Payment Operations Software and the Transformation of the Payments Landscape with Rikhil Bajaj of Tarsadia Investments

Our Guest: Fintech Investment with Rikhil Bajaj at Tarsadia Investments

Rikhil Bajaj, a Principal at Tarsadia Investments, plays a vital role in the company’s venture and growth equity investments. Focused primarily on financial services, technology, blockchain, and web3, Rikhil also lends his expertise to software, healthcare, and consumer investing. With a rich background in guiding businesses through growth, he supports entrepreneurs in areas such as expansion, talent acquisition, and financing, including mergers and acquisitions. Notably, Rikhil collaborates closely with companies like Pagos, Petal, YieldStreet, and BoltTech.

Before joining Tarsadia, Rikhil was a founding member of the growth equity team at SignalFire, a venture capital firm with over $1.5 billion in assets. Here, he invested in Stampli and Argyle and initiated an executive-in-residence program. Rikhil’s career also includes a senior role at GTCR, a private equity giant with assets exceeding $20 billion, where he partnered with prominent companies such as Paya (NYSE: Paya), RevSpring, and CAPTRUST. He brings extensive investment experience from roles at Warburg Pincus and Primus Capital, focusing on technology and healthcare investments.

Rikhil’s academic achievements include an MBA from The Wharton School at the University of Pennsylvania and a BBA (Honors) from the Schulich School of Business at York University. Beyond his professional life, he’s an adventurous soul, enjoying activities like kayaking, cycling, and hiking. Based in New York, Rikhil frequently travels to the West Coast and internationally, adding depth to his diverse experiences.

Episode Transcript

Rikhil Bajaj: Open source is a great way to magnify your learning that you have, but also to create an ecosystem. So what does that really mean for us? In addition to having a dialogue with founders that often provide us unique and refreshing insights on the research that we’re already doing. We’re also engaging in dialogue with customers, and we’re distributing this research to a lot of payment leaders at large enterprise merchants and saying, hey, like there’s a better way to solve your payments challenges than working with idea. And look at all of the innovation happening in this space. And by the way, if you want to chat about working with any of these innovators, we’re happy to start that dialogue for you.

Jacob Hollabaugh: Welcome to PayPod, the payments industry podcast. Each week, we’ll bring you in-depth conversations with leaders who are shaping the payments and fintech world from payment processing to risk management and from new technology to entirely new payment types. If you want to know what’s happening in the world of fintech and payments, you’re in the right place.
 
Hello, everyone. Welcome to PayPod. I’m your host, Jacob Hollabaugh. And today on the show, we are putting our investor caps on once again as we take a look at what makes for a category-defining company in the payments and fintech space. I have the pleasure of being joined for this conversation by Rikhil Bajaj, head of FinTech and software at Tarsadia Investments, the firm making high-conviction investments in category-defining companies. Rikhil, welcome to the show. Thank you so much for joining me today.

Rikhil Bajaj: Hey, Jacob, It’s great to be here with you. Thank you for having me.

Jacob Hollabaugh: Pleasure is all mine. Let’s start, if we can, by getting to know a little bit about you yourself. First, can you tell me a little background about your how you got into this industry leading up to Tarsadia? And then what attracted you to this firm and wanting to lead specifically the fintech and software team?

Rikhil Bajaj: Yeah, I’m Canadian, originally. I first came to working on technology transformations of big financial institutions as a management consultant and in this process to creating slides that would drive changes over many decades, I quickly realized that there are just had to be a better way. And so over the past decade, I’ve been a payments investor. My first investment was a cross-border payout platform called Hyperwallet, that is now PayPal’s global payout platform. And then I’ve also focused pretty extensively on payments infrastructure. The way I think about this is it’s all the software analytics and fraud tools that power payments. For example, we recently invested in a leading payments data intelligence company called Kallipygos. And in the last category of where I spent time is B2B payments within specific verticals. A few years ago, I worked with a software-embedded payments company, Piia that was recently acquired by Nuvei. So I’m an old-time payments nerd dating back to the time before fintech was fintech. We used to call it financial services and technology.

Jacob Hollabaugh: Yeah, love it. Well, you’re the perfect guest then to have here on the show because we definitely love getting in the weeds, getting nerdy about it, and don’t always get to get really deep down into the actual tech side of it. The software side of it, of what actually works doesn’t work, what’s making it difficult. So I’m excited for this conversation. The one other overview, if you can give just of who Tarsadia investments is, what all the company does and the types of company you’re looking to invest in, or at least your division is looking to invest in?

