Fintechs - the disruptors

Welcome back to Bitesize Payments where we discuss their history, how they work and of course who does what…. 

Today we are looking at key stakeholder in payments, fintech's… The new young things of the industry or are they… ? 

So today we are discussing Fintech’s, and I am super pleased to be joined by Caleb, CEO of Tilled.

It was not long ago that the industry was the Fintech's were all tech and no fin….. not so sure that is true any longer … anyway we shall see ….. 

Hold on,  here we go……

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_01: 0:01

Welcome back to Bite Size Payments, where we discuss their history, how they work, and of course, who does what. Today, we're going to look at a key stakeholder in payments, fintechs, the new young things of the industry. Or are they? It wasn't that long ago that the industry talked about fintechs as if they were, frankly, all tech and no fin. I'm not sure that that's true anymore. Anyway, we shall see as we go through the podcast. Hold on to your hats. Here we go. Today we're discussing fintechs and I'm super pleased to be joined by Caleb.

SPEAKER_00: 1:02

Thanks for having me on the show today.

SPEAKER_01: 1:04

You're absolutely welcome, Caleb. Caleb, could you just tell us a little bit about yourself?

SPEAKER_00: 1:09

Yeah, absolutely. So I'm Caleb Avery. I'm the founder and CEO here at TILD. I started my career in the payment space at 19 years old by co-founding an ISO. Probably not what most people were doing when they were in college, but I started out going door to door selling payment processing services to small business owners. And over time, we scaled up that first ISO. And then I took a step back from that business to start doing more angel investing and consulting for vertical software companies. And that was really my deep dive into this whole FinTech and and PayFact ecosystem working with these vertical software companies to help them figure out their payment strategies.

SPEAKER_01: 1:45

Cool. That sounds very cool. Sounds like you're exactly the sort of person to come and help me navigate through the world of fintechs.

SPEAKER_00: 1:55

I've definitely had a lot of experiences over the years and I've had a lot of fun.

SPEAKER_01: 2:00

Anyone who starts at 19 in the payment industry is either a genius or let's go with genius for now. Fintechs, short for financial technology, is a term that's been around for a while now, but the concept has evolved significantly over the decades. As ever, we try to think of ourselves as being the centre of all the new things, but I think they've been around for, well, frankly, ever. Was the first person who wrote the first cheque in 1659 a fintech? When we discuss networks, were the Knights Templar fintechs. When we go back to cheques or coins, were they in their own right, new technologies? Indeed, if we think about fintechs perhaps as agents of change, then they go back to the very, very beginning, the 80,000 years ago that we talked about, and every major step forward that we have in our industry. So, 1950s when the first credit cards were introduced or the 70s with the introduction of ATMs. These were all processes led by fintechs. Generally speaking, however, we kind of now think of fintechs as PayPal, the first one anyway, which was founded in 1998. PayPal is generally recognized as the first major financial technology company to revolutionize online payments, allowing consumers and, of course, businesses to transfer money electronically without the need for traditional banks. The real explosion of fintechs and payments, as we think of them now anyway, began in the late 1990s, as we said, and going through the 2000s, 2010, but perhaps even riding on the coattails of the internet. This era saw the birth of online payments with PayPal, frankly, taking charge, making it easier and clearer for people to be able to sell and buy online. But when we kind of moved to 2010, the FinTech landscape just frankly exploded. Startups began to challenge traditional financial institutions by offering faster, more convenient, and frankly, cheaper payment services. This era also saw the emergence of mobile payments with companies like Square and Stripe leading the way. These innovations have frankly completely changed the way that we think about and the way that we handle money. But it wasn't just about being online. It was about just about every part of the ecosystem. Moreover, fintechs, have brought us a different way of thinking. But it wasn't just online. It was frankly, every part of the financial services and especially the payments ecosystem. Moreover, fintechs brought us something very special, a different way of thinking and a different way of challenging the status quo. So Caleb, you've got a vast, history for someone who I can see isn't that old, unlike me, who's an old man. But you've been in the industry for a while in the era of fintechs, which is, I think, fascinating.

