The PayFac Opportunity

James Shepherd: Hey everybody. Welcome to the Merchant Sales Podcast. This is the podcast for you if you want to learn about the payments industry. Today I've got Simon Kemp joining me. Um, Simon's a great guy, uh, from the uk. Interviewed him a little over a year ago, uh, in a different role. And now they have gone after this idea of payfac for the ISO. Now this is still in the uk, uh, market moving to the eu. Um, but I think it's a topic that we need to be talking about. I'm actually a little surprised that has not been talked about more, to be honest. Um, in our industry, this idea of taking the Payfac model, making it available to ISOs. So it's a very interesting concept and topic that we're going to talk about today. Um, then Patty Murphy shares today in Payments and talks about a lot of really cool stuff happening in the payments industry and also some not so cool stuff that we talk about that I think is interesting. Uh, I came into the conversation a little bit irritated actually with uh, uh, some interchange things that I learned and some things with some competitors and stuff. Uh, we kind of bring that up and talk about that a bit. So it's interesting conversation, uh, today there. I also want to mention our sponsor. So, um, Nativia, head over to nativia.com ccsalespro uh, they have so many things going on. I actually was talking to, uh, the CEO of Vlad Sadowski last night late as he was coming back from a trip. And we were just talking about a bunch of different things they have going on right now, including their fiserv fsp. Um, and so, you know, being able to have TSIS and fiserv under one roof, having really unique clover placement options, but also being able to have that thesis ability to get that thesis var sheet we need to need to do the integrations. Um, so pretty cool if you're an ISO looking to grow. Um, and so again, if you fit in that bucket, head over to nativia.com ccsalespro to check them out. Uh, again, my name is James Shepherd. I'm your host. Let's dive into this week's episode. Welcome to the Merchantsales podcast. Hey everybody. I'm, um, here today with Simon Kemp, who is the VP of Enterprise at a company called payfac Lite over in the uk. How you doing today, Simon?

Simon Kemp: James? Yeah, very well, thank you.

James Shepherd: Yourself, doing great. Uh, so it's been a little while, over a year actually since we had you on the podcast. Always, uh, enjoy following your content and what you're doing. So I thought as we kind of kick this off, we're going to be talking about payfac for the ISO, which is not something that we've really talked about ever on the podcast. Uh, and it's something that behind the scenes there's a lot of conversation. So I'm really looking forward to this. Before we dive into that, Simon, tell people a little bit about what you do. What is payfac Lite, what is this company and what do you guys do? Give us a little context if you would.

Simon Kemp: Yeah, great, thank you. So we saw uh, a space in the market. There's the traditional ISO model. Everyone understands, everyone gets, and everyone sort of understands what a payfac is. But to migrate from one to the other is a really, really big jump and takes a lot of, It's a big investment in time and finance. Um, so we've built a model that basically sits in, in between. So we give all of the ISOs, we give ISVs, we give SAS platforms the full control as if they can operate like a payfac, but we keep all the liability, the indemnity and the risk sits with us. So we've sort of bundled, if you like a payfac model into a bite sized chunk, uh, and kind of brought it to the market in a solution that hopefully people find is, is palatable and easy and just is less of a, you know, the go to market window can be three weeks versus you know, you could be three years if you want to become a payfac. Um, you know, and I think what we, one, one thing we say at the company is that nothing we do in its own end, like individuality is special but because we've bundled it all together and it's one source for everything, um, yeah, it just, it's, it's making, making the life of an ISO that's wanting to a bit more control life easier.

James Shepherd: Mhm. So let's, let's break this down. You know what I'm, what I really curious to hear from you is when you guys put this together, what were the top two or three pain points that you were like, hey, because of the way things are currently done, this is what ISOs are having to deal with. And so we want to solve that. What were those big pain points you were looking to solve?

Simon Kemp: I mean the first one's boarding times and control. And you know, every ISO knows that once you've handed that application over to an acquirer, uh, you kind of open praying and then you might get into information back and Then it's, it's of, you know, three days, four days, something like that. Then the merchant's live and then also the life contractual control of the merchant. You know, I think if you're, especially in the UK, a lot of the ISOs don't own the terminal. They use the terminal of the acquirer. Uh, that was always then. Fundamentally the ISO is not owning anything in the chain and they're the two big pain points that um, we noticed and I think, and also the live data. And this is Bugbear for me for many, many years I've been in payments 23 years and I can't think of a time until now when um, I'm at a company where they can actually give the partner live data and the partner can understand as soon as the transactions happened in store or online, partner can see it in the portal. And that sort of control is just, it shouldn't be a difficult thing for an acquirer or anyone to offer.

James Shepherd: Right.

Simon Kemp: But it's, they're the three pain points.

James Shepherd: So let's, let's break these down. So let's start with boarding. So you know, there's in my, um, the way I look at it is there's two different sides to the boarding pain. One side is this like technology kind of, and you know, in compliance and kind of all of the like legacy friction that exists that the pay, pay model gets rid of. But then the other side of it is too. You're like, there's also some legitimate, you know, risk and underwriting concerns and things where it's like, you know, uh, so talk to me about that. How are you in your model? How are you dealing with that? How are you reconciling this? Because I think what I hear you saying is you typically are holding the risk. Uh, and so talk to me about that. How does that, how does that work and how do you guys think about that?

