In the late 90s, YapStone’s current CEO and chairman, Tom Villante, was an investment banker looking for his next big thing. Back then online was new — Amazon was a mere toddler, and online marketplaces were mostly Craigslist and eBay. But it was the latter that got Villante’s attention — since that marketplace, without PayPal, was nothing more than a catalogue of products that consumers could see, but not buy — or at least, not without massive friction. The notion that payments could be such a powerful catalyst for transforming that online catalogue into a commerce engine was intriguing. More than that, Villante was struck by the notion that the PayPal platform was actually enabling thousands of individual merchants to accept digital payments and make a market where none had existed.
One evening, while playing poker with a group of buddies, the lightbulb went off.
“I was looking for something that could scale, and payments intrigued me —particularly looking in markets that were traditionally paper check,” Villante told Karen Webster during the most recent episode of The Matchmaker Is In. “I asked them ‘What’s the one check that you write every month?’ Most everyone said – rent. That gave me the idea to find a solution to turn rent checks into a digital payments business.”
So, off Villante went, knocking on the doors of the mega apartment landlords. “Thanks but no thanks,” he heard countless times, given the fee structure that made cards an expensive form of payment to accept — landlords didn’t take kindly to the $1000 rent check minus a 2.75 percent or higher fee. That’s when Villante turned the traditional “merchant pays” business model on its head and introduced consumer-directed convenience fees — renters would pay a small fee to the landlord for the ability to send payments digitally instead of writing and mailing a check.
That, Villante said, was what created the foundation for using digital payments to unlock untapped value in marketplaces where buyers and suppliers were conducting commerce — big ticket commerce — using paper checks. In this week’s episode of The Matchmaker Is In, Villante recounts the evolution of fax farms and credit card authorization forms to enabling payments for mega vacation rental establishments like HomeAway.
Here’s an excerpt of that conversation.
KW: So take us back. You went into these large apartment conglomerates and said listen, guys, “Sign on with us and we’ll not only digitize these paper checks that you’re getting from your renters, but we’ll do the end of month reconciliation for you.” Was that your sales pitch?
TV: Exactly, and they wouldn’t have to pay a dime for it. There were a lot of things happening on the back end to make it happen, too.
Remember, this was 1999, so at the time, people didn’t want to enter their credit card information online — and neither did the property managers. The method of doing business was the fax machine — renters faxed in their credit card information. We had these huge fax farms that were our cash registers!
And that’s how we started in a 300 square foot office in Pacific Palisades. One small win after another, and we did small fundraising from family and friends in the beginning which lasted us until we were first profitable 15 months in. We didn’t raise our $50 million round until 2011. We built on apartments and then went into vacation rentals in ’06 / ’07.
KW: It’s unusual to have a consumer pay to make a payment. How did you persuade consumers to do that?
TV: Initially, it was not easy to sell and there was a two-step marketing where we’d sell to the property and hope that the property would sell to the end resident. The associations weren’t crazy about convenience fees at the time, but eventually they saw the volume that we were doing and growing and knew that it was all new volume — and a large opportunity for them. There’s $450 billion a year total in the U.S. in rents and security deposits — that had the potential to run across the Mastercard and Visa rails. They worked with us in exchange for helping open this new market.
KW: How did you get into vacation rentals?
TV: One of our sales reps called on a vacation rental by mistake in ’06 thinking it was an apartment management company. We signed them up because they didn’t have “vacation” in their name. All of a sudden, they become our largest volume customer – larger than even a 100,000 unit apartment. We found out there were 20 people at this company and it’s a vacation rental company in the Southeast. They were pretty soon doing $100 million volume with us a year. That gave us the idea that there’s a big business there — and a more traditional merchant-pays business model — online. It also seemed perfect for online payments. So off we went to sign up 20 of the largest vacation rental software companies to integrate with us.
KW: Are you still in the apartment rental business?
TV: We definitely are, and we’re doubling down efforts there because it’s still ripe. We’re going at it more from a marketplace perspective than from the hand-to-hand combat from the early days, because it’s a highly fragmented market. Seventy percent of the market are smaller landlords with less than 500 units, and 50 percent of people live in buildings of four units or less. Getting to those renters and landlords is really through some of these large apartment listing marketplaces.
KW: Are the things that are important to vacation rental operators and apartment landlords the same? What adjustments did you have to make to adapt your platform to serve them well?
TV: One of the big things was the risk component. We were signing up established landlords, for the most part, and so only needed one risk person. If there was a chargeback or fraud, we’d have a very credible merchant to capture that. Basically, we were only on the hook if that landlord ever disappeared, but that never happened in the apartment industry.
The vacation rental is filled with more credit risk then selling traditionally to property management companies. When you’re dealing with a marketplace of unidentified homeowners and renters, there’s the risk of collusion fraud where the listing isn’t based on someone’s own home. Believe it or not, people do steal credit card numbers and take a vacation — but we know those patterns.
We now have 70 people in risk and the data scientists that we have – and take on 100 percent of the risk on that marketplace – which is why we are also selective and enter markets we know well.
KW: It seems like for many of these marketplaces, payments is now a strategic part of their operation. What is your sense of how these operators view their business and therefore the role of a provider like YapStone?
TV: A typical marketplace is focused on growing and conversion, and that drives the features and functions we build into our platform. For example, for HomeAway, we pay homeowners instantly even if the booking is six months down the road. We’re able to do that because of the information we have and rating of the potential risk. Getting paid six to nine months in advance of the traveler showing up is a massive competitive advantage.
KW: As you think about your platform, what’s on the roadmap that you can talk about that further provides these players with a strategic advantage?
TV: It’s really end-to-end. Whoever you talk to, if they do pay in and pay out throughout the world, they’ve had to stitch together 10+ vendors. Some vendors do pay ins in the U.S., Europe, Southeast Asia and some have very few pay out capabilities. What we’re pulling together is really an end-to-end solution — a one-stop shop that uses software to connect seamlessly with their business. We’re plumbing, at the end of the day, but also we’re creating solutions on top of that that make us a valuable partner for our clients.
KW: Who in the matchmaking arena solves a customer or business problem well, from your perspective, and has scaled their business well?
TV: Uber has done a great job. They have a fantastic team on the payments side, and it’s a frictionless payment. It’s one of the most brilliant things that I’ve seen. The ability to go to multiple countries like they have and adapt to local economies is hard — and they’ve made it work. That frictionless eCommerce experience where the consumer isn’t even thinking about it is powerful.