SPEAKER_00: 5:33

Yeah, absolutely. You know, I started out in payments in 2012. So that was right as, you know, guys like Stripe and Square were first coming online in the ecosystem. And when I look at the impact that organizations like Stripe and Square have had, they've really fundamentally changed the way that small business owners have gotten access to payments. When you think about the Like myself, going around from the local bank or the local processor, offering small business owners those solutions. And then these modern fintech platforms like Stripe and Square came in with better technology, better rates, better solutions. And they started to disintermediate a lot of the legacy players within the ecosystem. Yeah. During the course of my time running that ISO, what we started to see was this big shift towards software-led payments. When I talk about software-led payments, when I first got started, I think software-led payments, which would be an integrated payment solution that does more than just payments to run your business, represented something like 5% of the overall SMB payments market. So one in 20 merchants were leveraging these software led solutions, whereas today it's something like one in three merchants. And so there's been this fundamental shift in the way that small business owners are getting access to their payments. And a lot of the new fintech platforms over the last 10 years have really been the driving force behind this change. And so to me, that's kind of where we've been and the status of the market now. And then the big question is kind of what's next.

SPEAKER_01: 7:24

Yeah, it feels to me, Caleb, that, you know, I mean, in, you know, as we were just joking before we started, you know, my first job was taking an eight-inch diskette. You know, that was a different time. But it was also a different time, I think, from a thinking point of view. At that time, it was all, we can only be safe. Anything we do to change, well, we could do it in two years' time. That's kind of not the way that fintechs really think, is it?

SPEAKER_00: 7:57

I feel like the market's definitely moving faster and faster, and it's really up to the legacy incumbents to decide if they're willing to adapt at the pace at which the market is changing. I gave a presentation. This was about two years ago at the Southeast Acquirer Show, and the title of the presentation was The Death of the ISO. And it was a little bit of a cheeky presentation because it was to a room full of probably about 300 ISOs that I was talking about, the death of the ISO. And the presentation started where I said, hey, guys, I've been in this space 10 years. People have been talking about the death of the ISO for 10 years. And the reality is ISOs aren't necessarily going anywhere, but the products and solutions that you're selling are changing very rapidly. And two years ago, I was talking about how this software-led payments movement was really more of an opportunity than a threat. And fast forward a couple of years, and all of a sudden, it's really starting to look like a threat for a lot of people. of these legacy incumbents. And so we're seeing a lot of the big players in the ecosystem that are starting to wrap their heads around the fact that they have to modernize their technology because they can't afford to stick with their current technology, to stick with their current distribution model if they want to stay relevant over the coming two or three years, just based on the pace at which the world is changing around them.

SPEAKER_01: 9:22

I think that's right. I think, you know, in the US where you are, things are a lot more uniform and I think it's easier to make those changes happen from a FinTech point of view. But I think it's the cultural differences. It's the can do, will do, and it's tomorrow, as opposed to, oh, I'm not sure, I'll see what the regulator says and I'll have a plan for the next five years. And I think if you will, that's kind of the ethos that fintechs are bringing to the payments market, which least we forget is about money. So people do get sensitive, but I think that's the cultural shift. And we talk about digitalization in a minute, but I think the cultural shift is can do, will do and quicker. Is that the way that you see it, Caleb?

SPEAKER_00: 10:08

Absolutely. I mean, I think certainly, you know, here in the US, there's a very, you know, entrepreneurial mindset, whether it's the fintech startups or just the small business owners. themselves. And I think a lot of the demand for these integrated payments and embedded fintech solutions are really being driven by the small business owners. They're demanding these solutions from their bank, from their processor, from the legacy incumbents in the space. And so it's almost like these banks don't have a choice because that's what the customers are demanding from them. And then from there, it's their choice. Do they want to build? Do they want to buy? Do they want to partner? But there's not really the kind of fourth option of bury your head in the sand if you want to stay relevant.

