I don’t feel confident saying what makes one qualified or unqualified to run NASA but, in addition to running a successful publicly-traded company ($FOUR), Isaacman’s space bonafides seem legit to me:

• Aeronautics degree from Embry-Riddle University

• Co-founded a defense contractor that trains NATO-affiliated air force pilots

• Flies fighter jets for fun (and philanthropy)

• Currently holds the world record for circumnavigation of the globe via light jet

I feel a lot more confident suggesting what makes for a good payments company. And after speaking with Isaacman via Zoom last November, I believe his experience as a private astronaut helps explain why Shift4 has been so much more successful than legacy payments processors like Fiserv and Worldpay in growing its business—especially via M&A.

Shift4 is a Rocketship

Shift4 mainly offers an integrated suite of point-of-sale (POS) hardware, software, and payments processing to merchants in three verticals: restaurants, hospitality, and sports & entertainment. Over the past four years, it has grown its primary revenue metric, “gross revenue less network fees,” at a 43% CAGR with end-to-end payments volume growing at a 57% CAGR. For comparison, Fiserv’s merchant solutions division grew its “adjusted revenue,” by 9% YoY in Q3 2024. Clover, the software-based point-of-sale solution Fiserv bought in 2013 (a bright spot among its M&A history), which competes with Shift4 in the restaurant space grew revenue by 28% in Q3. That growth rate is gangbusters for Fiserv but would be a terrible quarter for Isaacman’s company.

Shift4’s growth is even outpacing digitally native vertical processors (DNVPs) like Adyen and Stripe. Stripe’s 2023 TPV growth rate was 25%. We don’t have data for Stripe’s 2024 performance yet but Adyen grew total payments volume (TPV) by 33% in H2 2024. Shift4 is growing faster than both and has no plans of slowing down. In the same Q3 report, the company raised its net revenue and EBITDA guidance for Q4. Shift4 is flying!

But these comparisons aren’t quite fair. Adyen, Fiserv, and Stripe are all much bigger than Shift4, which is currently at a $175B TPV annual run-rate. Adyen and Stripe are both processing over $1T, and Fiserv Merchant Solutions’ annual net revenue is over 6x what Shift4 does each year. One would expect a company growing from a smaller base to have higher growth rates, so let’s compare Shift4 to a comparably sized Adyen (the best run payments company in the world) from several years ago. Adyen, circa 2018, processed €159B, growing at 47% YoY with EBITDA margins of 52%. Shift4 grew its TPV 56% YoY in Q3 2024 with 51% EBITDA margins. Fiserv Merchant Solutions has historically had EBITDA margins in the mid-30s.

There are important differences between each of these business but Shift4 looks much more likely to be the next Adyen2 than the next Fiserv.

The key difference between Shift4 and Adyen is that, while Adyen is philosophically opposed to M&A, Shift4 has been on something of an acquisition streak lately, having purchased nine companies since 2020. And, based on the numbers above, its approach appears to be working.

The Shift4 Playbook

After Shift4’s most recent acquisition in December 2024, RBC Capital Markets’ Dan Perlin told his clients “this is another acquisition that will run the Shift4 playbook.” Until a few months ago, this is how I understood the the Shift4 Playbook:

1. Buy companies in its core categories

2. Cross-sell Shift4’s payment services to the acquired company’s merchants

3. …

4. Profit

While I'm not categorically opposed to M&A, I believe it usually doesn’t work in the payments industry (also see my comments on Worldpay’s trench coat theory of M&A). But Shift4 claims it has a “tried and true” acquisition playbook; I just didn’t buy it.

So, when Jared Isaacman engaged with one of my tweets, I shot my shot and ended up talking with him via Zoom for about 30 minutes last November. My conversation with Jared provided me with a much more nuanced understanding of the Shift4 M&A playbook. Here are some things I missed:

1 - Find companies overlooking the embedded payments opportunity

Jared told me that he’s understood for well over a decade that Shift4 “had to have payments alongside software.” This is essentially the embedded payments opportunity of the past 10-15 years. When looking for acquisition targets, Jared said that Shift4 prioritizes software companies that have been overlooking the payments opportunity. For example, Revel Systems, which Shift4 bought for $250M last summer, was a software company where “payments was somewhat of an afterthought until the last couple of years,” Jared explained on an analyst call last year.

2 - Buy overlooked companies

Last fall, rumors were flying that Shift4 might acquire Canadian POS company Lightspeed. Jared didn’t comment on these rumors specifically but he did tell me “if you’ve heard of the company we’re buying, we’re doing something wrong.” Shift4’s M&A track record backs this up. I know about more payments companies than the average person but I had certainly never heard of Eigen Payments until Shift4 quietly acquired the company last December.

By focusing on overlooked acquisition targets, Shift4 has used M&A as an incredibly cost effective customer acquisition tool. It’s acquired nine companies (that we know of) since 2020—gaining access to tens of thousands of merchant locations and hundreds of billions of dollars of payments volume across North America and Europe—for less than $2B. Lightspeed’s current market cap is $1.5B.

3 - Cross-sell customers

Jared knows Shift4’s product is most competitive in the restaurant, hospitality, and sports & entertainment categories. As a result, the company’s M&A activity almost entirely falls within these areas. But the company has different strategies to win with each type of merchant.

For example, in hospitality, Jared told me that the “number of combinations of software is immensely complicated.” Shift4 integrates with hundreds of third-party software systems that a hotel might need. He told me Shift4 has embraced this combinatorial complexity to make sure they have every combination of golf course booking software, parking management software, online reservation management, etc software they might need to win a hotel’s business.

In the table service restaurant space, Jared seems to think technology is much less differentiated than in the hospitality industry and that Shift4’s M&A playbook will help it overtake competitors like Toast. “We believe we install the second most table-service restaurant systems in the U.S…and our roadmap and playbook give us a real chance at becoming number one” he wrote in Shift4’s Q3 2024 letter to shareholders. Indeed, many of the company’s recent acquisitions are in the restaurant space. More flippantly, Jared told me that “the POS system doesn’t make the food taste better; it’s not putting more butts in seats.” Here, Shift4 is focused less on the complexity of third-party software integrations and more on converting acquired merchants over to its product—namely its SkyTap POS system. The company claims it has over $350B payment volume cross-sell opportunities just from the Vectron and Revel acquisitions.

Shift4 has clients in other areas as well. Notably Starlink, Elon Musk’s satellite communication company is a customer. While not a huge driver of TPV today, Jared shared that Starlink has been an important customer for pushing Shift4’s online and international payments capabilities. As Jared put it, Shift4 has been “following Starlink around the world.”

4- Delete the part

In 2021, Jared served as commander of Inspiration4, the world’s first all-civilian spaceflight, and, in 2024, Jared commanded Polaris Dawn, a record-setting private spaceflight that saw all four astronauts perform extravehicular activities. Both missions were operated by SpaceX. I asked Jared if he’s learned anything from working with the government or going to space that might have helped him in running Shift4. He told me there were “no lessons from working with the government,” but he shared that he’s learned a great deal “being a fly on the wall at SpaceX,” specifically the idea of “deleting parts.”

In 2021, Elon Musk did an interview with Tim Dodd, aka the Everyday Astronaut where he outlined the five-step process SpaceX uses to design rockets. Step 2 is “Delete the Part or Process.”

“Possibly the most common error of a smart engineer is to optimize a thing that should not exist,” Musk explained to Dodd. Jared has taken this lesson to heart, and I think Shift4’s bias to “delete the part” largely explains its success in M&A when others have struggled. When Shift4 buys a company, the goal is to convert acquired merchants to Shift4’s platform and fully deprecate the acquired platform. “You don’t need two restaurant products,” Jared explained after buying the POS system, Revel, last summer. Jared further explained that Shift4 would “take the best capabilities out of Revel” and add them into its SkyTab system.

In other cases, Shift4 isn’t interested in any of the acquired company’s product capabilities and the acquisition is purely about gaining access to more cross-sell opportunities. Last year, Jared told me, Shift4 bought SpotOn’s sports and entertainment division, Appetize, and Shift4 “didn’t take any developers.” They simply told customers they had two years to switch to Shift4’s product line.

This approach to growth is not without its issues. Customers using the POS systems Shift4 has acquired have taken to Reddit, among other places, to complain about their experiences transitioning to Shift4, but even they see the strategic vision. “I’d bet Shift4 shuts down most of these POS spinoffs and forces everyone to move to a single product. Will be much easier for them to manage,” shared one member of the r/POS subreddit.

Despite its best efforts, Jared believes Shift4 still has too many parts. From his Q3 2024 letter to shareholders:

“Over the last 25 years, we've accumulated some baggage–some going back to the internal software systems we built in our basement days and some through M&A. We have tens of thousands of legacy POS systems that we will eventually move to Skytab, many gateway connections to sunset and other inefficiencies to address. The "Shift4way" includes staying flat, being procedurally driven, embracing radical ownership and passionately deleting ‘parts’. We are still in the early days of this transformation, there are lots of ‘parts’ still to remove, internal systems to replace with Project Phoenix, operations to improve with Mission Control and automation to achieve with AI, but as we progress, you should expect us to become more efficient, improve the service quality, expand margins and become significantly more profitable.”

Reaching For The Stars

In 2024, Isaacman led Shift4 through a strategic review, inviting bids to acquire the company. It seems Isaacman didn’t like the offers that came in and publicly committed to running Shift4 for the foreseeable future. From a May 2024 letter to shareholders: “I own way too much of the company to ever sit on the sidelines, so I intend to see this story through as CEO.” Then, last December, Isaacman received an offer he couldn’t refuse from then-President-elect Trump. He was nominated for NASA administrator, “a role that reflects [his] passion for advancing humankind’s reach among the stars, unlocking the secrets of the universe, and improving life on Earth along the way,” Isaacman shared in another letter to shareholders after his nomination.

Isaacman intends to remain Shift4 CEO until confirmed by the Senate and it's unclear how the company will fare after he’s gone. On one hand, the path to continued success seems very clear and the company has other capable executives—like Taylor Lauber, Shift4’s president for the past seven years—who can take over in Isaacman’s absence. On the other hand, so much of the Shift4 playbook seems to come from Isaacman’s personal experience as a private astronaut and aeronautics obsessive. Will others really be able to continue that culture? In his letter after the nomination, Isaacman left the door open to return to Shift4 and I wouldn’t be surprised if he does.

Further Reading

Jev Kazanins wrote a great profile of Shift4 a few years back and a compared Shift4 to Toast last year on his wonderful blog, Popular Fintech.

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Adyen

• $34B total payments volume

• 670M transactions, peaking at 163K transactions per minute

• 99.9999% API uptime, handling a peak of 25K+ requests per second

Stripe

• $31B total payments volume

• 465M transactions, peaking at 137K transactions per minute

• 99.9999% API uptime, handling a peak of 27K+ requests per second

6-Nines

All the numbers reported here are incredibly impressive but what blew me away was the “6-nines” of API uptime from each DNVP. Stripe initially reported “more than 99.999%” uptime but later changed it to “more than 99.9999%” uptime. Regardless, this is an incredible technical feat to pull off during the biggest shopping period of the year.

To put this in perspective, maintaining 6-nines uptime means Adyen and Stripe, combined, processed more than 1.1 billion transactions with less than 1 second of downtime over a four day period!

Further Reading

If you enjoyed this, check out my thesis about digitally native vertical payment processors (DNVPs) and my standalone pieces on Adyen and Stripe.

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Sources: https://stripe.com/newsroom/news/bfcm2024

https://x.com/davistrazza/status/1863950716584521752

https://x.com/jkwade/status/1864025101282189449

Finix Rising

Finix is one of the few payments companies in the world that has a shot at joining the ranks of Adyen and Stripe as one of the digitally native vertical payment processors (DNVPs) stealing market share from legacy processors over the next decade.

Finix has always been committed to helping merchants with complex use cases. When I worked there1, we helped online platforms and vertical SaaS companies become payment facilitators (payfacs). Eventually, Finix became a payfac itself in order to help platforms launch more quickly. In May 2023, Finix announced it had gone even closer to the metal by becoming a payments processor in the US (just like Adyen and Stripe). This is a rare feat. By my count, there are only ~25 merchant processors registered in the US today (including Adyen, Fiserv, Global Payments, Stripe, and Worldpay)—Finix is one of them.

The company said it became a processor to offer customers “even more configurability, reliability,” and better pricing. “But being a processor has also allowed us to move much faster,” Richie shared in a LinkedIn post reflecting on the one year anniversary of the company becoming a processor. Of course the CEO would say that, but Finix’s momentum over the last 18 months speaks for itself:

• Became a payments processor with direct connections into the major card networks

• Expanded to Canada

• Launched support for standalone merchants (vs. just software platforms)

• Launched four major new products:

  • Finix Payouts

  • Recurring Billing

  • Low-Code/No-Code Tools

  • Automated Merchant Underwriting

• Expanded its lineup of in-person payment devices multiple times

• …and more

Finix hasn’t publicly shared revenue numbers but it has disclosed that it already processes “tens of billions of dollars for tens of thousands of merchants” each year. In a phone conversation, Richie shared with me that with its increased product velocity and control over its stack, Finix is signing more customers than it ever has before. Keep in mind the new volume the company is signing today will likely compound over time just as it did for Adyen and Stripe. It’s not hard to imagine a future (quite soon) where Finix is processing $100 billion/year or more.

Richie also told me that Finix is currently winning about 60% of the deals it sees and taking market share from other DNVPs and legacy processors alike. I can corroborate some of Richie’s claims about winning customers from other DNVPs. Since I left Finix, I’ve served as an adviser to a few startups and I was recently informed by a rapidly-growing vertical SaaS company that is planning to transition its payments volume from Stripe and Checkout to Finix because Finix was able to work with them on a more complex payments flow.

Finix’s plan of attack seems to be working.

The Case for Finix

Don’t get me wrong, Finix has its work cut out for it to reach Adyen/Stripe-scale (i.e., expanding to more international markets) but the bull case for Finix is fairly straightforward:

• Merchants are being underserved by legacy processors. This creates an enormous opportunity within the global payment market

• A new cohort of digitally native vertical payment processor (DNVP) is best set up to take advantage of that opportunity by serving merchants (digitally native or not) with unified platforms and rapid feature development

• Adyen and Stripe are the only two clearly established members of this DNVP cohort. Braintree and Checkout will both likely be successful but each company is vulnerable in its own way:

  • PayPal’s recent partnerships with PSPs that compete with Braintree indicates that it may no longer favor Braintree with exclusive access to PayPal products, which could affect the platform’s growth. Braintree’s in-person payments offering is also relatively weak.

  • Checkout is still working off its crypto hangover, doesn’t have major clients in the US, and is the only major DNVP without an in-person payments solution

• Finix is the only other DNVP with a shot of joining the cohort of companies that will come to define the future of global payments as legacy processors continue to decline. And it has a track record of doing exactly the type of difficult things that made Adyen and Stripe so successful.

Now, I won’t go all Ryan Breslow on you and say that there’s some conspiracy keeping investors from putting money into competitive payments companies but it is true there haven’t been many investments in early-stage payments companies in the US over the past decade. Finix has been one of few exceptions, raising $135 million from investors like American Express Ventures, Sequoia, Visa, and many others.

Now, with an additional $75 million raised from existing and new investors, Finix has even more fuel to keep up its product velocity, expand into new markets, and continue to win customers from legacy processors and DNVPs alike.

Further Reading

This piece fits nicely into my thesis about digitally native vertical payment processors (DNVPs).

I also recommend listening to Richie’s interview with Miguel Armaza of Gilgamesh Ventures from earlier this week:

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Disclaimer: The information contained in this piece is for educational and informational purposes only and should not be considered financial advice. Do your own research or seek professional advice before making any investment decisions.

DNVPs are directly connected to the major payment networks, offer rapid merchant onboarding, have straightforward integration options, and build unified platforms that allow them to add new functionality at a pace that, frankly, legacy processors can’t keep up with. Here’s how JP Morgan’s Equity Research described the dynamic in its Payments Market Share Handbook earlier this year:

While the majority of payment volume in the United States is processed by a few large, legacy entities, newer entrants have started becoming processors themselves. Namely, Adyen, Finix and Stripe have all become licensed processors with direct integrations into the major card networks in the United States. While doing so provides a slight economic advantage (in-housing their processing costs), we see the core benefit as having a single, unified technology stack that can implement new payment methods and products more quickly and reliably.

Over the next 10-15 years, DNVPs will become the dominant merchant processors in the US and Europe while legacy processors continue to lose market share. In fact, this trend is already happening…

The Great Payments Flippening

Merchant processors are essential players in the global payments ecosystem, enabling tens of millions of merchants to accept trillions of dollars worth of payments each year by connecting directly into payment networks like Visa, Mastercard, American Express, and Discover. But the revenue and payments volume growth rates for legacy processors have not been looking good lately.

In 2020, Credit Suisse predicted that “modern processors” (aka DNVPs) would grow at a ~40% 2020-2026E CAGR, while “legacy processors” (FIS, Fiserv, Global Payments) would grow “in the high single-digit, low-double digit growth rate.”3 That has more or less played out:

• Worldpay revenue grew by just 3% YoY in Q4 2023, the last quarter in which FIS reported numbers for Worldpay as its Merchant Solutions division before spinning it out as an independent company

• Fiserv’s Merchant Solutions segment revenue grew 9% YoY in Q2 2024

• Global Payment’s Merchant Solutions adjusted net revenue grew 8% YoY in Q2 2024

In Europe, where bank payment schemes are much more competitive with card-based payments, things are even worse:

• Worldline, the French-based payments giant just fired its long-time CEO after the company issued its third profit warning within a year. The company’s updated guidance for organic revenue growth in 2024 is now just 1%.

• Nexi, Europe’s largest payments company, is doing a little bit better, growing revenues at 6% YoY in H1 2024.

• Barclay’s the #2 merchant processor in the UK is “finding it difficult to sell a stake in its British merchant payments business” at the valuation it wants, according to Reuters.

Meanwhile, Adyen grew net revenue at a 34.5% CAGR from 2019 to 2023 and announced that it’s processing more than $1 trillion in payments volume each year. In March of this year, Stripe shared that it processed “$1 trillion in total payment volume in 2023, up 25% from the prior year.” PayPal doesn’t breakout Braintree’s revenue but we know that the company’s “unbranded processing” volume, which is mostly comprised of Braintree, grew 40% YoY in 2022. Checkout told Tech.eu earlier this month that “it has seen 40 per cent year-on-year revenue growth” after sorting out some wobbles with crypto-related clientele in 2021/2022.

I know these aren’t apples-to-apples comparisons but it seems like it’s just a matter of time before DNVPs surpass legacy processors as the largest (and most profitable) cohort of payments companies on the planet.

What’s wrong with a little M&A?

Faced with declining organic revenue growth and increasing competition from DNVPs, the first instinct of legacy payments companies has been to buy their way out of the problem. Global payments M&A activity over the past five years has been remarkable but it’s only made matters worse.

In 2020, Worldline acquired Ingenico and Nexi acquired Nets, resulting in just two mega-payment companies in Europe. In December of 2023, it was rumored that Worldline and Nexi would merge. If Nexi and Worldline were to combine, there would be virtually no other payments companies left in Europe for them to acquire—that’s the end of the line. Flagship Advisory Partners illustrates Nexi and Worldline’s M&A histories nicely:

In the US, it’s a similar story. In 2019, FIS bought Worldpay for $43 billion, Fiserv bought First Data for $22 billion, and Global Payments bought TSYS for $21.5 billion. Each of these companies has a long history of M&A that pre-dates these mega-deals and their dependency on M&A has put them in a worse position to compete against DNVPs. The problem is the resulting patchwork of technologies and internal coordination issues of from an amalgamated company are even less responsive to the needs of modern merchants—this is what I call the “trench coat theory of M&A”:

Here’s a simple example to illustrate my point about integration friction. Say you’re a retailer that wants to use Worldpay to accept online payments in the US and the UK. Should be easy, right? Well, you can choose from Vantiv eCommerce (formerly Litle & Co.) or Vantiv Express (formerly Element Payment Services) but they are US-only. You could also use WorldPay US in the US but it’s not exactly clear why you’d use that API instead of the other two. For the UK, you’ll need to use Worldpay’s UK-based capabilities, which support SEPA bank transfers, which are popular there and not available via the other APIs mentioned so far. For each integration, there are different endpoints (URLs) to communicate with the API host and different authorization headers needed to authenticate your API requests. And when Worldpay releases a new version of their API documentation (like replacing instances of ‘Litle’ with ‘Vantiv’ in response messages), you’ll need to update how you interact with the API to handle that or risk your integration breaking. Accessing in-person payments requires integrating with additional environments. Litle for example, is for ecommerce only and there’s a different Vantiv system for card-present payments.

