In Depth

FundsFlo And Escrow-Based Commerce

Without trust, there can be no commerce.

All deals – no matter how complex or simple – have at their center two parties that have to believe in each other: the buyer and the seller. The buyer has to believe the seller is actually providing her with the goods and/or services she is paying for, and the seller has to believe the buyer is actually going to pony up the funds when that exchange of value takes place.

But a funny thing happens on the way to the checkout, especially when big money is at stake. Trust, it seems, is negatively correlated to dollar value. The bigger the price tag on a transaction, the more nervous all parties feel about the degree to which the other can be trusted.

That’s somewhat understandable. And, none but the most cynical believe that others are out to cheat, steal or otherwise defraud them. Ratings and recommendations have emerged to give buyers the confidence in purchasing (in the case of goods) or hiring (in the case of services) decisions. But those only provide a sense of what has happened in the past – other people’s experiences. In many situations — think of home remodeling and the progress payments that contractors require to keep the wheels of progress moving — there’s just not a suitable mechanism for making large dollar payments subject to the satisfaction of the buyer at certain milestone intervals.

This, Lu Tupponce, the COO of FundsFlo, told MPD CEO Karen Webster in a podcast interview, hamstrings both the buyers and the sellers.

“The limited capability to address the risk that is inherent in large dollar transaction limits the types of parties that can do business with each other,” Tupponce said. “At a high dollar price point, most of the time there must be a large business that will carry that trust burden on at least one side of the transaction. But when you look at the overall economy and see that most companies are small business and most folks deal with small business very regularly, this is clearly a problem. FundsFlo is about enabling parties to do business with each other, even if it is two small businesses, or it is a consumer and a small business.”

[pullquote]FundsFlo is about enabling parties to do business with each other, even if it is two small businesses, or it is a consumer and a small business.[/pullquote]

FundsFlo is a brand new payments startup that launched yesterday to fix what it believes is a big and under-addressed pain point in the high dollar/small business transaction.

“We want to provide a way to do that, but in a way that provides safety for both parties,” Tupponce noted. “The buyer is able to make sure they get their stuff, the seller is assured of getting paid.”

FundsFlo essentially acts as an intermediary between the buyer and seller in a high dollar transaction. In its simplest iteration – a purchaser buys some goods and upon approving the purchase, the funds go to FundsFlo – where they are held. Once the buyer receives the purchase and affirms it is to their satisfaction, they approve the payment and the funds flow (get it?) to the seller. If the buyer doesn’t like the goods, they can return them. When the seller affirms they have them back, the funds are returned to the buyer.

If that process sounds familiar to you, it should — it is modeled on something familiar to anyone who has ever worked in real estate.

[pullquote]We took a clunky, slow method — an escrow-like process — and we’ve automated that and made it user-friendly and taken a lot of the paperwork and headache out of that.[/pullquote]

“We took a clunky, slow method — an escrow-like process — and we’ve automated that and made it user-friendly and taken a lot of the paperwork and headache out of that.” Tupponce told Webster.

That simplest iteration can be customized in a variety of ways, depending on the relationship between the buyer and the seller. He noted, for example, that a home improvement project might be set around a series of “milestone-based” payments with the contractor.

“If you think about a home improvement project, they have a lot of phases. What FundsFlo allows is for each one of those particular milestones — like buying materials, framing, demolition and such — to have an associated payment that goes with it when the buyer affirms the milestone has been met. It really provides a granular level of control between the parties that is not available with other payments forms.”

Moreover, because it allows for a platform that is transparent to both sides of the transaction — but parties can stay aware and ahead of where the funds are and what exactly the status of the transaction is.

“Large dollar,” is a relative term of course – and FundsFlo is referring to “large” as compared to the average price tag on a typical online purchase.

“What we’re looking at is [purchases of] four figures and above. We don’t expect multimillion dollar deals through here, but in the markets we are looking at — home improvement, marketplaces, resale of autos — the transactions will be four and into the five figures.”

As for bringing in funds for themselves, Tupponce told Webster that FundsFlo’s revenue stream is a 1.25 percent processing fee they charge to the buyer. However, they believe that it is one of many things buyers and sellers can determine amongst themselves.

“Like any other term in the transaction, that should be negotiable as well,” he said. “We just wanted to make sure for our fee we didn’t want to impede any of the transactions they want to take part in.”

Because, Tupponce noted, at the end of the day, the big picture win for their new company is getting more deals to happen by making it easier for the parties involved to trust each other.

Webster noted that their method, though independent of the bitcoin rails, held some of the same appeal that bitcoin protocol enthusiasts hail — a process wherein the buyers and the sellers, by the act of transaction, verify the process and can release funds accordingly. Tupponce agreed, noting that they manage to do this without any of the baked-in “weirdness” that seems to follow the world of digital currency.

“This works extremely well with card processes and cash. You’re talking about currency that everybody uses to do business, so universally there is an application there so you don’t have to go off the grid and work with an unregulated form of currency,” Tupponce said. “Really, we can use the existing forms of currency we have.”

The trick, he noted, is to find a way to use what we already have better than we are presently using it. FundsFlo thinks it’s found that way.

Now, having launched to the world, it remains to be seen if the marketplace agrees. So far the company has picked up some seed funding from a single private investor — but like almost every other startup out there, it is looking for more.

We’ll keep you posted on how they do.

Investment Tracker: July’s Second Week Shows a Bit More Torpor

The second week of July saw deal activity to the tune of $2 billion. It was a bit of a slowdown from the first week of the month, in which there was a mega deal from GE, which had announced a $6.9 billion sale of its vehicle fleet management business. That skewed things a bit, and dare we say that the last week, ended July 10, showed a bit more “normalized” activity?

For the week, the top deals all came within the logistics sector, with the largest transaction coming in the energy space (details below):

EnCap Caps the Week

Looking on a deal-by-deal basis:

The biggest funding deal of the week in the payments space came from a private placement within the U.S. A group of investors, led by EnCap Flatrock Midstream, invested $750 million in Moda Midstream, a deal tied in part to U.S. midstream logistics. That capital commitment had been announced earlier in the year.

Alibaba Continues its Expansion

That midstream deal was followed by a much smaller transaction, in which Alibaba continued its seemingly relentless push to expand its operations, both near and farflung. This time around last week, the Chinese eCommerce giant put nearly $207 million into Singapore Post, expanding a relationship within eCommerce. Under the terms of that agreement, announced last week, the companies broaden their year-old joint activities to include logistics across the Asia Pacific region. This would be the second largest deal we’ve seen to date in the segment.

As part of the deal, Alibaba is putting up about $68 million to take a 34 percent stake in Quantum Solutions International, which operates within the eCommerce space and within that geographic region.

Following in the eCommerce deal roster was a stake taken by Warburg Pincus for $133 million in Ecom Express, an India-based logistics company.

U.S. Leads the Way in FinTech, Followed by Asia

This week, the U.S. was the most active region for dealmaking, followed by Asia (excluding China). As can be seen in the chart below, the preponderance of investments within financial technology have come from the U.S. at 65 percent of activity, with Asia trailing a bit behind at 26 percent, and China further back at 8 percent.



The PYMNTS Cross-Border Merchant Friction Index analyzes the key friction points experienced by consumers browsing, shopping and paying for purchases on international eCommerce sites. PYMNTS examined the checkout processes of 266 B2B and B2C eCommerce sites across 12 industries and operating from locations across Europe and the United States to provide a comprehensive overview of their checkout offerings.

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