Simon Kemp: Yeah, absolutely. I think the one benefit that we've got is, you know, we're the company and the concept, uh, was sort of thought about three years ago and being built from there and you know, and if you look back in technology, the last three years has been insane. So we don't have any legacy processes that lots of the providers currently do. So whereas we built, our whole boarding platform is built around AI and machine learning. So every single transaction that's going through is feeding the learning of uh, our, of our database. So we know that if a merchant has got these five criteria, they're probably going to fall into this space. So we Take a risk portfolio on a live kind of database. Whereas a lot of the other providers in the space, they've been around for a long time, they've got great legacy and actually that's a good thing. They've got a really strong brand but actually their boarding process hasn't really updated very much. As soon as uh, the partner is inputting all the information into the boarding app, it's doing it as um, it's doing it as it's going, so it's going out, it's talking to the credit checkers, it's talking to the company's house, it's talking to all the place underwrite this merchant. So by the time the merchant's coming to sign their application on screen, we've done 85, 90% of the application. Um, and it's that machine learning that we can offer because um, there is a risk for us uh, that ah, we take on but we're comfortable enough with our, with the size of our back book that we're learning from transactions and monitoring transactions all the time, that we've got an educated risk uh, appetite that most of the merchants and also most of the merchants we try to make sure we work with partners who we know we trust and we've got a reputation with because there's always some dodgy people out there. But the industry, especially the UK is, is incestuous enough that you know, you can avoid certain people. So actually I think just with some common sense and machine learning that's kind of how we've uh, you know, we'll always get, you know, you always get a little burn on the wrist every now and then. But I think if as you build the business it risk mitigates.

James Shepherd: The other thing that you mentioned there that I think would be interesting for the US market to understand. So talk to us about this pain point of the terminal, uh, ownership. I, if I'm understanding correctly, I don't think in the US market that's as common. I think most of the ISOs do just you know, buy their own hardware and deploy their hardware. But I would imagine there's also some interesting kind of crossover appeal of being able to instantly approve a merchant, potentially get a terminal. Like I have a terminal and trunk of my car, I can submit an, you know, an application from my phone or whatever and then you know, two minutes later I can just go out in my car, grab the terminal, put in the terminal ID or whatever it is. So talk about that a little bit more help that because again my, my audience primarily being Us definitely some uk primarily US they may not understand that pain point specifically but talk about that and also how you solve more of the overall kind of like onboarding experience with the terminal.

Simon Kemp: Yeah, yeah the terminal is a couple other things I want to add to the terminal as well. So if the you know leaning more to the US model if the ISO is or the ISV has purchased uh the hardware they've got like you say they've got a stack and they can drop one off. What our ability is because our uh, we call it commercial orchestration so we have the ability to be really flexible on how to the merchant um pays for the solutions. The merchant can buy the hardware up front and we can send them a pay by link that they pay and then release the terminal or we can split it so they can pay like 99p a day or they can pay £10am month or they can pay 1 point blended rate. And the flexibility on the commercials that we can offer for terminal rental or terminal terminal cost collection if you like. Rentals not the right word. Um, is, is is is unlimited. Um and then in regards to what you're saying about uh the, the terminal kind of how, how do we. The biggest pain points are the, the contractor right who owns that terminal. Uh and it's for me that's the biggest challenge in. One of the biggest challenges that the ISOs have in the UK is if you don't own anything in, in the lifespan of that merchant you're fundamentally giving away a lot of the you know the, the company profit if you like when it comes down to it uh is that yeah you just, you don't want that to disappear. So yeah the flexibility in how we give create almost given creativity on the pricing for the, for the merchant to say I want to pay this way and what we get really nicely is we've been because we net settle we have the ability that we can put in not just with the chip and pin table. You might have the, the the E4 system, you might have some uh CCCV, you might have other things that this, the ISO is supplying. Put that into our um into our uh we ah call it the product catalog and that's then dropped down the menu. So the merchant has you know one bill at the end of the month for everything and they just understand kind of how it all fits together. Hopefully that covers your question and leaning forward to how the US works.

James Shepherd: Yeah, I think it's fascinating. Right so again with, with payfack there is a bit more flexibility there and so and so it sounds like even that idea of being able to put multiple items on the statement is, is a big deal. ISOs do care a lot about that. A lot of them will have, you know, they also offer, you know, websites or they offer like you said, software of some kind or they want to charge for hardware monthly or whatever it is. Um, what about gateway? How do you deal with the uh, the gateway component? I've heard, you know some of this, some of the payfac Lite or payf, uh, have built their own gateways, some are partnering with others. White labeling. What are you guys doing?

Simon Kemp: Yeah, so we, we've decided to build everything in house. So everything that we supply is owned, you know, is owned by, is owned by us. So that way we've got full control. And it means that when we're giving to solution to an isv, for example, who's got to do the integration to our gateway? They've got one integration that gives them full access to, for the terminal suite, the soft pause, the virtual terminal, the payload, everything is built into the single gateway. Uh, single integration can be done. API, SDK, uh, Android, there is iOS, there is no right or wrong because everyone's got a different flavor that they need. We've built this solution in a way that enables everyone to access it. And as I said earlier, it's lots of small elements all bought together. Uh, start with just the integration on the terminal, just that single gateway integration, use that and then add on something else, then you add on something else, then you add on something else. You know, you've got a shopping list of stuff that we can provide and it's just kind of what the ISO would actually need. Uh, assume merchant LED funding is quite big over in the US as well.

James Shepherd: Mhm. Yeah, it is, yes.

Simon Kemp: Yeah. So we've got, you know, we have merchant LED funding option, we've got uh, so we call it um, VERIFY card list. So it's like a DD sort of process. Like it is a full suite of solutions that the ISO needs all fed off. Because we own the settlement file, we move the money, we have real, real control of a sort of end to end process. And that's where you're just giving that control to a third party. Uh, it almost puts them in, you know, we say going toad. So with giants, you know, you've got the, the big players, the toast and the, the light speeds of the world. We can, we can take an ISV who's you know, not in that sort of category, but give them that sort of functionality.

