On August 4, Colorado’s Reserve Trust announced a $30.5 million Series A fundraise, led by QED Investors. The investment brings total funding since the fintech company’s inception to $35.5 million and includes $17.9 million in secondary shares. FinTech Collective and Ardent Venture Partners also participated, as did Mike Massaro, CEO of Flywire, and Lowell Putnam, founder and CEO of Quovo.
Transforming Cloud Payments
Established in 2016, Reserve Trust claims it’s the first fintech trust company to have a master account with the Federal Reserve, allowing it to act like a bank without being a bank. Its unique trust charter means it holds customer funds in a fiduciary capacity, not on its balance sheet. It also allows the payment services company to bypass the archaic legacy systems of traditional banks to make B2B payments directly via wire and ACH payment rails. In contrast, their competitors must operate their payment services via partner banks.
By connecting directly to the Federal Reserve, Reserve Trust says it can offer customers seamless embedded cloud-based domestic and international B2B payments, all at a scale, speed, and cost that can’t be matched. Reserve Trust’s customers are currently small and midsize fintechs, but larger fintechs with embedded banking and B2B payments of much higher volumes are knocking on the door. “They are looking for a stronger banking partner than what they’ve been able to find among the role of traditional banks,” says Reserve Trust’s new CEO Dave Wright.
Reuniting Two Successful Serial Entrepreneurs
Along with Wright as CEO, Dave Cahill has been named chief operating officer. They’ve both been involved in founding and scaling several successful startups, and they last worked together at SolidFire, Wright’s cloud storage company that he sold to NetApp in 2016 for $870 million. Wright is loath to describe himself as either a technologist or a visionary but says he enjoys partnering with such people to get their ideas ready for the real world.
The infusion of capital will be used to grow their team (Wright’s LinkedIn profile even boasted a “hiring” banner immediately upon announcement of the deal) and invest in the technology required to innovative new payment solutions to customers. Wright and Cahill will be joined on Reserve Trust’s board by Matt Burton (QED) and Phil Bronner (Ardent).
The Global Payments Market
Global digital payments reached $5.44 trillion in 2020 and are projected to hit $11.29 trillion by 2026. The COVID-19 pandemic has strengthened international cooperation and policies for online commerce and demonstrated how digital platforms could support the small and medium businesses that form the backbone of many economies.
In its 2020 Global Payments Report, McKinsey estimates changes that typically take five years are being squeezed into less than one by the crisis. It also notes these changes are in areas that are traditionally slow to respond, such as customer behavior, economic models, and payments operating models. However, many banks are unwilling to commit the investment needed to update their payments infrastructure, thus opening the field for more focused players.
Supply Chain Finance Presents Opportunities
Within the payments market, digital marketplaces will account for 60 percent of transactions in the next few years, according to McKinsey. Furthermore, the report predicts that the significant uptake in digitalization and possible geographic disruption of cross-border supply chain spending will mean the hitherto overlooked arena of supply chain finance will finally see some innovation. And with fintechs such as Reserve Trust targeting B2B payments, it seems the prediction was spot on.
To date, investment has largely been in core payment-enablement services like authentication, fraud detection, and alternative-payment-method acceptance. But McKinsey suggests retailers are missing out on additional value-adding opportunities. Plus, supply chain finance benefits the entire ecosystem by securing inventory for retailers through extended terms while giving suppliers certainty on forward orders. However, existing products are mainly targeted at large multinationals. In addition, fragmented manual processes and lack of data-sharing mean onboarding and credit decisions are often slow.
Nontraditional providers like Reserve Trust can stimulate cheaper and more accessible supply chain finance to smaller enterprises. For example, fintechs like C2FO facilitate “dynamic discounting,” in which early payments secure discounts. Tradeshift’s platform connects large buyers to small and medium-sized suppliers that wouldn’t otherwise hit their radar.
Globally, payment services is one of the most lucrative financial services product segments, but it’s not so for banks, where the cost of ownership is heightened by regulatory changes, IT, and the proliferation of alternative payments. As a result, bank employees are kept busy protecting existing customers from disruption rather than developing new and innovative products and experiences.
What Wright and Cahill will do with Reserve Trust remains to be seen. Still, McKinsey suggests that current providers, such as banks, treat payments as a stand-alone entity to drive innovation, scale, and profitability. Alternatively, they can outsource payments to payments-as-a-service (PaaS) players and thereby modernize their payment offerings without any upfront investment. Whichever they may choose, it seems businesses can look forward to better payment products in the future.
Sources:
https://mordorintelligence.com/industry-reports/digital-payments-market
https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/accelerating%20winds%20of%20change%20in%20global%20payments/2020-mckinsey-global-payments-report-vf.pdf
https://www.linkedin.com/feed/update/urn:li:activity:6828732166327873536/
https://finance.yahoo.com/news/trust-secures-30-5m-series-160000020.html
https://techcrunch-com.cdn.ampproject.org/c/s/techcrunch.com/2021/08/04/the-stripe-for-b2b-payments-reserve-trust-raises-30-5m-in-qed-led-round/amp/