The Fintech Phenomenon is rarely about doing something entirely new. It’s about doing things in a new way that better fits the needs of the target market. The fintech model also enables the provider to reach underserved market segments.

Lending is, of course, the core offering of banks. But between their legacy processes, underwriting requirements, compliance demands, and more, they simply aren’t nimble enough to serve new segments in our evolving economy.

And the banking crisis of 2008 left them even more risk averse.

That’s left small business lending wide open to fintechs.

Case in point: the online seller, that small business that makes a product or buys wholesale and sells direct to customers through their own website and, for most, through marketplaces like Amazon and Shopify.

Cash Flow is Everything

Here’s where success can kill a business. If their online store and what they’re selling catches on, they’ve got a tiger by the tail. They’ve already invested their own money to get the store off the ground. But they have to keep buying inventory in order to fulfill orders. Where’s the capital to pay for that inventory to come from in order to do that?

As the founder of multiple small businesses, I can tell you that cash flow management is a daily concern. It’s no different for these Amazon sellers because Amazon pays out every two weeks and it may take a month or more for the funds from some transactions to hit the seller’s bank account. With cash flow “everything” for the SMB, funding business growth is a major challenge. To keep up, you have to reinvest to feed the beast. You take all your earnings and put them into new inventory.

That’s where our guest for this episode comes in. Keith Smith is co-founder and CEO of Payability, a firm that has loaned over $2.5B since 2015 to Amazon and Shopify sellers.

Data Enables the Model

Payability, sitting between the seller and the marketplace, sees massive data sets that help it and its algorithms determine risk. Given the volume of data, the myriad sources of these signals, it’s impossible for humans to do the underwriting. Machine learning can examine far more signals than a human can ever handle. So, as Keith puts it, Payability’s staff “trains the robots” to help the company accurately price financing for those who would otherwise be locked out this kind of business.

The Money Supply Chain

In the business of selling money, you have to have access to it. You have to be part of the money supply chain.

Drastic changes in the finance ecosystem have taken place since 2008. With traditional banks stepping back from small business lending, fintechs have entered the money supply chain, as the new distributor of funds, enabled by their ML-based underwriting and risk models.

The fintech underwriting sophistication has been a boon to traditional sources of financing, both banks and institutional investors. They still sell money; they just do it through the new fintech channel.

The COVID Accelerator

As a funder of online businesses that have benefited from the COVID-driven shift to e-commerce, Payability has prospered in 2020. As Keith put it “we’ve seen four or five years of growth out of a single year.”

In Glenbrook’s payments consulting work, our discussions with merchants, billers, sellers, and their technology parters have included this common refrain. COVID has hurt many but others, able to respond to the challenges and opportunities of the digital shift, have prospered.

Find more podcasts and commentary at Glenbrook’s Payments on Fire® site, check out our blog Payments Views, and subscribe to the best payments industry news feed, Payments News. Read our COVID-19 Payments Industry eBook.

 

George Peabody:

Welcome to Payments on Fire. A podcast from Glenbrook Partners about the payments industry, how it works, and trends in its evolution. I’m George Peabody, partner at Glenbrook and host of Payments on Fire. Great to have you here. Welcome to 2021. Welcome back to previous listeners. In 2021, we are absolutely going to increase our focus on fintechs and the fintechs phenomenon; what they do, who they are, and what makes them different. One thing I’ll say, though, is the fintech phenomenon is rarely about doing something entirely new. It’s about doing things in a new way that better fits the needs of the target market. The target market may in of itself be new. In many cases, the fintech model, and we’ll get to that shortly, enables the provider to reach underserved market segments and lending, of course, is the core proposition, the core offering of banks, but between their legacy processes, underwriting requirements, compliance demands, and more, they’re simply not very nimble. And they’re not nimble enough to serve new segments in this economy.

George Peabody:

So that’s left, particularly small businesses, and I have a lot of friends who operate small businesses, really turning towards fintechs as sources of capital and operating funds. So, case in point, and this case in point is what we’re talking about today, is the online seller. That small business that makes a product or buys wholesale and sells direct to customers through their own website [inaudible 00:01:38] through marketplaces like Amazon or Shopify. And here’s where success can kill a business because if their online store and what they’re selling catches on, they’re going to tiger by the tail. They’ve already spent a bunch of money to get their site up and running, get their store off the ground, but they got to keep feeding the beast with more inventory to sell. And if they don’t have the capital for that inventory, their other sellers are going to crush them.

