March 11, 2016
The room at the San Francisco office was abuzz with the voices of more than 50 professionals discussing a variety of topics with passion and interest while munching on the Mediterranean spread provided by Protiviti, the host for the event. Attendees represented many facets of the payments ecosystem – major banks, the payment networks, payment processors, telecommunications tech companies, consulting firms, bitcoin startups, e-commerce marketplace players, market intelligence firms, marketing firms, social media, country trade & investment representatives, mobile ticketing, emerging international payment service providers, emerging payroll providers, financial advisor solutions and more.
BayPay Forum (http://www.baypayforum.com) is on a track for growth this year, expanding its presence not only across the US into places like Atlanta but also into Europe – France, Luxembourg, etc. – providing opportunities for payment professionals around the world to connect on trending topics. There are more than 14 events already planned in the San Francisco area alone.
We had a fireside chat with Marwan Forzley, CEO of Align Commerce, a next-generation Payment Service Provider (PSP) for global commerce that enables businesses and payment platforms to send and receive payments in local currency by using the blockchain as a new settlement rail. There is, of course, no fire, but Daniel Chatelain, Founder of BayPay Forum, was comfortably ensconced in a pale blue chair and Marwan sat opposite from him in a similar chair, the camera trained on him for the live streaming of the event (the video will be available on the BayPay Forum website later for those interested in a replay of the event).
Daniel Chatelain, Managing Director of BayPay Forum, started the conversation with helping us to understand his guest’s background – where they were born, how they got started in payments, etc.
Marwan was born in Lebanon and grew up in Canada. He lived in New York for a while until his company was bought by Western Union and he was moved to DC. His career has alternated between startups and big companies.
What was his first job in payments?
VOIP was acquired by Nokia. While at Nokia, he moved around to multiple business units, figuring out how to turn a mobile device into a point-of-sale device (POS) – this was in 2001/2002. It was a new market at the time; he’s always had the good fortune to enter a new market in its early stages.
Since Align Commerce just raised a round of $12.5M from Kleiner Perkins, Digital Currency Group, Pantera Capital and Recruit Venture Partners, Daniel asked Marwan for his tips on the best ways to get financing in Silicon Valley today.
Since this wasn’t his first startup, he had lots of great advice to give. When you build a company, make sure there is a market for what you are producing. Someone needs to buy the product; you have to have a plan to get customers. The product needs to be well-designed, and it needs to solve a problem customers have. You need to have a defensible strategy on how you are going to generate revenue.
Then you want to find the companies to finance you. Look for companies that have funded other similar startups and that have earned good returns on those investments. There is an appetite for venture capital funding in FinTech, it’s a growing segment and should be sustainable for a long period of time.
VoIP vs. FinTech: VoIP was really big at one point, but it was relatively focused, enabling communication across the world. FinTech addresses a much broader range of services. What kinds of companies are interested in FinTech?
VoIP changed the world by disintermediating the communication system, taking out some of the players in the middle. FinTech is also disrupting the payment ecosystem, eliminating the processors in the middle. Marwan looks for investors that have invested in companies that are solving similar/parallel problems and have had success. It’s important to look for investors that complement what you offer, so you aren’t just getting money from them; you are able to get exchange value in other ways.
How important are seed money investors?
Every round of funding is a building block to bigger funding. Each stage helps you understand more about your market – what works, what to avoid. He worked with different investors for different aspects of the business – bitcoin/ blockchain, foreign exchange, and payment processing. By working with specialty investors, he could get money and advice at the same time. Then use that as a stepping stone to get the bigger funding.
Is it important to have advisory board members involved in larger-stage companies? Did he create a board?
Yes, he’s had an informal board; he has a guy from Visa, Google, PayPal, etc. It’s important to involve people that have the know-how and expertise, get their advice and learn from their experience. He recommends staying connected with those early investors because they have that early expertise.
Does he think being in Silicon Valley makes it easier to raise money?
When you have ideas that are capital intensive, it’s much easier to get support in San Francisco because there is easy access to funds on a larger scale. There are also other cities that you can build ideas on a larger scale, like London where there is expertise around remittances and FX; but other than that, if it’s expensive to build, the odds of getting funding are better in San Francisco.
Cross-border payments are complicated; how did he start the journey?
Marwan likes the challenge of a complicated business with problems that are hard to solve for. When you solve a problem in a complicated industry, the barriers to entry are higher, the margins are higher, and the long-term potential is much greater. Lots of players try to enter in the space, and the market is compressed. Cross-border payments require a certain level of subject matter expertise; it’s a protected market and it’s a pretty sizeable opportunity compared to the domestic market.
Startups have an advantage over big companies; big companies are slow to execute. It’s much easier for a big company to buy a startup than to develop a solution from scratch. The startup competency is speed and execution. Big companies have the assets and resources.
Tell us about Align Commerce.
Align commerce focuses on global commerce, using many different rails to move money from point A to point B – wires, bank to bank, SWIFT, blockchain – whatever is the most cost-effective, efficient route. It’s all transactional, they don’t store any money and can swap in and out of any cryptocurrency; it’s completely transparent to the users.
They are in more than 60 countries. It’s easy for customers to move money by email – set up an account, link bank account and send to a business on the receiving side (the recipient needs to have an account with Align Commerce, but that’s not usually a problem as they’re receiving money). Some transactions are managed on the blockchain.