James Shepherd: Yeah, well, it's so, it's so cool because yeah, I've been a big fan of this concept for a long time because again, with payfack, what I think people maybe don't understand from a technology perspective is that you mentioned earlier that ISOs don't usually have the like instant access to, you know, real time transaction data. Well, what's interesting is most of them do. Technically they could if they want to do an integration with the gateway to pull this data. Right. Because the gateway has it. But then, but then the gateway doesn't have the settlement data and then it's like, well the settlement data is probably coming from like TSIS or fiserv, right. With your batch or SFTP file or API or whatever. And it's like, okay, cool, I have that. But then that doesn't usually have the application underwriting information. So I built a business a while back where I wanted to make kind uh, of a payfac like experience without doing the payfac stuff that you did for the last three years. Well, I had to pull together the gateway API and that had to talk to the batch settlement API over here. But then I had to create the, under the application and boarding process. There's so much that goes into that. And so the reason that a lot of the ISOs as an agent, you're selling for this ISO and you're going like, oh my goodness, what in the world? Why can't I see my transaction data? Why doesn't my transaction data match my settlement data? Why doesn't, why can't I get my merchant app put through here? Well, it's because it's very difficult to put all these things together and payfact is much more difficult than any of those things as far as creating it. But once you create it, you again, if you have your own gateway, you can, you can truly have everything under one roof. Which is pretty crazy from an API perspective.

Simon Kemp: Yeah, yeah, we are uh, super, super proud of the platform. It's, it's fact, it's all proprietary. It means we got total control. And if, and we really, really encourage our partners to say, have you thought about this? If we, if we could access this, we could do this. Really like insightful. So yeah, we kind of keep it real open forum with our partners just constantly, you know, they're the ones using it day in, day out so we really want their feedback. Say, this would be amazing if we could try this. This would be absolutely fantastic if we could do this. Got this. But I just need it Tweaked. Um, and you know, we're trying to give a lot, A lot of the ISOs and partners out there don't truly understand how AI can help their business. So we give them almost like an AI report writer. That space is just say what you want and it will give it to you in a way that you'll understand. Yeah, the platform is really, really strong.

James Shepherd: So is there an economic um, advantage to this model as well for the ISO? I mean, again, not asking specifics, I know obviously you're in negotiate with ISO, but I'm saying one of the challenges you face in the US market I would assume is also in the UK is that you know, you have the, you know, the processor and they've got their account on file fee and then you've got the gateway and next thing you know you've got, you know, $15 in monthly cost that you can't, there's nothing you can do about that. And it really prevents you from competing head to head with like, let's say you want to go after a marketplace or something where the average merchant's going to process 200amonth. Well, you can't have a $15 a month permit cost there. Right. Or you want to do merchant of record or something. So talk about that a little bit. Is there, are there economic advantages in flexibility and things of that nature as well?

Simon Kemp: Yeah, definitely. It's, you know, for us it's economies of scale.

Speaker C: Right.

Simon Kemp: We've, we've. So the owners of the, of the company, um, have got a history, uh, and they built a real good strong back book of business. So that's, we're migrating that through to the payfac license. So that's given us the volume that we need to be able to make sure that we keep our costs as low as possible because everything's proprietary in regards to the Gateway. We have total control on commercials of that. So yeah, I would be very, very surprised if another provider in the uk, I'll caveat that in the UK right now has um, the ability of the commercial control that we can offer. Um, just because a, we, we realize that, you know, we, we just want to get our volume, our players volume, right. So we want as much volume as possible. So we, you know, we make an absolute, tiny, tiny bit on everything, but that's enough for us if we got the volume and then we can give the rest of our partners so the partners have got as much control as possible. And you know, I'm not sure if it's in the, in the us but in the uk we saw a point where the transaction rates just, they hit the ground. Like there was interchange card scheme and then there was a tiny, tiny bit on top and that's all there was. And we're now seeing in the UK market things are starting to creep up because they could only. You can't go any other way.

James Shepherd: Right, right.

Simon Kemp: A lot more blended rates. You know, ISOs and especially ISVs, uh, are joining, joining forces. So they've ah, got a combined ISO, ISV solution, payments and epos. All is all as one. And it's like, you know, 1.4, 1.8% blended rate which probably going to shock all your US uh listeners. You know, the UK, uh, card rates um, are very, very weak ah, compared to the US. So yeah, 1.8, 1.2% is ah, would be an absolute filled day for us. But uh, we're seeing that because they're saying, here's the, here's the EPOS software, here's the SaaS platform, 50 pounds a month plus, you know, 1.4 or something like that. You know, you get super creative with the, with the commercials. But our, you know, our, all I can say is our commercial power, uh, is that we realize that uh, yeah, give as much to the people doing the selling as possible. That's where they keep them interested and we're. Ours is just economy of scale.

James Shepherd: So you mentioned AI a little bit ago. Uh, obviously that's, you know, the hot topic of the day right now. Um, talk to me about that a little bit more. How do you guys see AI? You know, how is it impacting your business and what you're already providing to the ISOs? You mentioned a couple of things already. Um, where do you see it going in terms of impact on the market just broadly as far as, you know, you're dealing with these ISVs. You, are you looking at that and saying, okay, how is this going to impact them? The ISO community, talk a little, a little bit more about how you guys are viewing AI and how that's impacting your business.

