Despite the boom in online commerce, finding the right payment processor is a complex process for most software companies. Tilled founder Caleb Avery is redrawing the map for online payment facilitation—and changing the landscape of fintech in the process.

‍Most of us make purchases online without thinking much about the machinery behind each transaction. For consumers, the process is simple: Punch in your credit card number, and you’re done. But for merchants, there’s nothing simple about payment. And until now, that’s been a growing problem.

For consumers, the process is simple: Punch in your credit card number, and you’re done. But for merchants, there’s nothing simple about payment. And until now, that’s been a growing problem.

The payment facilitation model developed as the newly evolving world of online commerce demanded more flexible payment solutions. Historically, few options existed for online payment processing. In order to accept credit card payments, businesses had to sign up for their own merchant account at a bank—and the approval process took weeks. Or, merchants could spend years (and millions of dollars) building out their own payment infrastructure. 

‍Payment facilitators offered a way to circumvent that logjam. Under this framework, the PayFac itself partners with a financial institution, allowing it to apply for its own merchant ID. After approval, the facilitator can use its account to sign up sub-merchants and process their transactions. The facilitator also absorbs the administrative services and compliance requirements—and risk—for its sub-merchants. Payment facilitation revolutionized e-commerce: All a business had to do was go online and fill out an application with a PayFac platform. Approval took minutes.

Payment facilitation revolutionized e-commerce: All a business had to do was go online and fill out an application with a PayFac platform. Approval took minutes.

PayFac is a relatively recent innovation; although PayPal went public in 2002, two of the most recognizable payment processors, Stripe and Square, were both founded in 2009. Initially, “becoming a fully registered PayFac was a two year multi-million dollar process,” Tilled founder Caleb Avery says. “Most businesses that are customers of big companies like Stripe and Square and Braintree aren’t familiar with what it actually takes to operate as a fully registered payment facilitator. It’s really only in the last few years that the concept of actually becoming that payment facilitator has become much more mainstream.”

It’s really only in the last few years that the concept of actually becoming that payment facilitator has become much more mainstream.

The past five years in particular has seen a rise in vertical-specific software solutions for a variety of non-payment merchant needs, such as scheduling customer appointments. “Every single vertical has their own software solution that is offering more than just payment processing,” Avery says. “These vertical software companies are coming in and selling a scheduling tool, a payments collection tool, invoicing, employee management, payroll—all of these additional benefits aside from just payments. The real question has been, ‘How do you power integrated payments inside of these vertical-specific software solutions?’ And that question has been fundamental to the fall of these legacy processors, the rise initially of solutions like Stripe, and now the rise of alternatives to Stripe.”

The real question has been, ‘How do you power integrated payments inside of these vertical-specific software solutions?’ And that question has been fundamental to the fall of these legacy processors, the rise initially of solutions like Stripe, and now the rise of alternatives to Stripe.

Platforms like Stripe succeeded because they were able to provide payment options for vertical platforms in a matter of days, and companies were willing to sacrifice profit for convenience. And Stripe has dominated the PayFac market: The company is currently valued at $95 billion, and Stripe is used by 1.96 million active websites. But some software companies realized they could potentially bring in greater profits from payment processing than their core products, and Stripe is no longer the right choice for them.

The big shift that’s happened over the last few years has been all of these vertical software solutions realizing how much money they can make by monetizing their payments.

“The big shift that’s happened over the last few years has been all of these vertical software solutions realizing how much money they can make by monetizing their payments,” Avery says. “Toast, in the restaurant POS space, is a perfect example. They make three and a half times more money on payments than they do on their core software offering. Once you understand that economic landscape, you realize that if your competitors are just giving away all the revenue on payments, you can have an incredibly lucrative revenue stream from payment processing. What a lot of these vertical software companies are starting to do is give away the software and then earn revenue on payments. And it’s allowing them to achieve a pretty incredible scale in the distribution for their products.”

PayFac-in-a-Box solutions like Infinicept, Finix, Payrix, and Amaryllis give companies the opportunity to become PayFacs themselves, but still require a significant investment of time and capital. And, unlike PayFac platforms like Stripe, they require companies to build their own compliance teams and handle their own risk and liability—a significant hurdle even for larger companies, let alone small startups. “They took that historically two-year multimillion-dollar process and brought it down about a six-month, couple-of-hundred-thousand-dollar process. That brought down the scale that you have to have achieved in order to make the economics of becoming a PayFac viable. But the reality is, it’s still six months. It still costs a fair amount of money. And you have to build out a team to handle all the underwriting, the fraud monitoring, KYC, PCI compliance. It’s a big burden to operate as a fully registered PayFac. Even for companies that have achieved the scale where economically it could make sense, the question is, ‘Do you want to take on that overhead and that liability to become a PayFac?’”

Avery worked in the credit card processing space before he spent two years developing Tilled to address this gap. Tilled offers PayFac-as a-Service rather than PayFac-in-a-Box, and ease of use is a core value of the product. “The focus all along the way was on the ease of implementation. Before we ever wrote the first line of code, my goal was for somebody to be able to come and implement Tilled in under a week,” Avery says. As importantly—and as radically—Tilled is based on a revenue share per transaction model rather than a fee structure.

The focus all along the way was on the ease of implementation. Before we ever wrote the first line of code, my goal was for somebody to be able to come and implement Tilled in under a week.

With Tilled, businesses can be up and running in a matter of weeks, profiting off the payments they process each year with no upfront costs or extra overhead.  “From a business model perspective, when you look at the PayFac-in-a-Box landscape—those guys are offering consulting packages, plus high SaaS fees, typically $10,000 a month. We came at it from a completely different direction, where it’s all about a very simple interchange plus wholesale buy rates and then a revenue share. We give our partners the full flexibility to design the pricing models for their end customers.”

The market took notice: Tilled has raised a total of $13.15 million in funding since the company’s founding in 2019. And the PayFac market is vast and growing. It generated $2 billion in transaction revenue in 2018, and is expected to climb to $25 billion by 2025. Avery believes the secret to Tilled’s success is straightforward: “There's no cost to working with Tilled. It's a very simple revenue share concept. The combination of those two factors has driven the excitement in the market about what we've built.”

Few people understand the complex PayFac ecosystem better than Avery, and building a knowledge base is a major priority for the company. “Education is a huge component of what we’re doing, and it’s a big part of our strategy. It’s less about building up a huge salesforce, and more about getting the word out there through conversation and letting the world know about the paradigm we believe in. We’ll come in and talk with our partners and our customers and educate them on the landscape and the options that are available to them to help them figure out what the right option is for their business.”