Payments & Processing Innovations for Software Solutions
Panelist: Chris Daden
CEO and Chief Architect, DADEN LLC
Guest Panelist: Doug Meli
SVP of Operations and Development, Basal Smart Solutions
Moderator: Karley Velasquez
Runtime: 32:18
Payment processing is vital to the success of your business. View the virtual event replay of our Roundtable Discussion for details on how custom payment processing software may improve security, efficiency, and revenue.
We cover topics from integration issues, unnecessary or out-of-control processing fees, the challenges you face with business payment processing, and security concerns that can turn an essential transactional platform into a liability. Additionally, the panel discusses routine onboarding flows which streamline bringing on new customers and collecting payments effortlessly.
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Roundtable Transcript
Karley Velasquez
Welcome everyone, we plan to get started in just a few minutes. We're just waiting on a few more attendees to join us. While we're waiting for others to join during the last few minutes of our event, we will be conducting a live Q&A. For those of you who are watching on Zoom, you can enter your questions in the Q&A panel and for our viewers on LinkedIn live stream, please submit any questions in the event chat down below, and we'll answer as many as we can at the end.
Hi everyone. Welcome to DADEN Software, Purpose-built Software Solutions for the Best Version of your Business. I'm Karley Velazquez with Daden Software and we welcome you to today's Virtual Event Roundtable Discussion, where we will be covering Payment Processing Innovations for Software Solutions. With me today we welcome our guest, Doug Meli. Doug Meli is a senior executive with 20 years of experience with a proven record of accomplishments in payments, marketing and software development. His current role is SVP of Operations and Development with Basal Smart Solutions. Speaking alongside Doug today, is our very own DADEN Software CEO and Chief Architect, Chris Daden. Chris has founded multiple software development companies and created more than $30 million in software deliverables, Chris and Doug both know the ins and outs of custom software and the implications of payment processing, and all that comes along with it. Please feel free to type in any questions that come up throughout today's discussion and drop them in the chat. Chris, Doug, it's great to have both of you on with us today. How are you both doing?
Chris Daden - Doug Meli
Doing great. Thank you so much.
Karley
Great. Doug, can you tell us a little bit about Basal Smart Solutions?
Doug
Sure. I originally joined Basal in August of this year, and the main overarching goal of the company is that we provide revolutionary AI, a social media platform. It's still in its alpha stages, but we're looking to unveil it here shortly, Q1 2022. But it's very exciting. It's a new area for me, working with AI in combination with my experience in payments and software development. But I'm very excited there, and we also do offer custom software solutions as well for specific clients.
Karley
Great, that sounds so cool. We'll just get started and jump right into talking about payment processing. Let's talk about the overall structure of that with payment processing. What roles are there in accepting payments and what do they all mean?
Chris
Yeah, great. So Doug, why don't you give us an overview of the objects in the ecosystem? And then maybe I'll add some things from a custom software perspective afterwards.
Doug
Sure, sure. At a high level, and you know, many of our viewers may already be aware of this. But for those that are not, there's mainly four roles and the four roles in the space when you want to take payments. There's your issuers, those who are the banks and processors that issue the cards to people, whether they're credit or debit cards, you know, branded by the associations, the networks, your MasterCard, your Visas, Amex, Discover, China UnionPay, JCB. There is the payment gateway, which accepts the transaction and interrogates to transmit that to the acquiring bank. They've been passed on through the network, get the movement to payment approved or rejected status, then back to the merchant for finance. Issuers, gateways, acquirers, and there's even ISOs, Independent Sales Organizations, that add on additional services in tandem with those gateways. Sometimes they deal with risk reduction, but basically act as the customer service to some degree there.