Simon Kemp: Yeah, yeah, I mean it could be going for hours around this, but I think there's two, there's two kind of pros and cons that I see AI, uh, right now. So absolutely. In the back, backend reporting and giving data and insight into what is actually happening in the business. ISOs and ISVs can, can give that information to a merchant that says, you know, we've seen you done this, this many transactions have come through, this transaction's failed because of this now AI is literally just spieling out these updates and, and insight. And that's where, you know, that's, that's just a, uh, general business kind of insight. I think that's absolutely huge where AI is causing a little bit of a headache. And especially in, you know, all everyone's seeing it across the board is you've got the AI, you know, I've got, I've got an AI bot doing my shopping and then the retailer's got an AI bot receiving the order. You've got two AI machines talking to each other. But behind the AI bot is a fraud tool built by an acquirer that doesn't understand that it's two bots because it's looking for human interaction. So that then says the transactions, you know, it's giving you a false negative. And actually that, that's a little. So the whole system and that's just, that's a general industry challenge. I think, you know, more and more, you know, especially what we're. Because we're much, you know, we're not a traditional acquirer. We're not got the size of the battle, just the sheer might that those guys have got. We've had to get, lean into AI in a big way to, uh, sort of build. Build our, uh, you know, our learning and our machine learning. That actually our fraud tool is a little bit more advanced in our opinion because we've had to lean on the AI for, for so much. Does, you know, does AI then understand AI that that's the real kind of. I don't. I think we're in this weird tipping point as a society, how it's going to go. Um, but yeah, super excited. Um, I think AI is used properly. It's, it's absolutely mega.

James Shepherd: Yeah, it's, it's interesting to me. Like all the AI stuff I find so fascinating right now. It's like I feel like I go back and forth almost on a weekly basis where, you know, we'll, we'll find a use for AI that we're like, oh my word, this is such a game changer. Um, and then it seems like later that week we find something where you're like, really? AI is not able to, to do this. This is insane. You know, so it's, it's very exciting and then very disappointing at the same time. And so I think you're right. I think it's worth that tipping point of like, I feel like the next six months are going to be very interesting to see how this all plays out, you know.

Simon Kemp: Yeah. Yeah, no, I completely agree. It's um, it is, it's super interesting. Like I'm, I hold my breath almost on a daily basis. Like, is it going to work? It works. And then sometimes like, yeah, you're absolutely right. I can't believe it. Didn't know what that meant.

James Shepherd: Um, right.

Simon Kemp: But yeah, we're using it.

James Shepherd: Yeah, it's like, it's like when it works, it's amazing when it doesn't work, it's really frustrating when it, like, it, like it offends your sense of, of logic. A lot of times where you're like, you know, you go, okay, what I want is, I want to figure out how do I engineer AI to, to solve this particular problem for me. And this is an important problem. So I need a very, I need a 100% level of confidence that AI is going to consistently solve the problem. And AI doesn't do that. It's. You can get to maybe 98%, but you can't get to. So you're like, so then you, at scale, you start to go, what in the world? How did that happen? You know, and it's like, oh, the AI just, just did it.

Simon Kemp: Yeah.

James Shepherd: Did some ridiculous thing, you know, and you're like, okay, is this, is this, is it solvable or is it just a never ending long tail of improvement? You know, it's going to be interesting to see how, where, you know, where it can be useful because there's things where you're like, man, there's a lot of things where 98% accuracy is totally fine.

Simon Kemp: Yeah. You know, yeah.

James Shepherd: But then there's also a lot of things where it's not at all okay. You know, 100% is required in some things, especially in the financial services industry. So, um, yeah, I'm, I'm very curious to see innovations around process development and, and almost like, almost like, okay, there's this huge efficiency boost and then it's like, you know, how do we, you know, how do we train AI to know when it might be wrong? Like, you know, so you could just, that's 98% is fine as long as you realize that the 2% has a lower. Like I've been doing a lot of confidence score stuff. So with us we'll kind of have a process where it's like, okay, AI, solve this problem for me, but also give me a confidence score of how confident you are in your answer and if it falls below a certain percentage, kick it over to a human to take a look at it, you know what I mean? Stuff like that.

Simon Kemp: Yeah, yeah. And what does that interest? What is. What does AI rate itself as? Does he always cut the date? Do they always come back as a 98, 99? Or do they come back as a I?

James Shepherd: I've used it now in probably four or five really unique situations. And I would say confidence score, it's very, it's very accurate on its confidence score, actually, which is, which is good. So some things, some things, like I'll give you a really easy example, a kind of a personal, uh, one. So in my email inbox now, whenever an email comes in, so I have an assistant who screens my emails and did that for years. But my problem with that was sometimes there's an email where I do want it to come directly to me. I don't want to wait on my assistant to screen it and give it to me. So every email I get now, it starts by going into AI and I have this huge prompt that I wrote that basically says, here's this prompt that tells you which emails James wants to see versus once he wants his assistant to screen.

Simon Kemp: Yep.

James Shepherd: Come back with your confidence score that James wants to see this. If you're at 96% or greater, just go ahead and put it in the inbox. And, uh, if you are less than 96%, you put it into this, like what I call filtered emails. My assistant looks at it and then puts it back in my inbox if I need it. So it's been fantastic for that. So I have my small list of people that come right through. Everybody else goes through the screening and it's like, I don't want to see that somebody else was cc'd on it or whatever. I don't want to see it. So that's an example. But then, yeah, you get into some of these other processes, like, like, um, our statement analysis with ISO amp, you know, and we'll have things we're like matching and, you know, try to match this to a particular interchange category. This feline.

Speaker C: Yeah.

James Shepherd: So it's interesting. There's a lot of things where, again, I think confidence score is going to be a big concept as we move forward. But I don't know, it's just very fascinating to me how to. How to structure.

