Finterview: Poynt's Ray Tanaka

Poynt's CTO Ray Tanaka talks POS, the future of online commerce, and the commoditization of payments processing

Ray Tanaka is the Chief Technology Officer at Poynt, the first smart payment terminal and open commerce platform. Tanaka started his career at Silicon Graphics, and was part of the team at PayPal that helped the company move from being eBay-dependent to being its own wildly successful payments processor. After PayPal, he ran developer organizations for Magento, a platform that processed about a quarter of all e-commerce. Tanaka’s many experiences building and scaling payments companies led him to Poynt. Chelsea Allison of Plaid chatted with Tanaka about the trouble with current POS systems, the future of online commerce, and the commoditization of payments processing. This interview has been edited for brevity and clarity.

CA: What prompted you to start building Poynt, and what were the problems you saw that Poynt could uniquely solve?

RT: Back when I was at PayPal, I thought a lot about how, as PayPal moved from being dependent on eBay to being more independent, to be a relevant e-commerce solution. Later, when I was running PayPal's R&D team and once we started to see progress on that front, my focus shifted toward thinking about how to handle all payments which included offline. That was when I started to think about the role the traditional payment terminal played in payments. At the time, PayPal was doing about $150 billion a year in payment volume, and U.S. retail was about $3 trillion. There was no question where money was being spent and the technology that enabled that and it was clear that PayPal couldn’t be the de facto payment method without being an offline payment mechanism. I think that still holds true today. PayPal is tracking to about $400 billion annually and retail spend is at about $4.5 trillion annually. Although e-commerce is outpacing the growth of retail, the gap is still enormous and yet very few companies are looking at it from the offline side.

CA: Right.

RT: The other problem that I see is that if you go into most small businesses, they typically have two to five tablets sitting in their stores. They have one for order ahead, one or two for their loyalty solution, one for the POS solution, there’s probably one in the kitchen for orders, and it just keeps going and going. That is a sign of a problem and, probably more importantly, an opportunity for consolidation. At Poynt, we’re working towards changing this by creating a platform to consolidate these solutions and have more interoperability and consequently fewer single-purpose tablets. We saw a similar phenomenon with the iPhone—the number of gadgets that were converted into an app still amazes me to this day.

So we knew that if we were going to tackle this problem, we had to fix the device that was causing this friction, and that was the payment terminal. At the end of the day, consumers see a credit card terminal and they pull out their credit card. Using PayPal and even using Apple Pay is sort of an afterthought. It's really hard to undo or change consumer behavior. We had to reinvent that payment terminal, and we had to do it in a way that that made sense for merchants - all the while providing a path forward including enabling new forms of payments.

CA: So speaking of some of these alternative payments, I’d also love your take on the explosion in usage and growth of Alipay, and what that might mean for the U.S.

RT: I think many of us are in this bubble where we think that Silicon Valley is driving technology, innovation, and consumer behavior. That is false. Alipay and Wechat Pay did nearly $3 trillion last year. China UnionPay is outpacing Visa’s growth. It is crazy to think that we can continue to ignore the buying power and influence that China has. I think you can see Alipay is trying to make strategic alliances now all over the world, where they are going to try to bring this $3 trillion of spending power to the tourist traveling abroad. Interesting because we were all so allergic to QR code payments - the whole method just seemed so backwards, so wrong. I didn't think it was feasible either, and then out of nowhere, Alipay has come and proven that QR code–style payments do work and can get adopted at scale. Here in the U.S., we many of us still act like it's not even happening outside of Starbucks. It’s a reminder we have to keep looking around and being aware of what is going on globally now. It's a good lesson to understand. I see something similar happening on the biometrics side too and how it is taking a huge, huge role in payments now, especially in India. It’s still extremely early but something else to keep an eye on as well.

CA: So back to Poynt and behavior here. You integrate seamlessly with existing POS terminals. Was that a big hurdle? Or was the infrastructure already there to facilitate that integration?

RT: It wasn’t a hurdle. It was more of a necessity. Payments is about transitions and we recognized early on how difficult and unrealistic it is to expect a business to rip out their infrastructure overnight, set up and reconfigure everything, retrain their staff, and go about business as usual the next day. This forced us to think about how to slip into a business and evolve over time. Merchants still need to conduct day-to-day business, so it's got to be the slow and comfortable upgrade. Our device is very different and has a lot of capabilities. But we purposely downplay that role, and we try to make it very familiar and obvious that we handle the payment methods that they are already handling, which is credit cards and cash.

