Priority Technology Holdings, Inc. (PRTH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Priority Technology Holdings conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to your speaker today, Mr. Chris Kettmann. You may begin your conference.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; Mike Vollkommer, Chief Financial Officer; and Sanj Goyle, CEO of Finxera. Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements as defined in the private Securities Litigation Reform Act of 1995 regarding future expectations about the company's business, management's plans for future operations or similar matters, which are subject to certain risks and uncertainties. The company's actual results could differ materially due to several important factors, many of which are beyond the company's control, including those risks and uncertainties described in the current report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements. Additionally, we may refer to non-GAAP measures, including EBITDA and adjusted EBITDA during the call. Please refer to our public filings and disclosures for definitions of our non-GAAP measures and the reconciliation of these measures to net income. We have also provided an accompanying presentation with today's call that will help us more clearly articulate our go-forward strategy. With that, I would now like to turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Chris. And I appreciate everyone taking the time to join us today. Look forward to describing to you a bit more about the transaction, what it means for Priority from a capital structure standpoint, but more importantly, what it means for the future of our payments platform and its ability to serve modern payment networks and a really unique way with a complete payments and banking solution. Chris, if you wouldn't mind starting off with our -- the strategic rationale slide. I'll cover some of the salient points. And then kind of crisply move through this presentation, so we can open it up to Q&A to the group. So with regards to the strategic rationale this -- of our combination with Finxera. I think as many of the folks on this phone can appreciate the modern world of payments, and in particular, the integration of software and payments. It is critical to execute with simplicity and a feature set that allows those software enterprises that are connecting into Priority for payments to really identify ways to keep that value inside the network. And Finxera and the technology assets that they've built over the last dozen years are really designed to do just that. They are a leading provider of banking infrastructure as a service. And I don't want to steal Sanj Goyle's, CEO of Finxera, who's joined us on the call today, in describing the details around the business. But importantly, the tool set that Finxera brings will immediately bring Priority into the payment facilitation and payment aggregation world, enabling us to expand the verticals that we not only serve with deeper solutions that will maintain the money that's flowing through those verticals, and I'll provide some sailing examples later. Inside those networks, but also expand our ability to operate in verticals outside the ones that we touch today. Importantly, one of the core value components of Finxera, their CFTPay business, is a market-leading account administrator to the debt settlement industry. That robust cash flow associated with that business provides a natural countercyclical balance to the core assets of priorities that perform well in markets and economic cycles when spending is up, this provides a natural offset to that. So as you may recall from many of our previous conversations, we've been focused on identifying countercyclical assets that will help the business perform across economic cycles. Finxera brings to Priority, not only the technology itself, but all of the resources that have built out over the past dozen years, including an outstanding team in San Jose, and a very scalable and unique team in their India development center that handles both development and payment operations that will help our organization scale. Lastly, as I think many can appreciate, this is a -- it's a large acquisition. And it's going to require the full expertise of not only our team at Priority, but the management team at Finxera that is going to continue in their roles and help expand the PRTH management team as we not only establish the unification of our technology platforms and deeper penetration into the consumer finance vertical, but also as we grow into other verticals, a team of extremely talented people to help us execute. If you wouldn't mind, Chris, if you could just move forward to the transaction summary. So this transaction was executed, total purchase price of $425 million, $375 million of which is cash consideration and $50 million of Priority Technology Holdings common stock. That stock is going to be retained by the Finxera management team as well as their private equity sponsor, Stone Point Capital. So we're super excited to have what we regard as a premier investment management team that has -- that is showing their support for the Priority platform. The transaction is immediately accretive to both EBITDA and EPS revenue coming out of the gate for 2021 on a pro forma basis will be approximately $540 million with adjusted EBITDA of $130 million. And that $130 million, just for everyone's reference, does not include what we anticipate to be natural expense savings as we just consolidate services. It does not include personnel savings, which we are anticipating very, very few because we're looking to continue on in growth mode and are going to need human resources to do it. The operating construct and how these assets combine, the core technology of Finxera's Banking as a Service platform will be combined in with Priority's payment infrastructure platform to really form one discrete technology for both payments, taking and making payments and the ability to manage those payments in individual accounts and sub accounts. And I'll talk more about the application of that technology in some future slides. Importantly, with the execution of this transaction, we've not only brought in strategic investment from Stone Point, who's rolling a portion of their consideration, but as well, Ares Capital Management is making a sizable investment in Priority to retire existing debt and invest in the future growth of the platform on a combined basis. We've also meaningfully improved liquidity with a 5-year $40 million revolver. The sum of this equity roll and investment from Ares will allow us to refinance our existing debt and bring net leverage down below 4.25 by the close of this transaction. The closing is expected in 6 to 9 months. We, of course, could -- we're prepared to do it faster from an operational standpoint. However, due to the regulatory transfer of money transmission licenses, which takes a reasonable amount of time, we anticipate those licenses should be transferred and completed in 6 to 9 months, hence, the expected timing. Chris, if you wouldn't mind just forwarding to the Priority business overview. And I briefly want to touch on, I think most of you on this slide understand the framework of Priority in the business segments that we currently serve. We've built a modern infrastructure for payments that serves 3 broad universes: consumer payments, commercial payments and our integrated partners verticals. And what's allowed us to be adaptive and operate at scale on that single technology infrastructure is that it's been built in the cloud, it's a modern API for payments, and we plugged in, what I'll call, business applications like MX Merchants, that serve the consumer payment space; CPX, of course, our core commercial payments product; and then a host of integrated business applications that serve unique and discrete market verticals. Finxera, and I'm going to hand it over to Sanj Goyle here in a moment, is configured in much the same way. They have built an API for banking as a service that allows the accounts that they are managing money flows for to be accessible to a host of business applications. We will combine that core technology up at the technology holdings level, if you can think about it that way. And their core CFTPay business application that serves as an administrator to consumers engaged in debt settlement will reside within our consumer finance vertical. Sanj will run that component of the business for the foreseeable future, while we consider other verticals that we believe this technology can be expanded. The core Finxera technology team will be combined with our technology group at Priority to unify these 2 stacks so that they can operate seamlessly together across the industries we serve. With that, let me give you an opportunity to be introduced to Sanj Goyle, CEO of Finxera, and cover a bit about the journey that they have been on over the past dozen years, and really how this transaction, I think, is a natural evolution for what they built within the fintech and banking space. Sanj?