SPEAKER_01: 10:54

I think that's absolutely right. Look, I mean, we'll come to that in a second because I think that's a really key point. But I think the argument that I would put forward here is that fintechs are really pulling if there was two forces i would say perhaps not so much in the us but certainly in europe and for the rest of the world the regulators are pushing shoving not necessarily pulling but said uh pulling but definitely pushing and i think fintechs are the other driving force saying hey you can do it like this anyway let's um let's come back to that in a second so We kind of know how the incumbents work, but how do these fintechs work? Well, they start, you know, as Caleb says, by bringing new thinking, different business models, and certainly a much more dynamic approach, pushing the status quo to a place that, frankly, the incumbents probably don't really want to go to, but the incumbent's customers do. And that's kind of the big shoe here. And, you know, as I've discussed previously, the incumbents, typically the banks here, tend to have legacy technologies and perhaps moreover legacy thinking too. But they do have banking licenses and they are regulated. And perhaps they're the adults to sometimes these pesky teenage fintechs saying, oh, you could just do it like this and it'll all be fixed. And the truth of the matter is, perhaps it can be, right?

SPEAKER_00: 12:33

Yeah, I think it lies somewhere in the middle. When you look at what fintechs are bringing to the table, it could be modern technology, like the developer-first approach that Stripe took. It could be a new hardware solution, like the square dongle that just overnight revolutionized that category. Or it could be a new business model or a new approach to something. But the reality in the payment space, the lending space, the banking space, is that oftentimes you do need that regulated or licensed provider to actually be involved in the ecosystem. And so there ends up being a lot of, I say like coopetition is a word that I use a lot in my day-to-day where the fintechs are building typically a layer on top of the incumbent solution. So you're leveraging the banking license from the bank, but you're building the UI, the APIs, and the service around that layer. And I think that brings a healthy balance to the ecosystem where you get the modern approach and the modern technology from the fintechs, but you get some level of oversight from the banks and the processors that these fintechs are bringing solutions to market in partnership with.

SPEAKER_01: 13:49

Yeah. And I think, look, I think the... At the heart of this change, there are many step changes, whether it's the Knights Templar bringing in a different type of network, whether it's the physicalization of coins. And I think it's important to go that far back to say this isn't that new as a concept. But what is new is that all the incumbents typically live in an analog world. That's the world they came from. You know, ACHs were designed in the 1960s. There was no concept at that point of view of a digital world. Most of the RTGS systems around the world are, you know, frankly, older than that. So the opportunity that is here, and it's difficult to know which comes first, but it's like once you start to think digitally about you open the door to this different mindset, A, of thinking digitally, but also the things that you're talking about or just mentioned, you know, APIs, UIs. I can tell you 20 years ago, nobody in the back was thinking about an API UI. Yeah, well, you know, go talk to Mary in the branch, you know. So I think that we have to think about it from a digital point of view as well.

SPEAKER_00: 15:13

Yeah, absolutely. And I think what's happened is a lot of these fintechs that started 10, 15 years ago have made a lot of these concepts mainstream. So the idea today that you don't have a digital banking experience or online access to your checking account or APIs to access a software solution, it's almost crazy today not to have those things, whereas even just 15 years ago, those were not the norm. And so it's wild to see how fast just the status quo has changed within the ecosystem. And I think you can credit fintechs for coming and introducing a lot of these concepts to the market that a lot of the legacy incumbents, but for the pressure from the new entrants, from the fintechs, you know, we probably still wouldn't have a lot of these concepts mainstream, you know, here today.

SPEAKER_01: 16:06

I think that's right. You know, I mean, I, you know, look, you know, I can remember the conversation was all around. There were, you know, these fintechs are all tech and they have no fin. And to a degree, at the beginning, that was true. I don't think that's true any longer, by the way, just to be clear. But at the time that this was happening, most of the traditional banks, the high street banks, if you will, were saying, these guys don't know what they're talking about. I'm a regulated entity. I've got to do what the regulator says. I've got to make sure these things work. And actually, that was their... No, don't touch me. Don't talk to me about these things because I'm the adult in the room. I've got to make sure that these children don't misbehave. And now it feels like the adults are going, hey, would you mind telling me more about how to behave a little bit more agilely, how to be more like a child and rather like a grandparent that I probably am? I guess that's a conversation you see in different guises every day.