Rikhil Bajaj: Yeah. Actually, I’ve had the good fortune of knowing the Tarsadia team sometime before I joined to head up our fintech efforts. It’s an interesting story, so Tarsadia is not a VC, but rather a multi-billion dollar investment firm backed by senior operators. And our operators are folks who’ve built businesses and real estate and fintech. So career investors like myself are more the exception than the norm. And because of our operators’ success in building companies, we have this multi-billion dollar permanent capital base with no outside LP. So this enables us to invest with a very different time horizon. We often invest over a decade plus and we take all of this operating experience we have and pair it with multi-year research efforts. For example, we’ll talk about this today, I’m sure we have the deep thematic focus on payment optimization. And when we do invest, we invest with conviction. So what does that mean? Often our investments are caught the stages of an individual company’s life cycle. We often collaborate with our public market team holding businesses well past IPO. And because we’re in it for the long run, like our founders, we also invest flexibly. So that could mean leading venture capital financings. It could mean funding, very specific growth opportunities in between rounds. It could mean M&A finance. Often I’m talking with my founders helping them buy significant competitors.

Jacob Hollabaugh: Yeah, it makes sense that it would be a much more cohesive kind of relationship and more symbiotic relationship than some of your kind of typical, more traditional investment firms that are out there. Let’s drill into what you’re looking for when building one of those partnerships. Leading one of those investments. Are you more focused on the founder or the idea? Does one of those kind of outweigh the other for you? And with both the founder themselves or the idea the company itself, what are some top characteristics that you’re maybe looking for that really stand out to you, that we should dive into this company a little deeper?

Rikhil Bajaj: It’s a great question, Jacob. I mean, I’ve had the good fortune of being an investor across stages where I’ve spent time in venture capital, growth equity, and private equity. And many folks on the Tarsadia team have a similar lens to mine, where we focus on much more than just the founder and the market. We like to call them Team and Tam investors, their team and Tam investors, and fintech. They sort of caused a real bubble in our industry in 2021. But I think, look at the world a little bit differently. We’re very focused on secular industry shit, like a real transformation that’s happening. And then seek out founders that are pioneering entirely new ways of approaching and solving for that shift. And our companies often have something unique about them. So that could be a unique business model, a unique technology, a unique go-to-market approach, really hard to replicate.

Jacob Hollabaugh: So that’s where the category-defining companies, that is how I did the introduction is listed on your site is really what you’re looking for and to use a very popular buzzword that doesn’t always work but seems like in this instance would disruptors, if you will, that are actually coming in and doing something completely different, something totally unique, as you say, that can change an industry versus just doing something a little bit better?

Rikhil Bajaj: Exactly. Like we’re focused on that disruption. But in addition to that, we are excited about backing companies that are executing that disruption with very attractive economics. So our companies tend to be a bit different from the long cycle burn for many years, profile that you often see in venture capital and I recognize I’ve used a lot of venture buzzwords here, so maybe it’s helpful. I think, Jacob, for me to share an example, like one example would be we’ve been studying for many years now how the value capture and payments is shifting away from the big processors, the audience, and braintrees of the world to the software tools that actually enable the payment. We recently invested in a company that’s at the center of the ship. The company’s name is Pagos, and what it is doing it, they’re providing data intelligence to merchants. Putting the power back in the hands of merchants to optimize their payment performance and then extract more value from their processing relationships. And the founder had a unique insight. The founder, Klaus Bach, spent decades advising large enterprise merchants on optimizing their payments performance. And for those many years of experience, he realized that it’s possible to build a data tool. And now Pagos have multi-billion data points and serve some of the largest marketplaces streaming platforms, software companies, e-commerce merchants in the world, helping them use data to optimize how payments could run better. So this is like a really classic example. You have the industry transformation happening, a founder with a unique insight, a product with a very powerful data moat, an incredible unit economics because the large merchants were serving.

Jacob Hollabaugh: And I typically wait till the end to ask this, but you bring up the data side now. So I’m interested to ask you when viewing the investment landscape in different companies that are using data-driven practices like Pagos’ to have such power and bring such efficiency to the market. Where do you think the data, AI, machine learning, all of the new technologies have been really buzzy this year? They’ve gone mainstream as far as people’s knowledge of them or acceptance of how powerful those are. What’s leading the way going forward? Where do you think the fintech industry, the financial industry is in the adoption curve of actually harnessing some of the powers of different data analytics and use of data in actually bringing things like what Pagos is to the market? Do you think we’re still very early or where would you say we’re at in that adoption curve?