Great. Thank you so much, Tom, and good to be with everyone. Let me share with you all. There is a genuine excitement between the 250-person team at Finxera about this transaction. When you have a transaction where there is no overlap, all the services and assets are complementary, it serves a countercyclical product and there's a cultural fit. I mean it just -- it really is -- this merger is about a shared vision about how the convergence of banking and payments is going to happen. It represents a growth opportunity. And one of the things that's incredibly gratifying for me and my team as the founder of this business is that it's a validation of the investment thesis that we started with 10 years ago. And let me give you a brief rundown of what that is, is that when we raise venture capital money, we're based in Silicon Valley. We raised money from Tier 1 VCs, foundation capital being the lead. And we had a vision that was that the functions of banking, which is opening an FDIC-insured bank account, moving money around, reconciling it all in a compliant manner, would not have to reside with the bank's loan, but rather that could be delivered through technology, and embedded in any kind of software application or user experience. And 10 years forward, we have largely executed that vision in terms of what we built. We have a forward-facing set of banking APIs that move billions of dollars a year. We have a banking operations team. We have a banking compliance regime. And we have money transmittal licenses on a nationwide basis. So -- and as Tom mentioned, we've grown the team to over 250 people, 225 of which are in our India office. And 25 are in -- mostly in California, but also in Phoenix and North Carolina. And so the way we have commercialized our technology and how we have developed a robust business with cash flow that could enable this deal is that we become the premier payments and escrow provider for the debt settlement industry, which is helping consumers who are behind on their credit card bill, enter into debt settlement programs so they can get a discount on their principal balance. And it's important work because the accounts that we manage help a consumer from having their savings swept by their creditors and automate a monthly savings plan for the consumer. But that is just one vertical and, frankly, a narrow application of the technology that we built out. The thing that excites us is the combination with Priority really takes us back to the audacious vision that we had with Finxera, which is the delivery of banking in a -- as a service model. And so I think Tom is going to give you greater details, but we're a company of some scale, but not the scale a Priority that you can imagine every one of the customers and lines of business that they have, we can complement and augment it with the management of a bank account. So the way I like to think of it is Priority as an expert and a leading company in money in motion, moving it from point to point. What we enable is the management of money at risk, the opening of an account, the reconciliation of that and doing it in a compliant manner. So across the 220,000 merchants that they have in their platform, well, our ability would be to be able to offer them a business bank account, or the 1 million tenants that have their rent collected every month. We can offer a security deposit or an escrow account, which offers business logic on top of it for the landlord to manage and transparency for the tenant. These are all things that are largely out of the box as part of the Finxera platform. So let me pause there. I think I'll turn a lot out of you. Hopefully, enthusiasm was one of them. And I'll turn it back to you, Tom, to kind of make examples more real.

Yes, thanks very much, Sanj. Chris, if you would not mind just moving forward to Slide 7. And look, at the end of the day, the way you monetize payment networks is making payments easy. And Sanj alluded to some examples, but I'm going to describe our combined platform and the functionality of it, which, look, you should be aware, this transaction has been over a year in the making. We've been connected with Sanj and his team at Finxera. They are integrated. They became introduced to us through some common relationships. They've been integrated to us for payments. So it is, I'll just say, a very short sprint to the unification of payments and banking on a single platform within Priority Technology Holdings. And for us, what makes this platform unique and we believe is what the modern integrated software provider wants is they want -- I'm going to call it the anti-Stripe. They certainly want to connect in easy for payments. They want to be able to move money and have that experience be one where they can open up a single merchant and have a sub merchant for all of the relationships that they're serving on their software and have that money move accurately in and out. And perhaps that money can be stored there for -- and to be consumed later, either using a debit card or using a virtual car to make payments. But importantly, they don't want to do any of the servicing or compliance or risk or underwriting that surrounds running a payments business. And that's what our combined offering affords them. When you need someone on the phone, our client service is there. When you need a payment operation problem solved, we have payment experts, both in the U.S. and now in India, prepared to solve those issues. And that's the experience that a customer wants, I'll call it, choose your own -- kind of choose your own journey, if you will, that we unlock and allow them to work with a complete payment and banking organization to realize within those software networks. Chris, if you wouldn't mind just kind of flipping forward to Page 9, and I want to kind of bring this home with some of the existing assets that Priority has and maybe give you set of some fine detail around the use case. I think many on the phone have probably heard us talk about the real estate payments vertical, where we've had a very strong performance in 2020. We monetized that asset in partnership with MRI Software. That's become a tremendous partnership for us. Well, now imagine if your MRI Software and your tenant that's living in a building that the property managers are using that software, not only can you sign up and get your rent payments taken care of, but you can also get your deposit account for security or any escrow that needs to be put up, can be managed on that same platform. Similarly, as the property manager wants to just manage their core business, which has multiple properties, probably in multiple states that they need to account for and perhaps even complex ownership structures that need to be separated. Well, the ledgering system that's already within Finxera will enable all that to occur through a single interface. So it becomes an extremely powerful tool for these complex networks that manage money flowing through them, like real estate. Another great example, health care, FSA, HSA accounts. These are in fact, savings accounts, but they have to -- money has to flow in from payroll, it has to flow out to providers. It would be ideal if as that money flows out, in an FSA or flex spending account, cannot only be directed to your provider, but if that were also an open loop solution like a Visa card, where Priority happens to be an issuer and can be used to buy other things that -- contact lenses, a host of other conveniences for a consumer to use their flex spending account. So with applications like these that our combined platform is going to unlock, because that is the experience that is the modern payment environment that providers in these verticals and software systems that are enabling expect to have. And that's what we're prepared to deliver, domestically today, but we believe in our near-term future we'll also be international. Chris, if you wouldn't mind just flipping forward to Page 10 here. And I won't belabor the point because I've tried to provide some -- just some more salient examples that exist in our current infrastructure. But I think just as you walk away from this conversation and think about the applicability of payments and banking on a single platform, you can appreciate the addressable market that exists for the combination of these assets across just 6 segments that we've outlined here for consideration and our ability to expand our reach as we execute on what's in front of us. We're not going to try and boil the ocean here, day one. There are some clear opportunities that are in front of us. We're going to execute upon those, but we know that the world that we can operate in and capture, we think, is vast. Chris, if you wouldn't mind flipping to Page 11 for the audience. Just to reiterate some of the powerful numbers that this combination represents. At its current state, not to mention what we believe can be incredible acceleration as we execute on the vision that has been outlined. Combined, we have 15% pro forma net revenue growth. 75% of our revenue is from integrated payment revenue and is in excess of 90% is recurring. Before any synergies, we're on $130 million pro forma adjusted EBITDA run rate and our adjusted EBITDA margins are 25%. And the combined businesses kick off slightly in excess of $60 million of free cash flow to fund acquisitions, and to reduce debt. It's a great growth platform. Margins expand. It has countercyclical attributes to keep the overall business very consistent throughout economic cycles, and it generates high cash flow. The combination of this financial profile has enabled us to create a capital structure outcome, which I'll -- I'm going to hand it over to CFO Mike Vollkommer here in a minute, that really positions us with a balance sheet that is positioned for growth and continued consolidation of the payments industry. Mike?