Chris
That's what's really interesting about your experience in the space, because there's a lot more behind the scenes when you just swipe a credit card at a terminal. I think that's what you know, we give that brief overview to our viewers today. As a developer, we care most about the gateway. Obviously, everything's important, but from a custom software perspective, we look for processing partners who have effective gateways. Sometimes there are platforms out there that are only gateways and they bridge various back end offices. So from our development perspective, gateways are really where we spend a lot of our time but there is a lot that goes behind the scenes when you are running a transaction on an app, web app or even at a terminal in a retail store. Right.
Doug
Absolutely. But to your point, your gateways and your ISOs, at least from a merchant standpoint, who are you going to interact with the most there.
Chris
Yeah, they're more of that front end process.
Karley
That's so great to hear too, because coming from somebody who maybe doesn't have a technical background, and they just swipe the payment through an app or something, they have no idea really what's going on behind the scenes, so to speak. That's neat to hear from that perspective. So let's say if I were to take on the point of view of a small business and if I'm a first timer, what are some criteria that evaluates the best processor for my software needs?
Chris
Yeah, I think my non-professional payment processing experience, and then I'll let Doug add his comments in, when you're just starting out fresh as a small business, a lot of our clients are creating apps from scratch. They're just launching their businesses. What really matters when you analyze a processing partner, is the availability of their integrations, their support team, kind of the non-cost elements. The reason I say that is because when you're starting out with zero volume, and I'll let Doug talk about that, on his side, because I know he's negotiated a lot of great deals for companies on the processing side, but when you're starting out with zero volume and really have no history, and it's a factor of risk and compliance with with these processors. When you're coming in with a fresh slate, you have to kind of earn some volume and reputation, before you start getting really competitive rates. Now, it doesn't mean you should just go sign up with someone at 4% or something ridiculous like that, but you know, you can definitely get down in the reasonable competitive range with no history, but it's more about the relationship, the SDKs, is the technology partner, how capable is your team and comfortable with their documentation to build it into your system. So when you're just starting out fresh as a small business, be aware of rates, but be less concerned about the nitty gritty detail of the competitive rates until you build some history and volume. What do you think, Doug?
Doug
No, absolutely. I'd even take it just a higher level back to, you know, you're going to get hit as a new merchant, entering the space with all kinds of offers, deals and special new functionalities and the latest, greatest tech out there to protect you, as a merchant. Take a step back, what do you really need to function, and then also do a competitive analysis of others in the industry that will help you to drill down to exactly what do I need to take off, get out of the gate here. There's a lot of off-the-shelf plans that you can get up and running really quickly, if that's your goal. Now, that being said, once you see some history, you're going to want to go back and renegotiate rates and look at that, but always keep in mind that, you want to do the easiest, but also compliant integration to get out and start making revenue.
Chris
Another comment would be, when we started the presentation today, we talked about issuers, gateways, acquires, ISOs. For those of you in the small business space, you're like, 'Oh, my gosh, this is way too complicated,' right? A lot of times, the big vendors in the space provide you with the whole package. You don't actually choose the merchant bank, you don't choose the issuer, the gateway that acquirer, you just kind of go with their solution comprehensively, and they can typically do a turn-key package. So just to kind of link those two topics together, if you're brand new and starting out, focus more on that partnership, that relationship and look for that turn-key processing package.
Doug
Yeah, absolutely. And the expandability because with that turn-key package, there may be a list of 10 different things that they offer, maybe you only need the first four, but you will need those six eventually as you grow.
Karley
Great. So if we were to change the point of view, from someone who's a first timer, what about someone with a small business who's already processing?
Chris
I think the biggest difference there is, like I said before, if you have no history, you really have no bargaining power, no negotiation power. Doug can comment on this as well, but if you have the ability to grab historical statements, you've got a history, and you've got a reputation built, and you've got good documentation on what your platform does, you have history about your chargeback rate. You have history about the risk of your business, essentially, you gain negotiation power to go back to those major providers and be able to have some weight in that conversation to reduce those rates. That is the time, once you've got that established track record, that is really the time to go back to a processor and have that conversation. A lot of my clients get a little ambitious, they think they're gonna have 10 million in revenue the first year, or 20 million, and this and that. Then they go to the processors with no history, and that conversation happens all too often with processors, and it doesn't hold any weight. What do you think, Doug?