Simon Kemp: Yeah, no, absolutely. You know, we've done. We're building some of the really cool tools and regards to. Actually, this is probably. I don't know if this is relevant for the us, but we're seeing that the uk, the ISO market and the ISV market are really merging. So you're having ISO selling EPOs and EPOs providers now taking the full payment, 100 in bed. Um, but lots of the ISVs have absolutely no idea how to read a statement. Like, yeah, as an ISO, we understand all the different requirements, every statement's different. So we're, you know, we're building a tool that we can offer all of our partners that they just ingest the statements and it comes out and says, this is where it should be so that, you know, using AI for that and, you know, you can be 96 and you're gonna. Yeah, yeah, but, but, uh, you're absolutely right. And in regards to kind of fraud and is this, is this transaction good? You need to be 100. That's. Yeah. So, yeah, the, the confidence scorings are super interesting.

James Shepherd: Yeah. So, uh, Man 7 It's always great having you on the podcast. I know we could sit and talk for hours about the payments industry and AI. Um, I do want to just really quickly though, revisit something. So to clarify what you're talking about as far as payfack for the ISO, which is very fascinating as of right now, this is uk. Uh, and I think your roadmap, you know, maybe talk a little bit about that because obviously I've got my audience, a lot of us based, so they're going to be wanting to reach out to you. But.

Simon Kemp: Yeah, absolutely. So we launched, we launched in April. Um, super exciting. Um, so the. Currently we're UK only and the theory behind that is we're based in the UK and that's a market we all know and love really, really well. Um, and the UK is quite a, quite an advanced payments market. So with theory is if you get the UK right, it's quite an easy thing to pick it up and drop it into the other regions. Obviously Europe being less than 22 miles away across the English Channel, that's an obvious move for us. Um, and the other Geo expansion that we're looking at is of course following the English language and visa, MasterCard around the globes, Australia, Canada, mainland, USA. Um, yeah, super. That, that's probably something that's a little bit further down the pipeline. But, you know, if any of your listeners have got a huge opportunity, then, you know, by all means we'll always, always love to explore something. But yeah, mainland Europe's probably the, uh, is what we're. Is the main focus for at least the end of this year.

James Shepherd: And for those who want to just kind of follow your progress, Simon, and learn more about it, where, where would you send them to kind of connect with you and learn more about Payfac Light.

Simon Kemp: Yeah, I mean, so, um, payfakelight.com um, is the website. Have a look at that. Obviously got my LinkedIn page. The payments guy. Um, it goes there at the, ah, follow my journey on that. Um, but yeah, payfactlite.com is the uh, website.

James Shepherd: Awesome. Simon, it's always great having you on the podcast. Really appreciate you jumping on and taking time to share your insights with us today.

Simon Kemp: Cheers James.

Speaker C: Good day now for today and payments brought to you by Proscribes Inc. With Patty Murphy and James Shepherd. So James, you know we've talked um, about uh, the state leg. The state, uh, legislative initiatives. Um.

James Shepherd: Yes.

Speaker C: Regarding Interchange. You know there are about 15 states now that have legislation and, or, or pending laws that would prohibit interchange on the tacks and in some cases even the tip portions of car transactions. Now uh, you and I have talked about the impracticality of such restrictions.

James Shepherd: Right.

Speaker C: But I just came across a report that puts a price tag on um, legislation in particular in Iowa. Actually. This think, uh, tank, Common Sense Institute, has done it for several states. Um, but Iowa is the one that I saw reported. So that's the one I'm going to.

James Shepherd: Right.

Speaker C: Talk about today. Common, uh, Sense Institute is a think tank. You know, it focuses on free enterprise economics and uh, it's, it's found. It did some calculations and found that this bill that's pending in Iowa, which would ban interchange on the tax portion of a ticket, um, would cost the state's economy $67 million in economic output and 350 jobs just in the first year.

James Shepherd: Um, and all that for what benefit? You know, it's like.

Speaker C: Right. So would generate about 36.2 million immersion savings statewide. But the POS system upgrades and payment infrastructure changes needed to comply would cost about $82 million.

James Shepherd: Yeah, and that's, and that's a totally an estimate where, you know, can you imagine it would be a field day for POS companies to say like, oh, you live in this state. Well, great, you get our $297 upgrade package for your state to be able to comply with this law and you're going to save $53 over the course of the year in Interchange and you're

Speaker C: in this state and that state, so you need two different systems.

James Shepherd: Yeah, right. Exactly.

Speaker C: Right, yes. I mean the savings like uh, like you said would be small. The average business would save about $220 a year.

James Shepherd: Yeah, there you go.

Speaker C: Most of that would be for, for larger merchants, of course.

James Shepherd: Right. Yeah, that's really skewed. Like the 80% of the, of the merchants in the state are going to save less than 50 bucks or something.

Speaker C: Yeah.

James Shepherd: And but they're all going to have to pay for whatever upgrade is necessary to like make this work, you know, so.

Speaker C: And in fact it said for 42% of small merchants it could take a decade or longer for the savings to implement, uh, to offset implementation costs. Yeah, I mean that just, just blew my mind when I, I mean I like I said we've, we've talked about the impracticality but when I saw a price tag put on it. Yeah, that's just when it's like amazing

James Shepherd: and it's like a big picture thing. You're like who is coming up with this ridiculous idea? It's like, it's like we want to go to businesses and say we are really trying to save you 2% on 5%.

Speaker C: Yeah. What.