George Peabody:

So having been myself a founder of multiple small businesses and I can tell you that cash flow management is a daily concern. It’s no different for these Amazon sellers. I thought this was particularly interesting as I was looking into this because Amazon itself pays out every two weeks. And it may take a month or more for some funds to actually make it all the way to the seller’s bank. Well, that’s cash flow. That’s a cash flow management issue. So funding business growth with this kind of thing is a major challenge. So that’s where our guest for this episode comes in. Keith Smith is co-founder and CEO of Payability, a firm that’s loaned over, big number, two and a half billion dollars since 2015 to these Amazon and Shopify sellers. So welcome, Keith. Glad to have you here.

Keith Smith:

Thank you, George. Thanks for having me.

George Peabody:

So, Keith, let’s just set the stage a bit more. Fill in the gaps from my introduction. What’s the Payability elevator pitch?

Keith Smith:

So we are all about providing both capital as well as payment solutions and very specifically targeted to e-commerce sellers. And those are the sellers exactly that you’re talking about. They are typically small businesses. They can range in monthly sales. Anything from $2,000 a month to $2 million a month. So there’s a wide range of sales volume. Some of them have been selling for four or five or more years. Many of them have been selling for two or three or four months. And so it’s a wide range of the small businesses, but they are selling their wares primarily through e-commerce channels. Of course, two of the big channels that we focus on in the U.S., along with others, is Amazon and Shopify. And those are great examples of the kinds of channels that these e-commerce sellers sell through.

Keith Smith:

And they have the exact problem that you’re talking about. They need cash flow. They need daily cash flow in order to be able to keep their business to float, but they also need capital to be able to buy inventory. And depending on which platform they’re selling on, they may need capital to buy advertising. And that’s where we come in. We provide very specifically specialized financing solutions that are really meant to be tailored for these types of sellers and attempting to be as friction-free as possible. Getting the friction out of the way for the sellers so that they can continue to focus on growing their business. And don’t have to spend so much time thinking about how to raise money.

George Peabody:

So, but just money is what we’re talking about. How do you get paid? What’s the flow of funds here? How do you insert yourself into the … Or do you insert yourself directly into the, I assume you do, payables that are coming out of the marketplace?

Keith Smith:

That’s right. And in most cases that’s right. But the simplest version of this is that we are providing capital to our customers and charging a fee for that. We aren’t actually a lender and that’s more of a regulatory designation than anything else, but we don’t actually charge interest rates, but instead we charge what’s called a discount rate. So we basically charge a fee for the money that we are providing to our sellers. And we have two types of capital and two primary finance products. One that allows for that cash flow that we were talking about. It’s called Instant Access. It allows instant access to the sales that you’ve made before you gotten paid from the marketplace or the channel that you happen to be selling through. And so daily payments based on yesterday’s sales, and it allows you to be able to then have predictable cash flow.

Keith Smith:

And then the other finance product is a product called Instant Advance. And that product is really meant more for customers to be able to get access to be able to buy more inventory, to be able to purchase advertising. It’s meant to be relatively short duration. It’s meant to kind of match the duration or the time cycle that it takes to buy inventory, get that inventory, and then sell it. And so relatively short duration, but it’s meant then to be recycled and done over and over and over again to be able to continue to provide our customers then with that capital they need to continue to buy more inventory, grow their business, buy more advertising, be able to continue to scale their business.

George Peabody:

In both products, you’re taking a percentage of the daily funding product, you’re taking your percentage of the sale.

Keith Smith:

That’s right. That’s right.

George Peabody:

And you’re getting paid first by Amazon?