So imagine Worldpay, Inc. is a very tall gentleman wearing a trench coat. You approach the man hoping to introduce yourself only to realize that he’s actually several children sitting on each others’ shoulders pretending to be an adult. Instead of maintaining the illusion that it’s just one very tall adult when you reach out to shake their hand, Worldpay opens up the trench coat and you have to shake hands with each individual kid.

While I understand the incentives that led to these mergers and acquisitions, the legacy processor urge to buy other companies usually makes their problems worse.

Why DNVPs Win

DNVPs maintain a single platform, which allows merchants to take advantage of new capabilities quickly, without doing a ton of extra work.

In contrast to legacy processors, Adyen is philosophically against M&A. Instead, the company opts to build everything in-house, offering its customers a “single platform.” So when a merchant using Adyen for online payments wants to offer in-person payments—or vice versa—it’s much easier for them to do so using Adyen rather than integrating a new processor. This leads to more payments volume and revenue going to Adyen. Stripe, on the other hand, has acquired several companies in its 14 year history that have provided core functionality to its platform (i.e., payments, financial operations management software, and fraud prevention). Yet, unlike legacy processors, there aren’t several different versions of Stripe running that developers must integrate into and simultaneously manage4.

We rarely see legacy processor offer unified platforms5. When JP Morgan (often thought of as the most tech-forward of the big banks) acquired WePay in 2017 for $400 million, the goal was to merge WePay’s capabilities into JP Morgan’s merchant services platform. But in January of 2024 (7 years later), a spokesperson for the bank told Fintech Futures that JP Morgan is “currently supporting two acquiring platforms in market”, and intends to migrate merchants to a single platform. “But that hasn’t happened and won’t anytime soon.” 😬

As you can see, the difference between legacy processors and DNVPs isn’t whether they make acquisitions or not. DNVPs like Adyen, Finix, and Stripe do the hard work of maintaining a single platform that abstracts away the differences between underlying platforms. Legacy processors, for the most part, do not (can not?) do this.

DNVPs use technology to abstract away underlying vendors, which allows them to expand to new regions more quickly.

A core aspect of being a DNVP is being vertically-integrated. Usually, this means DNVPs have direct connections into payment networks and/or money movement licenses in each region in which they operate. Doing so provides more control over things like authorization rates, payment routing, settlement times, and risk policies. But that wasn’t always the case. When Adyen first entered the US market, for example, it was sponsored by Fifth Third Bank and used Fifth Third Merchant Processing Solutions as its underlying processor. As it gained more customers in the US, it became a processor itself, and even a bank. Similarly, when Stripe entered Europe, it initially used the Icelandic processor, Valitor. Over time, Stripe became a processor itself in the EU and no longer relied on Valitor. Adyen and Stripe’s API abstracted away all of these different entities and customers were able to continue processing payments largely unbothered.

Being good at technology isn’t just a talking point. DNVPs’ superior command of technology allows them to win—and grow with—more dynamic customers than legacy processors can.

1. The canonical Adyen success story is that the company signed Groupon as its first global enterprise merchant in 2009 and then, as Groupon expanded to markets around the world (mostly in Europe), Adyen grew with them. This story is true but one important aspect has always gone overlooked, in my opinion. European payments are particularly laborious because each country has its own wildly popular local payments method. Sure, Groupon could have expanded to Europe while only accepting regional bank transfer protocols like SEPA or multi-country card products like Maestro, but the company’s conversion rates would have suffered. What about the payment method which 80% of Swedes use? How could they accept the country-specific card that 40% of Belgians prefer? Adyen did the hard work to add dozens (and now hundreds) of local payment methods to its unified platform, which allowed Groupon to launch in new regions more quickly without compromising on performance. Uber and Spotify chose Adyen for similar reasons and, today, Adyen reliably brings in 80% of new revenue each year from existing customers that grow and expand with the company.

2. Stripe is famous for popularizing “developers payments” but, in my opinion, the company’s core innovation was streamlining merchant onboarding. They figured out a way to take a process that used to last weeks and condense it down a few minutes. Developers building online marketplaces and platforms around 2010-2015 (e.g., DoorDash, Instacart, Postmates, Shopify) quickly realized they couldn’t scale their platforms without a fast, API-driven way to onboard merchants and turned to Stripe (and my company, Balanced, for a time). Nearly a decade on, these platforms are some of Stripe’s largest customers. For example, Sacra estimates that Shopify alone contributed $108 billion to Stripe’s payments volume in 2022.

3. Braintree, PayPal’s white-label payments platform, might be my favorite example of how acquiring fast-growing customers early-on can lead to compounding growth later. I forget where I found this slide, but here's a graph of Braintree's transaction count growth during a period where both Stripe and Adyen were ascendent and while PayPal had mostly stopped investing in the Braintree product. It was largely on autopilot and 2.6Xed in three years thanks to the growth of digitally native merchants like Airbnb, Facebook, and Stitch Fix that Braintree acquired early on.

Digitally native processors attract digitally native merchants that need access to the kind of payments capabilities and rapid regional expansion legacy processors have been slow to provide. And it turns out that these digitally native merchants have been some of the fastest-growing consumer brands of the last decade. As these customers grow, DNVPs grow along with them. Meanwhile, legacy processors serve large, but more staid clients. For example, when Vantiv (now Worldpay) filed to go public in 2012, it listed Kroger as one of its key national merchants in the grocery category. Krogers’s sales growth that year was 3.5% (without fuel).

But it gets even worse for legacy processors. Today, Adyen, Stripe, and other DNVP players are increasingly serving traditional, non-digitally native customers like Hertz, Prada, IKEA, and Urban Outfitters that want to accept payments both online and in-person, often via low-code/no-code tools. That’s a lot of infrastructure and software to build and I don’t think legacy processors are up to the task. Instead, DNVPs will continue to grow, but which one will win?

Isn’t payments a race to the bottom?

I believe payments is basically what investor Nikhil Trivedi calls a “many-winner market,” one defined by “market opportunities that have such tailwinds that they produce many winners”. McKinsey estimates that the global payments industry will produce $3 trillion in revenue by 2027. That is an enormous pie which will support multiple winners. In the payments infrastructure market, there are certainly benefits to scale (like using large datasets to increase authorization rates) but, unlike P2P payments, there aren’t really network effect that lead to only one or two players dominating a market. As a result, I believe many of the concerns about competition in payments are misguided and worries about revenue compression are actually about declining take rates. A quick aside to illustrate this…

In Q1 2024, Adyen released an impressive Q1 business update:

• Payments volume was up 46% YoY and net revenue was up 21% YoY

• North America, remained Adyen’s fastest growing region

• “Over 80% of this period’s growth came from existing customers, and we achieved less than 1% of volume churn yet again.”

The stock fell 16% in after hours trading. The prevailing market sentiment at the time was that Adyen has dipped into its profits to fund an aggressive push into the North American market just as PayPal had finally started pricing deals more aggressively and Stripe was hungry for enterprise clients. Adyen’s declining take rate was perceived as evidence of a price war, which would forever impact the company’s profitability. Here’s how Niklas Kammer from Morningstar described the company’s stock price movement:

“We surmise the market is getting hung up on the divergence of volume growth and net revenue growth, which suggests a declining net take rate.”

Yet, Adyen’s management has repeatedly stated they do not attempt to manage take rate and feel confident in their net revenue growth. They feel take rate is a function of payment method mix, regional interchange regulations, and other, more idiosyncratic, dynamics. Instead, Adyen looks at how much revenue they get from a customer. Often, they are willing to price lower on a per transaction basis if they feel confident (through volume minimums and other contractual mechanisms) that they will receive more volume from a merchant or platform. Jevgenijs Kazanins, creator of the excellent Popular Fintech newsletter, published a chart illustrating this point. Adyen’s take rate has been declining for years while payments volume has been growing—often a sign they are working with larger and larger merchants.

While Adyen’s net take rate was declining, the company was offering guidance to the market for its net revenue growth in the “mid-twenties and low-thirties.” As you can see from Jevgenijs’ chart, they were close to or within that range in 2023 and 2024.6 Adyen largely had this situation under control.

Don’t get me wrong, it appears that Braintree was trying to undercut competitors with low pricing, but it wasn’t sustainable. In its Q2 2024 earnings call, PayPal’s new CEO shared that he’d reoriented “the team with Braintree around profitable growth,” and that “Braintree is now meaningfully contributing to transaction margin.” Braintree reached the same conclusion as Adyen: it doesn’t matter if you can win deals if the incremental revenue doesn’t contribute to free cash flow.

A final note on competition from my time as an operator competing with some of the companies mentioned in this piece: There’s room for more players in this space. Yes, merchants are interested in the lower prices that tend to come from more competition in a space, but I observe something far more emotional from merchants that feel underserved by the existing options on the market. Here’s a text message someone on my team received while I was at Finix (circa 2021; Flex refers to the name of a product we were launching at the time):

The language here is obviously over the top—I personally think Stripe has created enormous benefits for merchants and consumers around the world. But this sentiment speaks to the latent desire among merchants and platforms for more digitally native vertical processors in the world. Later this week, I’ll publish a piece on a payments company I believe has the best shot at joining the ranks of Adyen and Stripe as DNVPs begin to replace legacy processors. Stay tuned!

Further Reading

If you enjoyed this, check out my previous pieces on Adyen, Block (Square), PayPal, and Stripe.

I’m a bit biased, but I think Finix could become one of the major players alongside Adyen and Stripe as DNVPs begin to replace legacy processors.

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Disclaimer: The information contained in this piece is for educational and informational purposes only and should not be considered financial advice. Do your own research or seek professional advice before making any investment decisions.

1

JP Morgan’s Equity Research: JPM Payments Market Share Handbook - 15th Edition:

October marks the tenth anniversary of Apple Pay, which had somewhat of a slow start, but by its fifth year was giving PayPal a run for its money:

Since then, Apple Pay has gone on to become one of the most successful consumer payment products in history. Here are some numbers illustrating the scale of Apple Pay, according to research from Capital One Shopping:

• 640 million people worldwide are Apple Pay users

• 60.2 million people in the United States are Apple Pay users

• Over 90% of U.S. retailers accept Apple Pay

As a result of this scale, Apple Pay is responsible for trillions of dollars of payments volume around the world each year. In 2022, for example, Apple Pay generated an estimated $6 trillion in payments volume and made $1.9 billion of revenue for Apple, according to Capital One’s research. And every time a transaction is initiated via Apple Pay, banks pay Apple 0.15% of the transaction amount. In 2019, Apple launched its own credit card, powered by Goldman Sachs, making it directly competitive with the issuing banks—those that “issue” cards to consumers—it works with for Apple Pay.

Banks are increasingly unhappy with this arrangement.

In 2021, issuing banks appealed to Visa to implement new rules that would reduce the number of fees they pay to Apple, specifically for recurring transactions, according to the Wall Street Journal:

“Currently, banks pay Apple a fee when their cardholders use Apple Pay. Under the planned new process, the fees wouldn’t apply on automatic recurring payments such as gym memberships and streaming services.”

In response, Visa introduced a technical change based on it’s network token service that would be more favorable to merchants:

“Visa shared its planned technical change with at least some banks in recent months. A document reviewed by the Journal that explained the new process didn’t mention the fees but detailed a change to so-called tokens that Visa issues for mobile-wallet payments.

When consumers load their credit card onto Apple Pay, Visa issues a special token that replaces the card number. That allows the card to work on Apple Pay and also helps keep the card secure in a potential data breach, among other benefits.

Visa plans to start using a different token on recurring automated payments. That effectively means that after a first payment is made on a subscription, Apple won’t get fees on the following transactions.”

Finally, earlier this year the Justice Department filed a lawsuit against Apple, suggesting that “banks have been victims of Apple’s antitrust infractions, noting that fees the banks must pay when consumers use credit cards are ‘a significant new cost,’” according to a March 2024 article by James Pothen at PaymentsDive. Now, framing the same financial institutions that make billions of dollars each year in overdraft fees as ‘victims’ is a bit rich but the point remains that issuing banks have been seeking a white knight to help them fight back against Apple Pay1.

Visa’s New Products Will Allow Banks to Compete with Apple Pay

It’s within this context that Visa announced a suite of tools at its Payment Forum in San Francisco last week that will help issuing banks more easily build Apple Pay-like consumer experiences. In an interview with PYMNTS’ CEO Karen Webster, Mark Nelsen, Visa’s senior vice president and global head of consumer payments, indicated that many of the company’s recent product announcements were aimed at helping its bank customers meet increasing consumer expectations with more “competitive authority”:

“Nelsen emphasized that the new products and services are built for the entire payments ecosystem but give issuers new capabilities to turn their mobile banking apps into digital payments and commerce focal points. Yet with the competitive authority to now play more fully in the digital wallet ecosystem, Nelsen said that consumers will also expect more from their banks. He believes the seven products Visa is launching today will give them a strong foundation upon which to innovate the consumer experience.”

There were three products Visa announced, which I believe will help banks compete with Apple Pay:

Visa Payment Passkey Service + Click to Pay + Tap to Everything

One of the benefits Apple Pay has held over other types of consumer wallets is the ability to authorize/initiate transactions via fingerprint or facial scans using a consumer’s phone, leading to lower fraud and dispute rates and as a result higher authorization rates. In response, other digital wallets like PayPal have implemented passkeys—an open standard maintained by the Fast Identity Online (FIDO) Alliance that uses on-device biometrics scans to securely login to accounts—to bring a similarly secure and convenient payment option to even more consumers. This is an example of good payments infrastructure that is most useful when deployed at scale so Visa implementing passkeys at the network level is the next logical step and the industry will be better for it. 

Visa’s marketing materials imply that Visa Payment Passkey Service will only be available via Click to Pay, Visa’s proprietary online checkout experience, which is primarily deployed outside the US, but here’s how Visa’s Mark Nelsen described a potential implementation in the US to PYMNTS:

“For US consumers, what they would be able to expect is when you’re buying something online have more of those transactions go through seamlessly and not have to get a call from your bank saying ‘hey, I need you to confirm your identity’...what this will end up doing, if you do the facial scan immediately up front, which as you know only takes half a second, you can do that real quick check which means all of these transactions will go through seamlessly and you no longer have to confirm your identity after the fact.

When asked how consumers will obtain passkeys, Nelsen said:

“You’re in your mobile banking app and your bank just simply says ‘hey do you want to create a passkey to make payments online easier?’ You just consent and that’s it. At that point in time Visa creates a private key and we put it on the consumer's device and when you now use that device for payments that key is going to create a digital signature so the bank knows that this is you.”

Visa also said that it “will partner with issuers to enable Click to Pay and Visa Payment Passkey Service on new Visa cards, reducing manual entry of card details and passwords from the moment the card arrives.” Visa’s Tap to Everything capabilities also provide the convenient experience of simply tapping a card to a device to automatically load your card details, but it’s the new Tap to Confirm functionality that brings an additional layer of security to transactions by allowing consumers to “use a card to authenticate identity for online shopping by tapping their card against their mobile device.”  

Taken together, these capabilities effectively give enterprising issuing banks (including neobanks using the appropriate issuing processor and sponsor bank) an SDK to build convenient and secure consumer payment experiences like Apple Pay or Google Pay.

Before we get too carried away, Fintech Brainfood’s Simon Taylor points out that “Visa has a history of announcing things like wallets that never catch on.” But, like network tokens—of which Visa now has over 4 billion in circulation—passkeys and Tap to Confirm are a security boon to the industry so I’m bullish they’ll catch on. For a complacent, rent-seeking monopoly, Visa sure did ship a lot of useful new products last week.

Remember Coin?

Now let’s talk about a less useful product.. 

Almost a decade ago, I worked with a lot of crowdfunding campaigns and learned a universal truth about the human condition: people really hate their wallets. More specifically, people seem to resent carrying around multiple cards in their wallets every day. This sentiment has resulted in over 2,200 wallet campaigns on Kickstarter in the last five years alone, according to LaunchBloom, and a decade ago, “slim wallet” campaigns were so prevalent on Kickstarter that the crowdfunding platform felt compelled to publish a deep dive explaining why these projects kept popping up. 

In November of 2013, the mother of all “I hate carrying multiple cards” crowdfunding campaigns launched, surpassing its $50,000 funding goal in just forty minutes. But the product wasn’t a wallet at all. It was Coin, a single “connected card” that could store the payment details of up to eight different cards on a single swipeable, battery powered device. Most users were excited by the idea of being able to slim down their wallet while others liked the ability to pay with different cards easily at different merchants, presumably to maximize rewards and cash-back.

A year after Coin launched, Apple Pay was introduced. Today, with just a phone, users can pay with a tap at almost any merchant and switch between different cards seamlessly. Users don’t need a wallet at all. Apple Pay more elegantly solved the problem Coin set out address (fewer cards in your wallet) by going a level deeper in the stack (phone operating system vs. a card) and riding the wave of some structural changes in the payments ecosystem that the payment networks rolled out around the same time:

• Visa and Mastercard introduced token services in 2014, allowing for payment information to be more securely transmitted for payments initiated from digital wallets like Apple Pay

• New fraud liability rules took effect in 2015 that accelerated the adoption of chip-enabled cards, which Coin didn’t support 

• Contactless cards—which Apple Pay massively benefitted from / helped spur the adoption of—were introduced by Visa in 2018

Take all of those structural forces working in Apple’s favor, add in Apple’s massive distribution advantage, and it’s obvious that Coin never really stood a chance. Indeed, Coin was acquired by Fitbit and eventually shut down in 2017. 

Visa Flexible Credentials: The One Card to Rule Them All, Maybe

The spiritual successor to Coin is Visa’s new Flexible Credentials, which they also announced at the Payment Forum last week. Flexible Credentials are “a new technology that lets issuers give their clients the ability to access different funding sources on an existing payment card,” including lines of credit, checking accounts, loyalty points, prepaid debit, installments, and maybe even stablecoins. Although the list of funding sources includes some modern additions (i.e., crypto and BNPL), the product itself seems to have been inspired by decade-old products like Coin. I mean just look at the marketing materials: 

This copy, in particular, could have been pulled straight from Coin’s crowdfunding website:

“For each line of credit, checking account or prepaid balance at your disposal, you need a separate card. This means a lot of us—for a long time—have carried around a small stack of plastic.

In the not-too-distant future? Wallets are in for a slimdown. New, flexible credentials map multiple funding sources to a single card — virtual or otherwise.”

Referring to products like Coin in her PYMNTS interview, Karen Webster joked about Flexible Credentials replacing “the bad old days of those battery powered plastic cards, with those little buttons.” She went on to say that products like Coin were “the birth, really, of the idea of having lots of different card capabilities inside of a single card.” 

Just like Apple Pay was able to create a more elegant solution than Coin by going a level deeper in the technology stack, Visa seems to be empowering Apple Pay competitors by implementing Flexible Credentials at the payment network level. Here’s the future Visa’s former SVP and Global Head of Fintech, Terry Angelos, believes is in store for consumers using Flexible Credentials:

“Now the 16-Digits can be mapped to multiple products and the “terms of service” resolved in real-time by the customer at the POS. We now have a pointer to multiple [Bank Identification Numbers] (BINs) and the consumer can choose:

• Fuel Tap = Shell rewards debit card

• Grocery Tap = Amazon Prime for 5% back

• United Airlines Tap = Mileage Plus Credit Card

• Restaurant Tap = Sapphire Reserve please

Note that the acquiring ecosystem of processors and terminals will need to be upgraded to support these dynamic BINs (which is why these flex credentials only operate in markets like Japan for now).”

If this future comes to pass, I would expect companies like Kudos, which just raised a $10 million Series A, to issue its own physical card that abstracts away all of a user's other cards as it decides—on the fly—which card should be used for each transaction. I would also expect companies like Curve to finally launch in the US. This is an exciting and competitive vision of the future that will benefit consumers. 

Unfortunately, while Coin and Apple Pay allow cards from multiple different banks to exist side by side in a single device or wallet, Visa seems to envision Flexible Credentials as a product that consumers will use mainly through a bank’s mobile app (vs. a fintech’s app). Here’s how Nelsen described the potential consumer experience:

“You go into your banking app and the bank could say to you ‘hey, we’re allowing for more control and flexibility in terms of how do you want to pay.’ For a consumer, maybe you want to pay on debit, so in real-time, for transactions that are less than $100. And maybe if it's over $100 you want to put it onto a credit line.”