Doug
Everybody loves to hear your projections, but when it comes down to risk review, they're not looking at that. They're looking at other competitors or other merchants in that same space to really come up with your rate and your plan. Until you have, most of them will ask for a minimum of three months history, I recommend six to twelve months if you can go that long, of actual processing statements you can provide to another gateway to basically give you a better rate quote. But also keep in mind that as you're making any kind of switch, there will be at least one time development cost, right to make that switch, unplugging from one and plugging into the next. So that's something else that you need to watch out for. But, it will absolutely benefit the business in a lot of cases of making that switch, right, because you're getting a lower rate, you're making more money on your transactions, and you'll recoup that development costs in a matter of months.
Chris
Yeah. Doug, do you have any tips on that conversation? In my experience, that's why it's really important when you start out to build a relationship with a provider, have an account manager, have a relationship with that entity, because it makes that conversation down the road, six to twelve months later, much more valuable if you establish that partnership. I know the payment processing industry has become quite transactional, where it's kind of like shared hosting as a space, they started at much higher margins, much higher rates, and they've kind of been so competitive in the space, and all the services are so marginally comparable, that shared hosting now is $3 a month. As more demand drives that competition and drives that price down it's the relationship that matters with your provider. So do you have any tips on having that conversation?
Doug
It's through relationships. But to that point, in the very beginning when you're setting up your first merchant processor, your first gateway, get in there and look for, if they're not already providing it, which most of them will, but some won't, ask right away, 'Well, okay, where are the breaks? When I hit X in volume, what does my rate dropped to?' Then you start looking at that from your internal business goals and can you really hit those brakes from your own projections. And if you don't think so, go back and ask for a different breakpoints, where your rate drops from 2.9 to 2.7%, etc. Try to get that all upfront, so that it saves you more on the time if you're looking to switch later, switches can go well, and they can be painful. So I mean, if once you're in with a good merchant processor, and you're happy with all their services, the more you can do upfront about rate negotiation, when you first sign the contract, the better.
Chris
Yeah, and be realistic with it, right? I think a lot of times you go into these conversations and you want better volume, you're kind of trying to puff your chest out about what volume you're going to do in processing. To set those breaks accurately is critical because when you miss your first break, you lose reputation with your partner, and they're just gonna think you're off track and not worth investing in if you don't set realistic goals. So that's another important part of that negotiation.
Doug
Completely. You will lose credibility with your account manager, and they won't even pass it on to risk at that point to review.
Karley
Those are some really great tips. Thank you for sharing that. So I know that a relationship is important. You guys touched on all of this as we went over in this last question. But what are the actual different methods of integrating with a payment processor?
Chris
Yeah, so obviously, with what we do, as a custom software provider, I want to clarify to the audience and to everyone that, we cannot create a payment processing platform, technically speaking, could we do the software to batch and manage? Yes, but that's not the industry we're in. We, from a payment processing perspective, look to integrate a client's application into these various methods of integration in order to achieve effective movement of funds in an ecosystem. So, you know, we're going to talk a little bit later about the flow in and flow out. But as far as methods of integration, we look at it this way. There's an SDK provided by most providers, and that stands for a Software Developers Kit. That SDK allows our engineers to pull in libraries or samples of capabilities to integrate. It's a good way to standardize security and it's provided by a processor. So you can ask your processor if they provide an SDK, and if they don't, these days, they may not be a processor worth partnering with. We also have the API capabilities of being able to call without an SDK, but integrate over the web and secure channels to do that. So that's the programmable interface that a lot provide. Then there's also some hosted forums and other drop in pages that would be an option for those less complicated integration. So for anybody that's on the line, that may be making websites for clients, or is looking to accept payments on your website, you may not need a custom software developer like us to build out an advanced integration, you just may want to plug and play some drop in some hosted solutions, so that's also an option as well. I know, Doug, you've used all of those methods, what else do you have to add to that?
