Disruption for good: Talking with Forage’s CEO Ofek Lavian

The payments start-up Forage applies disruptive technology to the social sector, bringing digital payments to the distribution of government benefits in the United States. In this episode of Talking Banking Matters, we hear from Forage’s co-founder and CEO, Ofek Lavian, about why he chose to tackle what used to be known as “food stamps” and how he feels Forage can benefit recipients of food aid. The following edited transcript presents highlights from the conversation.

Matt Cooke, McKinsey: In this episode, we talk with Ofek Lavian, the co-founder and CEO of the social-sector payments start-up Forage, which brings digital payments to the distribution of food assistance in the United States. A veteran product manager, Ofek worked at Uber and Instacart before co-founding Forage.

When the pandemic pushed online grocery shopping from novelty or luxury status to a necessity for so many, far fewer options were available to one group of customers in the United States: food assistance recipients. The complexity and regulation involved in building a system that could let recipients use their electronic benefit transfer or EBT cards inspired Ofek Lavian, who was at Instacart at the time. He soon left to co-found Forage, which is today a USDA-approved third-party payment processor and PIN provider that authenticates and processes EBT transactions. By enabling grocers to accept EBT digitally and food assistance recipients to grocery-shop more easily, Forage seeks to help grocers access a broader range of customers. Here’s Ofek describing what Forage does.

Ofek Lavian, Forage: In eight words, Forage enables businesses to accept food stamps online. Our mission is straightforward: we’re a mission-driven payments company. We offer an API that helps make it incredibly easy for businesses to accept regulated payments, starting with EBT, or electronic benefit transfer. It’s the primary mechanism by which the US federal government and state governments disburse funds to Americans in need.

The largest program is SNAP, or the Supplemental Nutrition Assistance Program, which was previously known as food stamps. Food stamps have actually been around since the 1930s and not only helped feed many Americans that struggled with hunger over the past century, but also helped address food surpluses from different agricultural hubs in the country. To this day, SNAP actually continues to be one of the main mechanisms by which the US government supports those that are most hungry.

Matt Cooke: Food assistance and social benefits generally are not that common a path among the start-ups receiving funding from the likes of fintech specialist firm Nyca Partners, PayPal Ventures, and even Ofek’s previous boss, Instacart founder Apoorva Mehta. We asked Ofek to talk about the path that led him to his work helping grocers accept EBT payments, which involves navigating daunting regulatory hurdles.

Ofek Lavian: I’ve had the privilege of working in payments for the better part of the last decade, working at internet marketplaces including Uber and Instacart. For decades now, there have been multiple API-first payment companies, including industry leaders like Stripe, Braintree, PayPal, checkout.com, Adyen, etcetera.

And yet, when it came time to enable food stamps during the pandemic, which we saw as a massive opportunity while I was the head of payments at Instacart, there was no business that had an API able to accept food stamps online. So we worked with First Data, which was the only business that actually had built out the capabilities to accept EBT online.

What we found during the pandemic was the adoption of food delivery accelerated. When I was at Instacart, I think we saw our top-line numbers quintupling during the year 2020 alone. So the adoption of food delivery has massively grown.

At the same time, in the retail space, EBT is such a large part of the ecosystem. Food is the second-largest spend category for the average American household, outside of housing. In North America, it’s roughly $1 trillion a year that gets spent on food and groceries. EBT is about a $200 billion market, with SNAP being the largest of that. In the offline world, most retailers see an average of 15 percent of groceries sold being attributed to EBT.

As everybody’s business was shifting online [during the pandemic]—and certainly I was at the forefront of that at Instacart—there was a huge missing piece that had many retailers asking, “When can we enable EBT online?”

Matt Cooke: As one might expect of a start-up entering such a complex environment involving operational, technical, and regulatory challenges, the experience has offered Forage some intense learning experiences. We asked Ofek to talk about the most important challenges his company has faced and how they’ve overcome them.

Ofek Lavian: The first thing I learned about online EBT is that there were a lot of questions on how big of a market it is, whether it would be viable, and whether people who rely on government assistance to buy food would ever use online delivery mechanisms.

