses. And so you go take a peek at how the math actually looks when they say our expenses and Jason I what would you say a reasonable internal processing expense might be for a processor?

Jason (18:09): You mean like blended rate?

Brian Abernethy (18:10): Yeah, something like that.

Jason (18:11): one five.

Brian Abernethy (18:12): Yeah, okay. And so when when you go and you look and so someone says, well our core cost is two You're like, Well where what's up with that fifty basis play Well, how are you coming up with that? Are you jamming G&A in there and travel and like how you how are you coming up with that? So understanding how they're actually calculating.

Jason (18:25): Something's got something's gotta

Jason (18:26): pay for Money20/20 right?

Brian Abernethy (18:28): That's right, of course. And all the after parties, right? Yes, all the rooftops. Of course, of course.

Brian Abernethy (18:32): another example, to defend the core processors, I think, we have seen examples where, for instance, an ISV might be partnered with an ISO or with kind of a company that ends up getting acquired by a larger entity, right? Happened a ton over the past few years. And what could what has happened is

Brian Abernethy (18:46): You signed an agreement with a smaller company that gets acquired two or three times, and all of a sudden it's part of this massive organization. And quite literally, like there, there is an incompatibility with what your schedule says versus what the billing engine at this company can do now. And so most of it's right, and then you've got someone who's going in and making manual adjustments to an incredibly dense data set and hoping it's right. And then also it's up to you to check that. And so you can imagine over time.

Brian Abernethy (19:11): that probably drifts a little bit and things, they're not adding up correctly. we have clients all the time where we see it's pla plainest day, like it's right here, it's on your schedule A and you're just not getting the right share of it. You confront the processor with the evidence and that, yeah, you're right, that's that's a mistake. And so it's good faith. It's just a mistake.

Jason (19:26): A lot of those manual adjustments are done in Excel workbooks that have 27 macros that need to be run. And the guy who built that Excel workbook has been gone for 15 years. And once a month, somebody just sits there and imports this file, runs this, runs that, copies and pastes this. They don't know why they're doing what they're doing. It's just what.

Jason (19:50): Somebody told them to do and nobody has the foggiest idea how that thing works under the hood. So until somebody says, Hey, this is wrong, they don't even know themselves that it's wrong.

Brian Abernethy (20:02): saying it's wrong or saying, Hey, this doesn't look right to me. You can imagine that probably largely falls on deaf ears inside. They're probably like okay, well, what are you gonna do about it? I think it's well what we try to do when we do find something is put together a pretty bulletproof case to say, no, like here is the example, tell us where we're wrong. Here's what we see, here's our claim, you tell us where it's off. and so I think then that gets into okay, well, what are my contractual rights to audit this? What's the look back period?

Brian Abernethy (20:25): I think usually that's limited to a handful of months. assuming that the partner wants to retain it, usually there's some negotiating room there. But it's an exercise everybody should absolutely be doing, at least once a year just to make sure everything a is as it seems.

Kitty (20:35): All right, now let's get into interchange because this is also where I feel like we can get into some pretty questionable math pretty quickly. Somebody sees a giant processing volume, multiplies it by a few basis points, and suddenly there's a PowerPoint slide saying you found a million dollars. Brian, what's wrong with this approach?

Brian Abernethy (20:52): great question. So I think that broadly speaking, interchange optimization, the concept of this has been around for a long time. It's usually a little bit of vaporware. So I think anyone can look at a merchant statement and see a downgrade and say something happened here. The level of detail where it actually becomes helpful and actionable is what part of these interchange optimizations are structural in nature and what are addressable. So we like to look at them, you cannot control.

Brian Abernethy (21:15): as an ISV, what the end customer of your merchant walks in and pays with. You can't stop them from using an Amex Platinum, can't stop using a debit card. It is what it is. understanding it is one thing. You should monitor it and understand it and make sure that it's consistent, but there's nothing you can do to manipulate that. And so I think helping ISVs understand that interchange is not avoidable, but it is optimizable and only a certain part of it is optimizable is kind of the a big education topic that we have to lead our clients to water on.