Doug
For me, for that proper UI, UX and end user experience, I always recommend the SDK or API route. Dropping secure pages, hosting forms, they're getting better, but they never really offer you that full functionality and often result in, for a lack of a better word, clunky user experience. No matter how much they make it look like your page or whatnot, you're still sending the user outside of your ecosystem, and then somewhere else to make a payment, and then back to you. So I always recommend, if it really is a custom solution, then go that mile and do an API integration or an SDK integration.
Chris
Yeah, and as far as that clunky experience goes, just for those that may not be aware, the reason why that is, is because if you're embedding a hosted or secure form into your site, it may be like iFramed, or embedded in your site. And what that means is, it's like a website within a website. So, the website that you're adopting it into has no control really, over the experience within the frame. What happens is, in a user experience perspective, they get stuck in various spots, or you might have, looped branding, even if it's your logo, it might be your logo within your website, looks repetitive, or maybe it doesn't even have your branding, and it has the processors branding on it. And it's looped into that web frame. So to Doug's point, it's entirely true, using an SDK or an API allows developers to customize that experience, make it seamless, so that it's not just a simple embedding of one object into another. That does a lot for user experience.
Karley
Awesome, that's great. So I think that's a good segue, let's have us talk about payment processing and the flow of funds.
Chris
So the reason this is an important topic is, I'm gonna let Doug take this away, because he's got that major industry experience, but from our perspective, and the clients we serve, accepting funds is one thing generically right. It's like the flow of traffic, right? Funds go from a client, or a consumer to a client's app, to a client's bank account. Accepting funds generally, in my experience, is a lot easier than a company who centralized payments, pushing those funds back out. What I think is interesting is understanding the flow of funds from capturing, to authorization, to withdrawals, to pay outs. And, Doug, I'll let you give us a brief summary of each of those in that lifecycle of a payment and I think that'll help people understand the flow.
Doug
Sure, this may be rudimentary to some viewers, but for those that are in small businesses, obviously, you know, don't have any experience with a credit and debit card processing, I'll just briefly cover things like the settlement process. So you're taking orders on your website all day, or you're in your retail store and you're taking card transactions all day. At the end of each day, that merchant, the business, closes out all their sales and that is transmitted to the payment processor, the gateway. They in turn, transmitted to the acquiring bank right. In this step, in which the merchant initiates transfer funds, that account is known as capture, capturing the funds. The inquiring bank then routes all the transaction information to the association's credit card networks for settlement, who in turn pass on all the proof transactions to the card holders, issuing banks. So you know, all the customers and banks basically get that notice to move those funds over. Issuing banks transfer the funds to the merchants acquiring bank, minus interchange, there's funds taking, changing hands here, so there's fees on each piece of the transaction, then the acquiring bank deposits the amount, less the discount, interchange to the merchants bank account. Then the issuing bank, of course, collects our funds from the cardholder, whether it's credit or debit. So that's really the overview of the settlement process, if you will. That being said, there are options with different processes on how often you settle, and how often you, as a merchant, collect those funds. Generally the standard is daily now. But, again, this is where your rates come into play, right? You want to make sure your rates are as good as possible. It's when you capture more of those dollars, you know, 'I sold 15 grand in sales day, or 50 grand in sales today,' but that only results in 46,000 in my bank account, right? That's a huge chunk for processing. So you're really looking at those rates and putting those against your projections is what's important.
