Payments, Credit and Vertical SaaS with Matt Brown of Matrix Partners

Overview

Matt Brown is a venture capitalist and Partner at Matrix Partners.

Matt is a founder and operator turned investor, having started two software companies, both backed by Matrix, and then led product for AfterPay in the US in the lead-up to its acquisition by Square, now Block.

Matt’s second company, Bonsai, is a vertical SaaS company for micro businesses which evolved from a pure software company into a fintech through the incorporation of financial products, before embedded finance was a household term.

Matt is strategic and thoughtful, writing regularly on fintech market dynamics, with a specific focus on payments, credit and vertical SaaS.

In this conversation, we discuss Matt’s approach to seed and A-stage investing, BNPL and the implications for digital commerce more broadly, Matt's analysis of payments market dynamics, opportunities for early-stage fintechs in an increasingly saturated market and more.

Key Points

We've pulled out the key points from the conversation here. Full transcript below:

Matrix Partners’ approach

Matrix Partners is structured around a small number of investors, 10 in total, each with domain expertise, usually former founders or operators. Each partner generally invests in their domain, doing 1-3 deals per year.

Buy Now Pay Later (BNPL)

Afterpay was an early player in the BNPL space, starting in Australia in 2014 and expanding to the US in 2018. At that time, Affirm was focused on infrequent, high value purchases, and Afterpay (and others) pioneered BNPL for lower value, higher frequency categories like fashion and beauty.

BNPL costs more to merchants than card payments but generally leads to higher sales conversion of website visitors and increased order value per customer. As such, BNPL is a win-win product, with merchants and consumers both benefiting.

Afterpay and other BNPL providers experienced rabid consumer demand for their product. Merchants that offered this payment option, especially in the early years of BNPL, experienced significant uplifts in sales.

As a result of the BNPL model, where the product is distributed at the point of sale via merchant websites, the CAC for BNPL companies is extremely low (exclusive of brand marketing commonly undertaken to raise brand awareness).

Based on Afterpay's analysis, there was no evidence of higher usage of BNPL by lower credit score/lower socioeconomic shoppers versus other customer types.

The broader payments market

The payments space has become increasingly competitive as disruptors like Stripe and Adyen have achieved scale and continue to grow. Card volumes have grown meaningfully in recent years, but the number of firms taking a cut of the interchange pool have increased as well. As a result, it’s now very difficult to build a business based exclusively on interchange. Instead, adjacent/complementary products are increasingly important, favoring models like vertical SaaS and embedded credit and insurance providers.

The characteristics of BNPL (win/win, point of sale distribution, low/zero CAC) can be applied to other products distributed at point of sale, including other payment and credit products, insurance and more.

As a result of competition in the payments space, maturing fintech infrastructure, and more players taking a cut of each interchange transaction, we’re seeing a convergence of fintech companies, including payments providers and neobanks that are adding SaaS/subscription services, and vertical SaaS companies that are adding financial products. The increasing need for products adjacent to payments and banking will drive demand for more fintech infrastructure, including embedded credit, insurance and more.

Most important founder skills

One of the most important strengths a founder/company can have right now at the early stage is insight into distribution for the particular product they’re working on, together with “founder/distribution channel fit.” The fintech market is crowded in many areas due to significant startup investment over the last number of years, driving up competition for customers. The best companies will be able to acquire customer cheaply in a saturated market through a competitive advantage in distribution.

Full transcript

Will Beeson:

Matt Brown, welcome to Rebank.

Matt Brown:

Excited to be here. Thanks for having me.

Will Beeson:

Yeah, it's great to connect with you. We haven't known each other for long. It was a fortuitous Twitter connection, I think, just a couple of weeks ago that put us in touch. Turns out we have a lot of similar interests and we spend a decent amount of our mental bandwidth thinking about some of the same questions. So really happy to be sitting down with you and exploring some of them.

Matt Brown:

No, same. The power of the internet, the power of Twitter, and publishing stuff online never ceases to amaze me.

Will Beeson:

Maybe you can kick off with an intro.