Thanks, Tom. As just the strategic rationale, this transaction isn't exciting enough, what we've done with the refinancing and how that has strengthened our balance sheet is equally exciting, at least to us finance people. Like the slide says, the final slide in this deck -- Chris, if you advance to it. The debt refinancing, it drives free cash flow and positions us for growth. As Tom had mentioned, our leverage will be reduced to below 5.25x. The strength of the company of PRTH and how we've been performing and the strength of this combination will enable us to refinance at significantly lower interest rates. And the mandatory amortization over the next 2 years will be reduced by $40 million. I may have misspoke on the leverage. It's like on the slide, it's 4.25x. I may have misspoken and said 5, but it's below 4.25x. So the reduced mandatory amortization is significant because as you're all aware, our amortization under the existing debt facility was stepping up in this year in '21, more so in '22 and then it matured in '23. One of the new facility, which is a committed facility from Truist, the amortization will be under $6 million a year. So a significant improvement on the debt service, which will provide cash to fund acquisitions, or take down debt even further, if we so choose. We also have ready access to the equity to -- for additional acquisition activity. So not only a tremendous day of an announcement for strategic business reasons, but we're exiting these moves with a much, much improved balance sheet going forward. Tom, I'll hand it back over to you.

Thank you, Mike. Well, we'd like to open the line to questions.

[Operator Instructions] Your first question is from Brian Kinstlinger of Alliance Global Partners.

I have a handful of questions. The first, a numbers question. If you could quantify Finxera's revenue in 2020, and if part of your $500 million outlook pro forma, what is their contribution in 2021 look like roughly?

So it will be in the -- just around low 70s.

That's 2021. And what about -- what was it in 2020? Is that also [indiscernible] organic growth, they're both?

So that's 2020. And we expected -- we've actually -- we've been pretty conservative with it given the COVID circumstance. So we expect it to be kind of in the mid-70s, given the stimulus, which we'll probably forestall some debt settlement activities. So we've had -- we've taken a pretty conservative view in our mind.

Great. And then just to be clear, what percentage of revenue comes from management fees versus transaction processing fees from Finxera, just so we're -- I assume they're charging monthly management fees for banking as a service per account managed? Is that how it -- they're generating fees for that business?

Sanj, let me allow you the opportunity to weigh in. But yes, that's accurate, but it's on a per account basis.

Yes. It's basically about 2/3, 1/3 in rough. I think we can get you the exact numbers later, but that's about the right range.

Yes. Great. And then can you talk about the verticals that Finxera's been successful in penetrating from this banking as a service business? And I think you were pretty clear or it is pretty clear that synergies with your merchants in your consumer business. So how are you going to go-to-market with this banking as a service model to your merchants? And what kind of sales cycle do you foresee?