Chris
Absolutely and on that, in that transaction lifecycle, we really just talked about a sample model of accepting a payment at a terminal, maybe from a customer at a coffee shop, swiping their card, it goes through settles, inevitably to the merchants bank account. At the very end, and I think something to call out is that, you know, if you return or refund, or avoid that transaction, it can kind of unwind itself. And there's different fees associated with that, depending on your agreement with your partner. But one of the things I want to call out and maybe valuable to others on the call that have, you know, goals with custom software is that if you're an ecosystem where you're accepting people to deposit funds, in exchange for credit in a live account, or maybe you're depositing funds to load their account to purchase services, and maybe there's a chance that the services can render them additional funds, and then eventually, one day, the end user would want to withdraw those funds from an account to their personal bank account, or push back to their debit card. I want to call out, you know, it's too detailed to get into this presentation today. But I want to call out that a payout is a different categorization and process from accepting the funds or issuing a refund through that transaction lifecycle. And if you're thinking about an application or custom software that becomes like a virtual wallet with the concept of payouts, you'll want to dig deeper into that. Doug, do you have anything to add on to that gotcha?
Doug
Oh, absolutely. Coming from a heavy background in prepaid debit cards and working on behalf of an issuer as a program manager, there are many ways to skin that cat so to speak. You are subject depending on your role, in that if you're a merchant, wanting to pay back your customers through some other method, then you returning the original transaction, you may be regulated, this gets into compliance. You may have to register with the government and state entities as a money service business or register with Fincen. You may, depending on how your solution works, and at that point, like you said, it's a larger conversation for today's call, you really want to engage some industry professionals. I'm the best solution that keeps you as far out of compliance scope as possible, but still meets your end goal, delivering those funds to the consumers in an acceptable manner.
Chris
Yeah, and the last comment on that topic is, it just highlights the importance of proactively, like fleshing out your business model in a planning stage. Before you enter a development cycle, or before you enter, you know, creating any product, flesh out A to Z, specifically the money flow, because if you're building an app, you might be focused on a lot of the features and the how your users are going to have the experience, and what you're going to fulfill there. I would invite you in context of today's presentation, to just think about how money flows through your app forward and backwards, because you may be able to identify some areas that are high risk before you even jump in. So you can identify the right partner without having all those extra costs in having to refactor any type of integration with a partner that might not support you.
Doug
Absolutely.
Karley
Hey, that is such good advice. Thank you so much for both of you talking about the ins and outs of all of the back and forth of payment processing. Those are just some things that maybe as a first time business owner, dealing with this process, one might not be thinking about that, so really, I think you guys condensed that into a good explanation, because you could just talk about this for hours. So I think with that, we're gonna jump into our Q&A. We actually have a first question here. So I'm going to go ahead and start that. What is your recommendation, Doug or Chris, for companies with no processing history? Go ahead, Doug.
Doug
Sure. The solid business plan, your projections are important, but understand also what the gateways are with the ISOs. What they're going to look at, giving you your rate is other competitors in the industry. We all want to have our own individualized new product to market, right. But be realistic, look at what other companies are doing in this space. Try to find out as much as you can about what they're doing, but have a really solid plan with solid projections, but know that you're going to be compared to somebody else. So look at them when you're developing that plan as well, so that you're not shocked when they return with the rate. Think forward, not just for what I want to process on the day, but think about logical, realistic break points that you can ask for where your rate gets reduced based on your volume of transactions.
Karley
Nice. Good point. Chris, do you have anything to add to that?
Chris
No, I think Doug captured that well.
Karley
So we'll move on to the next question. You talking about this previously, in part of the last part of the discussion, you touched a little bit on compliance. So this question is, how are payment processors regulated? And what should somebody know about the basics or regulation in that space?