Having done hundreds of UX [user experience] interviews in my role leading payments at Instacart, I found that there’s actually a lot of really strong product–market fit for online EBT. For example, one in four SNAP recipients are on some form of disability, and many are on physical disability, meaning it is hard for them to go physically to the grocery store. Also, there are many senior citizens, for example, who receive government assistance for food.

We now enable food delivery for such people with Forage’s API. Many recipients live in food deserts. Where I live in San Francisco, I can walk in many different directions and find a few different grocery stores. That’s not the reality for many parts of the country, especially if you think of rural states.

We also heard a lot about the actual experience of going to a grocery store and using EBT and how users feel embarrassment or shame, especially when a transaction is declined [because of a disallowed item or other issue]. One of the great things about being able to transact online is anonymity.

And then lastly, we found that there was limited car ownership across the demographic of SNAP recipients, higher reliance on public transit, and more participation in gig work. What that means is that every hour they’re out grocery shopping is an hour they’re not providing income for their families. So for those reasons, we’ve found that it’s been a really powerful product–market fit. And I think just as we’ve seen online grocery delivery skyrocket and accelerate in terms of adoption over the past two-plus years for all demographics, similarly, since EBT has moved online, we’ve seen a really fast adoption as well, with triple-digit growth year over year.

As an early-stage CEO, I feel really blessed and grateful to be working in a space that is at the intersection of technology, macroeconomics, and public policy. I think we have a mission that speaks to many people, and as we look out to the labor market, many individuals want to work on something meaningful, and they want to wake up every day energized by something. We’ve had, for example, while building up the team, a really high yield rate. I think we have something like 90 percent of offers that we extend accepted, because it’s a mission that really resonates with them.

I think that’s the main thing I’ve learned and I feel grateful for: working on something that really matters and that has the potential to impact so many people—in this case, the 42 million low-income Americans that rely on government assistance to provide food for their families.

Matt Cooke: EBT is not a simple system. Ofek has said in the past that working on it has been one of the most complicated things he has done in the payments industry. We asked him to explain what makes EBT particularly complex compared to other types of payment processing.

Ofek Lavian: EBT is incredibly complex. I think if it were easy, more people would be doing it. In some ways, it’s an opportunity for us that it is so challenging. For reference, 250,000 retailers in the US accept EBT in their brick-and-mortar locations, but fewer than 200 accept it online. So it’s a largely 99 percent–plus unpenetrated opportunity that is growing triple-digit year over year.

EBT is incredibly complex. I think if it were easy, more people would be doing it. And so in some ways, it’s an opportunity for us that it is so challenging.

Ofek Lavian, co-founder & CEO, Forage

To simplify, I think enabling EBT online is a two-pronged challenge: it’s both a technical and a regulatory challenge. On the technical side, we’re the only company that has built out an API that makes it easy to enable EBT online. And on the regulatory side, we’ve built out a team of experts that know the USDA process better than anybody and work directly with the USDA’s FNS, which is the Food and Nutrition Services arm of the USDA. We meet with them weekly, and we are now experts in it. I certainly know that from my experience at Instacart, it took me nine months to go and build out this business, both on the integration and the regulatory sides, because I didn’t know what I was doing at first and was building it for the very first time and making lots of mistakes along the way.

So again, as I think about the ecosystem, there are actually a lot of really great payments technology companies out there. If this was purely a software problem, I think it would have been solved by now, and Forage wouldn’t exist.

If in your online basket, you’ve got a hundred dollars in your basket, but $50 of it is meat and produce, veggies and fruit, etcetera, but $50 of it is other items—whether it’s alcohol or toiletries and toothpaste, etcetera, or even just the Instacart delivery fee—those funds can’t be paid for with EBT. So we had to build a mechanism to have split-tender transactions, which is when the customer clicks Checkout, they’re actually not sending a single API call to Stripe or Adyen to just go through the traditional payments rails. They’re sending two API calls: one through the EBT state program and one through their traditional card acquirer.

Additionally, in the EBT space, EBT items paid for with an EBT card are tax exempt, so you have to also build out by tax calculator, look up item eligibility, and so on. As you look down the layers of complexity, there is a lot that needs to be built by a retailer.

We’ve been able to take the hardest parts of the problem and build products around them to simplify the launch time. And now I’m proud to say that our average merchant launch is something like 12 to 14 weeks, compared to the nine months it took me at Instacart.

