By Ken Musante
Eureka Payments LLC
Every day I learn something new. There are so many aspects to this business and so many ways to succeed. I enjoy speaking to others within the industry to learn from their experiences. Recently, I spoke with David Leppek, President of Transaction Services (www.trxservices.com) to learn about his experiences in launching a startup company.
Leppek recently started a full-service ISO designed to serve his direct sales force and contractors. Transaction Services (TRX) automates many of the functions designed to support ISOs.
Q: What prompted you to engage in a startup?
A: All through my career, I've reported to someone else. The first time you ever disagree with a superior, you have a framework of how you would like to do business. Also, starting from scratch allows you to depart from the legacy systems and processes. The converse of that is, all responsibility, fault and credit now resides with you.
One of the cornerstones of my business is that all core functionality would be brought in-house. An industry veteran taught me one lesson that has stuck with me throughout my career: we are a services business, and if you get bad service, you are not going back. Many processors simply outsource the transaction processing side. But if our service is electronic authorization processing, then we should bring the technology in-house.
Q: Describe the services and advantages of Transaction Services:
A: TRX is based on an in-house-designed processing system; we're a full-service ISO with an emphasis on full service. One focal point is a complex residual hierarchy system that allows an unlimited number of levels and types of payouts. This system allows us to ensure that each merchant, at the merchant level, is profitable.
We can track this at the transaction level as well, and the marginal residual splits can be calculated. We also want to ensure repetitive processes, such as residual payouts, are automated.
We use TSYS as a back-end (and at the front-end), but we calculate interchange in real time to independently validate costs relative to income, as well as to compare our costs to what TSYS bills us. I can know my costs at the first minute of the next month rather than 15 days after the close, when my bill arrives.
Although TSYS is our only front-end support, we are exploring other front-ends and will depend upon market opportunity. Because of the level of integration we have with our processor, we have much greater functionality with that processor, although achieving this high level of interconnectivity does come with an expense, and we want to be sure the cost is justified before setting up a second front-end.
TRX performs its own underwriting and risk. Customer service is being built out, but is currently supported by TSYS. TRX or sales representatives enter their accounts into an internally developed sales contact database (similar to SalesForce.com) that interfaces directly with TRX's systems to allow for upload of merchant account data to minimize redundant keying. Chargeback processing is currently outsourced, but is expected to be brought in-house within six months as our number of chargebacks increases.
Our technology will auto check MATCH [the Member Alert to Control High-risk list], credit report and OFAC [the Office of Foreign Assets Control]. TRX first makes a credit decision, then the bank will approve the file so long as we followed our underwriting policy.
The bank sponsors are Merrick Bank and Meridian. Merrick is a well-established and well-capitalized bank while Meridian is entrepreneurial and small enough to allow for direct access with senior execs.
TRX has its own independent direct bank identification number/interbank card association (BIN/ICA) with both banks. Although this was a greater upfront expense, it will allow for better flexibility and reporting. This will also allow for true portability because you could move the entire BIN/ICA without impacting merchants individually.
One of the unique aspects of TRX is that we wrote direct terminal software for both Hypercom and VeriFone. Although this limits the terminals we support, it allows us to gather fully end-to-end encrypted data. Having the data from the point of sale allows us to control and utilize that data for service and profitability purposes.
We can calculate interchange, validate interchange, limit attrition and provide better service. One example that will stem attrition is that a merchant on a terminal will instantly see their transactional activity on their payment gateway for no additional costs. This is because the tool we will make available is the same tool we use for customer service. Over time, this technology will allow us to build our own statements because we are already doing our own calculations. We will be able to provide these statements less expensively and via email.
Q: What was your timeline?
A: Planning for 15 years [he laughs]. I actually started in November of 2009. I obtained funding in January 2010. I was registered with the card brands and had our own BINs/ICAs in May 2010. From May of 2010 through October, we were building our platform. We obtained our PCI certification in October. We boarded our first customer in October as well.
This long timeline and development allowed for many conversations with merchants so we could meet their needs. We were pre-selling prior to our launch, which allowed us to board many merchants in October, in part, because of pent-up demand. Because of our quick ramp-up and low overhead, by December, we covered our operating costs on a monthly basis.
Q: Discuss your security:
A: We built end-to-end encryption of PAN [primary account numbers]. This has resulted in high upfront costs. We had to be PCI Level 1-certified and have fully redundant back-end systems before we launched.
Q: What was the biggest variation between the actual and the plan?
A: First, the unexpected higher percentage of our volume from fewer larger merchants. Second, the unexpected delay from vendors. Though these delays set us back, we were saved by larger merchant customers who caused our growth to exceed our sales goals. Although startup was much later than planned, the large accounts more than doubled our expected volume.
Q: What would you do differently next time?
A: Altered expectations for third-party vendors. I also would have started this 10 years ago.
Q: What is your investors' perspective?
A: On a scale of 1 to 5, 4 out of possible 5. The knockdown is that some features are not yet complete, but we've been fortunate that our investors recognize that these setbacks have been unavoidable. A good strategic investor has been one of our biggest assets as a startup.
Q: What percent of your company is owned by outside investors?
A: In order to raise the capital needed, we needed to sell a good portion of TRX, but it was important not to sell a majority share. I didn't simply want to work for a different type of employer.
Q: What was the most difficult part of the process?
A: Doing things that were previously set up as a process and done by a department, such as HR, hiring employees directly, payroll and IT. One smart thing we did was obtain health care from our local chamber of commerce to get a volume discount. [TRX has 10 employees.]
Q: What advice do you have for other startups?
A: I read a number of books before I embarked on this project. They all said, and I've found it to be true, "Be very flexible. Expect your business plan to change."
Q: What was your wife's opinion of this venture?
A: When First National Bank of Omaha [David's former employer] sold to TSYS, I went from a secure position to a severance package - within two days!
I did not want to be in that same boat, and although I went through an interview process with a competitor, I did not agree with the direction of that company and did not see that organization as a place where I could work.
Even though I did not have a finalized commitment from our investors yet, and I had other job offers, I took a leap of faith. My wife was very supportive.
Q: What keeps you awake at night?
A: As the principal of a startup, all strategic and operational responsibility falls to me and my team.
Unlike many corporations, you cannot hide in middle-management, knowing someone else will pay the electric bill.
I keep two things on my nightstand, a notepad and my cell phone charging. After a full day, I sleep sounder than I ever have in my career. But if I do wake, I either make a note or take a call.
Q: How will the Durbin Amendment impact your business?
A: The Durbin Amendment was reactionary politics, poorly thought-out and now heavily scrutinized before implementation. It is hard to say how it will impact my business. But staying flexible, and owning both the technology and decision-making process, I am confident we can adapt much quicker than any larger competitor.
Leaving behind a paycheck in exchange for a startup can sound very appealing; calling your own shots and captaining your own ship can be extremely gratifying.
Yet failure is more likely than success, especially in this economy. But if David can be successful given the economic climate we are in today, imagine how he will prosper as the economy picks up steam.
Drop me a note if you know of someone I should interview for the next article.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at kenm@eurekapayments.com. For more information, visit www.eurekapayments.com.
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