Will banks build apps that allow users to add multiple Visa cards issued by other banks (e.g., BofA allows users to add a Citi card)? What about Mastercard? Visa and Mastercard did announce network token interoperability back in 2016. Will that work here as well? 

Is the Affirm Card the Future of Flexible Credentials?

I have a lot of questions about Flexible Credentials, so I looked more closely at the only product I could find using these capabilities in the wild: the Affirm Card.

Affirm worked with Visa, Evolve Bank & Trust (yes that Evolve), and issuing-processor Marqeta to create physical cards that allow consumers to pay via debit or Affirm-provided credit. Marqeta CEO Simon Khalaf confirmed on Twitter that the different funding sources operate under multiple BINs (one for debit and one for credit), but are those from the same issuing bank? Affirm CEO, Max Levchin’s tweets indicate that Affirm’s credit capabilities can be added alongside flexible debit cards issued by different banks, but at this point I really can’t determine how this all works and will have to wait for more information.

If you have more technical details on how Visa’s Flexible Credentials or the Affirm Card works, please email me at info@batchprocessing.co or comment on this post below.

While we’re here, let’s take a look at how the Affirm Card is doing to see if this is an exciting version of the future for consumers: Affirm Card GMV was up nearly 2000% YoY, based on the company’s most recent earnings report—a good sign.

But compared to Cash App’s Cash Card, it’s clear the Affirm Card has a long way to go to gain mass adoption:

• The Affirm Card had over 1 million active annual cardholders in the three-month period ending March 31, 2024 (Affirm’s third fiscal quarter), compared to 24 million monthly active Cash App Card users. 

• Affirm’s active annual cardholder count grew at 30% QoQ, while the Cash App Card grew 16 YoY. 

I know these are not apples-to-apples metrics becasue Affirm’s reporting on the Affirm Card is limited right now, but there are signs of life (granted, this is growth from a small base). Still, the Affirm Card is not the world-beater I would have assumed given all the excitement around Coin a decade ago and Flexible Credentials last week.

We’re going to have to wait for Visa to clarify how fintech companies can build new experiences using Flexible Credentials. Until then, we can all continue to use Apple Pay or do our best George Costanza impressions.

A final thought on a dynamic situation, which I wasn’t able to weave into this piece: Jason Mikula of Fintech Business Weekly has been doing impressive work covering the Synapse/Evolve saga. I highly recommend checking out his reporting. My main takeaway is that the For Benefit Of (FBO) bank account structure and the Banking-as-a-Service model—two innovations which have powered the past 15 years of fintech—are under serious risk. Will the future of fintech come down to Visa-empowered legacy banking apps vs. big tech fintech products like Apple Pay?

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The magic of the Forward API is in step #3, where Stripe pulls an Indiana Jones and replaces tokenized data with raw payment details as it relays the request to the third-party PSP.

My main takeaway was that despite the (many) headlines claiming that Stripe was “decoupling” or “unbundling” payments from its software services, interoperability for Stripe is largely an aspiration right now. The main limitation of the Forward API is that it can only initiate transactions with other PSPs. It can’t handle post transaction events like refunds and disputes. But Stripe’s integration with Korean PSP NICEPay—which they also showed off at Stripe Sessions—illustrates how they might work with other PSPs around the world in a much more seamless manner.

Stripe's Head of Product for Payment APIs expands on Stripe’s PSP interoperability

Luckily, Sophie Sakellariadis, Stripe's Head of Product for Payment APIs, Money Movement & Storage, reached out to me confirming a few things I speculated about in my post and sharing some new information about Stripe’s payment APIs. Here’s what she had to say (shared with permission):

Here’s some info on the open questions you mentioned about our Korea integration.

• 1/ Post transactions events on our NICEPay integration (e.g., refunds, disputes) are, in fact, fully normalized to work how they would for cards.

• 2/ We were able to normalize that experience because we built NICE on our Reverse API, which requires partners to integrate to a uniform charge, disputes, and refunds spec.

• 3/ We originally built this API for payment methods like AmazonPay and Revolut. But, as you note, we’ve since found that PSPs dominant in one market want to use it too (including Paystack, as you guessed).

FWIW, on the shortcomings of our Vault and Forward solution, we are working on it! We had so much demand from users to use products like the Payment Element with other PSPs that we decided to ship now rather than wait for the next wave of improvements.

Based on Sophie’s comments, the Forward API is only half the solution to making Stripe interoperable with other PSPs. Stripe also has a Reverse API (still in beta) that allows PSPs to communicate back to Stripe as events like refunds and disputes take place. This allows transactions processed on other PSPs via Stripe to be “fully normalized” in Stripe’s dashboard, API logs, ledger, etc, which is much more convenient for the merchant than using the Forward API and tracking down transactions across multiple PSPs.

The Reverse API was originally built to integrate alternative payment methods (APMs) more quickly. By providing uniform endpoints that eager partners could code to, Stripe “doubled the number of payment methods we provide access to, from 50 to over 100—now including Amazon Pay, Revolut Pay, Zip, TWINT, and Swish” over the past year.

It’s worth noting that APM providers have motivation to roll up their sleeves and integrate into a large and fast-growing PSP like Stripe. In fact, they want to make their payment method available on as many PSPs as possible. I doubt the same is true for other PSPs like Adyen. Sophie also confirmed that Stripe subsidiary Paystack is the Nigerian PSP that will be launching this year with a NICE-like integration, which underscore’s my point about Stripe mainly working with cooperative PSPs right now—often ones that are regionally concentrated and want a more global partner in Stripe. For Stripe to achieve its aspiration of widespread PSP interoperability, I believe they’ll need to find another solution that allows them to plug into other PSPs more quickly. Luckily, there’s another way.

Basis Theory and VGS founders school me on reverse vs. forward proxies

One point that I tried to get across in my last post, Stripe: Always Forward, is that Stripe’s technical implementation for their Forward API has some important limitations. Here’s what I said:

But there are more elegant and flexible technical solutions Stripe could have used to solve this problem. For example, data tokenization companies Very Good Security (VGS) and Basis Theory, offer services that function as forward proxies (vs. Stripe’s reverse proxy), which allow merchants to keep their existing integrations into third-party PSPs and simply replace/redact sensitive data from API requests passing through the proxy based on pre-configured rules. This setup requires more work for VGS and Basis Theory but requires less work for merchants.

To help me expand on this further, I spoke to the founders of the data tokenization providers I mentioned in last week’s post: Mahmoud Abdelkader and Marshall Jones of Very Good Security (VGS) and Colin Luce of Basis Theory. Mahmoud was my co-founder and CTO at Balanced, Marshall was our VP Engineering.

Mahmoud says that a “better way to think of a forward proxy is as a relay.” Meaning a client can make requests to any host it would like without the forward proxy having explicit support for that host. It’s a passthrough, not a destination. Here’s how Marshall put it in a comment on my last piece: “a forward proxy is more like a VPN connection than a HTTP API that you hit so it is more flexible .” The proxy can do nothing and simply allow the request from the client to be sent to the host unchanged. Or, the proxy can modify the payload as it passes through. In the payment context, the modification most often performed is swapping out tokenized data for raw payments data.

Here’s a diagram showing how VGS’s inbound and outbound proxies keep sensitive data out of a customer’s environment:

And here’s an example sandboxed payment request made to UK-based PSP Checkout through a VGS forward proxy:

curl https://api.sandbox.checkout.com/payments -k \
  -x USiyQvWcT7wcpy8gvFb1GVmz:2b48a642-615a-4b3c-8db5-e02a88147174@tntsfeqzp4a.sandbox.verygoodproxy.com:8080 \
  -H "Content-type: application/json" \
  -H "Authorization: sk_test_51*****7e" \
  -d '{
    "source": {
      "type": "card",
      "number": "tok_sandbox_w8CBfH8vyYL2xWSmMWe3Ds",
      "expiry_month": 8,
      "expiry_year": 2025,
      "name": "tok_sandbox_w8CBfH8vyYL2xWSmMWe3Ds",
      "cvv": "tok_sandbox_w8CBfH8vyYL2xWSmMWe3Ds"
    },
    "amount": 2000,
    "currency": "USD",
    "reference": "ORD-5023-4E89"
  }'

Notice that the host for the request is Checkout—not VGS—and (most of) the request conforms to Checkout’s spec, not one defined by VGS. The only VGS-specific items in the request body that would differ from a normal request made directly to Checkout are the PCI-sensitive fields like number and cvv, which VGS calls “Aliases” and are swapped out for raw card details as the request leaves the proxy. The other VGS-related information specify the proxy vault location, port, and access credentials. The example above uses the cURL shorthand “-x” to define the proxy information in the request metadata. This method is natively interoperable with “pretty much almost everything created on the internet since 1998,” (e.g. cURL, web-browsers, APIs) according to Mahmoud.

Host: https://api.sandbox.checkout.com/payments

Vault location: @tntsfeqzp4a.sandbox.verygoodproxy.com:8080

Access credentials: USiyQvWcT7wcpy8gvFb1GVmz:2b48a642-615a-4b3c-8db5-e02a88147174

Aliases: tok_sandbox_...

So why does the native interoperability of a forward proxy matter to multiprocessor merchants? Because with Stripe’s Forward API, merchants have to code to Stripe’s spec, not Checkout’s for the request to work. This can add additional work for the merchant as they move to a multiprocessor setup and is less flexible because Stripe needs to add support for any new Checkout functionality by supporting the necessary endpoints and parameters in Stripe’s spec first. Colin Luce of Basis Theory says that these “connections don’t change that often,” but it’s worth pointing out because Stripe is going to have its work cut out for it staying current with the APIs of the many underlying PSPs with which Stripe aspires to interoperate. 

Colin confirmed that “what Basis Theory and Stripe are doing is technically a reverse proxy.” Which means I got this part of Stripe: Always Forward slightly wrong:

And while, as of today, the Forward API can send data to only six supported third-party processors, the forward proxy approach allows merchants to effectively connect to any third-party PSP “as long as your partner can accept cards through an API endpoint,” according to Basis Theory’s developer documentation. 

But while Stripe’s Forward API is currently limited to the six PSPs it supports, Basis Theory has an interesting tool it calls “reactors” to ensure merchants can “connect to any third-party PSP as long as your partner can accept cards through an API endpoint.” Reactors are “serverless functions that can be run in parallel with the proxy,” as Colin put it during our conversation. According to Basis Theory’s documentation, reactors are “similar to AWS Lambda, Azure Functions, or Cloudflare Workers - except your applications, systems, and infrastructure never touches the sensitive plaintext data.” For what it’s worth, VGS has a similar serverless function runtime called Larky. This on-the-fly compute allows Basis Theory to modify both request and response payloads more dynamically than Stripe’s standard reverse proxy, which is how it ensures merchants do not have to wait for Basis Theory to update its API to unblock any underlying PSP functionality.  

I’m excited to see how this space plays out and what, if any, technical changes Stripe will make to achieve its interoperability aspirations.

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Merchants can “use Stripe within an open ecosystem of third-party providers,” Stripe’s Chief Product Officer Will Gaybrick shared in a blog post recapping many of the product announcements shared at Stripe Sessions, the company’s annual developer conference last Wednesday. According to Gaybrick’s keynote address at the event, Stripe is “extending [its] modularity to the very core of Stripe: payments processing.” Going “multiprocessor” is a big strategic shift for Stripe, which has historically made its suite of tightly integrated “financial infrastructure” an all-or-nothing proposition. “It’s a big deal,” Gaybrick would go on to say during his remarks. But as I was looking through Stripe’s documentation, I was left wondering if Stripe’s embrace of competitive payment processors says more about its current vulnerabilities than a bold new vision of its future.

How Stripe’s Forward API Works

At the core of Stripe’s new multiprocessor strategy is its Vault and Forward API, which allows merchants “to tokenize and store card details in Stripe’s PCI-compliant vault and route that data to supported processors or endpoints.” Most payment service providers (PSPs) offer some sort of vault/tokenization service. Indeed, as Simon Taylor points out in his Fintech Brainfood piece, The Token Layer Cake, Stripe popularized the modern payment tokenization technique of client-side payment forms posting sensitive card information directly to a PCI-compliant third-party processor:

This generation of digital payment tokenization started in the early 2010s, coinciding with the emergence of Stripe. At the time, digital payments in the US were in its infancy. It was becoming clear that there were benefits to merchants to retain card-on-file information, but this meant they needed to store it securely. However, the secure storage of massive amounts of sensitive payments was a viable option mostly for enterprise merchants who were willing to navigate the costly and lengthy process of achieving PCI compliance.

Stripe offered an elegant solution. Merchants could store cards with PCI-compliant Stripe and receive a token in return. Since merchants were interacting with just tokens, they not only didn’t have to touch sensitive data, but it also meant their time to market decreased significantly. To this day, this form of PSP Tokenization remains commonplace.

But Stripe’s payment forwarding capabilities are less well known and worth taking a closer look at given they are the basis of “a foundational update on how [Stripe is] thinking about the ecosystem in which we operate,” according to Gaybrick. 

Stripe has offered some type of forwarding capabilities since at least 2015 to support the “social commerce” boom from nearly a decade ago. That use case saw apps like Pinterest1, Facebook, and Twitter relying on Stripe and Braintree to securely accept user payment card details from their apps, store those details compliantly, and forward the subsequent transaction requests on to multiple different merchants and/or payment providers. 

Here’s how Stripe’s Vault and Forward API works:

Vault:

1. Merchant collects card details via Payment Elements, a set of prebuilt user interface (UI) components for building web and mobile checkout flows.

2. Stripe creates and returns a PaymentMethod object, which is a token representing the sensitive card information. The merchant is free to store this alphanumeric string in their database without fear of violating the Payment Card Industry Data Security Standard (PCI DSS for short).

Forward:

3. Merchant creates a ForwardingRequest using the Vault and Forward API, which tells Stripe the PaymentMethod to reference, which data Stripe should send, and the third-party processor endpoint to hit.

4. Stripe forwards the request on to the other PSP, but as it does, Stripe replaces certain redacted fields like the card number and CVC with the raw, PCI-sensitive payment details. Said another way, Stripe de-tokenizes the data as it passes it along to another PCI-compliant entity, in this case another processor. 

5. Stripe receives a response from the other PSP, redacts PCI-sensitive data, and stores the redacted response in the body of the ForwardingRequest object, which is returned to merchant as a response to the request they made in step #3. The timeout period for this response is less than a minute.

Note: I’ve used cards in this example, which have PCI-sensitive data, but presumably the Forward API could be used for other types of payment methods, such as bank accounts, and Stripe would redact the sensitive data, which are not under PCI scope.

The magic of the Forward API is in step #3, where Stripe pulls an Indiana Jones and replaces tokenized data with raw payment details as it relays the request to the third-party PSP. Stripe has effectively built a payments-specific reverse proxy. According to Cloudflare, a reverse proxy (vs. a forward proxy) “sits in front of one or more web servers, intercepting requests from clients…to ensure that no client ever communicates directly with that origin server.” 

Stripe has identified a real problem here—for itself and its customers. Enterprise customers often work with multiple payment providers and have contracts requiring a minimum amount of payments volume go through certain PSP, so even if an enterprise customer wanted to go all in on using Stripe, they often can’t. Here’s how Stripe President and Co-founder, John Collison explained the situation in an interview with Bloomberg: “as we’ve gotten into these larger and larger customers, they have more constraints, you’re dealing with different parts of the organization, and so this makes it easy to adopt the best parts of Stripe.” 

But the current version of the Forward API is limited.

The Limitations of Stripe’s Forward API

My main concern is that payments processed via the Forward API lack some of the polish for which Stripe’s products are famous. For example, Stripe specifically introduced its PaymentMethod and PaymentIntents APIs a few years ago as a replacements for its Sources and Charges APIs, respectively, in and effort to help merchants more easily track complex payment lifecycles (i.e., payment authorization, user-initiated payments). Here’s how Stripe engineer Michelle Bu explained the changes in a blog post explaining how the Stripe API has evolved over the past decade:

“Unlike a Source, there is no state or data specific to the particular transaction type captured on a PaymentMethod object—you can think of it as an object that specifies how to process a payment request.

With Charges and Sources (Stripe’s previous , a “best practice” payments integration for cards, iDEAL, and ACH debit required managing two webhook handlers (one that is time-sensitive and in the critical path to collecting money correctly), dealing with three different times a Charge could succeed, handling two paths to failure, and dealing with two stateful objects. 

With PaymentIntents and PaymentMethods, the integration is the same across all payment method types.

The PaymentIntent instructs what to do next when it’s in the requires_action state. Actions are standardized and predictable per payment method; for example, the 3D Secure authentication flow is managed via a set of actions.”

The Forward API feels like a step backwards. From Stripe’s developer documentation: 

“The Vault and Forward API doesn’t confirm or capture PaymentIntents. As a result, you might unintentionally use them to capture a payment on Stripe that was already captured on another processor.” 

Said another way, Stripe’s intentionally stateful PaymentIntents objects are missing a few states when used with the Forward API. To Stripe’s credit they do make an attempt to address some of these gaps. It supports first-party and third-party idempotency keys to help prevent duplicate charges and offers a standalone 3D Secure authentication flow specifically for merchants that are using multiple processors or initiating payments via travel aggregators like Expedia. It’s difficult to examine how graceful the latter offering is because the feature is still in beta and merchants must contact Stripe via email to get access. 

According to Gaybrick, Billing and Radar, Stripe’s subscription billing and fraud tools, respectively, “will work seamlessly with other PSPs by the end of the year.” But those services—like the the Optimized Checkout Suite, which is compatible with the Vault and Forward API today—are mostly focused on the experience before and during a transaction. 

The next example of Stripe’s multiprocessor support lacking the polish of Stripe’s more tightly integrated suite of tools comes after the transaction occurs. Ops and risk teams cannot manage refunds and disputes entirely from Stripe in a multiprocessor setup like they can using Stripe Payments. From Stripe’s docs again:

“If you’re using the Vault and the Forward API to make an authorization request, you must handle any post-transaction actions, such as refunds or disputes, directly with the third-party processor.”

A few more caveats about the Forward API from Stripe’s docs:

“When you use the Vault and Forward API to forward card details to a third-party processor, Stripe can’t guarantee that the processor will provide any particular response to your forwarded API requests. If the third-party processor is unresponsive, you must reach out directly to that processor to resolve the issue.”

“The Vault and Forward API treats any response from the destination endpoint as a success and returns a 200, along with the destination endpoint’s response code in the response.body. For example, when the destination endpoint returns a status code of 400 to Stripe, the Vault and Forward API responds with a status code of 200. The response.body includes the destination endpoint’s 400 response and error message. Separately test the API request that you send to your destination endpoint to make sure that you don’t have any errors.”

Now, I understand Stripe can’t control the availability of other PSPs or manage things like refunds and disputes for transactions processed through other PSPs without support from those PSPs (more on that later). But there are more elegant and flexible technical solutions Stripe could have used to solve this problem. For example, data tokenization companies Very Good Security (VGS) and Basis Theory, offer services that function as forward proxies (vs. Stripe’s reverse proxy), which allow merchants to keep their existing integrations into third-party PSPs and simply replace/redact sensitive data from API requests passing through the proxy based on pre-configured rules. This setup requires more work for VGS and Basis Theory but requires less work for merchants. And while, as of today, the Forward API can send data to only six supported third-party processors, the forward proxy approach allows merchants to effectively connect to any third-party PSP “as long as your partner can accept cards through an API endpoint,” according to Basis Theory’s developer documentation2. 

VGS and Basis Theory also support more data transfer protocols than Stripe at the moment. In addition to HTTP (which Stripe supports), they both support SFTP, and VGS supports ISO 8583, an international standard for payments initiated with a payment card (credit or debit card). I wouldn’t be surprised if Stripe launches a competitive service soon or acquires a player in the space. I hope to write more on this later. 

I can’t blame Stripe for all of the issues I mentioned above; they’re simply limitations of Stripe’s current approach. But that’s kind of my point. Stripe chose to launch a strategically important feature with clear technical limitations when more elegant solutions exist. This choice does not seem inline with the level of technical rigor and craftsmanship Stripe’s founders espouse. Here’s Stripe co-founder and CEO, Patrick Collison from an podcast interview a few weeks ago:

“If Stripe is a monstrously successful business, but what we make isn’t beautiful, and Stripe doesn’t embody a culture of incredibly exacting craftsmanship, I’ll be much less happy.”