Well...

I'll take that one with the merchants.

Yes. And let me -- and feel free to jump in here, Sanj. So the penetration into our existing base, we think it will be rather immediate because we're doing some of these functions today, however, we're leveraging other technology to do it. So we operate a relatively large real estate payments business, for instance, today. We have 1 million renters on it, but we're using other technology. So having that in-house, obviously, that would go away. There's other segments. So within that relationship, let's just stick with rent payments for a moment, okay? Within real estate payments, there's an adjacent security deposit that goes on with every renter. We're not touching that today. We immediately have a solution for that. We've largely been residential. The relationships we have today have an enormous commercial rent payments business that we have yet to touch. This gives us all the assets we need to do that. Those tend not to be on card, they tend to more be ACH, but they have massive security deposits that need to get put forth. So we think there's already -- that's just one example. Others within our book are the applications we have in health care within hospitality for Cumulus and e-Tab, where we operate that today on an individual merchant ID basis. Having payment facilitation will enable us to board those merchants faster, get them activated faster. Frankly, pursue different pricing strategies. So there's a host of applications within our existing base that we're -- we'll be able to flip on and pursue.

If I could follow up then. I just want to reconcile a sales cycle that's rather immediate to your large client base to the fees that you would generate right away. I'm just not reconciling that or with the revenue and the growth because if you're able to close those so quickly and add those so quickly and add those fees so quickly, I'm not quite understanding that sales cycle versus the revenue.

Well, I think what you're -- maybe the question you're actually asking, Brian, is, did we assume revenue synergies in what we've presented to you? And the answer is, no. So...

At least, to your point, the degree that you can get these customers signed on -- your merchants as well as renters, signed on to this platform that would add upside to the $540 million?

That's correct. And of course, the bottom line as well. So as I mentioned to you, we've tried to take an exceedingly conservative approach. We want to identify the opportunities that we think we're going to get the biggest bang for the buck and try and be very measured about how we do it. The other reality is there's a regulatory consideration in movement of the money transmission licenses. So we want to make sure we handle that very smoothly. But there are a host of, we believe, revenue synergies that are not modeled in our current financial profile that we've shared. And when I say that model, I mean 0. Those numbers are -- yes.

Your next question is from Andrew Scutt of ROTH Capital Partners.

I just want to say, congratulations on the transaction and refinancing. My first question is about Finxera. You guys have about 375,000 deposit accounts, looks like over $500 million daily deposit balance. Can you just provide some breakdown between commercial and consumer customers that you -- that have deposits in your accounts and kind of a target breakout between commercial and consumer depositors?

Sure. So that 375,000 deposit accounts are all U.S. consumers for whom we are managing escrow accounts for their participation in the debt settlement program. So the vast majority of the $500 million of deposits, we enjoy our consumer deposits.

All right. Great. And then my second question is on the CFTPay, I might be butchering that -- I apologize, brand, it looks like it's kind of one of the strongest brands in the Finxera family. So can you kind of provide some color on how you see that fitting into the integrated partners business and maybe some revenue and EBITDA guidance?

Yes, surely. Tom, you want to speak to that? Is it...

Let me speak -- yes. Yes. And then Sanj, feel free to kind of weigh in as to how you see the 2021 profile. So the CFTPay asset will reside within Priority consumer finance. And it will be an integrated business application, just like the host of others. I think there's a pretty good visual on this that I'll just refer you to as you -- on Page 5, And so that business will look to expand the consumer finance payments vertical with CFTPay as a core asset. And we expect to add others as well. Sanj, do you want to speak to some of the revenue questions?

Yes. I mean -- so I think you already hit on kind of what our projection is for this year, hopefully, tail end of COVID and stimulus and all that. And we do see there is quite a bit of upside opportunity on top of the low to mid-70s. I think that the thing -- the way to think about it is in this classic software eats the world, but software eats payments. What we have -- our banking as a service infrastructure, is about having a platform built on top of APIs that allows us very rapidly to build then the front-end application to address a vertical or market opportunity. So it fits very neatly in with integrated payments. So the CFTPay line of business is an application we wrote on top of our banking as a service software platform. That addresses the needs of consumers, debt settlement companies and banks. So what we feel is we are going to -- as we get more integrated, and we have all of the kind of the Priority discussions about what are the near-term opportunities, we'll look to see what are the extensions on top of our banking as a service that we need to address PayRight or e-Tab or a PayEx, and I think we'll develop those more over time.