SPEAKER_00: 17:10

Yeah, I think the pendulum has the capacity to swing both ways, where if you look back, let's say 10 years ago, a lot of the banks and the legacy incumbents were taking the approach of let's just sit back and kind of see, you know, what happens. We don't need to get involved right away. Let's see if the regulators crack down. Let's see if these concepts catch on. Let's see if this is really what, you know, small business owners are looking for. And then over the last, you know, five years or so, I would say it kind of swung the other direction where you had all sorts of banks that were deciding that they wanted to go in full force and, you And I would say over the last year, we've seen that pendulum start to kind of come back into the middle where a number of banks have been getting consent orders or have had some material losses or have had issues with some of the fintech customers that they've managed because they actually didn't have the technology in place to provide proper oversight from these fintech solutions. And so I feel like we're kind of reverting a little bit back into the median right now where only the banks that actually have the technology and the stomach for a little bit more risk and are a little bit more, you know, forward thinking are really going to be willing to stay, you know, supporting these FinTech, you know, strategies over the coming years. And so I definitely think we're in a period of transition right now.

SPEAKER_01: 18:32

Yeah, you know, I think there's, there's a, there's a bit of chewing, fraying, I can remember a an extraordinarily well-known bank, an American bank. They turned around at a conference once, and they said, hey, I know what all this fintech stuff's all about. I've got 50,000 developers. And I went to speak to the guy afterwards, and I said, how many of those guys are doing COBOL? And he went, well, yeah, most of them, actually. So I think there's a desire there. on the outside to feel, to look, to look at these fintechs. That's super exciting. I only wish I could bring it into my shop, but in fact, you know, they've got legacy issues that are a lot harder to fix. So I think that, One of the things that I've seen, again, slightly more outside of America, which is a lot more entrepreneurial, but I've seen, especially in Asia and especially in the EU, whereas the regulators are saying they want a leveling up, they want to create sandboxes, they want to create environments where there are different types of money licenses as opposed to banking licenses, to try and encourage fintechs to come and challenge frankly, the status quo. And I think that that was a pendulum switch. I think it's probably leveling back now, which says, hey, if you're moving money around, you better have some kind of proper license. But the truth of the matter is, there's a lot of push. There's a lot of desire to make change happen. And if you will, the central banks, the regulators are saying, We need to think a lot more like fintechs than the way that we did 10 years ago even.

SPEAKER_00: 20:21

Yeah, I feel like regulation is really a double edged sword. You know, it has the capacity to encourage innovation and encourage new entrants in the market and to make it easier, you know, for companies to come into business. But it also has the capacity to really create a lot of headaches. I mean, we're navigating some issues here in the US right now where some of the regulators and all of their infinite wisdom have decided that they want to outlaw the ability to charge interchange fees on tips and taxes, which besides the fact that it's a pretty silly idea, is nearly impossible in practice to implement. And so there's plenty of examples with well-meaning regulators stepping in and actually introducing complexity and hurdles into the market that in a lot of cases end up really benefiting no one.

SPEAKER_01: 21:10

Yeah, I can understand that. I spent a considerable amount of my career talking to regulators both in Europe, in fact, was on the UK regulator board for six years. So I was made one of the bad guys in that sense. But the truth of the matter is, you know, it is a double-edged sword and you have to balance both sides. But let's have a chat in a second about who are the players and let's get into that.

UNKNOWN: 21:37

Okay.

SPEAKER_01: 21:54

The kind of issue when discussing who the players are is just the sheer scale and breadth. While we think there are a lot of banks in the world, and there are, it's dwarfed by the number of fintechs. Somewhere in the region, ChatGPT, sorry about this, it might not be the best stat in the world, but Chat tells me there are over 26,000 fintechs as of 2024. And I'm not sure how accurate that is, but it kind of gives you a view Well, that's about, I don't know, 50% more than the total number of banks in the world. So you get the feeling that there is a demand and people are seeing the opportunity. And frankly, since 2019, that number has doubled. So there's a market, there's an opportunity. Well, it's definitely an opportunity. But while I normally keep the fintechs the spread around the aspects of the financial services is huge. It isn't just payments, but obviously this is a payments podcast. But when we get into payments, we do come across the big players that you mentioned, the PayPals, the Squares, the Stripes. And arguably, frankly, they're like 1984. Excuse me. They're a bit like Cannibal Farm. They're no longer... fintechs they may want to sound like the fintechs they might have cool t-shirts but the truth of the matter is they're part of the system now so you know perhaps you could give us a view on how you see that is that a desirous state for the fintechs to be joined and frankly be part of the legacy is that a good thing or is that oh they turn to the dark side

