Friday, May 20, 2016
Digitzs: Taking On The Pain Of Payment Processing
Story by Benjamin F. Kuo
One of the major issues for businesses, is handling and processing payments from credit and debit cards. In particular, there are many platforms who enable taking ticket payments for sporting events, donation payments for non profits and rent payments for property managers, who don't fit into the current legacy way payments are handled. Enter Santa Monica's Digitzs (www.digitzs.com), which has an all star set of advisors and investors, including Kevin Harrington (the original "Shark" on Shark Tank), and which is developing technology to help those platforms take payments. We spoke with CEO Laura Wagner about the startup.
What is Digitzs?
Laura Wagner: Digitzs is a payment company. The easiest way to describe it, is if you drew three circles, from left to right, on the far left is where a card is swiped. That's when you go into a grocery store, and swipe your card or swipe your iPhone using Square—the face to face transactions. That's something like five trillion dollars in Visa, Mastercard, and Amex transactions alone. On the far right, you have companies like Stripe, which is absolutely killing it in the e-commerce area, with online shopping carts. Those are the single merchants, who use Stripe to build a website, and also for mobile apps. We are everything else in between. We are between the cards which are swiped in person, and the shopping carts for single merchants.
Can you explain more of how this all works together?
Laura Wagner: It's old school, but since the 1800's every business has been called a merchant, and we unfortunately come from what is called the merchant services world. Merchants, meaning business owners, take a credit card, and are charged three percent to take those cards, at least in the simple situation. That percent is actually all over the board, very complex, and very competitive. In the middle section are platforms like Uber, Airbnb, or Taskrabbit. Those providers do what I like to call Cirque-du-Soleil moves to take those cards. For example, when you give your card to Uber, they take that $10 fare, split it out to everyone, with Uber taking some, some going to the driver, and so on. They're doing split payments, doing flips, and splits—which is why I call it the Cirque Du Soleil moves. Also in the middle of this, are platforms which specifically target certain kind of business owners, to process certain kind of payments. The example is, there might be a platform that processes ticket payments for a marathon race, or one for a concert—such as Ticketmaster. There are platforms for donating to nonprofits, and so on. How that actually works, is when you go to that nonprofit, they redirect you to another website. You think you're still at that nonprofit's website, but you're actually on a white label platform. When you go to pay your rent through a property management company, again you are usually sent to somewhere else to process that payment. Those are our customers.
What do you provide to those platforms?
Laura Wagner: These platforms have three, very specific problems. We interviewed 50 platform CEOs, and they are all using the usual, large payment providers. But, there are still huge problems that remain. One of our platforms isTicketSocket. Mark, the owner, goes to the New York City Marathon and will help them build a ticketing platform with their logo. The CFO of the New York City Marathon has to give Mark his merchant account information, for Visa, American Express, and MasterCard, and put those into Mark's systems—that way, when you buy a ticket, you see their name in their bank statement. You have to do that, so buyers can connect the dots, and see the business owner's name. So, he ends up having to send them somewhere to create a merchant account, whether that's Stripe, Webpay, or an old school First Data or Case. The problem is, when they do create a merchant account, they don't give Mark a commission. Even if he's sitting on millions of dollars of processing, he gets zero commission. That's because he's a third party to the transaction. He can't add anything to that transaction, and he ends up having to invoice the Marathon or his other customers every month. With our API, we have a back end solution where TicketSocket can integrate with our API, get a merchant account, and Mark doesn't have to call a payment company, or redirect things to Stripe, or anything. It's all on his site, and we provision things in real time, so that he can process payments. We charge the person 2.9 percent and 30 cents, and we give Mark really healthy commissions on that, and he can even add his own fees into that transaction. It's a trillion dollar, niche market.
Can you talk about the background of your team?
Laura Wagner: The first CFO of PayPal is our Chairman, and the gal who ran Visa, Linda Perry, is on our board, as is the gentleman who was head of payments at Apple. This is my third payment company. I started in the industry twenty years ago, when I moved here from Texas. I like to say I'm responsible for increasing obesity on the West Coast, by making it possible for McDonald's to take card payments. We pioneered way back the pin pad at the drive through, and added 50 cents for those transactions so it didn't cost the owners anything. Maria is our Chief Marketing Officer, and doing an awesome job. Ben Way has more or less a celebrity status in Silicon Valley, and has been responsible for starting and exiting a hundred companies in the UK and US. He's an incredibly hands on COO. Stacey Moore, my founding partner, I have been working with now for 25 years, and has been building our platform. We have a strategic partner which is the largest processor in the U.S., and has really been the key to our success in pulling this off. We now have a team of fifteen, and are doing our second round of funding right now. We raised $2.5M last year, and the platform is now live in private beta. We're now raising $3M at a $15M valuation, which is up on Crowdfunder. Next year, we're planning a Regulation A fundraising.
What made you decide to go with crowdfunding, versus going a more traditional, venture funding route?
Laura Wagner: We're actually doing both. It's a $3 million round, and we're doing $750,000 of that on Crowdfunder. The reason we are on Crowdfunder, is because people are interested in following on to their investment. That said, we are in talks with boutique VCs in the Fintech space, and people familiar with the payment area, as well as family offices. As you can tell, it's a very niche payment area, so we really only want to work with VCs that understand that niche.
So, with that interest from bigger investors, why go into crowdfunding at all?
Laura Wagner: I love crowdfunding, because the people who are investing are all very smart people, who have run businesses. They are great folks to bounce things off of. They want to put skin in the game, and they're not afraid of early stage deals. I think crowdfunding really is the new normal. I'm actually writing a book on raising money this way. For us, where we had been pre-product and pre-revenue last year, it's unheard of to get that from a venture capitalists. Nowadays, VCs are just going to later stage and are writing bigger checks.
What's next for you?
Laura Wagner: We're going to raise this $3M round fairly quickly. We are going to solidify our traction. As we prove out our model, we will also be doing a Regulation A round. If you're not familiar with that, that's where the barista at Starbucks can invest ina company. They don't need to be accredited to invest in an IPO. The Jobs Act comes into effect on May 16th. You've seen companies like Elio Motors, BrewDog raising money this way, and we are likely going to be one of the first ten companies who are going to do this form of a raise.