I don’t think Stripe should be happy with this release. Gaybrick admitted that Stripe is “just at the starting blocks” of its multiprocessor journey but the Vault and Forward API on its own is not capable of fulfilling the aspiration Gaybrick shared at Sessions for “all of Stripe’s products will gracefully inter-operate with third-party processors.” And while, yes, things may change and improve over time, I don’t think it’s unfair to be critical of the current state of the the Vault and Forward API. This isn’t a beta product. During the keynote Gaybrick made a point of telling the audience that “Mindbody, Blackbaud are using Stripe Forwarding today,” and that the new API is available to others “right now.” Regardless, Stripe seems to be betting a lot of their strategic shift on a capability for which merchants must contact Stripe support in order to gain access.

Now, That’s a NICE Integration

But there is another way. Gaybrick shared a more exciting version of Stripe’s multiprocessor implementation during Stripe Sessions:

“I'm excited to announce that stripe has partnered with the Korean PSP NICEPay to get you localized coverage faster. So, with a mere toggle in the dashboard you can give your customers a fully-localized experience.” 

Stripe’s Head of Product for Payment APIs, Money Movement & Storage, Sophie Sakellariadis, shared a few more details in a LinkedIn post last week:

“One of the first steps we are taking to make Stripe interoperable with the broader payments ecosystem is partnering with the best PSPs worldwide to supercharge our global reach. Thanks to our partnership with top Korean PSP NICE Payments, merchants in the US can now get access to any local Korean card brand (there are more than 20!) as well as top wallets KakaoPay, NaverPay, and SamsungPay -- all with the click of a button. 

Beta users saw auth rates in Korea improve to >98% (!). We have similar partnerships launching in Nigeria and Indonesia later this year”

Stripe’s documentation explaining how to set up future payments with Korean cards and payment methods mentions creating “mandates” for customers and SetupIntent objects, which indicates that NICE is much more tightly integrated with Stripe than simply using the Forward API. Merchants can use more of the convenience features of the Stripe PaymentIntents API under this setup. The main thing I couldn’t determine is how post-transaction activities such as issuing refunds and challenging disputes occur for NICEPay processed transactions.

At first glance, this approach feels like a more buttoned up approach to Stripe working with other PSPs. But if I had to guess, I’d assume this type of integration will be limited to locales where Stripe can establish a friendly relationship with local PSPs. For example, NICE Holdings, which operates NICEPay has an Indonesian arm, and Paystack, a Nigerian PSP, was acquired by Stripe in 2020. I also imagine PSPs with operations more or less limited to their own countries will be more eager to cooperate with Stripe on this type of integration, while more global PSPs like Adyen would not. 

This Is Not an Exit

During Stripe Sessions, Gaybrick mentioned that “over the past few years we’ve quietly made several of Stripe services work better with other PSPs.” One could claim this is a strategic masterstroke by Stripe as it attempts to leave the world of payments behind, focusing instead on higher-value software products. Or maybe Stripe was forced to implement a basic form of payment orchestration to attract and retain important enterprise customers. I don’t know for sure, but if I had to guess, the reason these integrations were completed quietly is because Stripe begrudgingly did them. In fact, the Vault and Forward API’s list of supported endpoints reads like a list of Stripe’s main competition for enterprise-grade customers:

• Adyen

• Braintree

• Checkout

• GMO Payment Gateway (a Japanese PSP)

• PaymentsOS (PayU)

• Worldpay

Adyen, in particular, has been a formidable competitor to Stripe over the past five years, signing deals with long-time Stripe customers Instacart, Postmates, Shopify, and others. Those deals appear to be paying off. Adyen recently shared that North America was its “fastest-growing region in the second half of 2023.” I imagine this Stripe/Adyen competition will only intensify over the next five years. Which is why, Scott Wessman, formerly of Visa and Global Payments, wonders if Stripe’s claim of interoperability is mainly useful for “counter-positioning with Adyen.” 

Like Stripe, Adyen is also an all-or-nothing PSP but they take things even further. They’ve never acquired another company—everything is built in house—and they also operate as a bank in many regions. Simon Taylor of Fintech Brainfood claims that “Adyen is modular too if you push,” but you can imagine Stripe’s new pitch to enterprise merchants being lured away by Adyen: “merchants can now use the Vault and Forward API to route contractually obligated transactions to Adyen while keeping everything else running through Stripe.” I believe that this gambit is at the core of Stripe’s strategy: if it’s so easy to work with other PSPs merchants won’t want to leave. As I mentioned above, I think Stripe’s current PSP interoperability needs a lot of work, but it’s an interesting idea, and one I’ve seen before. 

In 2010, Braintree started the Credit Card Data Portability initiative, which was “an opt-in community of payment providers that agree to allow a merchant to port credit card and other associated information if the merchant ever decides to move to another provider.” Here’s how Braintree founder Bryan Johnson described the initiative at the time (before he began his quest for immortality): 

“We initiated credit card data portability because merchants were in a serious bind. All their stored credit card data was being held hostage, and in the majority of the situations, they were blind-sided. We wanted to level the playing field and allow merchants to choose service providers based on merit, not restrictive business practices.”

The idea was that if Braintree, an upstart compared to large acquirer-processors like First Data, could convince merchants that they wouldn’t be locked into using Braintree forever, those merchants would actually be more willing to give Braintree a shot. It also created pressure on processors like First Data to join the portability initiative. Today, card data portability is more or less a standard across the industry which helped upstarts like Braintree and Stripe grow into what they are today.

We’ll have to wait to see how this all plays out, but, for now, Stripe’s new Forwards API hasn’t moved the payments industry forward.

As a follow-up to this piece, I interviewed Stripe's Head of Product for Payment APIs, the co-founders of Very Good Security, and Basis Theory's CEO/co-founder to learn more about forward vs. reverse proxies. Check it out here:

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Musk is turning Twitter into X, the “everything app” he envisioned more than 20 years ago while building PayPal. In his vision, X will offer communication, commerce, payments, identity services, and more to millions of users, much like China’s WeChat does. It’s not a bad idea, and to varying degrees, other US-based companies have pursued the same vision. Uber’s version of a “many things” app includes rides, food delivery, and scooter rentals. But Block’s Cash App and PayPal’s Venmo are likely more instructive for Twitter since they all take advantage of peer-to-peer network effects in a way that Uber doesn’t. Here’s the general playbook Cash App and Venmo used to succeed:

1. Use a peer-to-peer (P2P) payments network to bring on new users at a low customer acquisition cost (CAC), which increases the value of the network (i.e., Metcalfe’s Law)

2. Increase their average revenue per user (ARPU) by offering more and more financial services and commerce tools to customers over time 

3. Maximize the lifetime value (LTV) of each customer by making it attractive for users to stick with the same provider for 10-15 years, often through network effect

ARK has some great research showing this playbook working well for Cash App, which started with P2P payments and has been adding an increasing number of financial services over the past decade, starting with the Cash App Card.

The key to this strategy is that Cash App’s P2P network helps them bring in new customers at a ridiculously low $5 CAC, whereas traditional banks spend hundreds of dollars to acquire customers. 

Cash App then layered in additional financial services like trading, lending, and commerce to massively increase its average revenue per user (ARPU) over time.

Source: Aika Ussenova’s Cash App is King

Even more relevant to Twitter may be Venmo, which has shown the power of mixing social conversations with payments. The app started off in the mid-2000s with a feed of user-generated messages and emojis accompanying each transaction. The company removed its iconic global social feed two years ago amid security and privacy concerns but there may be something unique about the resilience of a social-first payments network. In its Q4 2022 investor update, PayPal reported that P2P payments volume excluding Venmo contracted 1% YoY while Venmo volume grew 7% compared to the fourth quarter of 2021. 

Source: PayPal’s Q4 2022 Investor Update

A quick aside: One failure mode, I’ve seen with communication networks layering in payments is assuming that a large network will necessarily lead to meaningful payment volume. For example, did you know that you can send and receive money via GMail? No, that’s probably because very few of the billions of GMail users take advantage of the feature. And sending money via GMail certainly is not anywhere close to a cultural phenomenon like Venmo or Cash App. It’s just not the tool users think about to send money. 

Musk says Twitter can generate $1.3B in revenue from a payments business by 2028. For context, Cash App just got to $1.1B revenue (ex-BTC) in Q12023, 10 years after it launched one of the most successful P2P apps in the country. 

PayPal, Venmo’s parent company, has actually been trying to realize the promise of an everything app for years. In 2021, PayPal rolled out what it called a “super app” that offered “a combination of financial tools including direct deposit, bill pay, a digital wallet, peer-to-peer payments, shopping tools, crypto capabilities, and more.” A few years ago, around the time PayPal was rumored to be interested in buying Pinterest, I wrote about how the company’s collection of subsidiaries and features could be assembled to create an incredible commerce platform—a deconstructed sales funnel for the internet. Commerce, as ARK’s ARPU chart below shows, is where the lion’s share of potential revenue for an everything app might come from. 

This brings us to Twitter, which Elon Musk believes has a “transformative opportunity in payments.” Here’s how Musk has previously described X, the everything app:

"Now we can say you've got a balance on your account. Do you want to send money to someone else within Twitter? And maybe we pre-populate the account…Then the next step would be to offer an extremely compelling money market account to get extremely high-yield on your balance," he said. "And then add debit cards, checks."

This is almost exactly the playbook I described above. Musk, like Cash App, Venmo, and many other fintech companies understands one of the first principles of financial services: People tend to keep their money in the place where it provides them the most value. That value can come in the form of payments, interest, access to other financial services, etc. 

Great! 

The problem is that Musk seems to have bad ideas about risk, payments, and ecommerce. Yes, I understand he co-founded PayPal, one of the most important peer-to-peer payments companies in the world, but as former PayPal employee (circa 2010) Ohad Samet pointed out, “Saying Elon Musk knows payments because he worked on PayPal 20 years ago is like saying I know waste management because I went to the restroom once.” 

The Man Who Knew Nothing About Risk

Peter Thiel, another former PayPal employee, was so alarmed by Musk’s PayPal credit card program that gave away $10 to unverified users and resulted in so many financial losses for the company, that Theil staged a coup and ousted Musk as CEO while he was on vacation and then joked about writing a chapter in his PayPal book about Musk entitled "the man who knew nothing about risk.” 

You might assume Musk has learned something in the 20 years since this episode, but his recent public comments about identity verification are shockingly naive. He seems to think that the key to fighting bad actors—whether fraudulent payments or spammy messages—on Twitter is simply charging a customer’s credit card as part of their Twitter subscription":  

“The key for verification is that now we know that this is someone who has been authenticated by the conventional payment system”

Unfortunately, being “authenticated by the conventional payment system” isn’t really a thing you can rely on in payments. Most payments risk/legal professionals will admit that despite well-intentioned Know Your Customer (KYC) regulations, single-use cards that require no identity verification are easily purchased at convenience stores around the country and the proliferation of KYC-less virtual cards—available via APIs and many neobank apps—further exacerbate this risk vector. 

Yet, Musk seems to genuinely conflate authenticating payment credentials with verifying someone’s identity. I believe this comes from his belief that “payments really are just the exchange of information.” From his first meeting with Twitter employees last November:

“From an information standpoint, not a huge difference between, say, just sending a direct message and sending a payment. They are basically the same thing. In principle, you can use a direct messaging stack for payments. And so that’s definitely a direction we’re going to go in, enabling people on Twitter to be able to send money anywhere in the world instantly and in real time. We just want to make it as useful as possible.”

This sentiment—that payments are just data—ignores the reality that billions of dollars in fraud occur each year due to things like stolen credit card numbers. Platforms like Apple’s App Store spend millions of dollars fighting fraud each year to great effect. 

Musk-era Twitter simply isn't equipped to invest in fraud prevention in a serious way. 

Ads > Commerce > Subscriptions

Last November, The New York Times’ Tiffany Hsu and Kate Conger reported that Musk “wanted users to be able to buy products ‘effortlessly’ on Twitter with a single click.” It’s not a bad idea. Recall what I said above about commerce being PayPal’s main “super app” monetization opportunity. But (in the US at least), most social media platforms have launched native shopping products only to shut them down a few years later. That trend includes Twitter. 

A decade ago, Twitter brought in Nathan Hubbard, former Ticketmaster CEO, to lead all aspects of commerce on the platform. Hubbard and his team ran a number of experiments and found that Dynamic Product Ads were the best-performing commerce unit the company offered—even better than their “Buy Button” program. I think this happened for a few reasons:

• Buy Buttons aren’t useful for many purchases:

  • Low-cost, low-consideration items that a shopper may be inclined to purchase quickly can see meaningful conversion rate increases thanks to native, in-app checkout. 

  • But for more expensive, higher-consideration items, shoppers (in the US) usually complete their purchases on a retailer’s website where they can see pictures, reviews, return policies, and other information that make them feel confident in their purchases.

  • Only after the consideration and intent phases is the increased convenience of a native checkout with stored payment details useful. This is why tools like Shop Pay and Apple Pay, which are built into a site’s checkout flow, yield better results than Buy Buttons on social media apps.

• Product-related ads have proven to be more lucrative:

  • Imagine there are two retailers selling different products. Retailer 1 has 30% margins and Retailer 2 has 50% margins. 

  • Under an advertising auction bidding model, retailers could bid ads up to an amount their cost structures would bear. In this case, Retailer 2 could bear to pay more. 

  • Under a Buy Button, take-rate model, each retailer would pay Twitter the same amount for a purchase made in the app—a less efficient market. 

  • Combine this dynamic with the fact that in-app transactions weren’t taking place in large volume due to consumer preference (see above) and you can see why all the social media platforms prioritized product ads over Buy Buttons in the end.

All that said, I remain hopeful that some variant of Buy Buttons will work on US social media someday (as it does in other countries). We may actually see the return of in-app, native checkout soon thanks to Apple’s App Tracking Transparency (ATT) framework, which has profoundly changed the nature of ecommerce and advertising on the internet. In response to ATT, Meta is retooling their in-app shopping experience and TikTok is introducing a native shopping experience—all in an effort to build what Eric Seufert calls a Content Fortress (I also think PayPal is one acquisition away from building an effective content fortress). 

Unfortunately, I don’t think Twitter will ever get a chance to build a content fortress or a scalable ads/commerce business because Musk is hellbent on implementing a subscription monetization strategy. He doubled down on his plan to charge all Twitter users just a few weeks ago:

"The single-most important reason we're moving to having a small monthly payment for use of the X system is it's the only way I can think of to combat vast armies of bots."

This plan is misguided. Musk would be sacrificing a scalable ads (or commerce) business model in an attempt to fight bots with tools that don’t really work while tanking Twitter’s user numbers in the process. Musk’s thinking doesn’t seem clear here. He keeps tweeting out nonsensical stats about usage on the platform, which only makes sense if you have an ads monetization strategy. Keep in mind that users willing to pay a subscription fee are likely highly engaged users, with a higher potential ad load than the average user. So the more time they spend on the platform, the more revenue they generate for Twitter. But if that same user pays a subscription fee, which presumably gives them an ads-free experience, their revenue contribution to Twitter is limited to the amount of that subscription fee. 

But, honestly, who knows if Musk will actually mandate subscriptions or generally do what he says he will do? Walter Issacson’s new biography of Musk paints him as an impulsive and capricious person. And that is the biggest risk to Twitter’s plan to become an everything app. 

The Twitter Jerk Circuit

Jerk circuits can be assembled using basic electronic components (e.g., resistors, capacitors, inductors), cost only a few dollars to make, and are primarily used to study chaotic system dynamics. The name comes from the physics concept of “jerk”: the rate at which an object's acceleration changes with respect to time. Elon Musk seems to have spent $44 billion on Twitter to introduce his brand of chaotic management to a business. The result so far, according to a Twitter employee who spoke to Casey Newton of Platformer:

“As the adage goes, ‘you ship your org chart,’ It’s chaos here right now, so we’re shipping chaos.”

I’m not here to belabor every failing of Elon Musk’s Twitter. I just want to point out that Twitter simply cannot become an everything app if it is steeped in this much chaos. A few reasons:

Everything apps are platforms. 

WeChat, one of the everything apps Musk wants Twitter to imitate has granted millions of “official accounts” access to payments, location, messaging, and user identification APIs to build apps within the WeChat app. WeChat understands that it cannot build everything itself and has created a relatively stable, accessible platform that others can build upon to deliver services to WeChat users. This is a win-win for WeChat as a platform and the hundreds of millions of entities (users and businesses) that rely upon it.

I won’t glorify pre-Musk Twitter but a combination of users, third-party app developers, and advertisers did come to rely on the company’s (often flawed) product and policy decisions. But Twitter’s recent adventures in account verification, third-party API access, and content moderation show us how quickly those same entities can pull back when rapid changes are introduced. The result is a less useful platform for users, and a downward spiral begins.

Twitter can’t be trusted. 

Trust is incredibly important in fintech. Whether they consider your rules to be right or wrong, users just want to know where they stand in relation to the rewards (payouts to users) or penalties (getting your account banned) of your platform. With such a capricious and singularly powerful leader, Twitter’s rules of engagement have never been less clear. Users are learning that they can’t trust Twitter to do what it says it will and they’ll keep that in mind when they decide how to use the app’s financial service offerings (should they ever come). 

Beyond intent, users must trust a financial service company’s abilities. Simple thought exercise: After witnessing disastrous feature rollouts, site outages, and a generally glitchy app over the past year, would you trust Twitter to safely manage your financial data and personally-identifying information? 

Musk bought Twitter last year determined to make changes but he’s introduced a level of chaos that makes it difficult for others to rely on Twitter. Let that sink in.

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Cutoff Time

Cutoff Time is a section of Batch Processing that includes links to interesting news or ideas that caught my eye recently:

• Braid Is Dead, Long Live Braid by Amanda Peyton

  • As a former founder who did not have the exit he wanted for his company, this hit home for me. I appreciate Amanda’s candor and am rooting for her.

• Twitter Payments registered for money transmitter activity (409), not as a payment processor with FinCEN per the New York Times

• VISA vs. Mastercard: visualizing the might of the payment giants by Jevgenijs Kazanins

• Thoughts on Solana Pay from Busy Panda

• Adyen believes its growth outlook is misunderstood by Sarah Jacob

• Some interesting overviews of Plaid by Alex Johnson and Mario Gabriele

• Uncensored Thoughts on Product Management, [Fin]Tech Markets, and VC by Jared Franklin

• Fundraising for fintech infra is different by Matt Brown

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Today, I’m excited to share that I’ve joined Arcadia, a technology company creating unprecedented access to the data and clean energy needed to decarbonize the electric grid. The company raised $325M in 2022 and is the largest manager of community solar projects in the United States (1 GW).

I started consulting with Arcadia in January but recently decided to join full-time as Sr. Director, Payment Products, focusing on Bundle, their utility billing platform. I had actually fully intended to wrap up my consulting engagement with and focus on Batch Processing full-time until just a few weeks ago. But I ultimately decided the opportunity at Arcadia was too good to pass up since it allows me to continue building payments infrastructure but at a climate-focused company.

Read more about my decision on my personal site here.

I was wrong.

What to expect from Batch Processing going forward

Batch Processing is changing from a reader-supported publication that I spend the majority of my time on to a free newsletter I update as I have the time.

I can’t share specifics yet, but during my hiatus, an opportunity emerged that I did not want to pass up. All I can say now is that I’ve decided to take a full-time job, which I start next week. Going forward, I won’t be able to publish essays as frequently as I once did, so I’m making some important changes to Batch Processing:

Posts are now free and available to all

• Free subscribers don’t need to take any action

• Paid subscribers that joined on or after March 6th, 2023* will receive a full refund and will be automatically moved to the free subscription tier.

• Paid subscribers that joined before March 6th, 2023 will receive a prorated refund and will be automatically moved to the free subscription tier.

• You can continue to pay for a subscription ($5/month, $50/year) if you’d like, as a form of patronage, but this is not required nor expected.

Publishing cadence will decrease

• Going forward, I hope to publish a new essay about every other month. This cadence will increase as I have the bandwidth.

• I will continue sharing thoughts on Twitter and will experiment with Substack’s Chats and Notes (still in private beta) features, which provide lighter-weight approaches to sharing content.

* March 6th, 2023 is when I announced a brief hiatus and gave all paid subscribers a three months complimentary subscription.

Batch Processing Retrospective

As I close this chapter of Batch Processing, I want to share some stats about the publication in the hope they are helpful to other writers. I spent about six weeks actively writing Batch Processing and achieved the following numbers:

• 1,782 total subscribers

• 126 paid subscribers (excluding those I gave complimentary paid plans)

• 7% free-to-paid subscriber ratio

• 59% average email open rate

Subscriber Growth & Retention

When I first started writing, I assumed that the posts with the most reach (i.e., free posts) would lead to the most paid subs. But it turns out that simply publishing quality content behind a paywall leads to more paid subscribers. Each of the upticks in paid subscriptions you see in the graph below came after publishing paid subscriber-only posts.

At first, I thought this paid subscriber growth was due to writing about newsworthy topics like Stripe’s partnership with Amazon or FIS spinning out Worldpay. I saw a few people accept a free 7-day trial, read a post, and immediately cancel their subscription. So, I decided to test this theory out by writing an evergreen post no one could possibly be interested in. The result: a 3000-word essay on how to increase payment authorization rates is my 3rd-largest driver of paid subscriptions and 4th most popular post overall.

Subscriber Retention

Consistency and frequency seem to be the main drivers of retention. My top unsubscribe reasons were “Low volume,” “Price,” and “Autorenew,” indicating these readers weren’t getting enough value for their money. But for the most part, I believe I did a good job setting subscribers’ expectations and meeting them as evidenced by the 99% subscriber retention rate Substack calculated for Batch Processing.

Traffic Sources & Discovery

My plan was to start with a paid tier from the beginning to gauge how valuable my content was and use my free posts to increase reach/exposure. This balance seemed to work pretty well. My most popular posts that have driven the most traffic were free posts about Square/Block, Adyen, and Stripe which have been shared widely on Twitter and included in other publications like Every. Special thanks to Francisco at and Michael and Nik atfor regularly including Batch Processing posts in their newsletters. I was also geeked to find out my Worldpay post was mentioned in Net Interest a few weeks ago!

Twitter has been a huge driver of traffic and subscriptions for Batch Processing. I already have a decent following there (9K+ Twitter followers) so my numbers are likely a bit skewed but I imagine most Substack writers get meaningful traffic from Twitter. I am doubtful Substack Notes will “kill” Twitter any time soon but I’ve been enjoying it so far.

Audience Insights

I don’t have many takeaways from this data except that maybe I should write a guest post for . 🤔

Closing

Thank you to everyone who has supported me so far! I’ve REALLY enjoyed writing Batch Processing and believe one day I will spend the majority of my time writing on the internet…just not today. I will share more about what I’ll be doing next as soon as I can. In the meantime, feel free to subscribe to (the now free) Batch Processing. I’ll see you in your inbox!

45 Days and 6 Batches Later

I’ll be honest, I didn’t expect this many people to be excited about topics like payments and profitability, but here we are with more than 1,600 Batch Processing subscribers (and growing!), including folks from Mastercard, UC Berkeley, FIS, Amazon, Marqeta, Mercado Libre, Morgan Stanley, Credit Suisse, Wharton, Shopify, Perkins Coie, WEX, Tiger Global, Block, and more. Thank you!

In January, when I announced I was going to focus on writing and consulting, I wasn’t even sure I wanted to think seriously about payments or fintech anymore, so I made commitments to consulting clients and assumed Batch Processing would remain a side project until at least April. But, in the last month, I have realized a few things:

I feel compelled to write. I sometimes literally can’t stop myself from thinking and writing about the latest payments-related news, a conversation I had with a founder, or how an industry trend will play out over the next several years. This takes the form of tweets, published posts, and even more posts still in my drafts.

I enjoy writing. I like the flow of it. I like the journey of starting with an idea, writing a paragraph, realizing the conceit doesn’t hold up, worrying I won’t have anything to publish that week, then figuring out something even better than what I had originally planned. I feel like I am learning new things and honing a craft.

I am a good writer. Since I started writing, many people have said very nice things about Batch Processing. The most rewarding feedback has been repeatedly hearing that I make complex, boring topics accessible and interesting. I also have quantitative feedback that I’m on to something. Since I January, I’ve gained nearly 1,000 new subscribers and my emails are averaging a 59% open rate!

I believe I will be able to earn a living as a writer. I intentionally started Batch Processing with a paid tier because I thought it was the most straightforward way to determine if I was providing value. So far, I am. In just 45 days, I’ve convinced over 100 people to pay me money to write about payments on the internet. Wild! Substack even gave me this cute badge to commemorate the milestone.

Batch Processing will return in April 2023!

I find writing incredibly rewarding and I plan to spend the majority of my time on Batch Processing in the near future. But for the next month, I am going to take a pause from Batch Processing, make some improvements, and will return to publishing (about) once a week in April. Every paid subscriber will receive three complimentary months of Batch Processing to make up for the hiatus.

I’ll share more details soon, but know that my personal goal is to publish 100,000 words by end of the year, so there are plenty more batches coming.

In the meantime, check out some of my most popular posts about Square, Stripe, Adyen, Worldpay, PayPal, and more.

In the view of my client, any transaction attempted by their customers yet declined (for real or spurious reasons) was money stolen from them. I don’t subscribe to that view. Honestly, each transaction successfully processed—in near real-time—is a small miracle. Our current digital payments infrastructure is an incredibly complex (and aging) system, with dozens of interlocking pieces that must fit together perfectly for everything to work. Sometimes things go wrong and no one can figure out why. As Patio11 recently described in his wonderful piece about improving how credit cards work: “a disconcerting number of spurious declines are caused by… gremlins, man.”

But I think it is both important and possible to improve things within the payments ecosystem, so I took it upon myself to get each company’s risk department on a call to see how we could increase Balanced’s baseline authorization rate and the authorization rate for this specific client. I, perhaps naively, assumed that we could solve this problem with a simple phone call. After all, it was in the best interest of each party to have more transactions processed (i.e., more revenue, happier customers, higher lifetime value from each customer), yet I ran into one of the most challenging characteristics of payments, a massive coordination problem.

What is an authorization rate?

Each time a customer attempts to make a purchase online or in-person with a payment card running on one of the major four payment networks, an authorization (aka an “auth”) is attempted. This auth message is sent from an acquiring bank (the merchant’s bank) through a payment network like Visa, to an issuing bank (the cardholder’s bank) to determine if a) the cardholder’s account is in good standing, b) if the cardholder’s account has enough balance (real dollars or credit) available to complete that specific transaction, and c) if there are any other fraud signals that should be considered for this specific transaction. The response from the issuing bank to the acquiring bank, and ultimately the merchant, takes just a few seconds and will come back with a success or failure message, and (sometimes) a more verbose description of why the transaction failed if that was the case.

If a transaction is successfully authorized, it can then be captured, meaning the funds will be reserved to be moved from a cardholder’s account to the merchant’s account. Often, especially with in-person payments, the capture occurs immediately after the auth—effectively at the same time. But there are many contexts where the auth and capture do not occur at the same time (e.g. placing a hold on a card at a hotel) and there are some cases where an auth occurs but the capture never happens (e.g. pledging funds to a Kickstarter campaign that doesn’t meet its goal).

Finally, in a growing number of regions, there is an additional “authentication” step being added before the auth. Requirements like Strong Customer Authentication (SCA) are part of the Payment Services Directive 2 (PSD2) standard, which has been rolled out across Europe over the last several years in an attempt to reduce fraud.

An authorization rate is simply the percentage of attempted transactions that are accepted by an issuing bank.

How payment infrastructure providers can increase payment acceptance rates

There are a few ways payment infrastructure providers (e.g., gateways, facilitators, and processors) can meaningfully boost payment authorization rates.

Maintain low fraud rates

One of the reasons we had lower authorization rates at that particular time at Balanced was that we had a spike in fraud and subsequent chargebacks several months earlier, which skewed the baseline risk perception issuing banks had regarding Balanced’s various merchant identification numbers (MIDs). Today, where many individual merchants are relying on the MIDs or integrations of their underlying payment provider, the risk of aggregate risk flowing down to an individual merchant is real. There are tactics for payment providers to mitigate this scenario but the most straightforward is to simply do the work to maintain a low historic fraud rate (as measured by the percentage of transactions and percentage of total payments volume).

There’s a famous line within fintech: “fraud isn’t a problem until it’s your only problem,” or something like that. This wasn’t exactly the case at Balanced. We knew we needed to build and optimize fraud systems but we consciously decided to spend most of our engineering efforts in the early days building functionality and deepening financial service integrations. Then, when fraud became a problem, we solved it.

But I learned a few lessons from this experience, mainly that a period of relatively high chargeback rates, even when resolved, can have lingering consequences. I discovered that Balanced was put on a “grey list” by several issuing banks, which was causing the lower baseline authorization rate. The issuing banks wouldn’t tell me exactly why nor how we could be removed from the lists. Even with Vantiv vouching for our much-improved fraud management practices, we could not resolve the issue directly with the issuing banks. That is why it’s imperative for payment infrastructure providers to maintain a history of low fraud leads in order to provide their customers with higher baseline authorization rates.

Luckily, several technologies have matured in the past decade, which has led to lower overall lower fraud rates. Indeed, the global fraud rate went down by 25% during Q1 of 2022, mainly due to security upgrades performed by financial institutions, and consistent implementation of fraud prevention tools and practices.

One of those tools is biometric-enabled payments, such as Apple Pay, which requires a face or fingerprint scan to authenticate a transaction. Consistent with the three security factors, it is much harder to spoof a characteristic someone has (e.g., their face) than it is something someone knows (i.e., a 4-digit PIN code).

Another tool is machine learning (ML) as applied to fraud detection. At Balanced, we started with a simple rules-based, which we used as the basis for a simple machine learning model to detect fraud. We also built a clever mesh network, which would associate various aspects like IP address, card fingerprint, email address, etc. If one of those aspects were found to be fraudulent, the other aspects would either be banned as well or considered at higher risk of fraud. Today, we are in the heyday of machine learning and artificial intelligence. Standalone companies like Unit21 and Sift provide risk scoring to payment facilitators and gateways. Large payment processors like Adyen, Stripe, and Checkout all provided built-in risk management solutions.

Offer local payment processing

Above, I mentioned that regulators in Europe have mandated SCA, a type of multi-factor authentication standard used to lower fraud for online transactions in the region. A payment processor that’s unable to handle SCA isn’t viable in Europe. Hell, Stripe introduced an entirely new API schema to handle complex payment flows, including user authentication standards like SCA. This is just one of the many differences in processing payments in different regions.

Similarly, payment providers that don’t offer payment methods used and preferred in the regions they operate in will naturally decrease acceptance rates for their customers. A simple thought experiment shows this to be true. If a website only offers, say, Alipay as a payment method, most consumers outside of China are unlikely to complete a transaction. Sometimes a merchant will get a local payment method “for free” by accepting cards from major payment networks like Mastercard. Maestro, for example, is a popular debit card network that operates almost entirely in Europe but is compatible with the Mastercard network. So if a merchant can accept Mastercard cards, they can accept Maestro cards as well. But increasingly, each region has its own collection of popular and convenient payment methods that are not coordinated by the large payment networks. In this case, it’s the job of payment infrastructure providers to make them available to merchants so more transactions will be completed. This is why payment providers like Adyen, Stripe, and Checkout each offer 40+ different payment methods. There are also specialized payment providers like dLocal, Rapyd, Nium, and Airwallex that specialize in local payment methods and cross-border transactions.

Speaking of cross-border transactions. Did you know that payments processed by a “non-local” entity on the major payment networks (i.e., a cross-border transaction) are less likely to be authorized due to perceived higher risk? So to optimize payment authorization rates, most of the large payment processors have set up the necessary legal and technical infrastructure in each region to be considered a “local acquirer” by the payment networks. Again, large payment providers like Adyen, Stripe, and Checkout tout their "smart” routing of payments through the best entities and networks possible to optimize a transaction’s likelihood of success. A simple example in the U.S. could be taking a debit card and routing it, natively, through direct integration into that debit network, rather than running it through a partner network like VisaNet. This would lead to lower costs and potentially higher acceptance rates.

Dynamically modify authorization messages

If you’re wondering what the f**k Patrick is talking about, allow me to provide a slightly more straightforward explanation. Stripe, like all entities that process card-based electronic payments, uses the International Organization for Standardization (ISO) 8583 messaging standard to communicate with payment networks like Visa and Mastercard, as well as issuing banks like Capital One and Bank of America. The bitmap is an “indexing technique used in an ISO 8583 message to indicate which Data Elements are present”. The data elements are arranged in series (a requirement of the low-bandwidth information technology at the time), like so:

Although ISO 8583 is a “standard”, each issuing bank/processor combo has enough subtle differences in their implementation to yield meaningfully different authorization rates for what would look like identical transactions to a human. From Stripe CEO, Patrick Collison, on a 2020 Hacker News thread:

We now have enough data across Stripe to implement an ML engine to optimize these requests on a per-issuing bank basis. As mentioned in original comment, this helps collect a lot more "free" revenue for our users.

Today, Stripe, Adyen, and a few other processors have done enough micro-optimizations of the messages (the “bitfield” or “bitmap”) that they have been able to train machine learning models to dynamically modify how they arrange the bytes in an ISO 8583 submission—per issuing bank—to increase their merchant’s baseline authorization rates.

Adyen has offered primitive versions of this issuer-specific formatting since 2016 as part of their RevenueAccelerate suite of products. First was a Smart Logic Issuer, where Adyen would “automatically re-format the payment request, according to the issuing banks' specific preferences.” Next, they also offered Dynamic Card Validation, which would “automatically format authorization request to $0 or $1, depending on the issuer preference.” Finally, they attempted to use ML to predict whether they should present an SCA multi-factor authentication prompt to a cardholder or not. Since 2020, Stripe has been pushing Adyen to develop more sophisticated ML models to optimize authorization rates and prevent fraud.

This is an area of R&D where I would have assumed Stripe would be first to market. If not, then (again) what is all of its extra headcount for? But on second thought, it does make sense Adyen was driven to this optimization first. First, they manage their finances much better than Stripe so would have looked for ways to drive up revenue and reduce network expenses (via retries) earlier. Second, Adyen works with larger customers, where a 1-2% improvement in authorization rates can lead to tens of millions of dollars in additional revenue each year. Regardless, we’re beginning to see an emerging ML/AI arms race between Stripe and Adyen, which will produce enormous positive externalities for merchants and consumers.

Use Account Updater and Network Tokens

Adyen’s internal data suggests that “10% of cards are refused because of card expiry, or by being lost or stolen.” Changes to card details can lead to scenarios where a card that was successfully charged recently is declined today. And in an economy that is increasingly made up of subscription-based services (i.e. Netflix, Instacart+, Peloton) declines of this nature can be disruptive for consumers and costly for merchants, leading to unnecessary churn, customer support burden, and network fees for reties. As Patio11 put it in his recent piece “credit card numbers change more often than many commercial relationships” (e.g. subscriptions, utility bills).

In an attempt to provide merchants with continuity while maintaining security for cardholders and issuing banks, payment networks like Visa and Mastercard began to offer account updater services, which will automatically inform processors of changes to a cardholder’s details, such as expiration date. This helps reduce churn so everyone can continue to order ice cream from Instacart while binge-watching Wednesday on Netflix and burn off those calories on Peloton the next morning.

Network tokens are another service offered by large payment networks in an effort to provide security and reduce fraud. A network token can stay the same while the associated card details can change. So network tokens, in effect, inherit account updater properties, which leads to higher authorization rates. A knock-on effect of network tokens is that they are considered lower risk and are given favorable interchange rates. And as I mentioned above, transactions that are perceived to be lower risk have higher baseline authorization rates.

Use modern dunning practices to retry failed transactions

When a transaction that is part of a recurring billing relationship fails due to insufficient funds, for example, there are more and less sophisticated ways to retry that same transaction. In modern recurring billing contexts like SaaS, the process of retrying a previously failed transaction is called dunning. The naive approach is to just retry a failed transaction every [1, 3, 7] days in perpetuity. That approach can lead to unnecessary fees for each attempt and abuse fees for attempting to charge an invalid payment credential. A slightly more sophisticated approach would be to exponentially increase the intervals between retries. An even more sophisticated approach is to consider the time of day and day of the month in your retry logic to maximize the likelihood a transaction is successful. For example, a debit card may have a higher account balance after payday vs. another day of the month.

The most sophisticated approach to dunning is to take all of the factors considered in the examples above, get real-world metrics from processing billions of transactions, and train a machine learning model to dynamically update retry logic on what it predicts will lead to the optimal outcome. That is what companies like Stripe and Adyen are now doing.

Use network effect to create novel de facto standards that lead to higher authorization rates

One of the main values large open-loop payment networks like Visa and Mastercard provide is coordinating behavior and incentives among an unfathomably large number of actors in the payments ecosystem. Yet, there are still gaps in the communications between various entities that have similar goals. Recall the story I shared at the beginning of this batch. I wanted Wells Fargo and Vantiv to exchange recently updated risk data to help both parties generate more revenue and satisfy their users. But there was simply no way to do that so Wells Fargo relied on a relatively static list of chargeback rates per MID from several months ago.

Stripe recently announced an Enhanced Issuer Network (EIN) starting with Discover and Capital One. The basic idea is that Stripe is now sharing (in real-time?) risk signals with issuing banks via its Radar tool. It’s essentially a “sidechain” to Visa and Mastercard to communicate risk information in an effort to “reduce fraud and boost authorization rates.” Stripe advertises an 8% reduction in fraud and a 1–2% authorization rate uplift for issuers. The news didn’t seem to make many waves in my opinion, partially because Stripe didn’t do a very good job explaining what they actually built. I think this is an important and novel approach to an ecosystem problem (fraud/auth rates) and represents the best of what good infrastructure development can do.

The promise of good payments infrastructure

Patio11 offers the best explanation of what Stripe’s EIN is and why it’s important in Improving how credit cards work under the covers. If you haven’t figured it out by now, I really enjoyed this piece and HIGHLY suggest you read it. A few quotes that have stayed with me:

The burden for fraudulent credit card transactions, can be reduced by billions of dollars, without [merchants] having to take any action themselves.

New capabilities are hard to build right but easy to adopt. Then the adopters build things on top of them with speed and diversity the company could never have produced itself.

Almost all of the innovations mentioned in this batch offer similar value: One entity can make an improvement that the entire ecosystem benefits from with little or no additional effort. This is the promise of good infrastructure.

Payment networks like Visa and Mastercard are creating and launching solutions like network tokens, user authentication, and account updater. Payment processors like Adyen and Stripe are building cutting-edge machine learning tools to dynamically modify transaction messages, retry logic, and produce fraud signals. Once built and deployed, these tools help increase authorization rates and reduce fraud at scale—billions of dollars of value are created by these improvements each year—and we’re all better off for it.

Cutoff Time

Cutoff Time is a section of Batch Processing that includes links to interesting news or ideas that caught my eye this week:

• Apparently, Roku Pay exists, per Jerry

• Micropayments will never work, per DK (i.e. zaps on nostr)

• What Stripe did in the early days to build a strong brand, from my frenemy Cristina Cordova, an early Stripe.

• 2022 fintech funding trends, per Sid Singh

• Revisiting Not Boring’s Stripe bear case, per Brendan Keeler

• Very few BaaS providers offer payout via physical check, per Jareau

This batch was powered by:

• ☕️ Wush Wush Natural by Radio Roasters

• 🎧 Out Of Business by EPMD

I recently joined my friend, Brian Scordato, on his podcast, Idea to Startup, where we talked about growth tactics for early-stage startups. Check out a short clip here or watch / listen to the full episode later. Brian’s a great interviewer and I highly recommend listening to some of his other episodes. Most of the lessons are applicable to any early-stage startup, but I think a few are specifically relevant to payments infrastructure companies.

At one point (14:24), Brian asks how we got our early customers at Balanced, a payments company, I co-founded in 2011. I started off my answer by trying to explain impedance matching, an electrical engineering concept I learned in college. That part of the answer didn’t make much sense, so I wanted to try explaining again here in more simple terms.

Impedance Matching in Payments

When designing electronics for efficient data transfer, it’s important that the impedance of your source (where the signal comes from) and your load (where the signal is going) match in order to have maximum data transfer. Too much impedance in the source and there’s not enough power transfer. Too much impedance in the load and you get signal reflection and data corruption. I won’t torture this metaphor any further but I see a similar size-matching playing out among the large, modern payments processors (Adyen, Stripe, Checkout) and their early customers.

Adyen

If you read last week’s batch, you may have caught my note that the founders of Adyen sold their first company, Bibit, to RBS WorldPay in 2004. When they started Adyen a few years later, they had a cheat code: they were more credible to early customers, had existing connections to prospects, and knew how to build and scale stable payments infrastructure. It still took a while but there’s a reason Adyen is better at closing enterprise-grade customers than the other modern processors—they’ve been doing it since day one.

Stripe

Stripe had to match the size of their customers. They took on small, developer-led merchants, and then, as those early customers (e.g. Instacart, DoorDash) took off, Stripe grew with them, investing in the stability, features, and international expansion needed to support large, growing customers. Now, Stripe has the benefit of supporting large customers (that weren’t always large), which they can use to acquire eve bigger customers. For more on this concept, check out 💰 Batch #4: Stripe, Amazon, and The Compounding Nature of Digital Infrastructure.

Checkout

Checkout seems to have focused on crypto-related customers in order to gain volume quickly. A few weeks ago, I covered how this strategy has led to a “crypto conundrum” for Checkout as their payment volume and take rate seem to have fallen with the rest of the crypto industry. But the point remains, targetting customers that are not being served by many providers is a valid strategy to build payment volume and revenue. In Checkout’s case, they focused on high-risk merchants in crypto. At my previous company, Finix, we started off by focusing on payment facilitators, before becoming a payment facilitator ourselves and serving a broader customer base.

Some of this matching between processors and merchants occur naturally. But I wanted to share one point of caution for fintech infrastructure companies: be careful saying yes to everything a larger customer asks of you. Of course, you want to say yes to big customers that can bring a lot of revenue and social proof but there’s a risk of essentially becoming an outsourced development shop for them. I highly recommend reading last week’s Net Interest about FIS spinning out Worldpay. In it, are some great quotes from Adyen’s CEO, Pieter von der Does, about why Adyen insists on building a “single platform.” When they build a capability into their platform, it’s available to every customer across the platform via a single integration. Custom, one-off builds can quickly take an early-stage infrastructure company off course and is often not worth it.

Build Trust, Show Competence

All companies must attract and retain customers in order to grow but not all companies are vital like infrastructure companies. In their early days, payment infrastructure providers—like my previous company, Balanced—had to convince customers to trust them with revenue-driving infrastructure and securely handle sensitive customer data. If a service that you use to post snarky messages is down for a few hours, it’s annoying. If your payments processor is down or makes a mistake, you have a much more serious problem that could have long-term implications. As a result, it’s especially important for payment infrastructure companies to gain trust by investing in social proof and evidencing competence to early customers. At Balanced, we invested in a number of tactics to acquire early customers:

• We used the frequency and accountability inherent within Y Combinator, a startup accelerator my co-founders went through in 2011, to convince other early-stage customers to use our API to move money for their very young startups.

• We convinced prominent figures in tech to invest in Balanced. We specifically pursued investors—Brian Chesky, CEO of Airbnb; Yishan Wong, CEO of Reddit; Jeff Jordan of a16z—who had experience running platforms and marketplaces, which was our target customer.

• We operated Balanced as an “open company,” making everything from product roadmap, pricing decisions, customer support channels, etc all open and publicly available by default. Customers felt that Balanced had nothing to hide and could therefore trust us more easily. Customers could also more easily evaluate our competence because our product development process was happening in public.

• We actively engaged with our community on forums like Hacker News, StackOverflow, Quora, and our own GitHub repositories. Sharing posts like the ones below showed current and future customers that they could trust us to ship useful products at a rapid clip. If we didn’t have what they needed now we:

  • Show HN: One curl command issues next-day ACH deposit

  • Show HN: Same-day bank deposits to Wells Fargo customers

• When Stripe, another YC-backed company, launched their marketplace product to compete directly with Balanced, we could no longer rely on the YC trust factor, so we focused on marketing tactics like the ones below to showcase our credibility vs. Stripe:

  • We asked customers to write blog posts about why they chose Balanced over Stripe.

  • We got profiled in Forbes and GitHub produced a video about how Balanced was using their tools (can’t find the link).

The basic idea is that for early-stage payments infrastructure companies, it’s important to build trust with and evidence competence to early customers. This can be done using a variety of tactics: community, communication standards, investor endorsements, public relations, marketing, and more.

Mental Health for Founders

On the Idea to Startup podcast, I also shared why investing in your mental health is so important as a founder. For me, a lot of my mental health comes down to building healthy physical habits and investing in fulfilling relationships. Building fintech infrastructure takes a long time (I spent nearly a decade working on the same problem), so it’s important to have the physical and emotional reserves necessary to slog it out. Here’s a brief clip from the recording.

Cutoff Time

Cutoff Time is a section of Batch Processing that includes links to news and ideas I found interesting but decided not to write about in this batch:

• F-Prime released their 2023 State of Fintech by Abdul Abdirahman

  

• Lago, an open-source usage billing engine, has “launched”, taking on Stripe Billing, Chargebee, and Recurly.

• The Alchemy of FinTech Valuations by Ansaf Kareem

• Interchange Is a Burning Platform by Matt Brown

This batch was powered by:

• ☕️ Finca La Reserva from Camber

• 🎧 Life is Yours by Foals

FIS, a multinational payments and banking technology company, announced that it will be marking down and spinning out Worldpay, Inc., its payments division that it acquired for $43 billion in 2019. The standalone entity is estimated to be worth about $25 billion after a $17.6 billion “goodwill impairment,” and Worldpay plans to reaccelerate its weak revenue and payments volume growth via acquisitions. That all sounds like good corporate governance. There’s only one problem: Worldpay is actually just a dozen payment companies in a trench coat pretending to be a single payments technology platform. Said another way, I don’t think their merger and acquisitions (M&A) strategy will work.

Worldpay is the final boss of payments M&A. The company is the result of a $10+ billion merger between U.S.-based Vantiv and UK-based Worldpay Group in 2017. Vantiv was the merchant services division spun off from Cincinnati-based Fifth Third Bancorp in 2009. London-based Worldpay Group was spun out of the Royal Bank of Scotland in 2010. Those companies were, in turn, the result of more than a dozen smaller M&A deals, starting in the 1990s. Here is an incomplete list of all the companies each entity acquired before their merger:

Sometimes the acquisitions were motivated by bringing new capabilities into the company. Sometimes they wanted to reach new regions. Sometimes they were just buying a book of merchant volume. Regardless, the result seems to have worked. From Vantiv’s 2018 full-year results:

For the full-year 2018, net revenue increased 85% to $3,925 million as compared to $2,123 million in Vantiv Inc.'s prior year. Had the Company's acquisition of Worldpay Group plc closed on January 1, 2017, net revenue would have increased by 10% on a pro forma basis and by 9% on a pro forma constant currency basis, when excluding $36 million in foreign exchange tailwinds.

The Vantiv/Worldpay Group merger helped the business grow massively and Worldpay became the world’s largest merchant acquirer as measured by number of transactions. Previous acquisitions, like Vantiv’s acquisition of Mercury Payment Systems, did the same:

For the full-year 2015, Merchant Services net revenue increased 25% to $1,336 million as compared to $1,067 million in the prior year, primarily due to a 17% increase in transactions and a 7% increase in net revenue per transaction. The Mercury acquisition was completed during the second quarter of 2014. On a pro forma organic basis, Merchant Services net revenue would have increased 14% for full-year 2015 as compared to the prior year if we had owned Mercury throughout both years. [source]

While all those acquisitions have provided growth as measured by total payments volume (TPV) and net revenue, they have also created friction for companies attempting to access Worldpay’s capabilities.

Here’s a simple example to illustrate my point about integration friction. Say you’re a retailer that wants to use Worldpay to accept online payments in the US and the UK. Should be easy, right? Well, you can choose from Vantiv eCommerce (formerly Litle & Co.) or Vantiv Express (formerly Element Payment Services) but they are US-only. You could also use WorldPay US in the US but it’s not exactly clear why you’d use that API instead of the other two. For the UK, you’ll need to use Worldpay’s UK-based capabilities, which support SEPA bank transfers, which are popular there and not available via the other APIs mentioned so far. For each integration, there are different endpoints (URLs) to communicate with the API host and different authorization headers needed to authenticate your API requests. And when Worldpay releases a new version of their API documentation (like replacing instances of ‘Litle’ with ‘Vantiv’ in response messages), you’ll need to update how you interact with the API to handle that or risk your integration breaking. Accessing in-person payments requires integrating with additional environments. Litle for example, is for ecommerce only and there’s a different Vantiv system for card-present payments.

So imagine Worldpay, Inc. is a very tall gentleman wearing a trench coat. You approach the man hoping to introduce yourself only to realize that he’s actually several children sitting on each others’ shoulders pretending to be an adult. Instead of maintaining the illusion that it’s just one very tall adult when you reach out to shake their hand, Worldpay opens up the trench coat and you have to shake hands with each individual kid.

The idea behind the FIS-Worldpay tie-up was for each entity to cross-sell banking and merchant acquiring services to the other’s customers. But that hasn’t worked and Worldpay’s growth has been weak in recent years. So, it’s going back to basics with the express goal of re-invigorating growth via “capital allocation.” They want to go back to buying companies to fuel growth. I just don’t think the strategy will work because every time Worldpay buys a new company, they make the problem I described above worse. They are just stacking another kid under the trench coat.

The founders of Adyen sold their previous company, Bibit, to RBS WorldPay in 2004 and have seemed to have internalized the “benefits of a single platform,” essentially vowing to never acquire another company. Stripe is much more acquisitive but they go out of their way to abstract away the differences of the underlying technology in their API. As a result, many newly formed companies are choosing Stripe over Worldpay from the start while many larger companies are deciding to switch from Worldpay to Adyen.

To manage the business FIS has pulled Charles Drucker out of retirement. Drucker led Vantiv from 2004 through the spin out by Fifth Third Bancorp in 2009 to the FIS acquisition in 2019. He was the chief executive greenlighting most of Vantiv’s previous acquisitions so he certainly seems like the right man for the job given Worldpay’s M&A strategy.

Management changes at major payments companies

In addition to Charles Drucker coming out of retirement to lead the new and improved Worldpay, here are a few other management changes at major payment companies that have been revealed in the past few weeks:

• Visa has a new CEO, Ryan McInerney, as Al Kelly (CEO since 2016) steps down. McInerney previously served as the payment network’s president since 2013.

• PayPal announced that longtime CEO, Dan Schulman will be stepping down at end of 2023. Schulman has been running the payments company since 2015 when it spun out from eBay.

• Fiserv renewed CEO Frank Bisignano’s contract for an additional five years. Bisignano has been the CEO of First Data since 2013. When First Data was acquired by Fiserv in 2020, Bisignano became CEO of the combined entity.

• Adyen's long-serving CFO, Ingo Uytdehaage, will be stepping into a co-CEO position alongside Pieter van der Does. Pieter has been dealing with some health issues that have kept him out of the company’s Amsterdam office in recent months. Ethan Tandowsky, who has run Adyen’s finance group for the past few years will step into the CFO role. Kamran Zaki, who served as Adyen’s COO for the past three years and as President, of North America for several years before that will be leaving the company this summer.

• Stripe has announced that CFO Dhivya Suryadevara is departing to attend to family matters. Suryadevara served as GM’s CFO from 2018-2020 and Stripe’s CFO from 2020-2023. Will Gaybrick, who served as CFO from 2015 to 2018, and was most recently the Chief Product Officer, will become President - Product, Business.

• Checkout dot com has appointed its former CFO, Céline Dufétel as President (while retaining her COO responsibilities).

• Mollie, a Dutch payments company, has promoted CTO Koen Köppen to the CEO role after just 5 months with the company. Köppen, who was formerly CTO at Klarna, replaces Shane Happach, a Worldpay veteran who had replaced Gaston Aussems as Mollie CEO in 2021. Aussems himself, replaced founder Adriaan Mol as CEO in 2013. Lots of CEOs...

Braintree is the future of PayPal

It’s a new day at PayPal! Their Q4 2022 results show that, yet again, Braintree is driving meaningful payments volume growth for the company. From PayPal’s Q4 2022 investor update:

13% growth in payment transactions per active account (TPA) was predominantly driven by transaction growth from Braintree

Transaction revenue grew 5%, driven primarily by Braintree.

Based on this update, we can estimate that Braintree (”unbranded processing) is responsible for $408B of PayPal’s total payments volume (TPV) and growing at 40% YoY. That’s 100x the payments volume it processed when it was acquired by PayPal a decade ago and in spitting distance of modern payment processing peers, Adyen ($820B TPV, 49% YoY growth) and Stripe (est. $768B at 20%-30%). Meanwhile, peer-to-peer payments volume—a key user acquisiton tool for services like Cash App—for Venmo grew 7% and PayPal’s P2P volume actually declined YoY.

Departing PayPal CEO, Dan Schulman has spent the past decade leading the company toward "enhanced consumer choice," which means that card volume on PayPal (vs. digital wallet volume) has increased. Without the prominence of the PayPal wallet, there’s more opportunity to sell “unbranded processing” to merchants and platforms, while offering exclusive, native integrations into PayPal and Venmo as checkout options that increase conversion. One exciting vision for the product could be offering a Shop Pay-like checkout experience to merchants that uses the on-file information of shoppers in the Venmo and PayPal ecosystem. PayPal is already experimenting with these things via PayPal’s Branded Checkout but could make elements of this available via Braintree as well. If I were running the show, I’d split PayPal into two divisions: Braintree and Venmo, and put someone like Alyssa Henry or Sarah Friar from Block in charge as the new CEO.

Stripe Can’t Lose

Last week, I wrote an essay about Stripe’s early innovation, increasing competition, and questionable capital allocation for Every—a writer collective focused on business. The essay is now available, in its entirety, on Batch Processing.

Read Stripe Can't Lose

Cutoff Time

Cutoff Time is a section of Batch Processing that includes interesting links to news or ideas that caught my eye but decided not to write about in this batch:

• PayPal’s Buy Now, Pay Later (BNPL) product seems to be doing well (slide 9) compared to Affirm, which has much greater mindshare in the BNPL industry. PayPal bought Bill Me Later and offered a product called “Pay in 4” until 2020 so they weren’t starting from scratch but the usage numbers are still impressive.

• The global fraud rate went down by 25% during Q1 of 2022, mainly due to security upgrades performed by financial institutions, and consistent implementation of fraud prevention tools and practices. One of those tools is the statement descriptor.

• Stripe’s expenses were as high as $500 million in 2022, per The Information.

• Adyen’s earnings were good. The stock decreased 15% after hours.

• I cannot, for the life of me, find Fiserv’s merchant acceptance total payments volume in its most recent earnings. Can anyone help?

This batch was powered by:

• ☕️ Ethiopia Hayissa Olocho Natural From Onyx

• 🎧 Endel

Stripe Can’t Lose

For the last decade, Stripe could do no wrong. When the payments technology company—used by companies such as Amazon, Instacart, and Shopify—launched in 2010, it revolutionized the industry, making it much easier for small companies to accept payments. Entrepreneurs and software developers adored Stripe. Venture capitalists loved the company even more, pouring billions of dollars into the business, which made it, for a time, the most valuable private company in the U.S. at $95 billion. 

Within the broader tech industry, buyers have thirsted after Stripe shares on the secondary market, and working at Stripe began to signal the same level of intelligence and future potential that working at Google and eBay had in previous eras. Today, in the midst of a tech recession, many are hoping that Stripe can save the rest of the industry by being the first to go public, thereby opening up the opportunity for other companies to do the same.

But the picture is decidedly less rosy for Stripe than it was, say, two years ago. The company has had its wins—announcing partnerships with Amazon, launching new products, being named a Forrester Wave Leader—but for perhaps the first time in the company’s history, Stripe finds itself in a seemingly unfamiliar scenario: not everything is going its way.

There was the unfortunate public kerfuffle with fellow fintech darling Plaid in May 2022, in which Stripe defended itself against allegations of unscrupulous conduct after it released Financial Connections, a product directly competitive to Plaid’s core offering—after Stripe had offered Plaid to its clients instead of its own product.

Then came reports that mutual funds like Fidelity Investments and T. Rowe Price were marking down their holdings in Stripe by as much as 64%. Stripe has marked down its internal valuation three times since June 2022. 

In November 2022, amid a broader tech slowdown, the company laid off 14% of its staff, stating that the company "grew operating costs too quickly." Recent reporting from The Information has revealed that Stripe plans to provide liquidity to employees—some of whom have restricted stock units, or RSUs, that are set to expire 10 years after they were initially issued—by going public through a direct listing or by continuing to raise funds from private investors. The Information’s reporting also uncovered concerns about the company’s financials: slowing revenue growth and a lack of profitability. 

Stripe isn’t doomed—but its success is not inevitable. Nor will it be the only winner in the payments industry. 

Stripe is an innovative company that is facing competition as it moves upmarket and fends off new entrants as the market expands. As Stripe approaches an eventual public offering, it must become more disciplined in its spending, learning to balance investments in long-term growth with near-term profitability. Let’s take a look at where Stripe started from and what it’s up against in 2023 and beyond.

Early innovation

Stripe is famous for catering to developers, an overlooked but increasingly important buyer persona in internet-economy companies, but the company’s real innovation in the early days was making payments more accessible and invisible than other offerings at the time. When Stripe launched in 2010 there were two advantages that made it stand out relative to the competition: it offered a white-label solution and (nearly) instant access to payments acceptance at the exact right time. 

The most popular payments product of the 2000s was PayPal. A website using PayPal to accept payments required users—both the buyer and the seller—to have PayPal accounts and complete a transaction on PayPal’s site instead​​ of its own. Many startups in the 2010s were trying to emulate the online experience of marketplaces like Airbnb, where the entire transaction took place on site. Using front-end frameworks like Node and later React made it easier for Stripe to offer a white-label checkout experience without bouncing customers to a third-party site like PayPal. 

Around the same time, mobile payment experiences were being refined. The ability to complete transactions within an app without going to the PayPal app—think card-on-file experiences like Uber or in-app purchasing like Instacart—was necessary for startups of the era, when the iPhone and App Store began to flourish. In-app purchases for digital goods were fairly straightforward at the time: you would use iOS’s built-in payments capabilities, but for purchases of items or services in the real world, there was a big gap in payments capabilities. There were companies—a combination of legacy payment processors, one of thousands of Independent Sales Organizations (ISOs, which offer standalone credit card processing services), and/or a few dozen payment gateways (which don’t offer wallet or stored balance functionality)—that merchants could use to set up white-label transactions, but they were difficult to work with. 

The conventional path to obtaining a merchant account (i.e., as a retailer or an accountant) in 2010 involved emailing or faxing in paperwork to an ISO, waiting days or weeks for that information to be reviewed by a processor, and going through a cumbersome process to register that merchant account with a separate payment gateway. Stripe did all of that in minutes—an immeasurably better experience than the competition, even if, in the early days, its founders were doing everything manually behind the scenes.

Increasing competition

Today, Stripe is competing against other modern payments companies, well-funded upstarts, and formidable incumbents that offer much of the same functionality as Stripe. The payments landscape in the U.S. can be split into two categories: 

Legacy payment processors 

• Chase Merchant Services

• First Data by Fiserv

• Worldpay from FIS

• Global Payments

Modern payment processors

• Adyen

• Stripe

• Braintree

• Checkout.com

For the last decade, modern payment providers like Adyen and Stripe have, for the most part, been eating the legacy providers’ lunch—especially when it comes to winning the business of up-and-coming companies. For reasons similar to what I explained above, the modern providers’ products were better suited for digitally native applications and were easier to use than the incumbents’. During the pandemic, not only did the modern processors, which have a higher concentration of e-commerce payments volume, do well; their more flexible technology was a key asset to brick-and-mortar merchants that suddenly found themselves accepting payments across multiple channels: in-person, in-app, and online.

The legacy processors responded mostly by buying other payments companies to boost their total payments volume (TPV), culminating in a handful of mega-mergers in 2019. Today, despite the pandemic-fueled growth of modern players, legacy players still control the bulk of the market and are growing trillions of dollars worth of TPV ~9% year over year. But modern players are growing hundreds of billions of dollars of TPV ~60% year over year, so it’s not hard to imagine the relative market share between the two categories flipping over the next decade.

But Stripe hasn’t won yet. Neither has Adyen or Checkout, for that matter. The legacy providers process payments for massive customers that are unlikely to switch over to modern processors any time soon. Worldpay, for example, powers payments for some of the country’s leading grocery and pharmacy brands, including Kroger, which sold $137.9 billion worth of goods (excluding fuel) in 2021. Over the past two years, Stripe has been making it a point to showcase how many of its customers are processing over $1 billion annually. 

As the pandemic has begun to ease, consumer spending is shifting again. Visa and Mastercard’s latest earnings show a surge in in-person (what they call card-present) spending for 2022 relative to 2021, specifically within the travel category. 

That lagging green line—"Card Not Present, Excluding Travel"—is from where the bulk of Stripe’s payments volume and therefore revenue comes. U.S. Census Bureau data shows the pullback in e-commerce spending even more clearly: it’s basically back to the pre-pandemic trend line. 

A portion of the e-commerce slowdown is due to the impact of Apple’s App Tracking Transparency (ATT) policy, a collection of technology and rule changes that Apple began introducing over the past two years. ATT requires apps using Apple’s mobile operating system to allow users to opt into being "tracked." Apps are then allowed to share user data with third parties that a user may not have dealt with directly. This third-party tracking is the basis for digital advertising platforms, specifically direct-response advertising for e-commerce products and mobile apps on platforms like Meta, Snap, and YouTube. 

Due to ATT, direct-to-consumer companies like Warby Parker and the e-commerce platforms that support them (i.e., Shopify) are struggling. In turn, Stripe’s revenue growth has dropped considerably, down to 20% in 2022 from 60% the year prior. By comparison, Amsterdam-based digital payments company Adyen grew its net revenue by 37% year over year in the first half of 2022—a slowdown from the 70% growth rate it posted in 2021 but not as severe as Stripe’s. Worldpay’s revenue growth rate also contracted as of Q3 2022, but only from 14% to 9%, and the company is expected to fare well in 2023 as in-person payments continue to grow. 

Among the modern providers, Stripe’s fiercest competition is from Netherlands-based Adyen, arguably the best-run payments company in the world. Historically, these two have largely avoided each other. Stripe spent the first part of its life focused on winning smaller businesses while Adyen served enterprise customers from day one. Adyen is a European powerhouse; Stripe has mainly operated in the U.S. More recently, the two companies have been going head to head. Stripe is now co-headquartered in San Francisco and Dublin, Ireland, and has more than doubled its geographic footprint in the past five years, mostly in Europe. Adyen is growing its North American volume 60% year over year and has a banking license under a San Francisco-based charter. Adyen’s stated goal is to access more small businesses through its Adyen for Platforms offering, while Stripe is focused on closing larger enterprise deals that will meaningfully add to its revenue. 

The enterprise segment is where Adyen shines and is beginning to challenge the legacy players. Over the past few years, Adyen has moved from winning deals to process non-U.S. payments for digitally native companies like Uber and Netflix to winning deals to handle payments around the world for traditional large businesses like McDonald’s and Subway. As a result, its in-person payments volume grew a whopping 97%, according to its most recent investor filings. To fight back, Stripe acquired BBPOS, "a leading card reader provider," for an undisclosed sum in January 2022.

Both companies have spent most of the past 15 years putting up impressive revenue growth rates, and these dynamics have attracted competitors. There are a few well-funded ($100 million-plus) payments companies that have already gotten a foothold in the market and are growing quickly to challenge Adyen and Stripe:

• Rapyd is a Tel Aviv-based payments provider doing more than $20 billion in TPV for more than 12,000 small- and medium-sized businesses and platforms as of August 2021.

• Mollie is an Amsterdam-based payments provider estimated to be processing €20 billion-plus in payment volume for 120,000 monthly active merchants as of June 2021.

• Finix is a San Francisco-based payments provider moving billions of dollars a year for more than 12,000 monthly active merchants as of May 2022 (disclaimer: I was an early employee and executive at Finix).

Those are just some of the payments companies that have reached a meaningful scale as of 2023. In 2021, a record amount of funding flowed from global venture capital funds to payments startups. Adyen was founded in 2006 and Stripe in 2010. If the latest batch of payments startups evolve on a similar timeframe, it won’t be clear whether those investments will bear fruit until the end of this decade. 

All of these companies will do fine. Fundamentally, payments infrastructure is a many-winner market. There are few network effects. The capital investments required and economies of scale may mean that some entrants are scared off, but when global revenue for an industry is measured in the trillions, as it is for payments, there’s usually plenty of revenue to go around for a handful of players. There are also secular forces—like the increasing adoption of e-commerce—that are pushing digital payments forward. My best guess is that the payments infrastructure market can accommodate several winners in each region and category (and combinations thereof). May the best payments companies win. 

Questionable capital allocation

For most of its history, Stripe’s research and development (R&D) strategy has been focused on supporting its core payments offering. It didn’t launch many new products, opting instead to invest in the basics: improving uptime and reliability, expanding internationally, and adding new payment methods. Of the new products it did launch, Stripe Connect (payments for platforms and marketplaces), Radar (a payments fraud engine), Atlas (a business creation tool), and Identity (an identity verification tool) resulted in more merchants using Stripe’s core payments offering. Products like Stripe Terminal (software and devices used to accept payments in the physical world) and Billing (a subscription billing management tool) helped Stripe win and keep deals, like Glossier, over Adyen, FIS, or Fiserv, which could already handle in-person payments and complex recurring billing scenarios.

The strategy seems to have changed around 2018 with the launch of products like Stripe Corporate Card, Issuing (a platform to create virtual and physical pre-paid cards), Treasury (a banking-as-a-service product), and Financial Connections (a data aggregation tool), which are only tangentially related to card-based payments acceptance—from where most of Stripe’s revenue is assumed to come. Stripe has not released much information about the usage of its products, so it’s difficult to tell if these investments have been worthwhile, but ostensibly they expand its total addressable market by generating non-payments revenue.

This level of investment in non-payments offerings requires a lot of people. Stripe’s headcount ballooned to 8,000 employees in the fall of 2022 before it laid off 14% of its staff. Adyen, by comparison, had only 2,575 employees at the end of the first half of 2022. This difference in headcount appears to be the main driver of the profitability difference between the two companies. Last month, The Information reported that Stripe was burning a “meaningful amount of cash for the first time and was also unprofitable when measured by earnings before interest, taxes, depreciation and amortization (EBITDA). The cash burn reflected investments in new projects aimed at producing more revenue in areas outside of payments.”

At the same time, Stripe’s core payments offering wasn’t necessarily benefiting from the larger workforce. For example, in February 2022, Stripe was selected to be the first payment platform to offer Apple’s new Tap to Pay to beta users on iPhone. But by July, it was actually Adyen that made the functionality available to the general public. Stripe’s Tap to Pay product just came out of a limited beta in early 2023. You’d expect an R&D-focused company like Stripe to be first to market with new payment methods like Tap to Pay—otherwise, what is all that headcount for?

Stripe has also been investing in smaller companies—another form of R&D. It led an $8 million funding round for Nigeria-based Paystack, co-led a $40 million Series B for Tel Aviv-based payments provider Rapyd, and led a $12 million Series A for Philippines-based payment platform PayMongo. On the surface, these deals make sense, as they support Stripe’s core payments acceptance offering, just in different regions. In 2020, Stripe acquired Paystack for $200 million. Investors could take issue with Stripe’s use of funds for an investment that may not bear fruit until 2040 or beyond, but investment as outsourced R&D seems to have worked in Stripe’s favor.

Other investments are decidedly less advantageous to Stripe. Take Rapyd, for example. After bringing on Stripe as an investor in 2019, the company went on to raise a total of $770 million and acquire two European-based payments processors, bringing it into direct competition with Stripe. I wouldn’t think that seeding its own European competition was the intended goal of Stripe’s venture capital initiative. 

Stripe has also invested in companies that directly compete with its products. There’s one-click checkout company Fast, which burned through $120 million in venture funding in only a few years and competes with Stripe’s own products, Checkout (a low-code payment integration used to quickly collect payments information) and Link (an online checkout tool that automatically detects when a customer has previously saved payment and shipping details). Stripe also began investing in corporate card startup Ramp in 2021. Just 18 months earlier, Stripe had announced its own corporate card, which it still offers today. Aside from being a questionable use of capital to pursue both strategies at the same time, I can’t imagine morale on the Stripe Corporate Card or Checkout team was high the day it was announced their employer was leading a funding round in a direct competitor.

Stripe’s capital allocation outside of supporting its core payments offering is confusing at best—not ideal for a company that is increasingly being compared to Adyen, which has a history of profitability, rapid growth, and zero acquisitions. Whether appropriate or not, professional investors are expecting Stripe’s R&D, headcount, and EBITDA margin profile to look like Adyen’s eventually. Unfortunately, Stripe’s EBITDA margins in 2022 were reported to be negative due to investment in non-payments products and the workforce required to support them. 

Regardless, anticipating Stripe’s inevitable public stock offering, investor Max Friedrich of ARK Invest put together a valuation model that has Stripe achieving a $92 billion valuation—close to its 2021 valuation of $95 billion—only if it can achieve Adyen-caliber EBITDA margins of 60%. By comparison, legacy player Fiserv’s most recently reported operating margin was 34.1%. 

Yet there’s reason to believe the company will turn a profit again if it reins in spending. CEO Patrick Collison recently shared that 2021 was the first time the company was unprofitable and “has cumulatively consumed less than $150 million after 12 years of operation.” But even if Stripe returns to its traditional operating margins of 20%-30%, the company could be worth only about $30-$45 billion when it goes public, according to ARK’s model. 

Can Stripe win?

When we’ll see a Stripe public offering is anyone’s guess. The company is reportedly taking steps to give employees liquidity by selling stock to private investors rather than go public (disclaimer: I am a Stripe shareholder). This hasn’t stopped some on Twitter—in earnest and in jest—from hoping the company will go public sooner rather than later to open up the public markets for other startups. 

That’s a lot of pressure for a payments company, especially one that has its work cut out for it. Stripe faces increasingly tough competition from Adyen, legacy players, and upstarts; is suffering from declining revenue growth due to structural changes in consumer behavior and advertising technologies; and must get its spending under control after years of investing in non-payments products and companies that haven’t always worked out. But Stripe will turn it around. They can’t lose, right?

Cutoff Time

Cutoff Time is a section of Batch Processing that includes interesting news or ideas I didn’t get to in this batch:

• J.P. Morgan Chase offers a fun tool to evaluate the impact of changes to “operating rules, fees, compliance requirements, and other industry updates that may impact your processing account.”

• Simon Taylor of Sardine and Fintech Brain Food 🧠 has some concerns about Stripe becoming a “me too” company as they enter their “difficult teenage phase.”

• I’ve seen a few confidently wrong tweets and essays recently about stablecoin volumes exceeding the major payment networks.

  • I agree that stablecoins are “crypto's killer use case” but the facts I’ve seen presented are wrong. For example, Mastercard’s 2022 gross dollar volume was $8.2 trillion, not $2.2 trillion as the tweet above claims.

  • Card volume is also for everyday purchases, while stablecoins are mostly used for remittance or treasury management. Not an apples-to-apples comparison.

  • PIX (Brasil) and UPI (India) are more appropriate payment protocols to compare to stablecoins. Both were started within the last couple of years and are doing ~$2 trillion / year or more.

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• 🎧 Ether by Nas

• ☕️ Kenya Gichangi Estate by Radio Roasters

Earlier this week, Stripe announced an expanded partnership with Amazon.

Under the new agreement, Stripe will become a strategic payments partner for Amazon in the US, Europe, and Canada, processing a significant portion of Amazon’s total payments volume across its businesses, including Prime, Audible, Kindle, Amazon Pay, Buy With Prime, and more.

Stripe will expand its use of Amazon Web Services, Stripe’s long-standing cloud infrastructure provider, to run and grow its business while reliably serving millions of internet companies.

In this Batch, I’ll dive into what Stripe and Amazon announced, and what it tells us about the digital payments and cloud services markets.

The Amazon-Stripe Announcement(s)

Let’s start by all admitting that we really have no idea how much of Amazon’s total payments volume (TPV) Stripe will process. Obviously, things can change in the future, but what we can definitively say right now is that Stripe may process some payments for a few services in some regions in which Amazon operates. There are some important caveats to the announcement:

1. Amazon’s core retail business is not included in the list of services Stripe will be used for.

   1. Stripe is eligible to process “a significant portion of” Amazon’s own subscription products (e.g., Prime, Audible, Kindle). “Subscription services, including Amazon Prime, generated almost $32 billion in revenue in 2021.” That’s impressive but it’s a far cry from the $746B in global retail sales Amazon is expected to do in 2023.

   2. Under the new partnership, Stripe is also eligible to process payments for Amazon’s digital wallets (e.g., Amazon Pay, Buy with Prime) that can be used on non-Amazon websites. Amazon has been expanding Buy with Prime access recently, bringing it out of invite-only mode, and I expect to see both Buy with Prime and Amazon Pay as supported wallets on Stripe shortly (like Adyen does).

   3. This is distinct from some of Amazon’s other retail-focused partnerships. Both Affirm and Venmo, for example, are offered at the point of sale on some of Amazon’s retail checkout pages.

2. Stripe is not Amazon’s sole payment provider.

   1. This seems fairly obvious given caveat #1 but Amazon will continue to use its own in-house payments infrastructure and third-party providers like Adyen, which powers payments for Amazon Japan.

   2. We also know this simply because Amazon offers PayPal’s Venmo digital wallet as a checkout option (among others) in the US and Stripe does not offer any PayPal checkout solutions.

   3. And then there’s Amazon’s Payment Service Provider program, which allows merchants selling on Amazon Marketplace to use one of the dozens of payment service providers that have met Amazon’s standards for identity verification and fraud reduction. Stripe is not one of them.

3. The partnership is not global.

   1. The announcement states that “Amazon started using Stripe in 2017 to accelerate market expansion in Asia and Europe,” and that the expanded partnership will cover the US, Europe, and Canada. But as Payment Dive’s Lynne Marek points out, the announcement “made no mention of its work for Amazon in Asia.” We do know that Stripe helped Amazon rapidly add BLIK, a payment method preferred by ~60% of Polish buyers.

   2. It seems like Amazon was experimenting with several partners around this time (2017-2020) to see how they could gain access to new markets and payment methods faster. Amazon even bought a payments company—PayFort—in 2017 to bring localized payment processing in-house for the Middle East and North Africa (e.g. Egypt, Saudi Arabia, Kuwait). There was also the aforementioned Adyen deal to power Amazon’s payments in Japan in 2020.

Surely this partnership will help increase Stripe’s total payments volume (TPV) and revenue as they pursue profitability, but that’s kind of beside the point. The announcement itself is more important for Stripe’s long-term prospects than the economics of this specific deal because most people (and importantly buyers of payments at companies big and small) will likely not catch these caveats and will assume Stripe is Amazon’s sole payments service provider. “If Stripe is good enough for Amazon, it’s good enough for me!” And Amazon’s full-throated participation in this announcement was vital. Let’s take a look at what happened last time Stripe shared that they were powering some payments for Amazon. From Ashlee Vance’s 2017 profile of Stripe in Bloomberg Businessweek:

One way to justify [Stripe’s valuation]: Stripe’s new partnership with Amazon.com Inc., the largest and most sought-after customer on the internet. Over the past couple of weeks, Stripe began handling a large, though undisclosed, portion of Amazon’s transactions. Neither company will address the scope of the deal — which was only revealed by Stripe’s addition of Amazon’s logo to its website — but it could help Stripe greatly increase its transaction volume. (Amazon had no comment.)

So at some point in 2017, Stripe secured Amazon—the largest retailer on the planet—as a customer and announced it by ::checks notes:: publishing a .svg file to their home page (?!), and when Amazon was asked about the partnership, they said “no comment.” Yikes! We can assume this was a mistake or that Stripe was, understandably, eager to share the news with the world in an effort to convince larger customers that Stripe was no longer just for startups. From Vance’s piece again:

Stripe is also trying to make deals with Target Corp., Under Armour Inc., and other merchants to snag money available outside the startup scene, partnerships made more possible by the trust Amazon is showing.

That strange episode makes this week’s announcement all the more special for Stripe since they now have AWS’s CEO and VP of Payments on the record saying nice things about Stripe’s reliability, global reach, and “commitment to putting users first.”—characteristics important to enterprise customers.

Stripe Hasn’t Won Yet

Stripe famously started out as a service for developers who needed a quick way to get started with payments without talking to another human being. But that’s changed. Packy McCormick at Not Boring has done the best job explaining the compounding nature of focusing on small customers early and growing with them over time in his piece Stripe: The Internet's Most Undervalued Company:

Stripe similarly uses time horizons as a competitive advantage. It began by serving an overserved [sic] segment of the market -- engineers at startups -- with a product that traded features for simplicity and speed. And it’s grown with them. Like Slack and Snap, Stripe takes advantage of the compounding effects of young users. At an increasing rate, startups become big companies, and young people become decision makers. While incumbents and other competitors focus upmarket, on the most lucrative opportunity in the present, Stripe focuses on compounding over time.

Stripe’s CEO, Patrick Collison, confirms this strategy. From Ashlee Vance’s Bloomberg Businessweek profile again:

Stripe continues to attract startups. It intends to be behind the next Uber or Airbnb, to cash in on its meteoric growth. ‘If you think about the broad trajectory of the internet, most of the breakout successes are still to come,’ Patrick says.

So, from the early days, Stripe has correctly understood that most of the revenue it will get from customers comes in the out-years and it should do everything it can to keep those customers. The strategy seems to be working and plucky startups that started using Stripe a decade ago are now processing billions of dollars a year. In 2021, 60% of tech companies that went public processed at least some of their payments volume using Stripe, and I imagine a large portion of Stripe’s current payment volume comes from customers it acquired early that have now become massive (e.g., Instacart, Shopify). But as these companies grew, their needs became more demanding and complex. Companies like Lyft (First Data) and Postmates (Adyen) added additional payment providers in an effort to lower their payment processing costs. DoorDash and Instacart both selected Marqeta as their card issuing provider. In response, Stripe ramped up its rapid product velocity starting in 2018 with the release of Billing, Terminal, and Issuing.

The 2018-2022 time period is critical to understand Stripe’s enterprise aspirations. During this period, it appears that Stripe’s net-revenue growth rate began to fall and stabilize at (a still impressive) 50-70% YoY.

Stripe was motivated to win new deals big enough to meaningfully add to their revenue AND wait for growing customers to contribute serious revenue. Stripe’s CEO Patrick Collison stated this two-pronged approach plainly in his 2019 Stripe Sessions keynote:

Our strategy is very deliberately to serve both ends of the continuum (startups and enterprises), and every point in between.

This strategy meant going after larger, enterprise customers, which brought Stripe into direct competition with the best-run payments company on the planet: Adyen. Adyen doesn’t serve smaller merchants but they have the same “earned secret” as Stripe (volume under the curve compounds if you are patient) and their customers usually started from a much larger base. Each year 80% of Adyen's payments volume growth comes from its existing customers. Around this same time, Adyen was scaling its partnership with Uber, signing deals with McDonalds and Subway some of the largest quick service restaurants in the world, and luring eBay away from PayPal. So, all of a sudden, Stripe, a payments service provider that had spent the better part of a decade excelling at acquiring small customers by fine-tuning their API documentation found itself losing customers to Adyen because it didn’t have a good enough integration with Microsoft Dynamics, a leading Enterprise Resource Planning tool.

Enterprise customers care about things that startups don’t (or at least not to the same degree): reliability, global reach, and costs. They also care deeply about social proof. An up-and-coming startup might take a risk on a smaller payments company but an enterprise-grade customer will want to know that other large customers are using a provider before signing on with them. Social proof was one of Adyen’s early advantages. The Adyen founders had already built a payments company before (and sold it to the Royal Bank of Scotland) so customers could trust that they knew what they were doing. So, in addition to the new products Stripe launched during this period, they also put a lot of effort into establishing social proof signals that would lead enterprise customers to trust them:

1. They added a cast of enterprise-grade executives and board members:

   1. Diane Greene, co-founder of VMWare and former CEO of Google Cloud joined the board of directors.

   2. Dhivya Suryadevara, former CFO at General Motors became Stripe’s CFO.

   3. Mike Clayville, former Vice President-Worldwide Commercial Sales and Business Development at Amazon Web Services became Stripe’s CRO.

   4. Christa Davies, EVP and CFO at London-based Aon and former CFO for Microsoft’s Platform and Services Division, joined the board in 2021.

   5. Mark Carney, former Governor of the Bank of England and the Bank of Canada, joined the company’s board of directors

2. They signed and advertised enterprise-grade customers:

   1. Ford signed a 5-year deal to use Stripe for their corporate and dealership e-commerce and payments experience

   2. Atlassian plans to use Stripe for global billing and payments across all of its cloud product offerings

   3. Salesforce now offers Commerce Cloud Payments, an out-of-the-box payment solution powered by Stripe (you can use other payment providers like Adyen and Global Payments with Salesforce Commerce Cloud, but they’re not pre-integrated).

3. They won’t stop talking about being recognized as a Wave Leader by analyst firm Forrester in The Forrester Wave™: Merchant Payments Providers

4. They more than doubled the countries where they offered local merchant acquiring services from 20 in 2017 to 46 in 2021.

This brings us back to the importance of the Amazon-Stripe announcement. Stripe gets to continue touting its relationship with the most enterprising enterprise customer imaginable as they continue to move upmarket and battle Adyen. If you take Stripe’s multi-decade vision seriously, then investing in a relationship with Amazon, even if it’s not Amazon’s full payments volume and even if it’s with thin margins (no idea if that’s the case) is worth it because it allows them to acquire and keep large customers in the future, many of which are still to come.

It’s Still Day One at Amazon

What of Amazon’s motivations to announce a partnership with Stripe now, when they had previously been reticent? The answer is likely similar to Stripe’s, both in terms of the long-term nature of the bet and the competitive dynamics. First, Amazon Web Services (AWS) gets to lock in a fast-growing enterprise customer of their own in Stripe as they fend off Microsoft’s Azure and Google Cloud Platform (GPC) in the Cloud Wars.

I say “lock-in” because other tech companies with huge and growing cloud expenses (e.g., Pinterest, Snap) have struck deals with cloud infrastructure providers in recent years that commit them to hundreds of millions of dollars in guaranteed annual payments in exchange for per-event pricing discounts. Other AWS customers, like Spotify and GitLab, are being lured away by GCP to save money. These companies (like payments companies) care about profitability and I expect that trend to continue as the technology sector suffers through a recession in 2023 and 2024. I’d be very surprised if Stripe didn’t use the threat of migrating to Azure or GCP as leverage to lock in lower rates and get Amazon to agree to participate in their announcement.

The second reason I think Amazon was interested in announcing its partnership with Stripe is that lots and lots of startups use and emulate Stripe. AWS, like Stripe, understands the compounding nature of digital infrastructure and tries to work with as many companies as possible from day one. As we discussed earlier, early-stage startups eventually grow into large, successful businesses. From Geoff Colvin's November 2022 profile of AWS for Fortune:

Instead of raising millions of dollars to buy servers and build data centers, startups could now get online with a credit card, and pay a monthly bill for just the computing power and storage they used. If their new app was a hit, they could immediately engage all the cloud services that they needed. If it bombed, they weren’t stuck with rooms of junk equipment.

Realizing this, AWS began giving away credits to up-and-coming companies and lowering their pricing repeatedly (for all companies) to lock them in for the long term. Today, they have AWS for Startups, which offers a whole suite of services to promising young companies. A partnership with Stripe could reestablish AWS as the standard web services provider for startups that have been courted more aggressively by GPC in recent years.

The Compounding Nature of Digital Infrastructure

A few years ago, I wrote about cloud providers, like AWS, moving up the stack into the application layer and directly competing with companies like Twilio. As I wrote in Twilio & Tin Plates:

In early 1899, JP Morgan rolled up over 85% of the finished steel manufacturers in the country (producers of metal pipes, wire, and tin plates) into the National Tube Company, then struck deals to source National Tube’s primary steel exclusively from competitors of Carnegie Steel, the largest primary steel manufacturer in the country at the time. This maneuver stole market share from Andrew Carnegie’s core business and he responded by forming a finished steel manufacturer of his own, which could always sell its finished products for less than National Tube. From Charles R. Morris’ The Tycoons:

Given the relatively modest investment required to enter most finished steel businesses, it would always be easier for the primary steel companies to integrate forward into wire, hoops, or tubes. And by using their new finished lines to sop up surplus primary steel capacity, they would have the luxury of selling below cost and killing off independents at will.

In our modern-day web services analogy, AWS is Carnegie Steel, Microsoft Azure and Google Cloud Platform are its competitors, and Twilio is a tin plate manufacturer. Twilio can’t integrate backward into a wholesale web service provider. And if enough customers like Spotify and Apple continue to leave AWS for Google Cloud Platform or Azure, we might see AWS start to go on the offensive.

I was wrong (at least so far). Companies like Twilio, Snowflake, and others have experienced tremendous growth and success in the “application layer” even as cloud infrastructure providers offer directly competitive products. Part of the reason is that the cloud infrastructure market is so big and growing so quickly. From Fierce Telecom’s piece on Amazon’s Q1 2022 earnings:

While rivals are gaining market share little by little, AWS continues to be buoyed by the ongoing growth of the overall market. In the first quarter cloud infrastructure spending by enterprises reached almost $53 billion, a 34% increase over the same quarter in 2021, according to Synergy, and marking the eleventh time in 12 quarters that the year-over-year growth rate has been in the 34% to 40% range.

Although smaller in scale, the digital payments market has a similar dynamic. A 2021 Credit Suisse report forecasted modern payment processors (Adyen, Stripe, and Checkout.com) to grow at a ~40% CAGR through 2026. Categories with billions of dollars of quarterly revenue growing at 30-40% YoY is absolutely insane. The fact that there’s so much revenue to go around means that digital infrastructure providers like Stripe and AWS are better off staying in their lane (fighting to maintain market share and acquiring new customers) rather than trying to move up the stack. And the growth of the overall market will continue to lift them to greater and greater heights.

*Disclosures: I own shares of Adyen, PayPal, and Stripe. I am also dependent on Stripe for revenue as they are the sole payments provider for Substack, which I use to publish Batch Processing.

Cutoff Time

Cutoff Time is a section of Batch Processing that includes interesting links to news or ideas that caught my eye but decided not to write about in this batch:

• Stripe plans to raise money and/or go public in the next year (WSJ) amid a significant revenue growth slowdown (The Information).

• Visa’s covid recovery is officially over, per Robert Cantwell (same for Mastercard)

• On LinkedIn, Michael Liquornik pointed out some important caveats to my take on Checkout.com in my latest piece about payments and profitability: Checkout may have OPEX centralized in the UK that is not earning revenue in that same market.

• FIS has secured a patent for “systems and methods for providing analytics data to payment facilitators and sub-merchants via a dynamic dashboard, per Ali Sahibzada.

• Amazon won’t acquire Stripe but if they did, this Hacker News user came up with a clever name for the would-be AWS service: “Amazon Simple Transactional Revenue Internet Payment Exchange.” Get it?!

• “I'm too young to know this much about ACH,” per Marianne Motus

This batch was powered by:

• ☕️ Ethiopia Layo #5 from Loveless Coffee

• 🤘🏾 I Wanna Be Your Dog by The Stooges

 ____________________________
|Company         |Δ from ATH |
|Fiserv          | -17.9%    |
|Stripe          | -34%      |
|Global Payments | -49%      |
|Adyen           | -50%      |
|FIS             | -54%      |
|PayPal          | -74%      |
|Checkout.com    | -74%      |
 ––––––––––––––––––––––––––––

Pretty grim. But there are brighter days ahead for (some) of these companies.

Why I’m Bullish on Payments

I think digital payments is an incredibly resilient category and—if operated in a disciplined way—has one of the most incredible business models ever created:

1. Payments has one of the largest total addressable markets (TAM) possible. To believe the category of payments will grow, one just has to believe that GDP will continue to grow and become more digital.

2. Payments are ubiquitous. I understand the complaints about “rent-seeking” but I think charging 20bps + 10¢ in transaction fees for global, secure, and highly-available access to a payments network with hundreds of millions of customers is a pretty fair trade. From a business perspective, charging what is essentially a consumption tax on something that resembles (or exceeds) GDP is a pretty good way to make money.

3. Payments is also incredibly resilient. If a payments company does a good job providing reliability, security and/or network effect, they encourage new transactions to take place on their platform and revenue compounds.

4. Payments is a natural inflation hedge. If the price of a gallon of milk increases, the underlying payments providers—charging their consumption tax—will take a proportionally larger amount as gross revenue.

5. Payments is profitable (at scale). Payments have relatively thin unit margins but their overall profitability is an “area under the curve” equation and, luckily, businesses tend not to switch payment providers very often, giving them a long time to charge their consumption tax.

6. Payments are agnostic of whether the dollar (or euro, peso, etc) spent is for goods or services or whether the transaction is in-person or online. As we saw over the last few years, consumer spending can switch rapidly between channels. Most modern payments providers (the technologically agile ones) now offer a unified view of payments processing across channels because their customers are demanding it. This will set them up to weather any future storms like the covid-19 pandemic.

Most companies in the table above will rebound to some degree but I’m especially bullish on the modern payments providers: Adyen, Stripe, Checkout, and (to a lesser degree) Braintree, a division of PayPal. These are companies growing total payments volume (TPV)—and therefore gross revenue—at 60-80% y/y from a base of processing hundreds of billions of dollars.

I don’t know the specifics of how each business is run since two are still private and PayPal only hints at Braintree’s performance, but each has a clear playbook to follow to improve their net revenue margins.

Adyen’s Payments Profitability Playbook

Adyen wrote the payments profitability playbook. The business has been throwing off cash for years, achieving ~60% EBITDA margins, and is more profitable, on a per-employee basis, than Netflix, Apple, Google, or Facebook. They’ve done this while maintaining impressive growth rates (40-60%) and shipping new products at a decent clip. The keys to their success have been:

1. Close large customers (TPV)

2. Expand payments volume (gross revenue)

   1. They do this by gaining a larger proportion of that merchant’s payments volume and/or retaining that customer as they grow.

   2. 80% of new revenue in any given period comes from existing customers. That’s some nice net dollar retention.

3. Accept that their take rate will decline over time (net revenue)

   1. From their H2 2021 shareholder letter: “The gradual decline in take rate…is a natural consequence of our business model and the execution of our strategy of onboarding profitable volume at scale—which has always predominantly come from enterprise merchants.”

4. Remain disciplined, mainly by limiting headcount (opex)

Part of remaining disciplined for Adyen has meant being late to certain categories due to their relatively focused R&D. For example, they didn’t add platform payments, card issuing, or Banking-as-a-Service capabilities until they were at risk of losing volume from existing customers (see #2) or losing out on a meaningful number of new deals (see #1). Instead, Adyen waits to see if there is a business need (not just a general market trend) for new services, then goes all in if there is.

That focus allows them to move quickly once they’re committed to a product area (e.g., adding new payment methods/modalities). This is how Adyen, which I just characterized as disciplined and cautious, was the first non-Block payments provider to offer Cash App Pay, and (hilariously) beat Stripe to offering Apple’s Tap to Pay capability despite Stripe and Apple going out with a press release saying Stripe would be the first provider to offer it. Acquiring relatively larger customers, expanding revenue from existing customers, and focused R&D means Adyen can run a business with TPV comparable to Stripe’s with 1/3 the headcount, which leads to those high 50s / low 60s EBITDA margins.

New Years Resolutions for Payment Companies

As macro conditions worsen, I expect IPO-bound payments companies like Stripe and Checkout to emulate Adyen’s discipline as profitability becomes something of a New Year’s Resolution for each company. Here’s what they’ve been up to lately:

Stripe and Checkout both lowered their own internal valuations to attract/retain talent but it has the added benefit of decreasing the cost of their stock-based compensation (SBC). Adyen’s SBC is relatively low, in part, due to a Dutch regulation that prohibits financial institutions from offering more than 20% of an employee’s compensation as “variable remuneration.”

But there are other cultural differences between how the companies operate. Gergely Orosz has some of the best commentary on the Stripe vs. Adyen engineering compensation philosophies specifically:

Last November, Adyen published a letter entitled: “Growing our team in a disciplined way as we build the future of Adyen,” just weeks after Stripe announced it was laying off 14% of its staff. Checkout announced a 5% layoff in September. You can imagine both layoffs are intended to get operating costs more in line with a public comp like Adyen and are necessary if the companies are pulling back on their frontier R&D investments. Going forward, expect Stripe and Checkout to start managing their operating expenses more tightly.

Stripe’s New Refund Policy

Stripe recently introduced a change regarding how they’ll handle refund fees for businesses on interchange+ pricing going forward (learn more about interchange here):

Changes to refund fees

• Variable fees for transactions that get refunded: Stripe charges a variable fee for all transactions, and returns this fee for all transactions that get refunded. From March 1, 2023, we will no longer return this fee.

• Fixed fee for refunds: Stripe charges a fixed fee to your account each time we interact with the card networks on your behalf. This fee is specified in your contract and is intended to cover our costs. A refund, like all other transactions, requires interaction with the card networks through Stripe. Starting March 1, 2023, we will begin charging this fee for all refunds.

So not only will they begin keeping the variable fee they used to return to a merchant in the event of a refund but they will also start charging an additional fixed fee each time they initiate a refund for a merchant.

Stripe’s refund policy has evolved a lot over the last decade. In 2012, they proudly touted “no fees on refunded charges” in a pricing update but somewhere between then and now they stopped returning processing fees for refunded transactions and began charging fees for some refunds. The timeline I’ve been able to put together is:

• 2012: No refund fee and processing fees returned (source)

• 2017: Processing fees not returned but no refund fee for new merchants (source)

• 2020: Processing fees not returned but no refund fee for all merchants (source, source)

• 2022: Processing fees not returned and a fee for qualifying refunds for all merchants (source)

I can’t be 100% sure why Stripe felt the need to expand this policy further but it’s in line with their publicly traded peers—namely Adyen and PayPal—and is a clear example of Stripe getting their operating costs in control.

Checkout.com’s Crypto Conundrum

Checkout.com recently released a “Full Account” of their UK-based operations. It gives some insight into other European operations as well but it’s only a partial view of a company that has operations across the Middle East, Asia, and North America as well. That said, one can piece together some idea of the company’s 2021 performance. Investor and Batch Processing Pal, Gonçalo Fernandes, did just that. He points out that Checkout grew UK-only revenue 82% YoY and estimates $350M of net revenue with $280M of operating expenses, a 20% margin. That’s not bad but well under the 63% EBITDA margin Adyen reported for 2021.

And no, crypto doesn’t solve this. According to reporting from the Financial Times, nearly 50% of Checkout’s payments volume in 2021 came from fintech and crypto clients when “Binance was the company’s top merchant by net revenue.” I am NOT knocking Checkout for courting crypto companies and supporting crypto transactions. I’ve built my career building payments companies that support relatively new types of merchants. Checkout also deserves a lot of credit for identifying a category experiencing enormous growth that had few providers serving it. That’s a smart way to grow payments volume.

What I don’t understand is how Checkout has such low operating margins. Credit Suisse estimates Checkout and Adyen’s TPV were similar in 2021 ($450B vs. $478B) and Checkout had about 3/4ths the number of employees (1.6K vs. ~2.2K) in 2021. Assuming they have similar per transaction take rates, Checkout should have similar operating margins as Adyen. But they don’t.

If anything Checkout’s take rate should be higher than Adyen’s:

• Checkout serves relatively smaller customers than Adyen, which is known for its enterprise-scale clientele. Larger customers can demand lower rates.

• Crypto was a booming category for most of 2021, which could explain the eye-popping 82% revenue growth in the UK, but crypto was/is also relatively underserved and volatile. Checkout can and should be able to charge a higher fee relative to Adyen for jumping through all the regulatory hoops and taking on the financial liability for a such high-risk category like crypto. There is a similar dynamic when processing payments for adult content or cannabis products where 5-8% processing fees aren’t unheard of.

We will have to wait until Checkout goes public to get a better sense of their full financial health but I worry about their near-term prospects as crypto volume continues to fall. In the meantime, they seem focused on growing volume in new regions and with new products like card issuing (coming in 2023).

* Disclosure: I own shares of Adyen, PayPal, and Stripe*

Cutoff Time

Cutoff Time is a section of Batch Processing that includes interesting links to news or ideas that caught my eye but decided not to write about in this batch:

• Affirm now finances ~2% of US e-commerce spend, per Octahedron Capital.

• Gas stations are a difficult payments merchant category to underwrite due to high fraud and metrics certification, per Fintech Dion.

• Visa Direct’s payment volume is larger than I expected: ~600B in 2022, per Sid Singh.

• Mastercard has doubled the size of its acceptance network in the last 5 years! per Matt Cochrane.

• Visa & Mastercard are not in danger of a credit/lending pullback per East Cap.

This batch was powered by:

• 🎧 Dadalife’s January 2023 Mix

• ☕️ Ilse Coffee’s Ethiopian Hamasho.

What’s Balanced?

Most of the podcast is focused on Balanced, a payments company I co-founded in 2011 with Matin Tamizi (CEO) and Mahmoud Abdelkader (CTO) which was among the first to offer a payments API to online marketplaces and software platforms.

At our peak, we had 400+ customers, processed hundreds of millions of dollars in annualized payments volume, and—I’m obviously biased and maybe a bit nostalgic—for four years, Balanced set the pace of innovation for payments companies in the US. We struck a deal with and transitioned our customers to Stripe in 2015 but while we were operating, we were the first or among the first to introduce:

• Embedded payments:

  • White-label merchant onboarding via API vs. web page redirect

  • Consumer payment credentials stored across Balanced merchants. Consumers could simply enter in CVV rather than the full 16-digit card number to check out. This is similar to the Shop Pay of Google Pay checkout experience today.

  • Balanced partnered with messaging app GroupMe to support in-message payments. This is now a popular feature in Facebook Messenger, Whatsapp, etc

  • Soft-descriptor control so each transaction would show up with a unique description (or even a short URL) on the consumer’s credit card statement.

• Faster Funds

  • Immediate access to funds via account balance

  • Same-day ACH disbursements

  • Push-to-Card disbursements (instant)

• Novel API Design:

  • Idempotency parameter on transaction requests.

  • Tag parameter (simple key:value JSON object) added to each resource so metadata can be stored on each resource. Most commonly used to link a single transaction and multiple disbursements together as part of a single order.

Today, Balanced’s legacy lives on at Finix, a payments infrastructure provider for software platforms, where I’m currently the Chief Growth Officer.

If you’d like to learn more about me, Balanced, and Finix, check out the following podcasts:

• Chargehound Payment Innovator feat. Jareau Wade, Chief Growth Officer at Finix- Jul 2021 (Finix)

• Bringing Payments In-House With Jareau Wadé of Finix, PayPod - Jun 2021 (Finix)

• Life As A Chief Growth Officer, Divergent Unicorns By HBCUvc - Apr 2021 (me, Finix)

• Jareau Wadé Head of Growth at Finix, Around the Coin - Sep 2020 (Balanced)

• Jareau Wade on the Of10 Podcast - Feb. 2015 (Balanced)

Square recently rolled out a "new checkout experience" for their 70M Cash App users and 3M+ Square Sellers. This might not sound very exciting given the countless checkout options consumers have today, including Apple Pay, Google Pay, Amazon Pay, Shop Pay, etc., but what Square has actually built is much more valuable and much rarer than just a checkout experience. By bringing their Seller and Cash App ecosystems together, Square is attempting to build the Holy Grail of payments—a closed-loop payments network that rivals existing payment networks. Below, I’ll explain why there are so few payment networks in the US and how Square actually used the Visa and Mastercard network to bootstrap its own network effects. 

tl;dr:

• Today there are only 4 major networks in the US but over the past 70 years, there’s been a lot of competition.

• Owning a payments network is valuable, that’s why there’s been lots of competition. 

• Cash App’s early product team used Visa and Mastercard to jumpstart their growth and retention.

• Square is actually an underperforming payments company, which is one of the reasons they bought Afterpay.

• There’s never been a better time to start a new payments network. Will Square be the company to pull it off?

A Brief History of Payment Networks in the United States

Before we understand how Square built its network, let's discuss why new payment networks are so valuable and rare in the first place. Over the past 70 years, there has been an incredible amount of competition that's played itself out through partnerships and consolidation. What we're left with today are the "big four" payment networks (sometimes called card brands): Visa, Mastercard, American Express, and Discover. