In the past year, the world has undergone more dramatic, digital transformation than ever before. The capital markets are no exception.
Along their journeys to raise capital, issuers of varying size, shape, and industry are now finding themselves broadly categorized into two groups: those who are leveraging technology to raise more money faster, and those who are stuck in both mindset and mechanism using methods from the past.
This guide aims to walk you, a prospective issuer, through the 3 C’s of digital payment-tech for capital markets transactions: Conversion, Compliance, and Cost, and provide an understanding of how and why issuers are using modern tools.
To best understand the way digital payments impact the conversion rate of prospective investors, one needs to begin by studying insight from a digitally-established industry; e-commerce. The world’s leading online merchants, from mega-DTC brands to retail giants, all understand that optimizing conversion is about making it as easy as possible for people to buy things. The easier you make something, the more people will do it.
Few understand this, but smart issuers are catching on to a prevailing trend: the many tactics an online retailer uses to push your order to checkout (flash sales/incentives, saved/1-click information, abandoned shopping cart emails, fast loading payment screens) are all directly relevant to capital markets transactions. Whether you’re a retail investor filling a $500 order on a Regulation A+ offering, or an accredited investor subscribing for $40,000 to a “typical” financing, your path to purchase is not all that dissimilar from someone buying a purse (the difference being whether that purse comes from H&M, or Louis Vuitton). Across the spectrum, online retailers are just a lot better at making it easy to buy than most companies raising capital - counter-intuitive, given it’s often a much higher value purchase.
The good news is that the same way many tech companies have made it incredibly easy to open a quick-converting online store, DealMaker makes it exceptionally simple to transform your capital raise into a modern subscription experience. Our mission is to make the global capital markets better for everyone.
In the US, the continued growth of JOBS Act financings like Reg CF and Reg A+ offerings have opened investor and issuer eyes to the use of consumer payment methods, such as credit cards, within capital markets transactions. As the industry evolves, two truths have become evident:
Not all payment processors are built the same
A multi-million dollar online retailer does extensive diligence on their payment processor, studying the purchaser’s journey as well as understanding the conversion, acceptance, and chargeback rates. Issuers looking to raise capital should treat their equally significant operation with the same degree of sophistication. The reality is that a better payment processor loads and converts faster, loses fewer payments to unfair rejections, and ensures a lower rate of chargeback. You get what you pay for, and the reality is that working with a subprime processor to save a point on fees means giving up significant investor dollars to save pennies in transaction costs. DealMaker Payment’s robust infrastructure allows issuers to convert 30% more of their prospective investors - a lift that exceeds any potential difference in processing costs.
Digital payments are for more than just retail
An issuer soliciting their offering to a retail audience often understands the need for digital payments, but the average private placement continues to transact primarily on wire transfers and checks. We studied a recent offering on our system to demonstrate how that shortsightedness is losing issuers millions of dollars every time they raise capital.
Recently, an issuer on DealMaker allowed investors subscribing up to $10,000 the opportunity to fund via credit card. By the end of the round over half of investors had opted to pay digitally, 63% of which did so at the maximum of $10,000. There’s little doubt that had the issuer increased the maximum to $12,000, each of those investors would have opted to invest the maximum, easiest amount.
The secret is to think about capital raises as a traditional funnel, and understand that controlling conversion rate is the single most important lever in managing your offering. As an exercise, suppose a $10M financing. If an issuer is able to close 60% of capital interest, the top line must be at least $17M (and if marketing costs are 10%, this represents a $1.7M investment). Now look at what happens if the closing rate decreases to 40% - the necessary top line becomes $25M, and the 10% costs to acquire that interest skyrockets to $2.5M. Improving your conversion rate by 20% saves you $800,000 in this scenario - a gap that easily justifies any difference in payment processing fees.
Digital payments decrease an investor’s time to subscribe/fund, but they also ensure a seamless execution issuer-side during and after closing. The reality of raising capital the “traditional” way is countless hours spent waiting for and tracking down funds - updating spreadsheets, navigating trust accounts, and handling paper checks and wire confirmations.
Digital payments allow for easy, real-time tracking of funding transactions. An investor who funds digitally on DealMaker not only receives instant confirmation (and ongoing status updates) about the execution of their payment, but they ensure an easy experience for the issuer, who can track the acceptance of the payment method as well as the release of funds in real time. Rather than waiting for paper or excel reconciliations to be complete, a digital-first issuer can receive funds on a rolling basis from accepted and cleared investors, the same way an online store receives payouts from their sales.
Issuers soliciting investors for their raise may also endeavour to leverage automatic AML/KYC checks to verify investor information. This level of diligence is nearly impossible to do manually, but when facilitated digitally can be almost invisible to the investor (and provide reassurance to issuers). Combine this with the robust audit trail and funding ledger that digital payments entail, and it becomes obvious how issuers use a modern subscription process to dramatically streamline their close and post-close processes.
Raising capital necessitates a scientific understanding of your cost of capital, the same way an online merchant analyzes and optimizes their cost to acquire a customer. Issuers leveraging digital payments on DealMaker have unprecedented control over their customer financing and acquisition costs, the same way merchants can control their customer costs online.
While digital payments increase conversion to offset payment processing costs, digital payments are, of course, a new line item expense for many issuers. This expense may be further offset if the issuer elects to apply an administrative fee to investors - the same way event platforms charge a fee to buy tickets, or a full-service brokerage charges to execute a trade. Administrative fees vary in size by financing type and investor/audience target, but they allow a forward-thinking issuer to i.) analyze or predict their average ticket size and cost per acquisition, and ii) implement a fee that offsets all or a portion of costs incurred.
Investors can also incentivize higher subscriptions by removing processing fees above a certain ticket size, and can control the various “tiers” of investment at which certain payment methods are available. These tools allow for a rigorous understanding and maintenance of an investors’ acquisition cost - whether that investor is a close associate, or the result of broad solicitation.
There’s no two ways about it - digital payments help issuers convert more investors, making it easier to raise more money compliantly and with control. DealMaker succeeds when our issuers raise successfully, and our digital payment tools are built expressly with that goal in mind. If you’re looking to raise capital and are interested in a digital approach, visit us at dealmaker.tech to request a demo and get started. If you’re already raising money on DealMaker, talk to your account manager about enabling digital payments for your raise, and watch as your financing transforms for the better.