Finance

A partner at Bain Capital Ventures explains why payments companies need to do more than just move money to survive

  • Matt Harris is a partner at Bain Capital Ventures, the venture investing arm of Boston-based Bain Capital. 
  • Harris sees most of the innovation in payments coming from software companies that pair other products with payments. 
  • Fintech is putting pressure on some of the traditional revenue streams in financial services, like fees.
  • Harris thinks there’s still value in the risk management functions like identity verification and fraud monitoring, and that payments won’t be free any time soon.
  • We spoke to investors at Andreessen Horowitz,Bain Capital Ventures, Citi Ventures, and Insight Partners about where they see the next innovations and opportunities in payments tech. 
  • Click here to see what other VCs are looking out for in the payments space.

Matt Harris, a partner at Bain Capital Ventures, thinks payments companies need to do more to keep market share, and why it’s hard to imagine a world where payments come free.

Harris has led investments in fintechs like robo-adviser Acorns, bill-pay software startup AvidXchange, and payments platform Flywire.

Payments companies have already been snapping up ways to expand their services. Earlier this week, payments giant PayPal said it plans to buy Honey, a startup that makes browser shopping add-ons for its customers, for $4 billion, which would be PayPal’s biggest buy ever. 

Innovation in solving B2B problems 

“I think most of the companies that are taking market share in payments are actually what we would think of as software companies, not really payments companies at all,” Harris told Business Insider.

“They’re solving all sorts of problems for their B2B customers, and then integrating payments into that. That’s the most dynamic part of payments right now,” Harris said.

In general, B2B payments have been relatively slow to digitize, especially compared with transfers that happen between consumers. On the legacy player side, Mastercard recently launched a Mastercard Track service that looks to simplify and digitize business-to-business payments.

Then, there are companies that enable those software companies to process payments payments, Harris said.

“I think the first company to really capitalize on that fully has been Stripe, embedding their payments functionality with developers and all sorts of different software companies,” said Harris.

Patrick Collison stripe ceo

Patrick Collison, CEO of Stripe, which was valued at $35 billion in September.
Reuters/Albert Gea

To be sure, only offering payments could limit a company’s growth, and makes it hard to establish what some call a “moat,” or, differentiating services and products that keep the competition at bay.

The likes of Stripe and Square have built strong customer bases by facilitating online and in-person payments. Though both have launched additional products, like loans for small businesses, payroll services, and fraud monitoring.

“There aren’t a lot of companies who are content with doing only one thing these days,” said Harris.

Small business lender Kabbage, for one, just added payments on top of their existing credit offerings. 

Read more: SoftBank-backed small-business lending startup Kabbage is moving into payments. Its execs explain why combining the 2 services makes sense.

“The vast majority of payments acceptance companies over time have sought to be as horizontal as possible,” Harris said. Horizontal payments companies — meaning industry-agnostic — tended to serve more than one industry, but didn’t offer much more than transaction processing.

“I think they’re actually kind of in trouble as a result of that, because customers of any stripe, as it were, used to buy payments acceptance services from someone who showed up at the door,” said Harris. 

In the past, payments were just a commodity, and providers competed on fees and rates. Today, there are software companies offering payments as part of a larger suite of services, which makes it hard for a payments-only company to compete.

“Imagine a florist who runs their business on florist software, and is managing their inventory and their purchasing of roses and their payroll and their staffing, and then that software also offers payments. The next time that person comes to the door, they’re not going to switch,” Harris said.

Harris started his career at Bain before leaving to start his own venture firm, Village Ventures, in 2000. He returned to BCV, the venture arm of Boston-based Bain Capital,  as a partner in 2012. 

Moving money will still be a ‘magic trick’ 

“We do live in a world where anything touched by technology is getting cheaper,” Harris said. However, he said, payments processing giants like Visa and Mastercard set rates on things like interchange fees (fees that merchants are charged when customers use credit cards to pay), and they have little incentive to lower them.

Legislators have put some pressure on the payments processing value chain. As part of the 2010 Dodd-Frank Wall Street reform law, the Durbin Amendment limits the fees charged to retailers for debit card processing.

Still, Harris sees stickiness to the cost of moving money.

“It’s kind of a magic trick. It’s not the money movement that’s expensive,” said Harris. “It’s the fact that you walk into a store, they don’t know you, and you walk out with $100 worth of things.”

“That little plastic rectangle or phone enables a retailer to have full confidence that they’re going to get paid. I think that’s a valuable function,” said Harris.

Many fintechs boast fee transparency and low or no-cost services. However, identity verification and fraud monitoring functions are still vital, and there are costs associated with them.

“I buy off on the idea that everything should be free over time, but when I start thinking about how that would happen, I get stuck. Money movement is not a neutral activity,” said Harris.

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