Your next question is from George Mihalos of Cowen.

Congrats on the deal, guys. Looks very promising. I just wanted to circle back maybe to the first question and push something out a little bit. If we think of Finxera historically, where has that growth rate been? And I totally understand that you guys are being conservative as you think about '20 or '21. But just generally speaking, historically, what has that business been growing at?

Sanj, do you want at this one?

Yes, I'll take that. I'll take that. Yes. So for the few years before COVID, we had about 30-plus percent growth per year. And then in the COVID year, it was dropped to about 5%. So even in the midst of the COVID year, we had some growth, and that's because of the stable nature of our installed base of consumers that we service. Our feeling is that one of the forcing functions for people who enroll in debt settlement has been mitigated by the large government stimulus programs, which at some point, when they come to closure. We think the -- there's quite a bit of inflection point consumers who are going to sign up for debt settlement. So we're thinking -- it's best guess, in the back half of this year, we really think that the enrollment and growth will happen. And in our business, the enrollment growth tails -- the revenue tailed enrollment growth by about better part of 6 months or a year. So the enrollment that you have for this year really start to produce revenue in the next year. And so we'll see that impact in 2022.

Okay. But it sounds like long term when we think about these newer verticals that you're going into, that a continuation of that growth rate getting back to that point. Certainly, as we look at longer term into 2023 and the like, but that's still on the table clearly.

Yes. Absolutely, George. And not just in the core CFTPay business, but expanding the application of -- think about it this way, George, just keeping money in the network, okay? Priority -- imagine if you -- as a small merchant, you sign up with Priority for a processing account. And when you do that, you also get a bank account. And you can get your deposits instantly credited to your bank account because the money is never moving, right? It's going to Priority's payment settle account -- settlement account and immediately moving into your bank account. Well, just keeping that money in the network and the float associated with that, right, we do -- we're north of $50 billion of payments today, and that's growing as of last year. And depending on the quarter you want to look at mid- to upper teens. Keeping a sizable percentage of that money sitting in the network for float is -- it's a considerable amount of additional revenue. And we've taken, we think, a very modest approach to how we'll combine these assets and bring them forth to the market. We've not made old assumptions around the adoption of payment facilitation, which I think everyone on this phone knows, is a very valuable aspect to payment that most software companies want. And the opportunity is vast to extend the reach of banking as a service to our existing network and a number of the verticals we already serve. So we've -- we're in a position now as an organization to take a conservative approach we're going to, as we learn more about each of the distinct markets and project that forward, like real estate, like our core SMB space and our commercial as well.

Okay. That's helpful. And just last question for me, Tom. The decision to sort of move in this direction with banking as a service platform. Is that your customers in some of these verticals have been pushing for something like this? Have you seen other nonintegrated players that want to provide the best service to be able to service them? And do you think an integrated approach will allow you to better service them? Just curious strategically how this all kind of came together.