James Shepherd: Who cares about this? Why does. This is the dumbest thing. I like, I feel like so like the payments industry, we have all of these, these issues. You know, it's interesting. I literally, I just was talking about this today or uh, last night I guess I can't share any detail on this but basically I was talking about the fact that there's a company that uh, I'm competing with and in one of my other businesses and they were able to negotiate special interchange rates with Visa and MasterCard right now. Well, it's not as unusual as it might seem actually. It's interesting when you actually get behind the curtain in the payments industry, larger merchants and very large tech companies are able to have some sway in this area of interchange in a lot of cases. And as a result of that they have a pretty blatantly unfair cost advantage in the market. Right.

Speaker C: Uh huh.

James Shepherd: And it's like we're not talking about that. You know, like this is, this is like ah, John D. Rockefeller era, uh, um, you know, the kickbacks that they were getting. I mean that's basically what we're talking about here. It's, it's blatantly anti competitive business practice.

Speaker C: Right.

James Shepherd: And, and that's not being discussed. And instead it's like what all the states are focused on is like can we, can we somehow Save businesses the 2% on the 5% sales tax, you know, for a net of you know,.02% of the transaction. Like what, why are we talk about this? Like it's so frustrating to me that the states are, are forcing this to be the issue in the payments industry or you look at what, um, you know, Durbin and the other, The Credit Card Competition act, you know, and it's like, okay, like this is not realistic. Like there are actually real problems here, uh, that need to be addressed. And instead the legislatures and the government seem to be focused on these nonsense issues, you know, and I think these

Speaker C: nonsense issues are being brought up by the larger retailers and the retailer retail association.

James Shepherd: 100%.

Speaker C: And I don't think, I mean, the retailers, yeah, they're, you know, the Walmarts of the world have people on staff who understand this. Right. But all due respect, organizations like the Merchant Payments Coalition or NRF don't, you know, they, they're just looking at it like you say, for 2% on 5%.

James Shepherd: Exactly. And so it's like.

Speaker C: And uh, in the states, it's even let. There's probably even less, um, inherent, um, understanding.

James Shepherd: Yeah.

Speaker C: Of the mechanics, you know.

James Shepherd: Right. For sure. Well, when again, it's like for Walmart, 2% of 5% is a lot of money, you know, for the average business in Iowa, not so much, you know. So. Yeah, it's very interesting. But, Yeah, I, I'm fascinated by all of it. I'm sure you'll keep us up to date on it. But it's, it's, it is very interesting. You know, it's, it's so interesting to me.

Speaker C: It's so interesting. And in fact, just to, to, to sort of, uh, jump into Durban. We talked about Durbin.

James Shepherd: Right.

Speaker C: Um, the legislation has just been introduced in the US Senate that would ex. Expand the exemption from the Durbin amendment cap, you know, the, the, the cap on, you know, the 10 billion dollar asset threshold, if you're below.

James Shepherd: Yes, yes.

Speaker C: Right. So this new Community Bank Relief act, um, introduced by Senators, uh, Ted Cruz and Katie Brit.

James Shepherd: Right.

Speaker C: Raise the threshold initially to $15 billion and increase it thereafter annually based on the annual cost of living adjustments as measured by the Consumer Price Index.

James Shepherd: And why, why are they trying to do that? What's the punchline there?

Speaker C: When, you know, when the Durbin. Let's, let's be realistic. When the Durbin amendment first took hold, it was 2011. So that was 15 years ago. Yeah, um, at that time, you know, there were a lot of community banks under $10 billion, but a lot of those banks have now blown past that 10 billion dollar asset and are subject to the Durbin amendment.

James Shepherd: Right, okay.

Speaker C: So like according to, uh, uh, Cruise and uh, Brits, uh, a press release they sent out on their legislation, um, back in 2011, there were 80 financial institutions that exceeded the $10 billion threshold. Today, it's about 130. So.

James Shepherd: Yeah, that's interesting. Well, and I think, you know, I think one of the things that doesn't also, again, things that don't get talked about very much in the payments industry, um, you know, the Durbin amendment fundamentally restructured the way that banks operate. I've used this, this illustration so many times, but, you know, this really, this infamous law, uh, from, you know, I don't know what it was a thousand years ago or something 500 years ago in, uh, uh, England, where they started taxing people based on the number of windows in their house.

Speaker C: Right. I remember that.

James Shepherd: Remember this? And so the, the. They were like, well, people who are wealthy and, you know, have a lot of windows.

Speaker C: Windows.

James Shepherd: Well, the net effect of that was everybody built houses with no windows and everybody got really sick because there was no air moving through the house. And so this law killed, like, you know, hundreds of thousands of people because everybody stopped having windows in their house. Um, and I think in the same way, when they were like, well, you're going to be subject to this regulation if you have greater than 10 billion in assets. The banks are all like, okay, well, let's make sure we don't do that. So then it's like all of these smaller banks, because they wanted to, they wanted, you know, neobanks, etc. Etc. Etc. They all wanted to be able to do unregulated debit cards, to be able to make a lot of interchange on, um, especially on B2B. So, you know, ramp cards, et cetera, et cetera. All of these, you know, kind of like fundamentally change the structure of banking. And so it didn't, like, so, so to me, it's like 10 billion, 15 billion. At the end of the day, what you're trying to say is we're going to regulate the big banks and you're just defining big. And what's interesting about that is, to us, like, 15 billion sounds like a lot of money, of course, but it's really a. That's not a bank. Yeah, that's not a big. Really, they should just set it at like 100 billion and be done with it.

Speaker C: 100. Exactly, exactly.

James Shepherd: And then they, and then it's like, yeah, there are only seven banks that fall into this category. And that's, that's really what you're trying to do.

Speaker C: Anyway, um, those seven banks are the issuers of the, you know, of 80% of the.

James Shepherd: Right.

Speaker C: Of the cards. Right.