Keith Smith:

So we pay our customers first, and then we wait the standard payment terms. And it’s interesting because most of these marketplaces that you pointed out, they have a two week cycle. Many of them have to have a two week payment cycle, but that doesn’t necessarily mean that everything that you sold in that two week period is going to get paid out at the end of that two week period. Oftentimes there are limiters in place, or there are just holdbacks that are happening; if you’re scaling a lot, if you have a new product that you’re sailing, if may be your customer reviews weren’t quite as good as they were in the prior two week period. So a whole bunch of things that can trigger a marketplace to say, “You know what? We’re going to hold for another two weeks and maybe we’ll pay you the next time, or maybe the next time.”

Keith Smith:

So many times it ends up being four weeks or six weeks. And one of the biggest challenges is that you just don’t know, as a seller, what is going to be. Is it going to be two weeks? Is it going to be four weeks? Is it going to be six weeks? And so we smooth that. We make it predictable. We solve that problem for customers. And even if they’re getting paid consistently every two weeks, shortening that to less than a 24 hour cycle makes a significant impact in terms of these small businesses having access to that lifeblood of capital to continue to make sure that they can grow and scale their business.

George Peabody:

Yeah. Particularly in I would think with segments that are seasonal in nature. They have some bursting needs, right? So if I’m selling gifts in Q4, I’m going to have to buy a lot of inventory and I’ll probably have to have bought it in Q3 in many cases.

Keith Smith:

Exactly. Yep. Exactly. And if you’re selling barbecues, you’re going to have a very different kind of seasonality. And so, yeah. And many of our sellers they will sell barbecues in the summer time and they’ll sell toys in the winter time in order to be able to take advantage of that seasonality. But in each of those cases, it’s all about how do I get access to capital so that I can buy the inventory to meet the demand of these particular customers.

George Peabody:

Let me ask you about your business now and not so much what you do, but more about what enabled you to get into this business in the first place. What are the business model attributes and or the technology attributes or capabilities that are available to you that helped you get into this to fill this particular need?

Keith Smith:

It’s a really insightful question because this is not a business we could have started 10 or 15 years ago. There really needed to be an alignment of a number of banks. The biggest part of that is the massive new data sets that are available in this kind of modern supply chain. And these massive new data sets are available from marketplaces, retailers, but also from a number of other companies that are kind of in that supply chain ecosystem. And they have massive data sets and the signals are there to be able to then better understand what is the risk for any particular customer. But in order to be able to understand those signals, you can’t have a human processing all of that data. It’s just too big, too massive and too much comparative analysis between various different data sets. And so it requires a machine learning kind of approach to looking at and analyzing that big data, so.

Keith Smith:

So We feel like a big part of our job, at least as it relates to the risk analysis and risk model part of our business, is to try to understand that as best we can as humans and then train the robots to be able to do a better job than we do at being able to do that risk assessment. And that way we can build really intelligent algorithms that can look at far more signals than a human can ever look at. And that allows us to be able to better risk assess, and then ultimately to be able to much more accurately price financing for a whole segment of customers who have largely been locked out of getting access to this kind of capital. A traditional bank looks at an online only business and says, “Wow. You have no assets. You’re cash flow only. I don’t understand the business. I can’t possibly risk access.” And that is true for the vast majority of kind of legacy risk models. They wouldn’t know what to do with this type of customer, but this customer is the lifeblood of the modern economy.

Keith Smith:

It’s certainly the lifeblood of the modern supply chain. And, in 2020, it became a lifeblood to many of us as consumers sitting when we’re locked at home. And so thankfully there is this ecosystem that is in existence now, and these sellers have ways to be able to get access to capital so they can meet that inventory demand.

George Peabody:

So, let’s baby-step this a little bit more. Tell me about the data sources you use when you’re onboarding a seller.

Keith Smith:

So one of the things that we don’t use, I think that’s always kind of helpful, is we don’t rely much on self reported data from our customers. And that means that we try to go to the source of truth. And that is not a disparagement of our customers. We absolutely love our customers, but oftentimes books and records and some of those things that you may take for granted for … Large companies are just not quite up to speed when you’re talking about smaller companies. And so it’s important for us to be able to go to the source of truth. And that allows for a couple of things. One is it gives us significantly more accurate data to be able to then base our risk assessment on, but it also has a nice impact for our customers in that we aren’t asking them for all of the information that we are using in order to be able to risk assess.

Keith Smith:

We are asking them to connect their API to the marketplace so that we can then allow our robots to be able to access that information and be able to do that risk assessment on our behalf.