Sure, sure. I really appreciate you asking, George. Because look, this has always been Priority's vision, to have a very, I'll say, to make payments simple, right? Build a robust set of features to move money and allow business applications, not just ones we build proprietary, but others to plug in and use those services. But think about it this way, Priority has been on a path and has built payment assets over the last 14 years. Finxera's been working the last dozen years to build banking as a service. And the ability to manage bank, I'll call it, bank account or account ledgers. Well, it's taken them a dozen years to build what they have and us a dozen or more years to build what we have. So to do those both simultaneously would have been exceedingly difficult. So we've really kind of come together at a perfect time in our respective evolution to -- in a sense, to see through the original vision of both of our businesses, we're just attacking it from different sides. And the fortunate thing is there's a level of collaboration and modesty on the part of the Finxera team that realize like, hey -- I kind of say it this way, George, if you want to go fast, go alone. If you want to go far, go together. And both of our companies are believers in that. So we're going to come together to bring this functionality that, look, we know the market wants. Everything that's been described here, it has commonality to assets like Square, right, as well as Stripe. The big difference is, if you're a modern software company, and you need client service and you need risk and you need payment operations to actually support your business, well, we actually give you all that, too. So yes, we expect to be the go-to platform for modern software companies to monetize their payment networks because we're going to do all the hard work for you. You plug-in for technology, all that features there. You guys build the features into your application that you want and how you want money to move? But the nuts and bolts of making that happen in the client service and the risk management and compliance on all the things you don't want to do, we're going to do that for you. We know that software companies want that. We're already seeing that because software businesses that graduate off of square, we are where they come right now. And we want to accelerate the rate of that market penetration.

Your next question is from Andrew Jeffrey of Truist Securities.

Tom, I wonder if you could dig down a little deeper on the PayFac offerings. I think the characterization of the services and the capabilities that you think software companies are looking for is helpful. Can you elaborate a little bit maybe on sort of vertical markets or size of your PayFac customers? I think there's some discussion about the sort of the size in which becoming a PayFac makes sense for a software company. It sounds like maybe your customers could be smaller than average simply because you are taking on a lot of functionality that maybe a bigger company might have already built or is willing to undertake on its own. Could you elaborate a bit to the market positioning-wise?

Sure. Sure. Well, look, I'll tell you what we're seeing. So you're right, as it relates to pure payment facilitation, PayFac, there are size limitations on merchants, typically around $1 million of processing revenue. But that's where payment aggregation comes in. So that kind of increases the limitation that takes it off the table. It's ostensibly the same functionality. It's just a different level of kind of card brand recognition. So when you think of payment solicitation or payment aggregation, just think of them as ostensibly the same technology, but just with different market segments in mind and responsibilities to the network. But that tech that Finxera and Priority have combined serve them both. All right. But I'm going to give you maybe an example. And I think this will resonate with you. But let's take Uber. Okay? Well, Uber has actually a very modern payments business that they run, but they built it all. They had to build it all because it kind of didn't exist. So I'm a consumer, I take a ride, I pay on the app. Well, now the -- that money that came in through the app, a part of it goes to Uber, a part of it has to go to the driver, right? Who knows who that driver is? They could be somebody running a small business or maybe it's their side hustle, okay? But they want to put that money in their account and they'd like it sooner rather than later, right? So accelerating that cash has value to them. And there's revenue inside of that. Maybe they would like a debit card or some type of bank product attached to that account, so they could spend, right? And maybe if they spend because that generates interchange revenue on the spend side, they don't pay as much for the advancement of cash into their account, right? So well, that experience, right, that Uber built, that's fantastic, but they had spent a lot of money to build that. So imagine if you could just take your software and your -- maybe your different car share company or maybe you just decide, hey, I don't want to support this amount of infrastructure anymore and the CapEx and OpEx that goes into it. What if I could plug into somebody who could just do that all for me at a better all-in cost than I could buy it by the drink? There's a really good argument to be made around that for the Ubers, the Lyfts, the freelancers of the world and other software, the mind bodies, which is probably the poster child, the first poster child for payment aggregation, okay? So this is -- you can think of all these resources, they're at your fingertips at Priority. But importantly, all the other things that you need to build to sustain that part of your business, you don't have to anymore. You can buy it by the drink with Priority. Does that -- by the way, let me -- let me ask you. Does that answer your question well? Is that clear?

I think he may have jumped back in to the queue.

The next question is from Peter Heckmann of Davidson.

Just back to the Finxera revenue model, could you put a little finer point on kind of -- I didn't quite get what you're saying in terms of the revenue mix of user account fees and others. But can you talk about how the revenue mix is today and how it may morph over time as you add additional capabilities and whether things like interchange or float income can become a bigger portion of the total?

Sure. Sanj, do you want to take that with respect to the Finxera?