Doug
So again, rudimentary, for those that are in the space, but those who are not, there's PCI Payment Card Industry compliance, right, which, at the end of the day, basically states from a merchant perspective, you know, the way you handle card information, what you can and cannot transmit, what you absolutely cannot store. And if you do store, what security protocols you need to follow and prove, including having a third party assessor come in and validate what your statements are in your system. So again, we could have a whole two hour webinar on PCI wave even longer, the recommendation is, but you know, stay out of scope. Don't ever do all you can do, not capture credit, debit card information. Of course, one of the big no no's, you can never store the three digit code on the back of cards. But you know, most of the gateways you're going to work with at the SDK and API level, they're going to have that secure transaction transformation protocol. So you basically just need to sign off exactly how your application is transmitting that data to the gateway. And from there, that's it. You're pretty much set. It's even easier if you use those hosted pages or dropping forms. But again, I don't recommend those because of the user experience. So I say take the extra step, integrate, but also stay out of scope by just passing along the gateway what needs to be passed, and getting a return message of approval or rejection with no card information as well. But they all support this today.
Chris
Yeah, absolutely. And, you know, those are the probably the most important words, we can say of the entire presentation today that you should design your application to stay out of scope, because in reality, all of our clients we've ever worked with, they're solving some other business purpose. If you are a payment solution provider, then obviously you've signed up to be in that business. And you need to, you know, look to PCI compliance. But for most of us out there, data and software included at the coffee shop down the street, the coffee shops focused on selling coffee, they're not focused on how can I secure credit card data, so lean on your partner and processor, use their SDKs and API's embedded forms to use. What's typically referred to as their customer volt, to be able to store that information securely, and shed yourself of that liability as much as you can, and stay out of scope, is what we refer to it in the industry as so just make sure you play in that space. Then the other final comment on regulation is once again, in your early planning stages, payments are governed by a lot of federal law, as it refers to moving money through credit card processing, etc. Depending on your app type, we've had clients come to us with ideas that may be deemed in like the gambling space or other industries that are otherwise restricted in some ways. So it's very important that you have that conversation early on to make sure your business model does not interfere with regulation that would prevent you from using processing because that could be a very costly mistake when you get to your launch point. And you realize that you may not meet regulation of your providers.
Karley
Absolutely. Great. And I think just going off of what you just said there, Chris about being costly. Let's answer this last question that we just had come in. How do you find rate comparisons in your sector?
Chris
Sounds good. Doug, I think you can add to this and close that out but it's just like shopping around for a lot of other services, right, I think. My preference is to find some local providers in your area. Generally, there are independent sales reps of the larger companies localized and regionalized. You may be able to take advantage of some of that national or global volume that some of the big ones have with some of that local representation. Also know that with some of those larger folks, they all kind of know each other's rates and can compete against each other. It's a workable relationship. So from my perspective, it's kind of like shopping around when you're buying a car, right? There are a lot of different car dealers, build a relationship with one, compare the pricing, maybe use some of your history and other quotes as a mechanism to negotiate. But generally, that's the strategy that I would use in this scenario, Doug.
Doug
Yeah, I mean, it is a good mix, like you say, Chris. I think it's very individualized to the business if you're just spinning up an e-commerce business, and you're dropping in, and it's a standardized solution, so to speak. You're just out on your specific product or whatever, you know, you're fine going on the larger processors out there just doing a stripe integration, for lack of a better word, one of those out of the box solutions, when you have your own unique business model. Something I do recommend is those personal relationships, working with a local provider, who may be very well tied into a national gateway. But just having those conversations in person does absolutely help, because at the end of the day, they're your advocate going back for your rate.
Chris
For sure.
Karley
Great. Well, thank you so much for answering those questions by our viewers. So that is all the time that we have for today. Thank you, everyone, for joining us about our discussion. Thank you for listening to us share your thoughts and experiences regarding payment processing. So as I mentioned, there was a lot of other great questions that we didn't have time for, but we do plan to answer those in our live chat at a later time. Doug, thank you so much for being here with us today. We value our partnership with you, and we really enjoyed having you on with us. To our viewers, we hope you found our presentation informative. If you have any questions or you need more additional advice on this topic, we're here to help you. So keep an eye out for our next Virtual Event or Roundtable Discussion because there's more to come. Thank you and goodbye. Thanks, everyone.