Innovating Where Banks Won’t: Talking with Rich Aberman About WePay’s Vision for Group Payments

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It’s too bad the economic collapse of 2008-2009 gave “financial innovation” a bad name, because the online banking and payments sector could actually use a lot more of it. When’s the last time your bank’s website surprised you with a cool new feature or service? For that matter, when’s the last time PayPal rolled out any fundamentally new features or user-interface improvements? Once financial organizations grow to a certain size, it seems, they often stop dreaming about cool new ways to serve customers better.

But that actually turns out to be a good thing for startup entrepreneurs, who have been busy filling the gaps in online money management with services like Mint, acquired by Intuit last fall, and now WePay.

The Palo Alto, CA-based startup emerged last fall from investor Paul Graham’s Y Combinator startup school, with a plan to change the way groups of people pay for things. Born in Boston from the world of its co-founders, recent Boston College alums Rich Aberman and Bill Clerico, it started out as a way to do things like collect frat house dues or pool contributions for a bachelor party. But it’s already grown into something much broader, with some customers using it to round up homeowners’ association payments and others using it to collect donations for humanitarian causes. Couples are even using WePay to set up funds for date expenses without having to take the more deeply fraught step of opening a joint bank account.

“What really made us say, ‘Wow, we should do this’ was my brother’s bachelor party,” says Aberman. “I was collecting a couple of hundred bucks per person from 14 people, and track who had paid what, and I realized that there was a very specific need that PayPal wasn’t addressing…They do a good job of helping people sell things online, but I don’t think they do a good job helping people collect money from other people, particularly in large groups.”

WePay, which opened to the general public in late March, provides the coordinators of group payments with online accounts separate from their personal bank accounts. They can spend the money in the accounts using WePay debit cards or by writing paper checks. All members of a group can monitor that account’s activity, ensuring transparency and accountability. The system can also be used to send group members automated reminders that payments are due—in other words, bills.

Opening an account with WePay is free. The startup makes money by charging groups a small transaction fee that’s added to each bill or deducted from each payment. That’s the same way PayPal profits, and it’s a sufficiently convincing business model to have attracted $1.65 million in funding from August Capital and a group of angel investors that includes PayPal alumni Max Levchin and Dave McClure, former Googler Paul Buchheit, Swipely founder Angus Davis, and “super-angel” Ron Conway.

John Chory, an attorney at Boston-based Wilmer Hale, was an early adviser to Aberman and Clerico, before they entered Y Combinator. He argues that it took a pair of twenty-somethings—members of the Facebook generation—to invent something like WePay. “Rich and Bill are two very smart and very motivated entrepreneurs who recognized a problem in their own life and set out to solve it with WePay,” says Chory. “They are representative of the next generation—tech-savvy people who stay connected with technology 24 hours a day and who are comfortable keeping their friends apprised of their activities. I have a feeling they will keep solving problems for many years to come.”

The 8-person startup is “aggressively hiring” software engineers to solve those problems, Aberman told me during a long phone conversation. I’ve excerpted the most interesting parts of that talk below.

Xconomy: How did you and Bill Clerico end up co-founding WePay, and what was your path into Y Combinator?

Rich Aberman: Bill and I went to school together at Boston College, both on the same scholarship, and ended up rooming together freshman year and again junior year. We started a business together in college selling taxi advertising in Hong Kong. I was interning there for a telecom company and Bill had a software internship at Goldman Sachs. It wasn’t really a scalable, disruptive business, but it gave us an opportunity to work together and fall in love with entrepreneurship. We could have run it really effectively, but we both decided to come back to school. We weren’t quite ready to drop out.

I came out to the Bay Area after graduation to work at a Web development and video production startup for about six months, then I applied to NYU Law School and got in on a full ride. I was supposed to matriculate in the fall of 2008. Bill took a job out of school with a boutique investment bank out in Waltham.

About a year after graduating, and a couple of months before law school was going to start, we started incubating this idea. Bill predicted the impending collapse of the American economy and quit his job about two weeks before Lehman Bros. collapsed, which was a good time to quit investment banking. I ended up deferring law school, and we used Bill’s first-year bonus to seed the idea, and committed full time.

But we made the mistake of trying to raise money too early. We were first-time entrepreneurs and had never raised money, but we had this idea about what it was like to go out and raise venture capital and then build a company around that. While we were unsuccessful, we got some great people on board as advisers who understood the business. We spent the first year beginning to understand the payment landscape and what we wanted to do with the product, but we made very little progress building it, so we ended up applying to Y Combinator about seven months after starting the company. It worked out pretty well when we were accepted, because that was when some of our banking relationships were falling into line, and it was a good time to move out to the West Coast and focus on getting some customers.

X: What gave you the idea for building a group payment system?

RA: What really made us say, ‘Wow, we should do this’ was my brother’s bachelor party. I was collecting a couple of hundred bucks per person from 14 people, and track who had paid what, and I realized that there was a very specific need that PayPal wasn’t addressing. They do a good job of helping people sell things online, but I don’t think they do a good job helping people collect money from other people, particularly in large groups.

With the bachelor party, which Bill went to, by the way, people started to ask where the money had gone. I was the one with the receipts. I realized that there are two problems that PayPal doesn’t solve—the whole collecting-money thing, and then transparency and accountability once the money gets spent. The basic idea is that we would make it really easy to collect money online and give you a secure place to put it, and give you a transparent way to spend it and share the information back with the people whose money you had collected.

I had that idea probably six or seven months after I graduated, and the first person I called was Bill, who has a computer science degree and is generally the smartest person I know. It was serendipitous because he had basically wire-framed a solution to a similar problem where he was running a ski house every year with six friends from college. Having independently thought of a similar problem and a similar solution, we realized it was probably a pretty ubiquitous problem.

X: What did you get out of your experience inside Y Combinator?

RA: We were basically running out of money, and if you’re out of money, twenty grand [the rough stipend provided to startups accepted to the program] is a lot. The whole focus of the time at Y Combinator is on product development—building a product and iterating it and getting people to use it. There is an overwhelming focus on writing code and churning product. So when we got accepted, Bill had a CS background but we didn’t have the Web experience we needed to build the product, so we brought on a third guy, Eric Stern, a 21-year-old from New Hampshire who had dropped out of Babson College after his freshman year. We actually met him through an Open Coffee gathering at Andala in Central Square. So it was the three of us. [Editor's note: While they were still at Y Combinator, Clerico and Aberman also brought on a programmer named Karl Schults, who was then a 21-year-old sophomore at Olin College of Engineering; he "had a very big hand in building Version 1 of the product," according to Aberman. Schults took a leave of absence from Olin and is still with the startup today.]

During Y Combinator there are three things that define the experience. The first is the network of other entrepreneurs—the people in your batch, all of the peers going through the program who are building products while you’re building products, fundraising while you’re fundraising. Then there’s the network of Y Combinator graduates, who have been through the Y Combinator experience and are doing great things, like Dropbox and Justin.TV and Xobni. The third thing was just access to Paul Graham, who in terms of sheer IQ is one of the most intelligent people I’ve ever met. And also this guy has seen 400 companies go through Y Combinator , and the pattern recognition, the ability to give tangible advice based on very little data on the way in, was pretty important.

X: What did Paul Graham help you with, specifically?

RA: I think first and foremost is that he is really good at messaging. We did a really poor job describing our product to normal people, and the entrepreneur’s dilemma is that you want to talk about all of these features, but at the end of the day, if you can’t get it across as a simple message, you are lost. He helped boil down the product to our core value proposition. In terms of the product itself, he is very good at understanding general usability stuff. He is really good at tearing a product apart and telling you what’s wrong with it. We also spent a lot of time talking about customer acquisition, and what are the early-stage, non-scalable things we can do to get our first 1,000 or first 10,000 users, and after that, what are the strategies for scalably accruing users. Paul has an enormous amount of experience there.

X: Did you have a working product by the time you finished Y Combinator?

RA: About halfway through, we processed our first real, non-founder transaction. Our first 30 beta testers were all Y Combinator founders. So we were still in beta at the end. We were one of the last companies [in the Summer 2009 batch] to launch because there were a lot of important things we had to do that a lot of other companies don’t need to worry about. Transactional integrity, penetration testing, customer data security, that kind of stuff. So we were still under a closed, invite-only beta at the end of Y Combinator, and we only officially launched and allowed the public to join at the end of March 2010.

X: You’ve got some pretty interesting angel investors, like Max Levchin. Was it being in Y Combinator that gave you access to those folks? Did Paul call up Max?

RA: During Y Combinator we ran out of money again. $20,000 goes pretty quickly when there are hard costs associated with building a payment app. We ended up raising a small angel round from some of our advisors that we had met along the way. So we came out of Y Combinator with several names attached to the company and a little cash in the bank, and we ended up closing our institutional seed round in December of 2009, for $1.65 million.

Y Combinator definitely facilitates introductions. They do a really good job of launching your startup out of a bazooka, in terms of hype and PR and general excitement around the team and the company and the product. But what really helped us raise our round was the fact that they plugged us into that network. Paul might not have sent an e-mail saying ‘Meet the WePay team,’ but he put us in a position to know the right people and to reach out directly. But the vast majority of them reached out to us. We had a lot of inbound interest that we capitalized on.

X: You mentioned that when you were collecting money for your brother’s bachelor party, you started getting questions about where the money was going. Did you design WePay to make it harder to defraud people?

RA: We made a decision that we don’t want to fundamentally change the way people do things. We just wanted to make it easier and reduce the friction. Whenever a person is collecting money, whether it’s for a bachelor’s party or a ski house or fantasy football or paying the landlord, you are always going to run into the problem of that person spending the money unscrupulously. We don’t offer any kind of recourse if the money is not spent appropriately. That’s not the problem we are trying to solve. We just want to give people a specific place to keep the money, besides their personal account, so they can escape the liability, and if they want to they can share the information about how they are spending the money. So now you can make sure that your roommate sent the check to the landlord or that the fraternity treasurer spent the dues money appropriately. Everyone is already doing that, except that the process is very manual. You need printed statements and receipts. We just make that process a lot more frictionless.

