Innovation

PROFIT HOT 50: The Little Shop with a Big Friend

The inside story of Canada's Top New Growth Company for 2009

Written by Jennifer Myers

It was a partnership long in the making. For 10 years, friends Michael Gokturk and Kevin Short had talked about starting a business together. The two met when Short, an IT-architecture specialist, became a client of Gokturk, a stockbroker. And they became fast friends after discovering a mutual interest in making money and working for themselves.

“Kevin had something with technology, and I had something with finance,” says Gokturk. “We wanted to meet in the middle somehow, and we were always just talking and talking and talking about it.”

The talk turned serious in 2005, when a friend suggested they develop an online payment-processing system for a client in Toronto. That deal never materialized, but it led the two friends to a venture that finally united their skill sets: VersaPay Corp., a Vancouver-based payments processor for bricks-and-mortar businesses. “Everybody takes credit cards, so we thought that could be the foundation for our company,” says Gokturk, the firm’s CEO. The fact that Canada’s Big Six banks had the market sewn up — far from deterring the partners — struck them as an opportunity. Short and Gokturk reasoned that small merchants, who often complain about how the banks treat them, would welcome a new player.

The partners’ instincts proved right. VersaPay has carved out a niche providing SMEs with flexible, low-cost financial transactions, software customized to clients’ needs and bend-over-backward customer service. Along the way, it formed a strategic partnership with a U.S. banking giant that brought a new bank/processor alliance business model to Canada. The result: explosive revenue growth from less than $50,000 in 2006 to $5.1 million last year — a stunning 10,132% increase that tops the 2009 PROFIT HOT 50 ranking of Canada’s Emerging Growth Companies.

Such hypergrowth got a push with a little chutzpah and some lucky timing. Indeed, cracking the payment-processing industry is about as easy as getting into Fort Knox. The gate is controlled by such giants as Moneris Solutions, the Canadian market heavyweight owned by RBC and BMO, and other bank-owned players. That posed a challenge. In order to process credit and debit payments, you need access to VISA’s and MasterCard’s secure networks, which are limited to members only. “We needed a banking partner, and all the relationships were tied up,” says Gokturk. “That’s the way it works: you don’t just start this business and have a nice little shop.”

But the upstart got a big break. In Short’s research, VersaPay’s executive vice-president and CTO stumbled upon Chase Paymentech Solutions, a Dallas-based division of JPMorgan Chase & Co. that had recently bought Scotiabank’s payments-processing business. “I e-mailed the CEO out of the blue,” says Short. “I immediately got directed to the president, who forwarded it to his business-development guy, who was looking at potential new partnerships.”

Unlike Canadian banks, U.S. banks rely on hundreds of independent sales organizations (ISOs) to market and acquire merchant accounts, with both parties sharing the transaction fees. And, with little presence in Canada, Chase was out to boost its market share.

After eight months of negotiations, Chase named VersaPay as one of a handful of its Canadian ISOs. “The timing really worked out for us,” says Gokturk. “Chase did not really have feet on the street in Canada. We put together a good team, a good business plan. The president still tells us they took a leap of faith with us.”

With this alliance in place, VersaPay opened an office in Montreal, widening its access to experienced talent. That included Patrick MacDonald, who has a background in white-label ATM sales and distribution. As VersaPay’s president, he now heads its sales efforts.

The firm leverages Chase’s network and infrastructure to provide an array of payment-processing services. Gokturk says that when VersaPay launched, it reassured merchants worried that it might go under that “when you sign with us, you’re also signing with Chase. So you’re pretty well getting the oldest and largest [private] financial institution in the world.'”

Still, if the Chase name got VersaPay through merchants’ doors, its low fees and high level of personal service won them over. VersaPay sometimes undercut copetitors’ rates by half. Whereas rivals charge standard rates, usually based on the transaction amount, VersaPay’s are negotiable. Typically, these range from 1% to 5% of the transaction, depending on the type of card used (such as a standard, business or premium card) and the number and size of the transactions.