Brian Abernethy (21:43): But once we get in there and we start to understand how do our ISV clients actually price to their merchants, which we'll get into in the next section, these two are s are two sides of the opposite opposite side the coin because whatever you do with interchange, but depending on how you price your merchants, is either going to go flow flow directly to your merchant and cost savings or it's gonna retain you and in

Kitty (22:03): Mm-hmm.

Brian Abernethy (22:03): incremental revenue. And so these two to me are so intertwined. And so

Brian Abernethy (22:07): the idea of interchange optimization is so heavily reliant not only upon your processor's technology and their ability to actually support the levers that you need to pull to optimize, but also your ability to influence that maybe operationally how your customers try and even interact with the payments platform that's built into your product. I would say that generally speaking, this is the largest opportunity that we find for any ISV that we work with. This is the biggest dollar prize from an absolute value.

Jason (22:32): Yeah, and Brian, I do a lot of this, the interchange optimization side of things from the core processor, the ISO level, and just kind of flipping the script here, right? There's there's only two things you can control data quality and technology path, right? I there's so much smoke and mirrors in interchange optimization. I mean, looking at the processor level, I've seen

Jason (22:55): portfolios where things are downgrading, right? Because a AVS data is not being passed along, right? And one could look at that and say, well, all you have to do is collect the, the billing zip code street address and these transactions will qualify at a better rate. but from the processor level, they can't, just like you were talking about how an ISV can't force a consumer to

Jason (23:18): utilize a particular card type, right? The processor also can't go to the ISV and say, hey, you must do this, right? And a lot of ISVs don't realize they're they're leaving money on the table by not doing certain things. The flip side of that is the technology path, right? One of the

Jason (23:37): things that I've seen

Jason (23:38): pop up again and again and again. you've got ISVs, they go out and they build these world-class systems that leverage things like, Apple Pay and Google Wallet

Brian Abernethy (23:48): Mm-hmm.

Jason (23:48): and Tap to Pay on iPhone. then they're talking to some third-party gateway that doesn't expose all of the data elements that need to be passed in order for that transaction to qualify at the best possible rate or to get

Jason (24:04): Liability shift, right? and then they wonder what's going on. And they're doing everything right on their side. It's just that along the way, as that message traverses from their system to a payment gateway to whatever's behind that, to some core processor, things get lost in translation. So I think those are really the only two opportunities there are to clean up interchange, right? Data quality.

Jason (24:30): and the technical path that the actual message is taking to get to the card brands. Anything else is smoke and mirrors, right?

Brian Abernethy (24:38): Yep,

Brian Abernethy (24:39): yep, absolutely. I think when you think about what why is this run amok so much and why, wouldn't a processor try to help an ISV understand it, I think the bottom line, like there's really not really a commercial incentive to do so. I think, you could make an argument that maybe from a value add perspective, this is something you should be doing to enable your ISV partners to make more money, but how a processor would structure an agreement with an ISV, like there isn't really a benefit to them going and do this. They're gonna make their markup above interchange.

Brian Abernethy (25:04): And they're gonna let you go and kind of make whatever you want them beyond that. So there's not really a reason for them to go do it, which of course now leaves this huge knowledge vacuum where the processor probably understands it for the most part. There's no incentive to communicate to the ISV, and so they're just kind of out there, running their business and hoping everything's good. especially for ISVs who who tend to price

Brian Abernethy (25:22): in more of a bundled or simplified fashion, right? A lot of them have a blended rate of a 2930, a two seven five, whatever it is. interchange optimization in that scenario is pure margin to you. and it can be pretty substantial depending on the profile of your business and what optimizations there are. so I think just understanding what levers there are, quantifying the benefit of it. And Jason, as you said earlier, okay, well now twice a year we like to play this game where we update the entire schedule or some portions of it. to my knowledge,

Brian Abernethy (25:47): Very, very few ISVs or even ISOs beyond honestly beyond that have any ability to forecast the impact of those changes to their portfolio down to the transaction level. And that's something that we help them do. processor can't do it,

Jason (25:56): Or payments companies can't do it.