X: It’s sort of surprising that you can’t do this with PayPal already, or with your bank. It seems to me that payment companies and financial institutions are dropping the ball on innovation.

RA: We have a slide in our PowerPoint deck that mirrors what you just said. Payment companies in general are still innovating, but it’s a difficult landscape. There are a lot of compliance and regulatory issues. Moving money around is not something to be taken lightly.

I think where PayPal has failed to innovate is that 10 years ago, when they first started, the original idea was to allow people to send money via handheld PDAs. There was a very limited market for that, for a variety of reasons. When eBay exploded, they realized there was a really big opportunity in allowing people to accept payments online for things they’d sold. As the company evolved into this merchant processor, it began to look a lot more like its customers than like the people it served. Its customers ended up being the merchants. There is very little reason to innovate now because they are doing a pretty good business just allowing people to sell things online. From a user perspective, it has completely failed to innovate. It’s not really a functional, clean, easy-to-use way for people to collect money online for normal things.

X: Most of the use cases you’ve been describing, like collecting frat dues or paying the rent for a group of roommates, are things that are relevant to a lot of young people, but I’m wondering if you think WePay also has appeal for people in older demographics.

RA: One of the reasons we started with those use cases is simply because that’s what we know best. We know how to market there. Fraternities actually deal with a tremendous amount of money. That’s a great way for us to grow, but over the past year we’ve become more cognizant of the fact that this problem permeates all age groups. So we’re trying to identify more verticals that we can move into. School clubs, PTAs, Boy Scout and Girl Scout troops, professional associations like Kiwanis and Rotary and the Shriners are all dues-taking organizations. So we are getting smarter about what verticals we can go after. It’s not just limited to 20-to-28-year-olds.

X: A lot of money must be passing through WePay or sitting in WePay accounts already. To handle all that, did you basically have to become a bank?

RA: The process is pretty terrible. To become a chartered, licensed bank is a multi-million dollar proposition. But we have a partner bank on the back end that we work with, Bancorp, which has been truly instrumental in helping us get the product off the ground. At the end of the day, we are offering FDIC-insured bank accounts. What we get from them are the back-office financial details. The technology is built by us, and we leverage their position as a safe, secure, chartered bank to hold the deposits and issue the debit cards.

X: How hard was it to find a bank that would work with you?

RA: That was probably our biggest challenge. There are a handful of innovative banks. Most consumers don’t know their names, but they are doing innovative, early-stage things that are providing startups like us with the opportunity to deliver a great product to consumers, and Bancorp is one of those. There’s a startup in Boston, Perk Street Financial, and they’ve been instrumental in their case as well.

I’m a pretty outspoken critic of the general lack of innovation in financial services. If banks were doing their jobs properly, I don’t think you would have a Mint or a PayPal or a WePay. The services fit so naturally into what banks are doing; Mint is just a better online banking experience, so you can see what’s happening with your money.

X: Can you see one of those innovative banks like Bancorp buying WePay someday? Is that your exit scenario?

RA: I don’t know what our exit scenario is. We want to build a big company. Whatever that means in a couple of years, we’ll see.

X: Do you have any stories about people using WePay in ways that totally surprised you?

RA: There are fun ones that are relatively straightforward—roller derby, for example. There is a pretty large number of people on roller derby teams, as it turns out. One of the other interesting uses is for joint spending accounts between girlfriends and boyfriends who don’t want to go to the trouble of opening an account and calling it a joint bank account. There are a lot of commitment issues there. With WePay, you can set it up in a second and tear it down in a second, and put money in it for date night or whatever, and having an ongoing record of the expenses.

Another one is social savings—people saving together. People will have a trip in mind for seven months down the road, and they’ll send a recurring bill for $20 a week, and at the end of the year they’ll have $2,000 to go on a big group trip. Donations have also totally taken us by surprise. There are a lot of people collecting donations for friends who are having trouble paying their mortgages. You don’t have to be a registered non-profit to start accepting donations this way. After the earthquake in Haiti, we saw a ton of Haiti support groups pop up. Will.i.am from the Black Eyed Peas had this fund for paying people’s mortgages, and he actually used WePay to collect donations for that. That was a cool use case.

X: What’s the next year going to be about for you? Do you have milestones that you’re working toward that would help convince investors to put in a larger Series B round?

RA: We have some internal milestones, but I think generally the investors want to see that there’s a market out there for the product. It’s like pornography—you know it when you see it, meaning that you know when you finally see the product-market fit. By the end of this year we’ll have pretty solid data about how big the market is, and who wants to use the product. We have a pretty long runway, and we are really focused on getting the product out there and getting it into people’s hands.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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