George Peabody:

So the marketplace, and basically their sales history is the source of truth?

Keith Smith:

That’s right. That’s right. And when a seller signs up for Payability that’s one of the first things that they do. Is they connect to their various marketplaces that they sell through and allows us to be able to look at that data. And it gives us this interesting insight then into each of our sellers, because we’re not just looking at then that amount of data or those insights around those transactions going forward, but we get to see the entire history of what is the nature and the relationship between this seller and the marketplace or platform that they’re selling on. And that gives us great insights. And then we can say yes to far more people than we could have otherwise.

George Peabody:

So, therefore, you’re really not doing businesses with sellers who just started up a month or two ago?

Keith Smith:

We can actually. Yeah.

George Peabody:

Really?

Keith Smith:

Yeah. We can work with sellers that have only been selling for a very short period of time. So even a seller that’s just been selling for a few months. One of the things that we’ve been able to uncover, as part of our assessing of these various signals, is that we can tell even very early on, do they look like the kind of seller who is going to reach [inaudible 00:12:58] and actually start to build a real sustainable profitable business, or do they look like the kind of seller who is not going to? And so we can start to make some of those determinations very, very early. And it’s our goal to try to start with our customers early when they’re very, very small and then we want to grow with them. And so we love it when we have a success story. When a company can start with us doing $2,000 a month and in short order could be doing 10 times that amount, and we can get to see and, and help fund that growth and be a good partner to them as they’re growing.

George Peabody:

Are there particular types of sellers that provide you with positive signals versus other … I mean, is it got to do with what they sell?

Keith Smith:

To some extent. And more so in 2020 interestingly than at any other prior period. And that’s to a large degree just because there were essential and not essential items. That wasn’t something that was in all of our vocabulary prior to 2020. And another word there wasn’t in our vocabulary is PPE and the idea that this personal protective equipment, all of a sudden, is something that, in early days, there was a lot of counterfeits. And so a lot of these platforms that we work with and work with customers selling them, were very aggressive about terminating relationships with e-commerce sellers that weren’t selling appropriate PPE. And so that had to change our risk assessment. But to really answer the core question is that we view the world where there are, broadly speaking, three types of e-commerce sellers.

Keith Smith:

There are resellers. And these are folks that have relationships with their suppliers or manufacturers, but they don’t necessarily have exclusive rights to those products, but they resell those products and they add a lot of value to the supply chain. There are drug shippers who are similar to resellers, except they never actually even touch the product. And they are much harder to risk assess because it’s a more scalable, in some ways, business model in supply chain, but it’s also a much more fragile supply chain. And it’s one where we can get ourselves into trouble if we’re advancing dollars for somebody who doesn’t have a robust supply chain. And then we have proprietary sellers. And proprietary sellers can range from a reseller that has exclusive rights to sell a particular product, or even a brand that actually owns that product themselves.

Keith Smith:

So that’s kind of how we view the world. What I think makes us really unique is that we have risk models and risk assessment models where we can say yes to folks in all three of those camps. And that’s hard to do. Very hard to be able to risk assess some of those groups, easier to risk assess others. Because of where we sit in the ecosystem, because of the access of the data that our customers grant us access to, then we can say yes to folks in all three of those [inaudible 00:15:37].

George Peabody:

What’s your source of capital? You’ve got a lot to put out there too; making these commitments to these sellers.

Keith Smith:

Yes. If you’re going to be in the business of selling money, you have to have access to money. And we are no different than that. And so what’s interesting is that the finance ecosystem has changed very significantly after 2008. And that is a point in time where the banks, to a large degree, decided that they didn’t necessarily want to be in the business of funding small businesses anymore, directly anyway, and so then this ecosystem built up of both banks and non-bank entities, providing capital to innovative fintechs, like ourselves, to be able to then turn around, who can then build intelligent risk models … And so those banks and non-bank entities, instead of looking for small business customers themselves, they’re now looking to be able to put their capital to work by partnering with fintechs that have innovative, good proven risk models so that we can go out and we can originate and make those risk assessments and be able to partner with those banks. So the capital is still, to a large degree, coming from the same places. It is just being delivered with a very different supply chain than it was prior to 2008.