Rikhil Bajaj: Yeah, that’s something we spent a lot of time thinking about. We’re vertical-specific investors where we go really deep domain expertise. So often we’re focused on demand-side shit, and this is a very unique supply-side disruption where the ability to analyze data and generate content has completely transformed in the past few years. So what we’re really focusing is on applications of those big supply-side shifts. So for example, in the banking industry, there has been through the course of the pandemic, increased digitization of banking. And at the same time, large banks have realized that it’s really difficult to hire customer service agents. So we’re spending a lot of time around the thesis of how generative AI could contribute to better conversational banking in a way that reduces the long hold times, limited service levels that many of the banks that we work with. So this example is symbolic of how, yes, there’s a supply side shift, but you need to find a vertical-specific trend that will drive application of the technology.

Jacob Hollabaugh: It makes perfect sense. Let’s go to you referenced earlier, recent white paper that you published that I’d love to dive into with you. It was on overall the transformation of that payments landscape, very specifically looking at payment operation software as the kind of key driver in boosting that merchant power and efficiency will of course link to the full white paper in the show notes for anyone listening that would like to read the entire thing. Fantastic. Please do. It’ll be linked down there. But could you fill us in on just to start a couple high-level key insights or findings from this white paper that you expect to have a significant impact on the payments industry in the near term future?

Rikhil Bajaj: Yeah. Jacob, thanks for introducing that. I mean, the reason why we’re releasing this research is because we want to have a dialogue with the market about what we’re learning. And through the course of this research, we talk to more than 200 founders, 50 plus enterprise merchants to understand the major challenges they’re facing in payments. What we realized is that. Merchants are becoming much more sophisticated and how they manage their processing relationships. And then this is a classic kind of Porter’s five forces industry shift going on here, where the power is shifting away from the processor song. The payments to the merchant and the merchant in particular are using software tools to help optimize payment performance, and that’s making the processing industry way more competitive. Braintree, Stripe, and Adyen were all built to just improve online payments, and now they have very similar products. They’re facing a lot of price competition. We’ve even heard anecdotes of some of these players pricing at interchange minus. So the reason why we think that’s happening is because payment needs have gotten much more complex and you need software to optimize your payments performance. So what does that really mean? Like emerging markets as an example, have very unique payments needs. More than 50% of the world’s global payment volume today, according to Worldpay, is flowing through alternative payment methods.

So understanding what the local consumers are using to drive conversion of their transactions is very important. And having software that enables access to these payment methods is something that many of the large processors haven’t focused on. The other kind of unique need we heard from merchants is a lot of transactions are being intermediated through marketplaces and in marketplaces. It’s much more complex than simply accepting an online payment, which the large processors are very well positioned to do. In many cases, you have to accept an online payment and then disperse those funds to the seller on the marketplace in real-time, because the seller is often a small business and split off a commission that goes to marketplace simultaneously. So this is a very unique payment flow, but we see the large processors not very well positioned to solve for. And then the last opportunity is around cross-border payments. Now cross-border is now close to a third of e-commerce volume and that has very unique needs because in the cross-border world it’s not only about picking a processor, it’s about routing the payments intelligently across multiple different processors because in each region you have a better processing or payout platform. And we’ve increasingly spent time with orchestration businesses that are using artificial intelligence to route those payments intelligently.

Jacob Hollabaugh: Yeah, and I think we’ve spoken to a few people on this show who are doing that’s the entirety of what their business is currently doing is as these cross-border payments are going up and especially in the B2B world and there’s many, many steps along that payment of just simply facilitating what’s the best path here. And it makes sense that for the processors, had a lot of power back in the day when things were a little more simple and when you all in the span of a decade or two add in everything’s going way more digital, e-commerce explodes, cross-border explodes. There’s just all these steps of complexity that both brings in some new players. And if some new players are coming in, someone’s got to lose a little power. Someone’s got to lose a little leverage in that. And it happens to be the processor. As you said, they’re really poorly positioned right now. Do you think that’s something they can fix or turn around or find the appropriate kind of equilibrium? Or do you think that it’s not just a big issue that the processors are having right now, but might be I don’t want to say they’re going to go away completely, that their portion of the payments chain still has to happen? But do you see a world where they can regain the position they had or find a way to the most innovative of the companies, find a way to merge and integrate with this new setup a little bit better than the others?