SPEAKER_00: 23:45

Yeah, it's funny. I get asked this question a lot, whether Stripe is becoming a legacy incumbent. I tend to struggle calling Stripe a legacy player because they still have set the modern standard for what a developer payments-focused API looks like. But the reality is they are an incumbent. And so they have gotten to the point where they're moving a trillion dollars a year in payments. They're a massive organization. And with that, it is difficult for them to move as quickly as some of the smaller fintechs that are biting at their heels. And so I wouldn't consider them a legacy player. I would consider them an incumbent. And I think the reality is that's just the natural course of events. When these companies are successful, they get to the size and scale where they're no longer a startup. They no longer are as nimble as they once were. And the reality is they're operating across so many different product lines and geographies today that it's in impossible for them to truly be the expert on integrated payments just here in the US because they have 50 other markets and dozens of other product lines that their focus is spread across. When I look at the way that the ecosystem is changing around these legacy incumbents, I go back to that stat that I mentioned earlier in the podcast, where when I started my career, one in 20 small business owners were leveraging an integrated solution, whereas now one in three small business owners are leveraging these integrated solutions. And so these ISVs and vertical focus software companies are driving this pace of change within the ecosystem. And what we're seeing in the market is that these ISVs are no longer wanting to just offer an integrated payment solution to their customers. They're wanting to offer lending. They're wanting to offer disbursements. They're wanting to offer bank accounts. They're wanting to potentially add in crypto or digital wallets into their ecosystem. And that's what creates these opportunities for all of these niche fintechs in the ecosystem because they're specialists in digital wallets. They're specialists in the lending solution or the issuing solution and are supplying all of these other fintechs with the other solutions that they need to bring a cohesive, complete solution to market for all of their SMB clients.

SPEAKER_01: 26:10

I think that's right. I think that at least we forget most of the incumbents and we'll skip over whether... Stripe has turned to the dark side for a second. But the truth of the matter is, whether you're an incumbent or a fintech, there's a fair chance that you'll be dealing with a lot of fintechs full stop to build your portfolio out. If you're a fintech, you will share and you work with other guys. And frankly, if you're a, let's call them legacy for want of a better phrase at the moment, these guys need to work with fintechs to make the change happen. So whether they're, you know, An incumbent that used to say, leave me alone, I'll do it all myself. They don't. And whether you're a fintech thinking you're a small little firm with a niche thing, the chances are that you're going to be working with other types of fintechs to create this broader portfolio. I see that as being great for the industry because it brings interesting concepts that we probably wouldn't do inside of an incumbent.

SPEAKER_00: 27:13

100% agree. 100% agree.

SPEAKER_01: 27:17

So let me ask you, perhaps you could tell us a little bit about what you do, why you do it, and how does it feel? Because I guess a lot of people that will be listening to this will be going, doesn't sound like my bank.

SPEAKER_00: 27:34

Yeah, we'll start with how it feels. It's a lot of fun. There's a lot of challenges, but building a startup, building a fintech is... The entrepreneurial journey is just a blast. You never know what each day is going to hold. But in terms of who we are, what we do, the company is called TILD. We offer PayFac as a service. And so what does that mean? So at TILD, we target low risk vertical software companies that are looking to embed payments within their platform. And so we're giving them the APIs, the white labeled tools, and then providing a lot of the back office solutions for underwriting, fraud management, chargeback solutions so that they don't actually have to become payments experts. they can focus on their core business, but still generate this recurring revenue stream from the payments that are flowing through their platform. And that's really where the business started over the last five and a half years has been providing this direct to ISV solution, enabling this software-led transition in the space. But where the company has started to evolve is actually partnering with some of these legacy incumbents to arm them with the technology that they need to go compete in this ecosystem. And so over this past year, we've signed up multiple partnerships with some of the biggest names in payments that are putting their brands on top of our technology and then now distributing that out in the market. And for me, when I look at why that makes sense for a company like us, as much as we've got this phenomenal technology, this great service, all of these great solutions, we don't have the distribution that the legacy incumbents have. That's always been the natural advantage you know, that the traditional incumbents have had in the space is they've spent 20, 30, 100 years, you know, building up these distribution channels that are almost impossible, you know, for upstart fintechs to really, you know, overcome. And so partnering with the big players in the ecosystem that have these distribution channels allows our technology to have the broadest reach and the broadest impact on the market.