George Peabody:

New ways to access capital, new players, new technology, APIs, the web, and if you say the source of truth, the real data that’s coming out of the marketplace, as the key enablers for your business, nevermind the insight that there was a need here in the first place.

Keith Smith:

That’s right. By the way, that’s the other piece of what allowed us to be able to do this now is that there is a massive and growing ecosystem of e-commerce sellers that is largely underserved as it relates to their financing needs. And that continues to be the case even today.

George Peabody:

No doubt. The skepticism of traditional banks about e-commerce remains pretty high. What occurs to us at Glenbrook, as you know, we see a lot of entities out there who have access to the data that you’re talking about and who then say, “I’ve got the same perfect data as well.” I’m talking about payment service providers like Stripe and Square who see that volume, who see that sales data, and they themselves have gone into providing … Well, Square Capital is a significant contributor to Square’s revenues today. What’s your defensive mode? [inaudible 00:17:57] think Shopify and Amazon would see this kind of flow that their sellers have got and say, “Hey, I could be lending to these guys too.”

Keith Smith:

The way we think about this is from the perspective of our customers. And what our customers tell us is this is that when they become a multi-channel e-commerce seller … And almost all of them are either already a multi-channel e-commerce seller or want to be, and that means that they start selling on one channel and they realize they don’t want to have all their eggs in one basket once they get to a certain size of maturity. So it makes sense then to expand. And a very typical kind of expansion path would be, I start selling as an Amazon seller and I build up a business there. I figure out my inventory. I go out figure out my supply chain. I figure out my fulfillment chain. And then I decide that I’m going to go and start my own website. And so I need a website built.

Keith Smith:

And so Shopify is the leading platform for website builder. And so then I go and create my own website. And so if I’m going to now get financing from Amazon, for my Amazon sales, and I’m going to get financing from Shopify, for my Shopify sales, I all of a sudden have this siloed financing solution for a business that is not at all siloed. I have the same sources of inventory, the same supply chain that I use for all of these. Why do I have to have these siloed finance solutions? So what our customers tell us is that the multi-channel e-commerce seller needs a multichannel finance solution. And so we are that agnostic multichannel finance solution. We can give you credit for your sales coming from Walmart, from Amazon, from Shopify and 20 other marketplaces and platforms. And that allows you then to be able to have a single source of capital. You already have a single source of inventory. You already have shared systems across all these channels for other things. It makes sense to have money to be in the same bucket.

George Peabody:

What kind of data are you providing back to your customers besides money? Are you doing any forecasting for them? You clearly have a converged report on what the cost of their money is. How are you flowing it back into their accounting systems? Talk to me about the data that comes from Payability to each of your sellers.

Keith Smith:

We provide a lot of data and a lot of reporting. What we are endeavoring to do better at is to provide better insights. And so some of those insights around giving our customers a better sense of, “Hey, this is how you compare to other similarly situated sellers. These are things that would be a good path to success. These are things you probably shouldn’t do because they lead to bad outcomes.” Those are the kinds of insights we want to be able to share with our customers. We’ve been a bit limited in doing that historically for two reasons. One is we’re a startup limited resources. We have to kind of pick [inaudible 00:20:41] which things we focus on. And we are being able to expand that as we go along and as we get bigger and bigger, but that hasn’t been an area that we’ve been able to focus on a lot, but a lot of that restriction comes from the restrictions frankly that we have around the data that we access from these various marketplaces.

Keith Smith:

It is our customer’s data, but it often times comes with some limitations from the platform that is providing the API where we are pulling that data in. So some of that limits us in terms of our ability to be able to say, “Hey, here’s what other sellers look like that are just like you.” Because sometimes that will limit the terms and conditions from the various platforms. But with that said, we try to be a consultative partner to our customers, not just a source of capital. And that’s part of our longterm vision of providing the capital as well as the tools. It’s not enough to just give the small businesses a bucket of money, but giving them tools to be able to … How to spend that, how best to spend that, where to spend it, in order to be able to maximize their return is the kind of insight that we have and the kind of insight that we will be sharing more and more with our [crosstalk 00:21:43].