Brian Abernethy (25:59): to do it. And that, especially, the nature of a lot of these ISVs is they're investor-backed businesses, right? They're gonna trade hands, they've got boards. and so imagine that you're a B2B heavy, we have plenty of B2B heavy clients, say professional services.

Jason (26:10): Yep, see that.

Brian Abernethy (26:10): And a year ago,

Brian Abernethy (26:11): yep, you walk in and you're like level level two, level three is we're out of here and CEDP and we can't figure it out and we just lost what thirty, forty basis points in margin, your payments business disappeared overnight.

Brian Abernethy (26:21): you didn't understand what was coming. So yeah, obviously that's a pretty extreme example, but it is not uncommon to see margins compress five, ten percent quarter, and you'd have no idea why. and so I think

Brian Abernethy (26:31): with the information to see what's coming, model it out and say, is there anything I need to need to do to hedge against this? Right to your point. Pretty simple communication to your customer. Hey, here's the evidence. My underlying costs went up. We're passing it on to you. We think it's pretty fair. I think there's a way to message that, but if you never see it coming, it's kind of too late.

Jason (26:46): one thing I'll add, right? Because I'm sure you've you experienced this trend in your business like I do in my practice.

Jason (26:53): It's almost like Christmas for us every May and November because the phone starts ringing and the ISV or the ISO right, the words that come out of their mouth is Man, I don't know what happened in April or October, but all of a sudden we saw this shift in, in insert blank, right? Interchange authorization

Brian Abernethy (27:13): Yeah.

Jason (27:14): rate. And those those are those card brand

Jason (27:17): the card brands keep us in business, Brian.

Brian Abernethy (27:20): That's right, that's right. Well said.

Kitty (27:22): Alright, guys, moving on to the fourth, merchant pricing. This is where it gets interesting because finding a cost reduction doesn't automatically answer the next question. Who should get the benefit? Let's say we find an interchange optimization opportunity. Does that savings go to the merchant? Does the ISV keep it? Is there some combination? How should an ISV think about merchant pricing as part of the overall health of the program?

Brian Abernethy (27:46): Yeah, I love this topic 'cause it's such an evolving situation just based on the footprint of your portfolio and how you're growing and where you are in your company life cycle. But I would say generally speaking it the first question you should ask is where are we at from a maturity aspect of our program? Where is our adoption at? have we got product market fit? Is it early? Are we just trying to get it out there?

Brian Abernethy (28:05): most of our customers are going to market with some sort of simplified blended rate in an effort to kind of say, hey, like this really confusing interchange plus payments thing, which opens up a lot of areas to hike fees and manipulate interchange. That's too complicated. We're gonna keep it simple for you, right? Kind of the stripe and square model, PayPal model that they made made so popular. It tends to fit pretty well with the general value prop of embedded payments.

Brian Abernethy (28:26): and so most of our customers choose that route, in which case, like I said, all the interchange optimization benefit is theirs. But we have absolutely had scenarios where maybe it's earlier in the in the program. And I I'm a huge proponent of prioritizing adoption and product market fit first and worrying about margin later. And so, when when we look at a relatively less mature program, maybe the adoption percentage isn't quite there yet.

Brian Abernethy (28:49): I think there's a real argument to be made that if you can get sharper on price and maintain the margin that you need to make, you should consider doing that, right? Because I think if you are out in market and you're offering lower processing fees than your competitors, that not only could help you win, you get adoption on your payments program, it might actually help you win share of your core software solution. If the overall cost of working with you because you add payments is cheaper than your competitor, you could use that as a customer acquisition weapon and win share.

Brian Abernethy (29:13): I think the other scenario we see quite often is customers might have different customer cohorts, right? They've got their SMB, their mid-market, and maybe enterprise. And there's probably different pricing expectations across those as well. So maybe your long tail and your mid-market get that blended rate. but maybe enterprise wants interchange plus pricing, which again can get a little touch and go depending on the structure of your back-end agreement. Tying all of these, are important to look at cohesively because your agreement, of course, dictates.

Brian Abernethy (29:37): Whether you can actually offer that interchange plus pricing. So it's a very inexact science. I think a lot of it is understanding the interchange and what's optimizable, what's structurable, and what's addressable. But generally speaking, the ISV has a huge opportunity to retain margin here and then choose what to do with it, right? Do you want to keep it or you want to pass it along for some other person?

Jason (29:54): This is one of those things you don't want to just throw a dart at when you're you you're coming up with your merchant pricing programs, right? Brian, you and I we've in all in all the threads we follow, right? What's the common theme we see right now? This vendor just raised pricing by ten basis points. the costs keep going up, right? almost as important as the contract figuring out how you're going to price your merchants.

Jason (30:18): from the get-go so that you don't have to change it six months down the road and make all of your customers very angry. It's so critical, right? And if you again, if you don't know what to ask for, if you've never done this before, or even if you have done it before and it hasn't worked out, right? Like figuring this out early on so that you don't have to change it once you're you hit some sort of, critical momentum in acquiring customers.

Jason (30:44): it's so important and it's so easy to overlook. It's so easy to just say, so and so is charging this, so we're gonna match that, right? You need the interchange optimization needs to support the pricing. The contractual relationship needs to support the pricing. It's it's not something you wanna just guess and check.

Brian Abernethy (31:02): So I think that th this is kind of the last leg of the stool of thinking about, who should I be partnering with and you have to have this in mind when you go to make that selection because certain vendors can support different go-to-market strategies and we won't name names, but you the one of the largest players in the industry didn't even offer interchange plus pricing until a few months ago. And so if if that was a something you needed to do to compete,

Brian Abernethy (31:21): You were out of out of luck with that and so God forbid you go and integrate to that vendor and go to market to sell to your enterprise merchants and realize you're underwater on everything, right? So I think understanding what is my strategy there before I start my vendor selection process and contract negotiation, you gotta have a full view of this whole picture before you start that process.

Kitty (31:38): Moving on to number five, product fit, attachment, and churn. The first four have been pretty heavy financially. This last one feels different because now we're asking whether the payments product itself is actually keeping up. What does Product Fit tell you about the health of the payments program?

Brian Abernethy (31:53): so I think this is probably the most overlooked part of this whole equation because Kitty to your point, everything is kind of spreadsheetable and very commercially driven at this point. And then now we kind of move to more of a product or technology and feature set or even customer success type of discussion. I think that the way that we like to coach our clients to think about this is, starting with something like a share of wallet. Okay, so what is the actual revenue of this business and what percentage of that is your platform creating?

Brian Abernethy (32:18): And if it's not a hundred percent, to me, that means there's some sort of gap, right? Now again, that gap might be structural and you can't do anything about it, or maybe there is something that you can do about it. But I'll I'll give you example. many times we start working with clients who, because they're the system of record, they can see their customers' invoices go coming in, right? They don't know how they're getting paid, but they can see them coming in under the ledger. And so they might say, Hey, we have we have a billion dollars in adjustable volume here. Let's just, and then the investor says, cool, X basis points, we're gonna make this much money, right?

Brian Abernethy (32:44): All done. Well, obviously it's a little more complicated than that. but understanding, okay, well, if if it's not being processed on my platform today, where is it being processed? Is it on QuickBooks? Is it on Square? Is it on just a simple, online, checkout button? and when I do launch my product, how much of those different workflows am I going to be able to capture? So you could act almost accidentally go and build a solution for one of those things, but unintentionally leave out the functionality that's required to get the bulk of the margin.

Brian Abernethy (33:10): So for instance, that might mean the ability to push and pull data into QuickBooks, right? So if your customers prefer to use QuickBooks because it reconciles to the ledger, great. You should go find a way to build an integration there and be able to push the results back in there. And now all of that becomes addressable to you. Had you not done that, the customer is never going to leave because they need the reconciliation for either themselves or their accountant, right? That's just an example. but yeah, so I think that the product gaps, I think first and foremost is does my solution

Brian Abernethy (33:35): allow my customer to process all of their AR within my platform. And if not, you probably have a gap.