Yes, sure. Yes. So like I was saying in the past that -- so really the 2 main components of our revenue, 2/3 comes from monthly service fees for maintaining the FDIC-insured accounts for the consumer. So there's that. And then the other 1/3 is from transactional revenue from sending payments to creditors whether that be a check or an ACH or in some cases, wire. Is that clear so far?

Yes.

Okay. And then we have smallish revenue where we have some business process outsourcing services we provide. We've got some CRM revenue. But those are really kind of, I would say, kind of rounding years. The bulk of the revenue is from the first 2 components I mentioned. In our industry, interchange is largely not used because of the cost. It's largely an ACH model. So there's not -- we don't charge for debiting a consumer's bank account rather we just rely on the monthly service fee.

Got it. Got it. That's really helpful. And then just in terms of the bank partners that you've used, is there an opportunity now with the pending merger to consider other banking partners or potentially improve some of those relationships?

Yes, absolutely. I mean one of the things that we've done over time, I mean, if you think about it, you should think of Finxera and our banking as a service is kind of like a PayPal. So with PayPal, PayPal actually is an overlay on top of banking. You deposit $100 of PayPal, they're the system of the record. They displayed to you how much money you have and they help you move it around to other nodes in their network. But your money is, at some point, held at a bank. And that bank has maintained or is chosen by PayPal and they could Snapchat that across banks on their network, right? And I think Wells is their main bank partner, but they've got several. Finxera has the exact same architecture. We currently work with 7 banks, Wells Fargo being the main. And we've developed a technology that acts as an overlay on top of banking so that we present to a consumer, we opened up this account for you. You have $100 in it. We show you all the transactions, but that account may reside on a ledger that we maintained at Wells Fargo or Western Alliance Bank or Comerica Bank. It's been our goal to connect with as many banks as possible. We've gotten quite expert at understanding the functionality that each bank provides. So yes, we absolutely want to expand that with the Priority integration.

Got it. That's helpful. And just to be clear, the preferred investment from Ares, that sounds like that could close relatively near term, whereas deal based on the transfer or the money transfer license is probably going to be more like a mid to late summer type close?

Yes. So there's a sequence, Pete, to the closing. So there'll be initial closing on the first tranche of the preferred of 150. And then 2 subsequent, there'll be another 50 at close, and then we have another 50 that is used for future acquisitions. So we're -- we have a healthy amount more capital than we need. And look, the driver of that, just to be just plain about it is we've already had -- we've been approached by a tremendous number of smaller software companies who realize Priority is a go-to platform for payment infrastructure as a service. And it's already given us a number of at bats for integrated payments. We expect that will accelerate now that we have this functionality in place as well because it's a no-brainer. If you're a software company looking to monetize payments, there's no reason for you to rebuild what we already have, and it's exactly what you need. You have to manage accounts. You have to handle sub ledgering. Why would you ever invest in the CapEx when you can just leverage our technology to do it and get to market faster?

Certainly. Certainly. And then just lastly, it looks like the new program is going to lower your interest rate by about 200 basis points. If I missed it, I apologize, but is there another step-down in the future based upon a given level of leverage?

There is that capability within our -- within the refinance upon execution. So yes, as we bring down leverage by -- or I'll say this, this is what we anticipate because we're going out to market here shortly with the refi, but we anticipate we'll have an interest rate step-down with half a turn of leverage decline. And just to put a fine point, you sort of alluded to float and so forth. I just want to make it clear that the -- that source of revenue we would anticipate having as we plug Finxera into the other verticals Priority serves today because we'd just be holding the funds, if that makes sense. So that's more of an aspirational part of future revenue. But again, we've not assumed that in the numbers that you see.

No further questions at this time. And I would like to turn it back to Tom for any further comments.

Well, we want to thank everyone for taking the time to learn more about this exciting business combination. We are -- we will be available as additional questions may come up. Please feel free to reach out to myself or Mike directly as well as to Dave Faupel or Chris Kettmann on the Investor Relations side, and we'll set up time for any questions. But look, we're super excited about what we believe is the -- frankly, the most unique platform in integrated payments and the convergence of payments and banking that's going on today. So we look forward to executing. And thank you very much. Everyone, have a great night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.