Matt Cooke: It’s a truism of start-ups that once a company begins to grow quickly, maintaining the company culture and focus on its vision gets more difficult. Ofek talked with us about how he and his colleagues at Forage handle this challenge.

Ofek Lavian: It’s such a good question, and it’s one I hope that I continue to be asked as we grow. For reference, we were three people in Y Combinator a year and a half ago in the summer 2021 batch. We’re now 30 people, so we’ve ten-Xed in about 18 months.

I think there are two things. The first is that it’s a self-selecting group of people. When I was at Uber, Travis Kalanick had a famous saying that has really stuck with me, which was that at Uber, he wanted missionaries, not mercenaries, or people that really believe in the mission, and that if you hire people because they’re mercenaries, or because you’re offering them the highest cash compensation, their loyalty only lasts until the next person goes and offers them a slightly better salary. Luckily, I think part of the reason why thus far, even as we’ve grown ten times, we’ve been able to keep a strong culture [is that], with our mission at the forefront, we have a self-selecting group of people that really care about this. It’s actually one of the criteria we use to evaluate before we extend an offer.

The second is we’re a remote workplace, so we’ve had to build some rituals to be able to be a close-knit group. For example, every Monday morning, we have a weekly kickoff with every single department—whether that’s finance or marketing or sales, etcetera—where they talk about their priorities for the week, and others get to jump in and offer their help or assistance or guidance on what their priorities are for the week.

Then my favorite part of every week is on Fridays, [when] we have a retrospective where we take an hour for the whole company. We do a round robin; a different person leads it every week. We each write down on a virtual whiteboard what went well this week, what went wrong, who we want to praise, and what the main takeaways are.

I think that building small rituals, especially for a remote or a hybrid workspace, is really important. And I think it becomes actually more and more challenging, which is why every time I talk to the company or to investors or to candidates, I try to talk about our mission as much as possible.

Matt Cooke: Forage has strong backing from some payments industry mainstays, and we wondered whether Ofek and his co-founders specifically sought them out.

Ofek Lavian: I feel incredibly lucky to have so many exceptional investors in the business. I think that as we looked at our potential investors, with capital being somewhat commoditized, we wanted to make sure we had people on the cap table that were going to be able to help us with our challenges. As I look at each one of those investors—like Nyca, for example, having a history of not only supporting payments companies like Affirm but actually funding the only other EBT business I’m aware of that’s venture backed, which was Propel—showing conviction in the space and showing that they’re highly aware of it was really helpful.

Getting the support of Instacart’s founder, Apoorva [Mehta]—I think after maybe one phone call when I told him what I was going to leave Instacart to go do, he gave up on convincing me to stay and pretty much wrote a blank check, sight unseen. I think it goes to show a lot when you have somebody you work with in that capacity say, “Yes, this is a big problem. Yes, this is a big opportunity.” We saw it firsthand in the case of Instacart, and we were able to build it into a multibillion-dollar business line.

Looking back at last year when we were fundraising, I didn’t realize how turbulent it was going to be, so I feel very lucky that we raised when we did. We now have, I think at this point, something like six years of runway that we can outlast, whatever turbulent times are ahead of us. We also are a countercyclical company, meaning downturns are when we can help SNAP recipients the most.

Food at home is now up north of 11 percent [inflation] year over year, with categories like eggs, 50 percent year over year, that are particularly hitting the most vulnerable among us. As you think about low-income Americans struggling to be able to provide food for their families, I feel very lucky.

Matt Cooke: Given Ofek’s long-term view, we wanted to know whether Forage plans to develop additional products outside of their core business or whether their vision is to stick to scaling the core. And of course, if they see other products in their future, what they might be.

Ofek Lavian: This is a really good question, one I spend a lot of time thinking about, because as I mentioned earlier, our advantage is that we’re singularly focused on EBT. If that’s all we ever did, I think we’d be able to build a generational company while also helping tens of millions of people. So I think today we are laser focused on that, and we don’t spend any of our time thinking about anything beyond EBT. We have so much work to do, and as I mentioned, 99 percent of retailers that even accept EBT in store don’t accept it online yet.