James Shepherd: But then again, you know, I will Say what the thing. I guess that bugs me a little bit. And again, I'm more. I think I'm irritated today about. About this situation because it's like, is that really fair? Why. Why is that? Why is that? Why is it, like, the big banks shouldn't be able to make interchange on debit cards? Why? Like, okay, I, you know, whatever. But, uh, it just. I don't know. To me, it's like, I don't, you know, you could say. Because, I mean, the difference, to be clear, the difference is, like, massive. Like, the. The smaller banks are issuing these debit cards with, like, 2.5% debit interchange, and then the big banks are, uh, issuing it at 0.05% and 22 cents. Like, there is a very big difference here in what's happening. And it's like, why. Why do we want to make sure that large banks are not able to play in that space? I don't understand that.

Speaker C: Well, also, think about it. It's like that, you know, debit cards are also used at ATMs, right. Right now, uh, I went to. Generally, I go to Wawa or one of those places where they have free atm, you know, free atf. But sometimes I can't. You know, sometimes I'm. I need the money, and I need the cash for something, and there's only, like, you know, a B of A, and I'm not a B of A customer.

James Shepherd: Right.

Speaker C: And so, you know, I was in that situation of last, uh, week, and it cost me $3. Nobody's complaining about that.

James Shepherd: Right.

Speaker C: You know, it's the same darn debit card that, you know, that. That they were collecting interchange on. I mean, it's not called interchange. It's a convenience fee.

James Shepherd: Right, Right. It's a. It's a cost of. It's a cost of processing, uh, a payment. And, uh, yeah. And again, it's, you know, I think. I think at the end of the day, guardrails are very important. Um, and I think. I think guardrails are very important to define things like, what do we consider to be right and what do we consider to be wrong? Like, what do we consider to be illegal or, you know, what do we consider to be dangerous? I think regulation is great there. Where we start to have problems is when we get into, like, the nitty gritty of an industry that no one in Congress understands, and they want to regulate this stuff. And it's like, again, what. They're regular. There's no. There's not like this clear harm happening to anybody. Here.

Speaker C: Right.

James Shepherd: You know, and so, you know, to me it's like if you want to regulate, and again, I'm not a proponent of this, but it's like if you, I just, you know, this, this episode has actually got. Simon Kemp was the interviewee and he's from, uh, the uk. If you want to regulate Interchange, regulate it. I mean, I'm not a fan, but go ahead, if that's what you want to do. Make it 0.3, 0.4, 0.8, whatever the cap is going to be, you know, or you know, negotiate as uh, the government like they do in Canada. So it's like if what you're trying to do is reduce the cost of acceptance and you want the government to mandate reduction of the cost of acceptance, then just go ahead and mandate it. But they keep biting around the edges and all they're doing is making it more complicated for everybody and not solving the underlying problems. That's just really frustrating.

Speaker C: Yeah, yeah, very frustrating. But makes for great reporting.

James Shepherd: Yeah. Right.

Speaker C: Gives me something to write about. But you know, uh, I'm currently on this, uh, writing uh, a piece for the Green Sheet on the litigious nature of interchange. I mean, it has to be. You know, sometimes I think, yeah, if I were to recast my profession, I'd be a lawyer that specialized in helping people sue Visa, MasterCard over interchange.

James Shepherd: Right. It's crazy.

Speaker C: I remember back in the day, the original Walmart suit, um, Constant Constantine, um, I can't remember his first name. He was a lawyer that represented the merchants.

Simon Kemp: Okay.

Speaker C: He, I remember him saying that he made enough money on the, um, you know, his, his share, you know, whatever, you know, his cut from the.

James Shepherd: Right.

Speaker C: The lawsuit to put all of his kids through college.

James Shepherd: Wow. Yeah, I'm sure. Well, again, you know, there's a lot of people that have made a lot of money off of uh, going after Visa and MasterCard for interchange issues. But, but again it's, I think there is still so much that goes on behind the scenes there.

Speaker C: Mhm.

James Shepherd: That does not get reported because it's not public knowledge. Um, and I don't know, I just feel like there's definitely, uh, there's definitely, uh, an interesting side to our business as far as the interchange goes. And, and again there's a lot of, there's a lot of money that's made on, on Interchange. I mean a lot of people are really raking it in on the interchange and so it's interesting.

Speaker C: No question about it. No question. Yeah. Well, next up, uh, it's a Report out of the straw hacker group. Um, they found that uh, a study that they just did with um, Adian software.

James Shepherd: Okay.

Speaker C: Yeah, it's a ah, fintech platform. Um, they found that software companies increasingly view payments as a core platform capability, not just a feature. Yet despite the desire to modernize, most remain locked into complex multi provider environments. Um, the surf. The software company's survey reported working with an average of five payment services providers.

James Shepherd: Right. Because they'll have a gateway, they'll have a, you know, application flow, they'll have a, you know, a residual whatever system. They'll have a, the front end, the back end. Yeah. So yeah, yeah.

Speaker C: You know, it's not a lack of motivation that keeps these companies from taking action. TSG said uh, it's, it's friction. And the primary barriers cited by more than half of those surveyed were inter integration complexity, compliance requirements and operational disruption. You know, I just thought that was really interesting. Yeah, excuse me. Especially you know, if you're trying to, if you're trying to sell uh, services to uh, to an enterprise, to a fairly good sized enterprise, um, you better have something that can, that can, that can address these, yeah, these, you know, these things. I mean integration, especially integration. Um, but um, yeah, I thought that was really interesting. You can go to TSG and they'll have a, they have an overview.

James Shepherd: That is interesting report.

Speaker C: I thought people might be find that interesting.