Matt Brown:

For sure. Name is Matt Brown, as you mentioned. I am currently an investor at Matrix Partners. We are a early stage VC firm. Been around for a couple of decades, started in the late '70s. We're investing out of Fund 12. The firm as a whole is generalist. We invest across dev tools and infrastructure, semiconductors, but generally individual investors at the firm have a focus area and that's generally where they've built or scaled or operated companies in the past, and so for me that's fintech. I spend the entirety of my time looking at seed and A companies in fintech. And so a lot of, we can talk about there. Primarily in payments and credit, but have a huge interest in vertical SaaS and embedded fintech and what that means for incumbent SaaS companies and the opportunity for embedded fintech infrastructure. So yeah, a lot we can talk about there.

Before joining Matrix, I was head of product at Afterpay, which was one of the first buy now pay later that started in Australia and then expanded to the US. I joined as they were just launching in the US and helped launch the product here and then worked on merchant product globally there for a few years. Afterpay was acquired by Square last year and is part of Block now. And then before that I had started two companies, both of those were backed by Matrix. Most relevant was one called Bonsai, which is still around and doing very well. It's a vertical SaaS and eventually embedded fintech company. We started as vertical SaaS business and realized that we could improve our retention and LTB and all the metrics you really care about by starting to embed payments and banking and all these different things. This was in 2014, 2015, so before the playbook was as well known as it was now. So a lot of dead ends and a lot of mistakes we made in learning how to combine SaaS and fintech, but it was a ton of fun. So yeah, operator by background, now investor, and big fan of all things fintech.

Will Beeson:

Amazing. So Bonsai, vertical SaaS focused on what area?

Matt Brown:

Very, very small businesses. We started with freelancers, so your freelance designer, freelance developer, photographer, and over time have grown to support small service-based businesses. So these can be agencies, interior design shops, and physical services as well, so HVAC services, landscaping, anyone that sells their time rather than sells a physical product.

Will Beeson:

And like a software-based OS for those types of businesses, or a specific initial value prop that you then expanded from?

Matt Brown:

So started with software. The thesis was at the time that these business owners, they're small business owners, 1, 2, 3 people, and they have a suite of tools to manage their day-to-day. They have something for scheduling. They have something for communicating with customers. They have some way to accept payments. They have some accounting systems. So they have all these different systems that don't talk to each other, they have to pay different subscriptions, they have different logins, it's a mess. That's fine when you're a bigger company and you have one person who owns accounting and one person who owns legal and one person who owns accounts payable or whatever it is. But as a small business owner, you have to be the AP person, you have to be the accounting person, you have to be the legal person, and that's just too much for a lot of small business owners to manage.

So the thesis we went to market with is let's take all these tools, let's bundle them together, let's have them be very flexible, have them all work with each other. So when you create a legal contract to start a project with somebody, for example, once that's signed, you can extract how much you're getting paid, when is the project starting, what are the terms of payment, and use that to automatically create invoices as an example. And then you can have a debit card for example, when you spend a debit card, you can take that and put that into the accounting system, identify tax deductions, and make it easy to close your book. So again, the benefit of having everything in one place, all the data flowing seamlessly between these different products and it all actually meant to work together. In addition to it just being one login, one subscription, we found to be pretty powerful for those very small businesses.

Will Beeson:

Got it. Okay. So then as of what, maybe a year plus ago, you're full time as a partner at Matrix. What was that transition like? This is the first time you've invested full-time, right?

Matt Brown:

Yeah, that's right. It was a easy transition because I'd known the Matrix team for over a decade. They were the lead investor in my first company, the lead investor in my second company, lead Investor in Afterpay as well, so I've known them as a founder and operator for many years. Very small team there, as I said, all former founders, all former operators, and so just really clicked with the folks there, really liked how they operate. Everybody at the firm is investing because they love building companies. We don't do later stage, we don't do growth stage, we only do early stage. We don't do a ton of investments, typically, one to two investments per partner per year, again, at the very earlier stages. We work super closely with the founders that we invest in. Again, we generally only invest in areas where individual partners have built businesses before , operated businesses before. So as much as I may be interested in some other area, my expertise, my background is in payments, is in vertical SaaS, is in credit, and so I think when I work with a founder in that area, to me it's an extension of being a founder. It's almost like being an extended member of the founding team because we invest so early, and I think we have an edge in helping those companies because we have that expertise.

Now, don't believe that the investors are the main part of the show, it ultimately is the founders who have the vision, who drive the execution. The way we think about it is if we can dent the curve a bit, if we can make a 5%, 10% difference in both the ultimate likelihood of a successful outcome of the company and the size of that outcome, I think that's as best as you can hope for as an investor. So yeah, it's a great place to invest if you love working with early stage companies.

Will Beeson:

What's the structure of the investment decision-making process? You talked about each partner really focused deeply on their areas of background, areas of expertise, and then is there a committee based decision-making process or the partners have more autonomy in deploying capital?

Matt Brown:

Yeah, so this is another thing I love about the firm and I think is really baked into its history, it really operates on a sponsorship rather than a consensus model. We're a small team, nine investors, and ultimately we want everybody within the partnership to see every deal. We don't have a ton of portfolio companies, so we want everybody on the investing side to know the founders and in a lot of cases the executives of our companies. But it's not a voting system. It's not like founder comes in and pitches and then people do thumbs up, thumbs down kind of thing. We want everybody to know the founders to give their feedback, but it really is more sponsorship driven model.

That's not to say that if you're bring in say a fintech deal person that focuses on semiconductors, doesn't have any good feedback or anything like that. Often it's the folks who are coming from different disciplines who have the very different backgrounds that ask some of the best questions, that have some of the most interesting insights, that are looking at the business model or the founder, whatever it is, through a slightly different lens. It's not until we bring founders into those different folks who are not from the area that the individual investor focuses on that we uncover some interesting things. So big fan of the model, and I think that's contributed a lot to the firm's success over the years.

Will Beeson:

You talked about how closely you as a firm like to work with the founding teams. Are there any examples that you can talk to us about, either companies that you've invested in and the work you've done together with the founding teams, or I guess on the flip side, yourself as a portfolio company at Bonsai or previously with Matrix as investors?

Matt Brown:

Yeah, for sure. I think one example here which illustrates this quite well is Afterpay. Afterpay was a Matrix investment. The founder had built a business in Australia and was coming to launch in the US. Matrix invested in the US company. But the founder really didn't have much of a network in the US and Silicon Valley and he needed to hire a ton of great people, product engineering, risk, sales, needed to build a large and really high caliber team really quickly. After the Matrix investment, within a matter of weeks of the founder landing in the US and starting to build a business here... I was brought in on the product side, but Matrix was instrumental in bringing in the CTO, the chief risk officer, multiple really, really high caliber engineers, sales folks that, again, for at the time an unknown Australian company these folks wouldn't have given it a second glance.

And that was being able to bring, again, that quality of talent, that quantity of talent in such a short period of time and allow Afterpay to hit the ground running was a huge, I think, underappreciated competitive advantage. When you look at whether it's the founders of Matrix backed companies or the executive teams or whatever it is, there are CFOs or CTOs or whatever it is that we've worked with across 3, 4, 5 Matrix backed companies that span years or even decades. And so, there definitely is this, I would say, strong signal, if Matrix is investing and Matrix is leaning in, we have a very strong set of folks that we love working with that love working with us. Not just founders again, but executives or advisors that ultimately make these founders do the hard work to make these companies very successful alongside the founders.

Will Beeson:

What was the experience like for you when you moved to investing full time? You strike me as a strategic thinker having read some of your writing. I think your website is mtb.xyz, people should definitely check it out, there's some very, very thoughtful stuff there. Strategic thinker, but also not having actually pulled the trigger on meaningful investments previously, I imagine, and certainly not having done it full-time, talk to us about that learning curve.

Matt Brown:

For sure. I'd done some angel investing before, but angel investing is completely different than investing at the institutional level. You're obviously evaluating companies and rounds in different ways, evaluating founders opportunities in different ways. Firms have generally a firm level strategy, so Matrix, again, generally only invests in Seed and Series A, generally only leads rounds, is relatively US focused, whereas some of my angel investing was maybe later stage, maybe earlier stage, some outside the US. I think having those constraints on the strategy was interesting. It really narrows the pool of companies that you're looking at and the types of companies, the types of opportunities you're looking at. So that's one.

Switching from operating to investing was interesting because a lot of the stuff I'm doing now and spend time on now and thinking about what's happening with interchange or how are vertical SaaS companies adapting to the fact that embedding fintech in their products is now possible, as an operator, you have to be on top of that, but you're always looking at that through the lens of your particular company and the opportunities ahead of you in 12, 18, 24 months. The nice thing about investing is you get to do the same thing, but you get to step back a little bit and think longer term than 18 or 24 months. The fact that any company can embed payments easily now or embed issuing or whatever it is, what does that mean for the crop of companies that will be started in a year? And then once those companies start up and a lot of funding goes into that cohort of companies, what do the market dynamics look like 36 months after that? And so that level of longer term, second, third order effects, thinking, identifying trends is a lot of fun.

Will Beeson:

I would love to dig in a little bit to your experience at Afterpay. It sounds like your role was pretty instrumental there. You were on the ground pretty much from day one in the US and then ultimately in addition to, I guess, the consumer-facing side of that product were working closely with merchants over your time at Afterpay. And ultimately, hopefully, bring some of these threads together later in the conversation around a higher level review, analysis, interpretation of market dynamics and, I guess call it, the payment/digital commerce space where I think you've spent a lot of time thinking and doing work. So maybe to start then, what was, I guess, your initial mandate at Afterpay? And maybe also take us back to the state of the buy now pay leader market at that time.

Matt Brown:

For sure. At the time, this was five years ago, so very early 2018, the term buy now pay later was thrown around but really wasn't well known, certainly as it is today. You had companies like Klarna, which were popular in Europe, but certainly not in the US, and they do a multitude of things. You had companies like Affirm in the US, but they had a slightly different model. They were selling single-use credit products for higher value items. So your classic example is you're buying a Peloton, it's $2,000, you don't want to put down $2,000 right away, you don't want to put it on your credit card, you can essentially take out a line of credit for the Peloton specifically or a mattress or furniture or whatever it is. Affirm was doing quite well and was well known in Silicon Valley.

Max Levchin is a very well-known and excellent founder. But I think the Achilles heel of that model is that it's very episodic. There are only so many Pelotons an individual consumer can buy or only so many mattresses or whatever it is. So while it's very useful product and it's a very profitable product and increased conversion for these merchants, it really didn't build much of a consumer brand or consumer awareness at all. The interesting thing that Afterpay did, and again Afterpay started in 2014 or 2015, and by the time it expanded to the US, it was already a public company in Australia. I forget the exact numbers now, but an incredible percent of younger consumers in Australia used Afterpay on a monthly basis, so it was quite successful there. The nut that Afterpay cracked was going after a completely different... Well there are a couple of things, but first was going after a completely different merchant type. So rather than these high value purchases, they went after fashion and beauty exclusively.

The benefit of fashion and beauty is that it's relatively low order values. There's a lot of e-commerce volume around fashion and beauty. And the folks that purchase fashion and beauty do so on a monthly basis. And so again, if let's say you are buying a Peloton, you see Affirm, maybe you decide not to use, it will be months or years before you are in another checkout experience where you may see Affirm again. But if you're shopping for clothes online regularly, you see Afterpay on the checkout, maybe you don't use it the first time, but a couple of weeks later you're on a different checkout and you see it again and the value of your order is so low, typically, 100, $150 that the barrier for you to try it is so low.

And so just the low order value, the focus on high velocity categories made a huge difference in building a substantial consumer brand really, really quickly. And so it wasn't just a great product for merchants who loved it, but pretty quickly, Afterpay both in the US and Australia and other markets had this very rapid fan base that as soon as we would announce that Merchant X now supports Afterpay, they would flood and start buying things. We had cases where they would inundate support for some merchant with requests to support Afterpay. And this wasn't prompted by us. The merchants would come to us and say, "Hey, we're getting a hundred tickets a day for people asking us to work with you. We don't know who you guys are, but I guess we should try it out." So I think that that building of the consumer brand, the fact that the average order value is relatively low was a big piece.

The other thing that low order values allow you to do, which is really interesting, is be more flexible on your underwriting. If you're Affirm underwriting a Peloton or a Casper mattress, several thousand dollars purchase, the term of the loan, if you will, is 12, 18, 24 months, and so a lot can go wrong there. A few bad cohorts can harm the business. With Afterpay, it was low order value. So if somebody didn't pay us back, they could quickly be removed from the network until they got their account back in good standing. It was low order values, 25% upfront, and spread over six weeks, so we knew pretty quickly whether or not somebody was a good customer. We had very sophisticated risk and fraud underwriting. That team was unsung hero... or maybe a sung hero. I think they did an incredible job, huge aspect of the business's success. But ultimately, we could be a little bit more flexible on who we brought into the product because our downside was relatively capped because of the type of purchase that users are making.

Will Beeson:

I want to be conscious not to make this a deep dive on buy now pay later, as tempted as I am given your expertise in the space, so maybe asking another question or two around this and then making sure we move on. But I guess for listeners who may not be as familiar with it, I think a buy now pay later simplistically is a win-win product. It's like pitches to the merchant, "Accept this new form of effectively credit based payment. You will get paid, merchant, immediately. We will take the credit risk, we buy now pay later provider. You merchant will pay us some percentage of the order value or whatever it is for the risk that we're taking and the service. This is going to lead to a much higher conversion rate of consumers buying on your website because the consumer on their side will be able to pay back the cost of the dress or the beauty products or whatever it is over the course of three months or six months in fixed installments." That's the concept. So it's a beautiful win-win with, albeit, important credit risk being taken by the buy now pay later provider, right?

Matt Brown:

That's exactly right. So there are two benefits to the merchants. One is increased conversion rate because the consumer has the ability to spread the purchase over. And we very clearly were able to show across merchants, large and small different categories, that increase in conversion rate pretty quickly. The second benefit that a lot of merchants saw was increased order value as well. Ultimately, if you're an e-commerce merchant, those are the two things you really care about. What your total GMV breaks down into is how many website visitors are you converting to purchasers and how much are they buying, and buy now pay later increases both of those. If you maybe don't have the money to buy something completely right away, you can spread that out, or if you want two t-shirts, but there's one now, you can add that second one to the add that second one to the cart.

The other thing that was interesting is there was a lot of, I guess you could almost call it slander in the early days. It's like the only people that are using this are poor credit who don't have credit cards, they're high risk individuals. We did a ton of research on this both in Australia and the US, and that frankly really wasn't the case. I mean you certainly had some of that, but this is just a feature. If this is available to folks, even if they have a credit card with a high limit or whatever it is, as you said, it's a win for the consumer, like "Why would I not spread this out over time if I can?" And again, a win for the merchant. The way we'd often pitch it to merchants is, "Look, there are no fixed fees. You only pay if a customer uses it."

A lot of times the merchants were, I think, surprised at the uptake. They were expecting a lower share of cart than they often got. But again, the combination of, as a consumer, "Why would I not use this? This is beneficial to me," and then as the brand built up, and this was another interesting thing, consumers actually would start their shopping journey, and still do start their shopping journey with Afterpay. So Afterpay was one of the first companies to launch a shop directory. So you can go to afterpay.com and see a list of all the stores that support Afterpay and filter by men's or women's and type of good and all this. And that would drive an incredible amount of traffic. Again, I forget the exact numbers, but it was in the millions of unique purchasers every single year. These were purely incremental customers to each merchant. So not only would we increase order value and conversion rate, but we would send them completely new customers, which again, if you're a merchant looking at what are the drivers of your business, it's new customers, conversion to check out, and average order value. So again, it really was one of those rare products that's a pretty clear win for the merchant and consumer as well as Afterpay as the business.

Will Beeson:

What's the typical charge to the merchant for a purchase that happens using buy now pay later?

Matt Brown:

It varies. It varies by country, it varies by the size of the merchant category and all of that. But I could say it's definitely more expensive than a typical card payment. That was another thing that we always had to explain to merchants, why is this more expensive than the accepting credit cards online or whatever it is and what do I get for that additional value? I think ultimately once merchants saw the conversion and the increased order value and the new customers were able to drive, and even the merchants that were really on top of their metrics and their unit economics and breaking this down were very happy with the trade-off there. But it definitely was and is a premium over card payments, for sure.

Will Beeson:

One of the things that jumped out to me in reading some of your work over the past few days was what you may seem like a pretty obvious characterization, but for me was kind of novel. I think of buy now pay later being a credit product. You somewhere characterized it more or less explicitly as a payment alternative. So you can pay with a debit card, a credit card, cash, or buy now pay later. It's obvious that that's the case if you look at it through that lens. If you think about it from the perspective of the merchant, they're not paying card interchange. Visa's not making money off of this. MasterCard is not making money off of this. It's actually a different payment channel that's being settled differently. And from the consumer standpoint too, they've got a handful of cards in their wallet and then they've got this new payment option.

I think this point is interesting in the context of where this conversation can go because one of the things I think that you've been focused on is, I guess one, like the dynamics of the interchange pool and businesses that have been reliant on debit or credit interchange as a main driver of their economics and what the evolving market dynamics, what impact they might have on that going forward. And then I guess as a result, the implication being how businesses that do currently work in and around the payment space, what adjacencies they might be looking to think about and how quickly given how things are evolving. So maybe firstly, do you just want to talk about that point, buy now pay later as a payment method, and then maybe more broadly other opportunities for innovation in that list of payment methods? From there maybe we dig into the implications of that.

Matt Brown:

For sure. A lot to unpack there, we could have a multi-hour conversation just on that. But after leaving Afterpay and reflecting on it and what worked, what didn't, why it worked as well as it did, and what was surprising, what you're describing it as a payment method, even though just as a caveat, we generally didn't sell it to merchants as a payment method. Of course in implementation, all this, you have to work with a payments team and there's a lot of payments complexity and flow funds and all this under the hood. But I think we found that if you sell it as a payments method to the merchant, the merchant looks at it as that and they compare it to cards and it's whole thing. Where we found more success was selling it, as we said, almost as a marketing and a conversion and then average or something that benefited average order value and all of that.

So that in itself was interesting in that it taught me to, whether you see something primarily as a credit product or primarily as a payments product or whatever it is, different stakeholders within a company and consumers will see things in completely different ways. I think there's this consensus on what cards are and what card payments are, but I think a lot of these new emerging, interesting, you can call them payments products, you can call them credits products, are interesting because different people see them as different things and ascribe different value to them. So that's one hopefully not too abstract points.

The other interesting, the takeaway from it is whenever there was a new story published about Afterpay, they would often have a screenshot of a merchant's checkout page. It would be pay with a card, pay with PayPal, or pay with Afterpay. The realization there is that this is the first time in 20-plus years that a new payment method has appeared on checkout. Cards have been around since before the internet. PayPal grew with the advent of the internet itself. But from, call it, 2000 to 2018, those are the two games in town. And yes, there were different merchant acquirers underneath the hood, but as a consumer, you generally use one or the other. And so I think early on there was some questioning on how willing are consumers to trust this new third option, this new second option.

I was personally surprised at how willing customers were to try a new thing and how powerful point-of-sale and checkout was a place to distribute these kinds of products. That was another maybe non-obvious part of Afterpay's success is we didn't have to go out and acquire consumers directly. There's this famous story of how cards got started, the Fresno drop. Cards are fundamentally a marketplace. You need card holders on one side and you need merchants on the other, and you need to onboard enough of them that it makes sense to actually use the payment method. And so I think it was maybe in the '50s or '60s started to bootstrap this. One of the card companies mailed cards to everybody in Fresno and said, "Okay, everybody now has a card." But it's generally very hard to acquire and build up both sides of that marketplace to build a new payments product.

And that's the interesting thing that Afterpay unlocked is, again, you didn't have to go out and acquire consumers directly. You sold to merchants, you sat in the checkout flow, and that in itself, the fact that the merchant was there, the merchant was successful, people were already buying from the merchant, they did the marketing for you. They were effectively tying their brand to yours. So just like if you know trust Visa, MasterCard and if a business accepts Visa, MasterCard or Amex, if you generally trust them and vice versa, the same thing with Afterpay. If you love this online shop and you go to check out and you see Afterpay, there's this kind of halo effect on both brands. And so that was a very interesting lesson in that you could start to bootstrap these other payment methods.

Shopify gets a lot of credit for this. I think Shopify payments and the infrastructure they've built there and the ease with which you can launch new modules within checkout gets a lot of credit for this. They've not only allowed new businesses to start by embedding themselves at point of sale, but I think they've also as a second order effected that trained consumers to be open to trying new payment methods. It's become a meme now you see the checkouts and it has five different buy now pay later options and they have something to buy insurance and they have all these different kinds of payment methods. Joking about that aside, I think that touches on the ease of acquiring consumers now and the ease of distributing whether it's payments products or credit products or other things that are opening up a lot of possibilities that can now start to undermine the default payment method for most of the world for most of the last few decades, which are card payments.

Will Beeson:

Pulling a few things together. So on the one hand it's clear that by now pay later specifically and other types of online payment options have scaled, have gotten adoption because of ease of use and customer benefits and merchant benefits and various other things. As a result, to your point about the memes now, it's a saturated space. You talked about brand loyalty, I'm sure it's real, Afterpay versus Affirm versus Klarna versus whatever other buy now pay later option you have, and I'm sure that's real, but at the same time, the products are relatively interchangeable. I don't know about retention and things like that. You would know the details, we can unpack at some other time, but the point is it's an increasingly crowded space. And some of the other analysis you've done specifically on interchange highlights the fact that 10, 20 years ago there were three players who were splitting the interchange. There was the issuing bank, the acquiring bank, and the card network. And then now potentially there are like eight or 10 players. There's Apple, there's Stripe, there's the card network, there's the acquirer, there's the issuer, there's potentially a handful of other players as well.

So the revenue pool in interchange is shrinking. All of this sounds like it contributes to a meaningfully evolving landscape. So if you are a founder now, or I guess more specifically, if you're a seed and A stage investor and you're thinking about formulating theses for what the next wave of successful payment companies are going to look like, on the one hand you're looking at increased competition, shrinking revenue pools, and then on the other hand you're looking at scaled and increasingly scaling companies like Block who is in the process of closing the loop between the consumer side with Cash App and the merchant side with their traditional Square business, with people like Adyen who published great financial performance and continued growth, Stripe who continues to grow, these more or less incumbents, so to speak in the digital payment space who are really consolidating their positions. What's the takeaway from all this as you're thinking about this through the eyes of a founder or a seed, A stage investor?

Matt Brown:

Yeah, for sure. I mean to unpack there again. The most immediate takeaway, which I think a lot of folks are starting to realize or folks in fintech have realized for a while are business models that rely primarily or exclusively on interchange are increasingly unstable... or not increasingly unstable, they're recognizing how unstable that is. Even if you as a, say, a new bank or whatever it is, continue to get closer to the metal and have more control over your economics as Varo has done for example, and I'm sure others are doing as well, still that alone is not an amazing platform in which to build a business. And so I think for companies that started out there, if they have recognized that soon enough and they have enough runway and they have the capacity to do this, I think you're going to see this rush to bundling.

And ultimately, by the way, when you look at traditional financial institutions, it's not that somebody just has a checking account with them and that it makes that customer a profitable customer to them. I think I saw some stat recently that it was five or six plus products is the average number of products that a customer has at a traditional financial institution. I think I've seen numbers higher than that. It's your auto loan, it's your mortgage, it's business checking and savings and a bunch of other things. You open accounts for other folks in your family, whatever it is. And so, I think the businesses that position themselves historically more as kind of neobanks, exclusively reliant on interchanges are now again scrambling to layer in more and more of these products.

If you are one step down in the food chain, these infrastructure providers, you mentioned Adyen, Stripe as well, they're a little bit more insulated from this because, again, they're one step further down the food chain. But you can see this interesting evolution over the last couple of years where they've shifted from pure acquiring revenue to much more of a mix. So I put out a post recently, and it was a fun exercise to do, I took a screenshot of the product pages of Stripe and of Adyen and color coded all the products that they list and said, "Okay, here are all the acquiring products, here are all the issuing products, here are all the software products." And while those, Stripe as an example, still makes the majority of its revenue from acquiring, I imagine, on a per product basis, they have an incredible amount of software products as an example that certainly complement acquiring but are higher margin, are sticky, and are to this bundling theme. Once you're, say, a marketplace processing payments with Stripe, you want to use Radar to manage your fraud and then you want to use Stripe Tax to manage your taxes. I think they have a data pipeline product to get data out of Stripe and into your own databases.

So I think you're seeing this interesting shift away from pure fintech and pure transactional revenue to something that's more balanced. It's easy to throw out these sweeping statements like, "Every company will be a fintech company" or "Every company will be a software company." But my view it's much more convergence of those both, where Stripe certainly is a fintech company and that's what they're known for, but they certainly are launching and acquiring a large number of software products and probably watching the ARR of those products pretty quickly. And then on the flip side, those historically pure software companies that tracked ARR very closely and all this are now looking at integrating payments and tracking their payment volume and integrating lending products and all that. So again, it's not a black or white evolution, it's going to be this convergence between the two. And fintech companies are going to look a lot more like software companies and software companies like fintech companies.

Will Beeson:

Are there any specific opportunities that you see at the earlier stage based on all this?

Matt Brown:

Yeah, one trend for sure is if you look at a lot of these software companies that historically you've called them vertical SaaS where they have a very specific customer in mind and that customer has a workflow or whatever it is that's very particular to their business, similar to the Bonsai story I was mentioning earlier, they don't want to stitch together a bunch of tools, they want one subscription, one login that's bespoke to their type of business. AI think a lot of those businesses are starting to realize once they have good product market-fit on the software, once they know how to acquire those customers, the natural extension, if they're eating up enough of that customer's workflow is to start to touch money in some way, so whether that's helping that customer accept payments to make payments, to handle expenses for the business, maybe it's credit or some combination of all of those. Having watched a couple of those companies go through this journey, including Bonsai, there's a lot that you don't know how to do as originally a SaaS company. One big example of this is risk.

You can work with Stripe, you don't have to worry about compliance, they handle a lot of the onboarding for you. And Stripe certainly has some risk tools as well, but there's a lot you realize that you don't know about account takeovers and friendly fraud and chargebacks and folks using stolen credit, all kinds of things that, again, you don't know what you don't know, and a lot of these companies may not be staffed up appropriately to handle it. And so, there's certainly a lot of tools in the space that help you do this, but one area I'm particularly interested in is this concept almost as of risk as a service. How do you as a company that payments or financial revenue is a meaningful but not primary part of your business and you're going to continue investing in it, but a tax on that revenue is the fraud that always comes with offering some kind of a financial product. So how do you solve for or cap that fraud in a reasonable way without staffing up a huge team that then eats into the revenue that you are offering. So that's one example.

I think you can look at all the different financial products that these companies will want to offer and say, "Where do larger companies offer products like this and do it well because they have a whole team doing it, but a smaller company may want to offer that same product but doesn't have the resources to staff up a whole team?" And so another example here are various credit products. Again, it can be incredibly profitable, they can be vertical SaaS or these vertical ERP companies have a huge edge in offering credit because they've already acquired the customer, they have this unique data set, whether it's activity on the software or the customers that they're working with, the payments that are flowing through the existing payment product to underwrite these businesses. But again, there's this whole set of raising capital to do this, managing the facilities, underwriting risk, servicing, collections, all this stuff that these businesses probably don't want to staff up folks to handle. Again, just even if they wanted to staff up folks, a lot of these businesses just don't know what they don't know about this. And so, these credit as a service providers, I'm seeing several of these come out with very interesting models at the seed stage to make this available to companies.

Will Beeson:

Totally makes sense. All right, so maybe one last question for you, switching gears a little bit but dialing in on your experience as a repeat founder and now investor. You're talking with companies day in and day out, both companies that are in your portfolio companies, you've angel invested in companies that you're advising helping, and as well as companies that you're actually evaluating in your day job. What do you look for in a team?

Matt Brown:

That's a great question. The biggest thing is an insight into distribution for the particular product that they're working on and the founder distribution channel-fit to then go execute on that. I think that's particularly important because so much in technology is getting commoditized now. You saw this with SaaS. You don't have to run your own servers, you can use AWS, you can use Heroku, building your own login and authentication system and all these different things now can be done for you. And so it's easier than ever and cheaper than ever to build software. And so what makes you really stand out, let's say, in the purest SAS space is having an edge in distribution, knowing for some markets it may be outside sales, others inside sales, others is product-led growth and having an insight and the ability to really execute on that.

The same thing, by the way, is now starting to happen in fintech. With the benefit of last five years of all this VC money is you have multiple banking as a service providers, multiple, very credible [inaudible 00:41:27] options, again, risk as a service is growing all these sorts of things. And so what really is going to matter now and will matter more in the near future is an insight into distribution, like how can you acquire customers more cost effectively than the next person? Because the fact of the matter is they're going to be able to build a product that's comparable to yours within a reasonable period of time. Again, you may have an edge in some other way, but I think ultimately it's all downstream of an insight into cost-effective customer acquisition. There's plenty of other things that go into making an investment decision, evaluating a founder, and evaluating a company, but to me, it's getting easier and easier to build anything and it's getting harder and harder to acquire customers for whatever that thing is just because the market is so noisy.

Will Beeson:

Totally. Great point. Awesome. Well, look, this has been a huge pleasure, Matt. I really appreciate it. Where can people find out more about you and Matrix and read your work?

Matt Brown:

Yeah, so on Twitter I'm Mattt, M-A-T-T-T, three Ts, Brown, and my website is mtb.xyz. So publish stuff there and I'm active on Twitter, so feel free to reach out.

Will Beeson:

Excellent. Matt Brown, thank you very much for joining us today.

Matt Brown:

Thank you as well. It was a great conversation.