Rikhil Bajaj: Yeah. Mean that’s something we’re really we’re thinking a lot about. I mean, our view is that the large incumbent processors, even the modern ones, are doomed. There was a lot of talk in the public markets world about how retraded 50%. And I think we’re increasingly coming to the realization that is a innovative company. They’ve built some unique capabilities for large cross-border enterprise merchants, but their capabilities look a lot like Stripe or Braintree, and there isn’t actually a lot of differentiation among the modern processors. And so value is really being created by innovators that are. Hard to solve problems for a large enterprise merchants. Yeah. Is a good example. We talked a bit about it. Pogba is putting the power back in the hands of merchants, enabling them to optimise payments performance. We’ve also spent a lot of time talking to unique emerging markets gateways in Latin America and India. Latin America and India are very interesting markets because card authorization rates are very low. So can come in, build a local acquiring partnership, or even stand up a local acquirer. But that often is insufficient because if the card only authorized, let’s say, 50% of the time, you’re not really helping your client much because they’re not generating a lot of revenue. If you give them a product that works half-time. So we’ve spent time with gateways that have integrated with not just card processing, but local alternative payment methods. In many cases. And bank-to-bank payment networks where they don’t already exist, for example, in Mexico, and shifting the payments volume away from card over to the bank-to-bank network. And this is the type of innovation we think the large processors are really going to struggle to accommodate because they have grown very stagnant on the value extraction that they’ve gotten from overcharging for commodity processing.

Jacob Hollabaugh: Yeah, it’s been a great business for them. And so I understand why you would maybe say why would we ever change? But then the forces of the market come around and let you know, you probably should have changed because you didn’t. We have a bunch of innovators coming in and doing things differently and filling the gap that you used to fill and just have a stranglehold on. The other thing I want to ask you about from not this paper specifically, but what I was a little bit blown away by. I read this white paper, I read a couple others that you’d posted a little further back. And this is going to maybe sound a little weird to say. I found them actually valuable. I found them like actually full of like a lot of real insight and really like you were actually sharing what you had learned, what the research had done. And the reason it was striking to me is because I don’t necessarily always feel like a firm, an investment firm would be putting out everything that they learn. I’ve read others from other different companies where I’m like, okay, you’re putting out content, you’re putting out research papers, but I don’t know that I feel like you learned a lot more than what you actually put in the paper, and I didn’t feel that way with you. So it’s a random question, but the philosophy behind if you’re seeking out all this information to make really good investment decisions, the philosophy behind willingly sharing everything that you’re learning and like you said, having that true conversation with the market, any thoughts behind the philosophy of the nature of sharing? Because again, I definitely was struck with like, these are as good of reports that I’ve read from any firms coming out that actually feel like I am learning everything that they learned in doing the research for this.

Rikhil Bajaj: Yeah, it’s been a journey for us, Jacob. I mean, for the past couple decades, we’ve done incredible research in-house and have shared it selectively with the market, but have increasingly realized that like the technology ecosystem has, is that open source is a great way to magnify the learning that you had, but also to create an ecosystem. So what is that really mean for us? In addition to having a dialogue with founders that often provide us unique and refreshing insights on the research that we’re already doing, we’re also engaging in dialogue with customers, and we’re distributing this research to a lot of payment leaders at large, enterprise merchants, and saying, hey, like, look, there’s a better way to solve your payments challenges than working with and look at all the innovation happening in this space.

By the way, if you want to chat about working with any of these innovators, we’re happy to start that dialogue for you. And this is really with the intention of building the Gartner or Forrester A payments, creating a research ecosystem that enables us to provide differentiated advisory to customers, founders, industry leaders in the ecosystem around innovations that are happening. And I think you’re right, Jacob. I mean, we are very focused on providing unique insights as much a research house as we are an investment firm. And it is relatively easy to put out a state of fintech report. Many other great investment firms have done that, and those are rewarding and interesting to read. If you are a generalist person, but we really focus on domain specialist customers, domain specialists, founders that are thinking about how to solve very specific problems. Now, this may sound very niche, but these problems that we choose and the problems that our founders choose are one that are truly transformative to industries like in the case of this payment operations White paper that we released. We think that there are going to be multiple hundred billion-dollar markets created across the categories we mapped in our research.

Jacob Hollabaugh: Yeah, it’s I love the approach. Definitely, collaboration just wins in my book across the board and yeah, being able to build that ecosystem, I just, I definitely commend the approach you’re taking and I love the reasoning behind it and I think it’s the right one. If I were to be the arbiter of that, which I’m certainly not, but that’s where I stand. The final couple questions I have for you then, as an investor, you’ve got a really great vantage point to be able to see kind of where the industry is headed based off of both the research that you’re doing and looking into and what you’re finding out, but also based off of then companies that might come to you and bring to you ideas on their own. You have this really interesting vantage point and you referenced earlier looking really for those strong verticals or those really niche companies. So I always love to ask someone in your shoes this, is there any of those verticals, any sector within the financial world that maybe you’re getting pitched the most solutions to right now that maybe you’re seeing pop up more often than not in research? Is there any one part of the fintech payments world that stands out as maybe the hottest sector right now or the most ripe with opportunity?