Kitty (33:41): How do you separate this? Would be a nice feature to have from we're actually losing payments volume or customers because we don't have this.

Brian Abernethy (33:47): it's a very inexact science. And I think this is where you gotta get some elbow grease out and start to get in front of your customers. So one of the things that we work with our clients on is is our interviews, surveys, right? First party data to understand what's working and what's not today. So when we start to build business cases early on in these these processes, what we'll do is we'll reach out to, a pretty good chunk of customers and run through a pretty in-depth

Brian Abernethy (34:10): Q & A with and we'll incentivize them to get them on the phone and get some good answers. But we want to understand what is your workflow today? Like quite literally, like talk to me about, let's say it's a it's a veterinary practice. Okay, when someone brings their pet in, what happens, right? Okay, do they pay at the beginning? Do they pay at the end? Are we sending them an invoice through a text? Are you doing it in person in a terminal? I think understanding where the workflow is really important because the easy thing to do is match a payment stack and feature set to what your customer needs.

Brian Abernethy (34:36): The impossible thing to do, nearly impossible, is to change how people operate within their day-to-day business. That's a much taller task to tell a CPA who's been in business for 40 years that they need to build differently, or to tell, train 10 different veterinary locations to behave differently when someone checks in or checks out. That's a big ask. And so I think understanding can I match my feature set to meet them where they're at today is a much, much lower bar to clear and it's gonna make you a lot more money a lot faster. So I think that's usually where we'd start.

Brian Abernethy (35:05): I think the other thing that's important too is looking at, who has been successful in not necessarily exactly your vertical or your market, but adjacent ones that are similar in nature, right? So maybe it's card present or retail, card not present recurring. Who has successful strategies there and who are they partnered with and what features do they offer should leave you a pretty good, trail of breadcrumbs to figure out what features you need to build in.

Kitty (35:26): And Jason, I want your take on this too, because adding another payment feature isn't free. There's integration work, support, operations, potentially certifications, depending on what you're doing. How should an ISV decide when the business case is actually there?

Jason (35:39): This topic I think is one of the kiss of death items for an ISV. So many of them try to bite off more than they actually should when it comes to payments.

Jason (35:49): one of the things I always

Jason (35:50): Talk to an ISV about when they call me and say, hey, we want to become a PayFac we want to get more involved in payments or further down the rabbit hole, right? I ask them, does your customer actually care? Is doing that going to allow you to win more business? Or are you doing it because you have a problem with your existing relationship? I'll tell you, the salon owner could care less.

Jason (36:17): Who the actual underlying payments company is, right? The ISV who walks around saying, hey, we're salon software or gym software or medical practice software, and we're a payments company too. Nobody cares, right? Build the features and functionality that your customers actually care about and find the right payments vendors to partner with. Otherwise

Jason (36:42): You're gonna go have a team of people that are spending their life doing what you and I do, Brian, right?

Brian Abernethy (36:47): Why you doing what you and

Jason (36:49): semi-annual card updates. And you're gonna neglect the things that your customers actually care about, and your competitors are gonna pass you, right? So it's there's a lot of thought that really needs to go into that, how deep down the payments rabbit hole as an ISV.

Jason (37:06): Do I really want to go?

Brian Abernethy (37:08): All said.

Kitty (37:08): And we've now given everybody five different things to worry about. Now let's try and make it practical. If I'm a CEO or CFO of an ISV with a meaningful payments business, what should actually be on my payments dashboard? What are the handful of KPIs that tell me whether this thing is getting healthier or getting worse?

Brian Abernethy (37:25): if it was me, I'd build a very complicated dashboard. For the sake of simplicity, I would say that the top things you need to be looking at are obviously revenue, expressed both in absolute dollars and basis point take rate. I would also want to see that delineated by tender type, so card versus ACH or maybe even card split into credit and debit. just to understand kind of where the dollars are actually coming into my ecosystem. So that's one.