SPEAKER_01: 29:38

Yeah, well, I think I wouldn't do yourself down there. I can only believe that when the Knights Templar were trying to help people go to the Holy Lands, they didn't think that they were creating a version of tokenized money, which when we think about it now, we think that's very cool. But I think that actually a lot of the ideas that need a time and a place to actually evolve. And I certainly think that you're well on the way to doing that. But Caleb, have you got any final comments about fintechs, things we haven't talked about that you think might be useful to just chat about now?

SPEAKER_00: 30:20

Yeah. You know, when I look at where the ecosystem, you know, as a whole is headed, one of the things that we haven't talked about today is AI or artificial intelligence. I guess you had one reference to chat GPT. So we gave it, you know, a little bit of, you know, branding and marketing advertisement, you know, earlier, but I can't wait to see five years from now what impact AI can have across all of the different segments of the market that we've mentioned here to There's already applications and payments and lending and banking, issuing fraud solutions. But I feel like it's still really early days. I don't feel like we really have a lot of mature applications for AI here today. And so I'll make that same prediction I did a few years ago about software-led payments. Today, it's an opportunity. Fast forward two, three years in the future, I feel like it's going to be a threat to a lot of the players today if you don't find your strategy in a way to incorporate that into what you're doing today.

SPEAKER_01: 31:25

I'd give you the observation. I was in an AI conference last week, and it had all the hallmarks of the answer is AI. Now, what was your question again? And I think that's the sort of phase we went through with blockchain. And if I go back all the way to when I was at IBM, whenever that was, 30, 40 years ago, relational databases were the hottest thing since the hottest thing. And what I liked about the way that you described what you do, you put it into a business sense. What I hear too much of from fintechs in many ways is, I've got great tech. AI can do this. AI can do that. Blockchain can do this. You guys are stupid because you don't understand how good blockchain is. It's like, hey, mate, it's just a database at the end of the day. It's a tool. It goes so far down in the weeds, I don't care. But when you talk about it from a business point of view, that's when you get people excited and get people interested. And I think the lesson that I'm hearing mostly is the fintechs that are successful talk about things from a business perspective, and yes, they might use the best technology, and yes, they might have the best developers, but they talk about what it does, not how it does it.

SPEAKER_00: 32:48

Having the best technology in and of itself almost means nothing. You have to solve real-world problems, bring to market real-world solutions, and it has to be something that people are willing to pay for, or there's really not a business case there. Absolutely.

SPEAKER_01: 33:02

And there, I think we'll leave it, but Caleb, that's... That was a tour de force of just talking through fintechs. Thank you so very much.

SPEAKER_00: 33:14

Yeah, Paul, thanks so much for having me on the show today. Really enjoyed it.

SPEAKER_01: 33:27

Well, there you go. Fintechs. So what does the future of fintechs in payments hold? The industry shows no signs of slowing down. With the advancement of AI, machine learning, blockchain, we can expect fintechs to continue to disrupt the traditional financial sector and perhaps even become incumbents themselves. And I think that's the right way to think of them as disruptors. Some will grow and no longer be fintechs, but large financial firms and others, I'm afraid, will wither. they likely become even more integrated into our daily lives, making payments faster, easier, and more secure. Hopefully, we have walked today through the fintechs. Any questions, let me know. Hopefully, I've walked through fintechs. Any questions, please let me know. And please do feed the algorithms with reviews and subscriptions. Fintechs, the future, or what we've been doing all along. Cheers.