There’s a battle taking place at the top of the digital payments ecosystem. The winner (or winners) will become the gateway to trillions of dollars worth of economic activity in the decades ahead and one of the leading candidates may surprise you.
Everyone with an internet connection has heard of PayPal. Most technology early adopters have heard of Braintree and its subsidiary Venmo, as well as to a lesser extent Stripe and Authorize.net – or at worst unknowingly used their platforms. But few have heard of YapStone, the company behind RentPayment and ParishPay, and also the second-largest digital payments company by revenue, according to its founder and Chairman Tom Villante.
While Braintree and its ilk rose by wisely targeting the startup and developer community, YapStone has been quietly establishing itself as an enterprise player in the real estate, faith-based tithing, and nonprofit sectors. The company creates end-to-end solutions dedicated to these specific verticals. For example, PayPal is hardly set up to verify the authenticity of a property owner, but YapStone has built property record integrations and uses machine learning and social data to validate its new real estate merchant accounts. Similar category-specific wrinkles exist in the tithing and nonprofit verticals.
The 13-year-old company will generate nearly $100 million in revenue in 2013, up more than 250 percent year-over-year, and has been profitable for 28 consecutive quarters, according to Villante. That’s only a fraction of PayPal’s 2013 revenue but more than twice Braintree’s, yet it’s hardly a household name.
With Paypal announcing the official close of its Braintree acquisition late last week, I caught up with Villante to discuss what impact the deal could have on his company and the industry, as well as what he foresees in the year ahead.
Like most observers, Villante believes we’ve just scratched the surface in terms of the impact that mobility will have on payments. From that perspective, he describes Paypal’s acquisition of Braintree, the company that powers payments for hot technology companies like Uber, HotelTonight, and TaskRabbit, and Braintree’s acquisition of consumer-facing mobile wallet service Venmo before that, as savvy moves.
“I think it’s good for PayPal, and good for the market,” he says. “[PayPal CEO David Marcus] is a visionary and is shaking up things there. He’s been smart to go out and buying things they have failed to build. And I think this deal will have a major impact on their questionable reputation for customer service and among the developer community. I’m definitely more worried about PayPal than I was. I didn’t used to think about them, but now I do.”
In the same breath, Villante says that Braintree sold too early and missed out on a ton of the upside available as the undisputed consumer-facing mobile payments leader, leaving “some value on the table.”
Mobile is an area where YapStone has lagged behind and where Villante and CEO Matt Golis plan to dedicate additional resources in 2014. With nearly 50 percent of all payments coming into the company between the first and fifth of each month (aka, rent time) via Venmo, building a competing or complementary mobile payment solution seems like an obvious next move.
“People say Braintree, Stripe, and Dwolla in the same sentence,” Villante says. “We’re not in that sentence.”
YapStone has a 120-person team split between Walnut Creek and Santa Monica, and in the year ahead plans to hire more technical talent. “The biggest driver for us going forward is still product and technology,” Villante says. ”We just added a VP of Payment Ops from Square and we plan to hire more senior talent this year.”
When asked what he thinks will be the biggest trend in the payments category over the next 12 to 18 months, Villante replied “data analytics.” For YapStone, which processes a significant number of rent and vacation rental payments, that will mean extracting insights like when a person moves or has changes in their disposable income and using this knowledge to deliver targeted advertising and offers. The company handles 30 to 50 percent of the monthly take-home pay of millions of consumers, giving the company keen insight into their overall financial universe.
Villante expects to see a similar trend unfold industry-wide. Major credit card companies have been notorious for selling customer spending data to advertisers. Digital payments companies will soon get into the game. Villante believes that as long as the data is anonymized, and the sale handled ethically, then YapStone and other digital payments companies have an opportunity to add value to their customers. They also have the opportunity to rub a ton of people the wrong way.
There’s hardly a bigger trend in payments than bitcoin, the virtual, crypto-currency that seems to have gone from zero to The Beatles in terms of awareness and buzz over the last 12 months. Like PayPal and other industry leaders, YapStone is looking at how to incorporate the futuristic payment mechanism, but is moving cautiously.
“I would love to be able to accept bitcoin,” Villante says. “It makes so much sense from an interchange and [foreign exchange] conversion perspective. It just needs a bit more time to mature.”
PayPal’s blockbuster Braintree acquisition is unlikely to be the last big deal, Villante says, predicting more consolidation in the 24 months ahead. He also expects to see Google and Facebook finally leverage their considerable network effects to jump into the payments race.
“It’s not really about the direct revenue opportunity for them, as much as it is about the fact that they can get more credit cards on file and turn that into purchase behavior insights that will feed their advertising business,” he says.
In payments, scale is one of the biggest advantages a company can have. With a vertical rather than horizontal strategy, YapStone has taken a different path than PayPal or Braintree (or even Stripe and Authorize.net). The company is also the payment processor in nearly all instances, allowing it to make several dollars per transaction, where Braintree and others act as merely a gateway and collect pennies.
The vertical strategy has allowed YapStone to grow largely unchallenged. Along the way, it developed a number of proprietary systems like intelligent merchant on-boarding, escrow services, and risk analytics that will serve the company well as it broadens its focus and creates more of a consumer-facing platform.
Making the leap from a vertical-focused enterprise player to a mass-market digital payments leader is no small order. YapStone surely won’t benefit from the same lack of competition that it’s faced in its current sectors of choice. Rather, Villante’s company is now wading toward the deep dark waters where all manner of predators lurk. It’s not just PayPal, and its $70 billion parent company eBay, that the company will have to contend with, but, increasingly, Mastercard and Visa. Don’t sleep on Amazon, Google, Facebook, and Apple either. That’s six companies with market caps measured in the hundreds of billions of dollars.
“I think there will be a few winners in the payments space, but there’s a shakeout ahead,” Villante says. “There’s definitely a lot of room left to innovate. We’re just at the tip of the iceberg.”
That shakeout he mentions may be much more than that. This is not a race to build a mere billion-dollar company. The digital payments winner will be a $100 billion or maybe one day even a trillion-dollar company. We’re several years from knowing how this plays out, but the category leaders are already marking their territory – and presumably sharpening their blades.
[Disclosure: YapStone investor Accel Partners is also an investor in PandoDaily.]