Payments usually start from an invoice, but Align Commerce doesn’t generate the invoice, they just handle the payment for it.
At this point, the conversation was expanded to the audience who posed their questions.
Do they face any licensing issues?
One of the premises of the company is that it’s important to have legal and compliance processes from the start. If you don’t have these in place, your company can’t scale. Every transaction they manage has one end in the US and the other end in some other part of the world; then, they need to make sure they are following the laws of the respective country. The US has the tightest regulation and Europe has the second tightest, so if you adhere to the standards and regulations for these two markets, you are usually covered. The use of blockchain in this space is evolving. They only use it as a transmission tool; they don’t hold the bitcoin as a currency.
Align Commerce is registered as an MSB (money services business) and they follow the procedures for international money processing as required by a global processor.
CFPB (Consumer Financial Protection Bureau) enforces things are not always clearly defined. Each state has its own set of regulations; it’s almost like working with a multitude of countries. It’s actually much different than working with Europe which is defined under one regulation. It doesn’t look like the US system is going to be simplified anytime soon; if anything, it’s becoming more complex. Hopefully, the governing bodies will find ways to simplify regulation over time. Companies have to allocate a significant amount of money to account for all these regulatory requirements.
They recently entered China. Have they experienced any currency controls or other issues?
China is going to be a bigger corridor than Europe. There are a lot of manufacturers paying invoices to China, so there is a lot of money going out of this country, but not much money going in.
How much does the Align Commerce’s service cost compared to traditional services?
Usually half the cost and half the time. Users are more interested in the experience itself.
If you think about the traditional wire experience, as a payer, you have to gather lots of information about the receiver. Then you have to figure out if you can send the money online or if it must be in person. You have to be aware of cut-off time. There will be a bunch of fees. You finally send the money, but most likely won’t have any visibility to where your money is until it gets to the destination. When the money finally hits the receiver’s account, they can’t tell which invoice has been paid, and they won’t have an easy way to know who has paid them (if they have multiple people paying them at the same time to the same account. That’s a lot of sorting to do!). There are all sorts of fees that the receiver gets hit with, and then, it has to be aligned to the accounts payable system. Align Commerce’s solution is much simpler, has the transparency, and they know who is paying them.
Most transactions happen the same day or the next through their rails. Any time it involves the US, it has to be a next-day service since it’s using ACH rails. For other transactions, it can be near real-time by using the blockchain. It doesn’t even matter what the value of the bitcoin is; so they buy/sell real-time and get in and out.
Align Commerce will tell the customer upfront what fees are being charged, and it’s straightforward – they don’t play with the spread. They are straightforward in communicating the markup they charge. Businesses like the consistency and predictability of the fees.
What markets and segments do they target?
US- to-Europe is their biggest corridor followed by Mexico, Canada and the Philippines. They target those companies with under-25 employees. Typical businesses include offshore services, Import/export companies, Wineries, galleries, etc.
Bills of Lading and Letters of Credit are a more entrenched, complicated market. It will likely be a natural evolution of their business, but that will come later.
How do they avoid money laundering?
Align Commerce pays strict attention to regulations around AML (anti-money laundering). If they didn’t, companies wouldn’t do business with them. Knowing both sides of the transaction is a core foundation of the company.
The audience is done asking questions and so Daniel picks up again:
As a startup, how do they ramp up. Do they hire before and after funding?
Before you get funding, you don’t have money and no sense of urgency to bring on new employees. However, once you have the funding, then you have to ramp up fast on hiring. So, it depends on the stage of the company. A startup will first start by hiring engineers. Post funding, the focus will turn to hiring more sales and marketing; the skill set and the type of people needed will change. The more advanced the stage of the company, the more sophisticated the needed skill set. Initially, they want to hire people that can do a lot of different things, but later on, they need people with specialized skills.
In San Francisco, the talent pool is skewed. There is too much of a demand for engineers and not enough talent, so the talent gets more expensive. Getting to Series B funding is getting harder to do because of this increased cost. Eventually, the market will have to correct itself and level out the salaries because the current trend is unsustainable.
Talent is much cheaper in other countries. However, there are other tradeoffs – for example, you have to use an expensive senior manager here to manage the lower-cost resources overseas, and it may not be the most efficient use of that resource. In addition, there are challenges with managing the distance. You get more speed and synchronization with local talent.
Wrapping it up
As a note, a characteristic of payment companies is that many elements have to be in place before your first transaction. It takes a lot of conviction to get people to start using the service because people are trusting you with their money. You need to make sure that your first customers are happy with your service and are servicing as testimonials.
To get seed funding, you have to make sure you have a solid idea and that it’s scalable and repeatable before you throw money at it. The infrastructure needs to be solid, and you have to be able to handle large volumes. Don’t over-engineer or over-hire too early.
The first customers come because of a personal relationship, and it takes a lot of trust on their part. Your first customers will be people you have relationships with, and you’ll need to hand-hold them through the process; they are your keys to success. They will help define the product. They will give you direct feedback and your product will improve as you work to make them happy. For the next set of customers, you need to find those that look similar to your first set. They will become your champions and after that, it becomes a repeatable process.