I do think, though, looking beyond a multiyear time horizon, if we’re lucky enough to have success in EBT, there are other, similar adjacent government programs that, like EBT, have not transitioned to online commerce. As I think about domestic US programs like HSA and FSA payments [health and flexible savings accounts], education savings accounts, commuter transit, Medicare, Medicaid, and many others, the US government spends trillions of dollars a year supporting multiple programs, many of which have not transitioned online.

So with my own payments background, knowing what is possible in traditional card payments and knowing what has been possible online when you’re paying with your credit, debit, or prepaid cards, I think that there are many other opportunities to also build complementary programs in other spaces. We’ve got a lot of work to do before we can think about that. But if we have built a really great product that, for example, can handle split tender and be connected to back-end regulatory programs and has expertise in handling really complex integrations with merchants, then certainly I think we have an opportunity in other regulatory programs.

Unfortunately, the US does not have a monopoly on hunger, and many other countries similarly fund large portions of the population to be able to get food. I’m not yet an expert in those programs beyond this country, but as I look out at a multiyear time horizon, I think certainly the two major paths of growth for us are international and complementary US government programs.

Matt Cooke: Partnerships are a key piece of building market share for payments companies. We asked Ofek to talk about how Forage thinks about them and what types of partnerships they’re looking for as they seek to build the future for their customers.

Ofek Lavian: We’re talking to virtually anybody that sells food and groceries online, or we’re interested in talking to them. Certainly, I think we’re at the early stages of not only EBT online but also overall the trend of being able to buy groceries online.

So in many cases, we’re talking directly to retailers and to food delivery platforms. But we’re also really lucky to have partnered with some phenomenal companies, including Shopify. We’ve launched the only gateway in the Shopify ecosystem that allows Shopify merchants, many of which are mom-and-pop microbrands, to be able to accept EBT funds online.

We also have partnered with platforms such as Flashfood, which helps sell food that is close to expiring, to reduce food waste, with many retailers. Through them, we are working with a handful of the largest grocery retailers in the country. And as we look out at all the partnerships, I think because our mission is so important to us and because we’re laser focused on helping provide food for those that need it most in the country, we’re talking to anybody that can help us accelerate that vision, including multiple different payment partners for distribution.

Matt Cooke: Payments companies’ interactions with regulatory bodies generally involve banking or consumer protection, but for Forage, it means working with the United States Department of Agriculture, which oversees food assistance. We wanted to hear about how this works for Forage.

Ofek Lavian: We meet weekly with the USDA, every Tuesday. I think that for many merchants, and certainly when I was at Instacart, it is a foreign process. My background is in product management, so I’m used to testing things and not asking for permission, getting data and making informed decisions based on what I’m seeing users doing.

In the world of EBT, we had to go and ask for permission: “Can we enable it this way? Do we have to make this change?” You can’t, for example, have an order minimum. The prototypical Silicon Valley product manager, I think, struggles with the amount of government involvement in this highly regulated product. Now, our relationship, being on the other side at Forage as a provider, we view them [USDA] as a partner and hope they view us as a partner as well, because we have a shared mission.

So as you think about traditional government agencies, etcetera, perhaps one of the weaknesses that most people think about is it not being fast moving or not having technology resources. And I think we’re able to solve a huge gap for them in their product offering and able to help them realize their vision of launching EBT online. In that way, I think it has been a really great partnership.

Matt Cooke: In addition to Forage’s potential to open a wider variety of grocers to food assistance recipients, the possible ripple effects of expanding the access of such recipients and grocers to each other seem promising, especially if Forage eventually turns its attention to other areas of the social safety net. It has long been understood that benefit recipients pay a kind of “poverty tax,” in which the process of receiving and using benefits is so onerous and time consuming as to obscure paths to prosperity. In the United States, where so many benefit recipients live in “food deserts,” where they must travel far on limited public transportation to access what may be a limited selection of healthy foods, Forage’s offering seems promising.

On behalf of McKinsey’s Banking & Securities Practice, thanks for listening to Talking Banking Matters today. We’re always working on bringing you new conversations, so we look forward to you retaking your front-row seat to listen in on more industry leaders from the world of fintech, banking, and digital talk about their work shaping the future of this industry. For now, wherever you are today, thanks again for listening.

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