Rikhil Bajaj: Yeah, the areas where we’re spending time. Jacob, It’s very much more of the same for us. We’re going very deep on payment optimization. We’re focusing a lot on how software within specific verticals can better optimize payments performances as well as performance for the underlying sub-merchant. We are spending a lot of time around the automation of finance. So like I said earlier, these are all demand-side trends we think are transformative. These individual vertical markets. But at the same time, we recognize that on the supply side, there are major changes happening and we’re getting pitched a lot around how generative AI, for example, can help financial advisors and wealth provide better advice. And the question we’re always asking ourselves is. What insights do our founders have that will drive unique application of this technology at the intersection of both the demand side trend as well as the supply side trend? The way you framed the role of investor I think is great, right? Because investors, we have very privileged roles where we have the opportunity to be in our ivory tower and spend time talking to founders and. Picking unique solutions to problems that we identify. But ultimately, how I also see our roles is being in service to our founders. So the value we provide to our founders is taking this research and being a sounding board for founders as they find unique solutions to these problems, but also helping them not just identify commercial opportunities, customers, or channels, but providing ideas that can generate billions of dollars of value for both for them and for us from our research.

Jacob Hollabaugh: Yeah, I love that being able to look at the game board, have that vantage point, and where some might just say there’s some movement over here, let’s throw some money. That way you’re let’s go see who’s making that movement, see how we can help them, maybe fill them in. Hey, we’ve seen movement in this area before. Here’s what we can offer to help you do this even better. So that’s a great place to be. The last question I’ll let you get out of here on then is of the many, many trends and many forces working to transform the fintech world and the payments world right now, if you only had to pick one, what would be the most important trend for you in Tarsadia to stay at the forefront of while investing in FinTech over the next we’ll call short term half-decade or so?

Rikhil Bajaj: Yeah. I mean, if I was to boil down everything that we are doing, it’s about the digitalization of finance, right? We’re still at a point now where. Fintech is a very, very small percentage of the broader financial services market. Software is only started to eat the economics of payments when it comes to tools that enable financial services to run, for example, fraud prevention or compliance tools. Over the past decade, we saw an explosion of tiny little point solutions. Now these solutions are all rebundling and data intelligence is providing better overlays to drive better adoption for large financial institutions to be able to use some of these tools.

Jacob Hollabaugh: Yeah. So you think we’re still pretty early in all of that then? Because that’s that is an interesting thing that I think we get caught up, especially someone in my role having multiple of these conversations every week of like thinking we’re really, really far along. Like this has been happening for a while, but it sounds like you’re saying we’re still very much at the beginning stages of actually incorporating the software side, the tech side, and allowing that to really get to what the eventual size and impact it’s going to have will be.

Rikhil Bajaj: Yeah, you’re right, Jacob. We have the benefit of looking at the world over multi-decade investment horizons, but this still feels. All right. A lot of venture funds are very much focused on the markup. They’ll get on their equity between and series B. And so that provides you with a very different time horizon. It often means that you’re trying to predict what will be the next hot trend that will get you your markups in the next two years. But we really focus on long-term value generation. And so what that really means is. What’s happening in fintech today still feels very much like the first innings.

Jacob Hollabaugh: And you’re trying to be around for all nine at least, or extra if it goes to the extra innings. Love that. Well, Rikhil, this has been a real pleasure. For those listening who may want to follow you, learn more about Tarsadia, keep up with all of the awesome research and papers that you are putting out. Where would be the best place for people to go to find you? 

Rikhil Bajaj: Yeah, we’re pretty active on social media, so find us on Twitter, LinkedIn, drop us a note by email. We’re always around and excited to spend time with folks in the market, customers, founders. Otherwise, on all of the work that we’re doing wonderful. 

Jacob Hollabaugh: We will link to those in more in the show notes. Rikhil, thank you so much for your time and knowledge today. I’ve greatly enjoyed it and hope to speak again sometime soon 

Rikhil Bajaj: Thanks, Jacob, and looking forward to the next time we talk.

Jacob Hollabaugh: If you enjoyed this episode and want to hear more, head on over to soarpay.com/podcast to subscribe on your podcast listening platform of choice. That’s soarpay.com/podcast.