George Peabody:

Yeah. And this makes you a better partner because it makes them a stronger customer.

Keith Smith:

We are truly aligned in that. When our customers do well, we do well. When they don’t do well, we don’t do well. There’s never a mix of those two scenarios.

George Peabody:

Got it. Well, Keith, you mentioned a little bit about what the impact of COVID-19 has been, but if you could add some more color to that besides PPE counterfeit, which I know was a big problem, certainly in Q2, what was the impact of this pandemic on your business? Did all boats rise or was it just certain segments that have done well? Or did you have some surprises?

Keith Smith:

Lots of surprises. And most boats rose with the tide. There’s an obvious just gut punched to civilization with this situation. So there was nothing gleeful or happy about it in the slightest. With that said, there was a significant shift in consumer behavior and consumer demand away from brick and mortar towards e-commerce for all the obvious reasons, and so that just meant that there was a significant increase in demand for our customers and for their inventory, and by proxy, that just means that they then have need for more capitals. So it was a tailwind to our business that demand shift from brick and mortar to e-commerce. We think that is a shift that … I mean, certainly it’s a shift that’s been going on for years, and it was accelerated in 2020. We don’t think it’s going back.

Keith Smith:

We kind of got four, maybe five years of growth in e-commerce out of a single year. And we think we will continue to grow from that new foundation as we go forward. Speaking from my own personal habits, once I discovered e-commerce, it was very, very difficult to get me to go back into a store, pandemic or not. And so not everybody shares my reticence to walk into a store I recognize, but that convenience is something that we see that a lot more consumers have taken advantage of. They’ve now established relationships with brands that they now know and can access online. And we think that is going to continue, and we will continue to see until there is … Some point long in the future there’s some sort of balancing between brick and mortar and e-commerce, but at this point in time, e-commerce continues to cannibalize brick and mortar.

George Peabody:

Yeah. Well, to that point, at Glenbrook, our assessment is that this is a permanent forcing function towards the e-commerce channel. Yes. We’re finally freed from our lockdowns and feel comfortable about going to stores and mingling and large groups of people. Yeah. The point of sale of domain, as we call it, will return to some extent, but it’s not going to come back to the pre pandemic levels for sure. Whether it’s 5%, 10, 20%, no one knows yet, but absolutely your sellers, and I guess your business, have got some permanent tailwinds in place. That remark that you just made about seeing four or five years for growth in a single year is pretty remarkable. You must have had some pretty interesting conversations with your financing sources.

Keith Smith:

Very much so. Yes. And at the same time, there was also a lot of questions, especially in March-April timeframe. “What’s going to happen to supply chains? Will we be funding customers that now can no longer get access to their products at all because the supply chains are shut down?” And that’s only half the problem. The other half of the problem was the fulfillment chain. “Now that I’m an e-commerce seller and I have acquired my product, how do I get it in the hands of my customer?” If I was relying on, as an example, Amazon fulfillment services previously, and then all of a sudden Amazon, just because the crush of demand said, “Hey, we need to focus FBA resources just on essential products.” And now all of a sudden, you’re in the middle of a pandemic, you’re a small business, you’re classically underfunded.

Keith Smith:

As most small businesses are, and suddenly you’re working remotely and you need to figure out an entire new fulfillment chain that’s probably going to be temporary because your primary fulfillment provider is probably going to come back in three or four months. Which did generally happen, but it was a lot of disruption. So our customers, while there was a tailwind to their business, they went through the wringer this year. It was a tough year. It was a tough year on everybody. I don’t mean to call them out, especially as different from the rest but it was a difficult year, even for the companies that did well to be able to survive and just kind of managing business, let alone build and grow through this period.

George Peabody:

Well, you must’ve been adjusting your risk models on the fly during all of these.

Keith Smith:

Very quickly. Yes. Yeah. When you train algorithms based on historical norms, and then you have a once in 100 years event that comes along, that the algorithms are not ready for that. And so we had to put the human fingers on the scale, and I guess the good news out of all of that, the humans are still needed at least for now. So that’s the good news.

George Peabody:

Well, on that note, Keith, thank you very much. Really appreciate the discussion and good luck in your business.

Keith Smith:

Absolutely. Thanks for having me, George.