Brian Abernethy (37:47): I'd say two is obviously attachment rate. So what is what is dictating how much money is being thrown off is of course, the attachment rate and the volume that's actually being processed. I think that a couple that maybe aren't as intuitive that we encourage clients to look at would be utilization rate. So utilization differing from adoption in the sense of how much this goes back to the AR question, how much of your customers' revenue are you processing?

Brian Abernethy (38:10): So you might have, a great adoption rate, but if you're only getting 20% of the volume at each customer, you're still missing a big chunk. So adoption and utilization, I think, are very important. very few ISVs have any sort of line of sight into attrition or any predictive attrition indicators. Things like fee drifts, things like dips in processing volume month on month, year on year, like excessive tickets being opened, chargebacks, those types of things. I think getting a handle on

Brian Abernethy (38:35): what customers are most likely to churn in the next X number of days is critically important. And it's just not something most ISVs are aware of, something to look at. So those are a handful of things that come to mind. But I think ideally what you'd have access to is raw data that your team or an outsourced team can chew on and interpret on your behalf and give you the information that you really need to be looking at.

Kitty (38:57): All right, somebody has listened to this entire episode and now they're staring suspiciously at the residual report. Where do they start? If you can only do one thing this week to get a better idea of whether your payments program is actually healthy, what would you do?

Brian Abernethy (39:10): Well, the shameless plug would be to contact us and we can help you with that.

Brian Abernethy (39:13): I would say that the easiest thing that you can do is go and grab whatever your residual report looks like and go grab a handful of merchant statements for the same time period that residual report.

Brian Abernethy (39:22): Whether those are available to you in a portal or you might have to call some of your customers and ask them to pull them down. But go grab a handful of those and see if you can spot check them, right? So say, okay, here's the total card volume. and am I being billed correctly according to this? And my buy rate on cards is five basis points. Is my buy rate for this merchant in this residual workbook equivalent to five basis points on this volume or is something off, right? So something just as simple as spot checking.

Brian Abernethy (39:46): your residual with a handful of merchant statements should give you an idea of if things are generally tying out correctly. It's not going to be exhaustive, but I think directionally correct. Or if you start to uncover things.

Kitty (39:56): And this is your free card for a little closing plug. This is a good place to talk about what you've built because Straata has a diagnostic designed specifically to answer these questions. What does somebody actually get when they go through it with you?

Brian Abernethy (40:08): Yeah, so what we're offering right now and as part of a launch of the business is a free diagnostic. and think of a diagnostic almost like a like your annual checkup with your primary care physician, right? So we're gonna look at the five elements that we talked about today and we're gonna ask you to upload some data, some contracts, residual reports, transaction data, merchant statements. We've got a pretty simple checklist. We'll spin up a data room, you upload those, and we'll come back to you. we like to say that we're we're sizing the prize. Like how much opportunity do we see here?

Brian Abernethy (40:35): and so what you're gonna get is a headline number of how much revenue we think that you're leaving on the table and we believe that we can help you recover.

Kitty (40:41): I think the biggest takeaway from this one is pretty simple. A payments program doesn't become healthy just because transactions are processing and money showing up every month. You have to know whether the contract still makes sense. You have to know whether you're actually being paid what you're supposed to be being paid.

Kitty (40:56): You have to understand which costs can realistically be optimized. You have to know whether your merchant pricing makes sense for both the payments business and the software business. And you have to make sure the product you're offering still fits what your customers actually need. And apparently, before you can do any of that, you may have to figure out how to turn 2,000 PDFs into a database.

Jason (41:16): Welcome to payments.

Kitty (41:17): Exactly.

Brian Abernethy (41:18): Good luck.

Kitty (41:18): Brian, thanks so much for joining us and giving everyone five new reasons to go bother their payments team.

Brian Abernethy (41:25): appreciate the opportunity, Kitty. Thanks, Jason.

Kitty (41:27): Thanks so much for coming on and thank you everyone for listening to CentsChat, We'll see you next

Kitty (41:31): time.