James Shepherd: Yeah, no, it actually piggybacks good off the interview as well, talking about payfax and, and that sort of thing. But yeah, Adyen has just done an incredible job with all this. It's uh, you know they've, they've built you know, just an, kind of an unbeatable enterprise card present payment ecosystem that's just. Yeah. Amazing.

Speaker C: So yeah, yeah, they really have so. And finally, um, the Federal Reserve has just published its 2026 diary of consumer payment Choice.

James Shepherd: Okay.

Speaker C: And it found that despite the rise of digital options, consumers still like to pay with cash about seven times a month. M. According to the Fed's diary. It's been doing this diary now like around 10 years and it says that cash usage has been holding steady for the last three years. It's the third most common commonly used payment option follow, uh, you know, following credit and debit cards which are of course for about two thirds of consumer payments.

James Shepherd: Right.

Speaker C: So here, you know, I always love this about this Fed report because it sort of like you know, takes a, it takes a like a two week period. In this case I think it was October 2025. And you know has consumers keep tabs on every payment they make and what they're using, you know, what payment form factor they're using. So consumers made an average of 47 payments in the month of 20 in a month. In 2025, 16 of those payments were used, were made using credit cards. Fifteen, uh, involve debit cards, six with cash, six using the ACH and four using uh, mobile apps or other means such as checks.

James Shepherd: Interesting.

Speaker C: Uh, also found that Most consumers, uh, 76% that is carry cash in their pockets, purses or wallets. The average is about $69. And 43% keep several hundred dollars of cash on hand elsewhere like you know, in a sock drawer or into their mattress or.

James Shepherd: Right, right.

Speaker C: My case, it's in an envelope in my desk. Um, right. You know, for savings or emergencies. Yeah, you know I have a, I have some people that do some work for me and they only accept cash. You know, it's right, it's all, you know, non reportable income for them.

James Shepherd: Yes.

Speaker C: And so I keep a couple hundred dollars of cash if I need somebody to come, you know, drop a tree or paint my fence or whatever, you know.

James Shepherd: Yeah.

Speaker C: Um, and obviously I'm not alone. There's other people that do that, you know, for sure. So um, you know, that's such an

James Shepherd: interesting issue too, the whole tax issue. Like, you know, again, I think, I think it's easy as an industry, payments industry for us to kind of like, you know, zoom out and view the market a little bit differently than it really is. And, and like, oh, there's hardly anybody out there. Like for me I'm always, you know, as the technology guy, I'm always like, oh, nobody wants a standalone terminal anymore. And it's like, well I went out and did some prospecting the last couple of weeks I've been doing prospecting for stackably just because I'm, we're, we're making a new uh, doing a new launch of some different things and I wanted to like, you know, get out there in the field and try it. And you know, it's funny how you get out there and you're like 2 out of 10 merchants are still like I would never, like they're never going to buy anything from me other than a regular terminal. Like they don't want anything else. Like that's what they want. So it is interesting just seeing like in this case it's easy for me to say, oh, nobody would still want to take cash, you know, as a, uh. And it's like, well there's a 20 to 30% penalty if you're, you know, to taking a card versus cash, if you're not reporting it to the IRS. Now, of course, that's illegal. So, you know, it's like, not very many people do that, but there definitely are quite a few out there.

Speaker C: Uh, I mean, there are. There are people. I. I've had people say to me, well, you know, if you want this done, it'll be this. If you're paying by card, it'll be something substantially lower if you pay me by cash.

James Shepherd: Yeah, yeah, it's like the. It's like some of these people, they need, uh, a, you know, they need a true cash discount program where they offer like a 20 discount for cash.

Speaker C: Yeah.

James Shepherd: Because they're not reporting it.

Speaker C: I mean, um, I had one. I had one guy. I won't, you know.

James Shepherd: Yeah.

Speaker C: What exactly he did, but the discount for cash was like, almost 50. I'm like, dude, yeah, don't. If the Visa or MasterCard found out you were doing this, you would be

James Shepherd: like, well, if the. The IRS is really the issue, you know, that that's what actually put you out of business.

Speaker C: But, you know, I mean, he was sort of doing it as a discount for cash, and it's like.

Simon Kemp: Right.

Speaker C: Yeah. No, no, no, no. That's not a discount.

James Shepherd: Yeah, you're doing a discount for not paying your taxes. That's. That's a little bit different.

Speaker C: Exactly.

James Shepherd: What? Even, Even, like, some of the systems, like, I talked to, um. I talked to a lady at a small shop, and, um, you know, uh, she. One of her concerns was like, well, I don't want a system where I track all my customers and all my payments, even if they're going to take cash. Like, now I have this record. So she has, like, a little notebook, and she.

Speaker C: Uh-huh.

James Shepherd: Writes everything by hand paper. And, you know, it's just like. Really? Yeah, it's like. It's so shocking. You know, I live in this bubble of, like, payments and fintech. And then you get out in the field in central Pennsylvania and you go sell people and they're like, my pencil works. She literally, she holds her pencil up and she's like, when the Internet goes out, this pencil still works. And I'm like, well, we. We have offline mode, you know, but she's like, no, no, no. I have my pencil. It works great. So, you know, yeah, there's. There's definitely that. And I think, again, cash is still going to be utilized for a long time. It's a very, very, very long tail. Effect.

Speaker C: So it may not be king, but it's at least still a prince.

James Shepherd: Yeah, like that's a good way to put it so. Well, good stuff. Patty. Thank you as always for keeping us up to date. Thank you for listening to the Merchant Sales Podcast. Whether you are an industry veteran processing executive or just trying to learn about the payment space, we appreciate your time. We hope you will tune in next week for more information and tips on building your merchant services business.