“We’re more flexible,” says Gokturk. “We go in and build a merchant profile that saves them money, rather than just giving them the blanket rate.” VersaPay can afford bargain-basement rates because of low infrastructure costs. “We don’t have marble statues in our hallways,” says Gokturk, “so we’re able to offer better pricing and at the same time be profitable.”

Attractive rates also gave VersaPay a leg up when it pursued one of its key growth strategies from the get-go: targeting industry associations such as the B.C. Chamber of Commerce. “It gave us quick penetration with a credible partner,” says Gokturk.

VersaPay’s first key win was the Association of Canadian Travel Agencies. The big payment processors had categorized most ACTA members as high-risk because of turbulence in the airline industry, and were charging them “crazy-high rates,” says Gokturk. “We went in and slashed those rates in half.” Since then, VersaPay has signed up more than 30 associations.

Short points to another key to VersaPay’s appeal to merchants: its personal service. The firm assigns each account to a relationship manager responsible for keeping that customer happy. “If you call Moneris, you’ll get a person in India,” says Short. “At VersaPay, you’ll have an account rep in your region who you’ll deal with all the time. It’s a little more personal, versus the 1-800 number that routes you through to who knows.”

VersaPay bolsters its offerings with custom software. “We can design to meet what the merchant needs,” says Gokturk. A case in point: Short developed an e-currency platform for Brewers Distributor Ltd. (BDL), the Western Canada distribution arm of Labatt and Molson, that gives merchants ordering beer supplies multiple online-payment methods. This replaces an antiquated system of cash or money order.

Gokturk admits the platform isn’t a huge revenue generator. But it gives VersaPay an entry point for pursuing BDL clients such as The Keg and Boston Pizza. The idea is to upsell them credit-card processing, then throw in the electronic funds transfer services for free or at a discount.

To further expand VersaPay’s offerings,last year it acquired Montreal-based Positive Inc., a provider of wireless point-of-sale terminals and merchant services. “We were weak in the wireless sector,” says Gokturk. “We couldn’t deploy wireless terminals with ease or at a price that made sense to our merchants.” The deal added wireless expertise within such sectors as taxi companies. It also diversified VersaPay’s revenue base, 70% of it from credit-card processing, because its new subsidiary’s mainstay is debit-card processing.

If this sounds like a recipe that might wake a sleeping giant, Short and Gokturk aren’t panicking. “We’re not on Moneris’s radar yet,” says Short. “Part of it is that we’re just not big enough yet. And their focus is on the top 10%: the big oil companies and the Wal-Marts.”

VersaPay is a breath of fresh air in a stale Canadian industry, says Adam Atlas, a Montreal-based lawyer who specializes in the payment-processing industry and edits an e-newsletter about the sector. “The Canadian payments marketplace is starved for innovation for various reasons, including the tight hold of banks on the marketplace,” says Atlas. By stepping in with creative technology offerings, plus low fees and personal service, he says, “VersaPay has come out a leader.”

Last November, VersaPay turned profitable after two years of losses, and Gokturk says the firm will be in the black in fiscal 2009. It has about 2,800 merchants signed on and is adding about 200 per month. What’s more, the company is on track to double sales to $10 million this year.

VersaPay is opening a Toronto office, bringing Gokturk closer to the investment community in time for an initial public offering set for October. Despite the rocky economy, VersaPay plans to go public on the TSX Venture Exchange through a capital pool company transaction with JG Capital Corp. Gokturk says the IPO will allow his firm to attract and retain talent from companies such as Moneris and to make more acquisitions.

Five years out, VersaPay aims to have 10% of the Canadian payment-processing market, up from less than 1% today. Gokturk says the company will do so in part by launching a number of technology products that will simplify payment processes: “We want to make it easier for regular businesses to do transactions with banks or with each other.”

Originally appeared on PROFITguide.com
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