CA: Do you think it's easier changing consumer behavior online versus offline? What are some of the takeaways from that experience for you at PayPal, and how do they translate to what you are doing at Poynt?

RT: Let me start by saying yes, I think that changing behavior online is definitely easier than offline. I don’t want that to take away from the fact that changing consumer behavior is extremely difficult and unpredictable. In PayPal's case, the bar back then was so much lower that it was almost inevitable. What PayPal was able to do in the online payment space was replace a clearly inferior payment experience, because at the time, as an online seller, it was so cumbersome to accept credit cards—you had to sign up for a bank, get a processor and then figure out a way to get the card details from a buyer. So we all sort of succumbed and just relegated ourselves to sending checks. We would wait for the check to get mailed and wait another three days for them to cash the check and clear, and then they shipped the item out. So of course, when PayPal came along, where you could just type in a seller’s email address and they instantly knew that they got their payment - it was a game-changer. Offline, though, you are actually trying to change a behavior or convince people to use a new way of paying that isn't necessarily obviously better or easier. This goes back to what I said about offline payments being about transitioning behavior versus rapid change.

CA: You talk about this concept of breaking commerce so that it can actually get fixed. Is that tied to this, too, where sometimes concepts actually require being broken down in order to change behavior, so that we don't get complacent?

RT: Yeah, I think it comes down to getting people to realize that behavior needs to be changed or it can be changed. And then you need to give them a path to changing it. It’s really easy to complain and say how awful certain things are, but when you go to a merchant and tell them they really shouldn't have five tablets in their store, they go, “Okay, then what’s the solution?” And there’s no good answer for that right now, which is what Poynt is trying to solve.

CA: So are you basically addressing this problem as a software challenge, rather than a hardware challenge? Can you walk me through that?

RT: Absolutely. As we think about the future of Poynt, we often remind ourselves that we are a payments platform company that happens to make terminals. Our terminals are a necessary first step. Take these services like Five Stars, Order Ahead, Caviar, or UberEats—they have to not only figure out how to get a merchant to buy their software, but they have to get the hardware, too. That is not an easy sell. That is like telling an iPhone app developer, “No, you can't just write a cool app. You've got to get them to buy a device too.” So we are at a stage right now where we are taking the burden of getting the hardware out there and then asking companies to port their apps over to us so we can move this industry forward.

CA: So essentially, through the Poynt Terminal, you are lowering the barriers to entry for people to develop these apps on top of your system. It's actually quite similar to our strategy at Plaid, where we are trying to lower the barriers to entry on the infrastructure side so that more people actually innovate in the space. I would love to hear a little bit more about the platform strategy, how you came across that eureka moment, and what the reaction has been among developers who are actually building on Poynt.

RT: We have an efficient distribution channel on the processing and terminal side but it's still an uphill battle with developers. It's been about us showing them that for every terminal we have, we can offer very targeted distribution. If a developer has an app meant for cafes, we can help them get in front of those merchants. If they know that they need to do a certain amount of transactions or be located in a specific region, we can help target those. So there is still a big education process there. With the up-and-coming guys, it's a lot different. They are far more open to trying anything early on. Then there are the established and sophisticated guys, who I think we get the most amount of support from, who come to us with specific problems like needing to offer their merchants an EMV solution. So they see the value in working with us to convert their current solution. We’re seen as a way for them to keep their customers while migrating them up to being EMV compliant.

CA: Oh, that is so interesting. I'd love to know a little bit more about working with merchants. Any takeaways?

RT: A lot of the merchants we work with are sole proprietors. They take pride in their business and they love what they do. Because each merchant has very unique requirements and use cases, it makes me even more confident that the platform is the only way to go. As a company, we cannot cater to every one of their individual needs. So, it has to be done as an ecosystem. What we need to do is abstract what we learn from working with a subset of merchants and empower them. We need a lot of people on this problem. We need to be able to enable them to solve problems and create a feedback loop to continuously improve and evolve.

CA: Your platform strategy has also played into your business model. Why not take a cut of the payments?

RT: It’s our partners’ lifeline, and when every basis point counts we’d rather pass those savings on to the merchant and let the processors remain competitive. It also reinforces the fact that we believe in our platform strategy.

CA: When did payment processing become commoditized, and how does tech change the equation for ISOs?

RT: I don’t know that I can pinpoint the exact time but I would guess that it happened during the rise of e-commerce and fully cemented when Square became a viable merchant solution. Card-not-present rates put an upper bound on processing rates, and I believe this set the industry in a race to the bottom for processing fees. When the primary service and the equipment used gets commoditized, you’re forced to add value through other means such as customer service or other forms of services.

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