Before the Software as a Service (SaaS) model exploded, a small business (SMB) getting off the ground online had two big, but related, decisions to make: finding software that could help them manage the operations of their business — accounting, hosted shopping carts, reservations, to name but a few — and a payments provider that would help them accept card payments.
The problem with that rather bifurcated system — WePay Co-Founder and Chief Strategy Officer Rich Aberman told Karen Webster in a recent conversation — was that it created a rather lumpy and friction-filled process for getting that SMB up and running with payments.
“A decade ago, the payments provider for SMBs was the bank that had their bank account,” Aberman told Webster. “They called the bank and asked for a merchant account.”
Merchant account in hand (often weeks later), it was then up to that SMB to integrate their account into whatever software provider they were using to run their business — QuickBooks, Shopify, WooCommerce. The software provider used those credentials to plug into their merchant services gateway and begin processing the merchant’s transactions.
It got the job done, Aberman told Webster, but it was clunky and had the unintended consequence of keeping all three parties — the SMB, the software provider and the merchant acquirer/processor — “at arm’s length.” Aberman said that generated a vicious cycle of inefficient, “operationally complex” integrations each and every time the SMB wanted to integrate a new app into its business.
Where there’s friction, there’s also the creativity of an innovator devoted to reviving platforms that collapse those clunky and inefficient processes and embed payments into software that SMBs can onboard without the pain of protracted integrations.
“If you look at what WePay is doing — but also other modern software platforms like Stripe, PayPal, Braintree and Square — more and more we are all building technology to make it easier for the software providers, like the accounting packages or the hosted shopping cart software, to do much easier integrations and support a variety of payments providers,” Aberman said, which means SMBs have a choice, without having to trade off the need to hire huge teams of engineers tasked with integrating complex software into single payments solutions.
The end game, Aberman said, is to make payments so fully integrated into the software that there is no need for the SMB to interact with a standalone merchant services provider.
“Think Intuit payments, which customers use by default when they sign on for QuickBooks or Shopify Payments or even Uber,” Aberman said. “People don’t tend to think of them as a payments provider, but a very large part of what they do is move money seamlessly between consumers and the micro-businesses, called drivers.”
Software platforms that make it possible for SMBs to incorporate a fully integrated software/payments solution are proving to be great for SMBs, as well as for the software providers who view that integrated experience as a competitive advantage.
It’s perhaps not so good for the existing merchant acquirers and processors, who Aberman said are no longer the “tip of the spear” for serving SMB businesses — a role the software provider is now assuming.
The Centrality of Software
Think about all the things a new business does before it opens its doors, Aberman told Webster. In 2017, those things are centered on interacting with software platforms, whether its registering a new domain name (e.g. GoDaddy), building out a client list (e.g. Salesforce) or uploading inventory into a digital shop (e.g. Magento).
“That is your entry point into how you are going to manage your business, and that is pretty scary for traditional banks. If their entry point as a business is something like QuickBooks or GoDaddy or Salesforce, those providers hold a lot of sway in guiding how that SMB gets other services.”
Banks are still a necessary part of the equation, Aberman emphasized, but they now occupy a different place in the food chain. Banks no longer acquire or service the SMB; the software provider that small business is using to run key parts of its business does that work now, he said.
The essential gravity in the ecosystem right now, Aberman said, are SaaS providers: the central point around which all other services rotate.
“Unless the existing merchant services company is integrated into that software provider’s ecosystem and is providing unique value to the software company and the end user, they won’t exist in 10 years.”
Those software providers are competing in an ever more crowded market, he noted, and have two basic options for differentiating themselves, which will push them toward a more centralized relationship with their SMB end-users.
The first, according to Aberman, is hyper-focus: These platforms aren’t serving “small businesses” in general; they are targeting with “hyper-focus” the exact features that very specific types of SMBs require.
“There are SaaS platforms out there for everything, from restaurants to dog walkers,” Aberman explained.
The second competitive offering that SaaS platforms have to rely on is building the easiest, most turn-key solution. Invoicing, payments, inventory management, compliance, tax levies — generally speaking, no one founded a small business from a burning desire to manage any of those things (unless, of course, the SMB founded specifically targets one of those areas), but managing all of those things is a necessary part of any successful business.
“The software platforms exist so the business can spend more time on their craft, more time with their clients and less time managing all those other functions,” Aberman said.
Payments is just another one of those functions, and if a small business can flip that switch on with software integration, all the better from the SMB’s point of view.
But it’s not going to stop with payments, Aberman said. Uber putting its toe into auto lending or HomeAway offering insurance packages that serve their vertical or Shopify offering lending to its online merchants — these providers realize they are in the best position to provide not just payments services, but also a wide variety of financial services at a lower cost with greater value than a traditional financial services business.
Those SaaS businesses, he noted, have a suite of offerings their customers need, an established relationship and a lot of data they can use to tailor their services.
“When we say software is eating the world, we mean that software is quickly becoming the driving force behind commerce, and it’s going to determine who merchants work with, how they run their businesses, where they are finding service providers.”
The Future of Financial Services
From Aberman’s seat, the next decade will likely see those digital, software-based channels eclipse the traditional branch-based, brick-and-mortar channel. Software providers, independent software vendors (ISVs) and platforms will be the dominant driving force.
It’s a very stark challenge for the financial services players in the game.
But Aberman emphasized that this is far from a doomed situation for banks and financial services players. The reality is that software providers don’t want to be financial institutions (FIs) for the most part, as dealing with risk, regulations, operational liability, PCI DSS, compliance and a host of other issues go hand-in-hand with being a financial services provider. A SaaS provider, Aberman noted, by and large “doesn’t have the DNA or appetite” to make those things part of their full-time job.
The goal is to take the best the bank has to offer in terms of their ability to deliver financial services for SMBs, starting with payments at a massive scale, and to create a delivery method via API that will let platforms integrate those banking services with the value-added suite they provide.
“What we understand — and what Chase understands — is that there is nothing we can do as a horizontal payment provider that can compete with [what] the software firms can offer with their hyper-focus. Software providers and platforms are a necessary and valuable … and important part of our world, and we can’t build a successful business over the next decade without fully engaging them. The way you are going to add the most value is by building the exact right software for them,” Aberman said.
Internally, banks have work to do when it comes to integrating their own offerings. If a customer goes to any big bank with a powerful merchant services business, he or she will quickly realize the bank isn’t fully integrated. Merchants will be administered two separate logins to two separate websites to manage different parts of their financial services portfolio — when an SMB should really be able to access all of that within a single touchpoint.
Banks, Aberman said, need to understand that there is a breadth of value-added services that they need to provide in an integrated way so that SMBs can access a 360-degree suite of services to support them through their lifecycle.
“The challenge, though, is that recognizing that — and doing it — is not good enough. Once that is done, the bank needs to take that and integrate it seamlessly into the software that these businesses need to run better,” he explained.
It’s also Aberman’s and WePay’s day job — the complex and highly intricate task of making all of those connections seamless for the SMB and, in turn, the end users they serve.
“Unless you are building with a value prop that supports these platforms [and] supports these merchants, you’re going to be irrelevant,” he said — something that’s clearly not on WePay’s agenda.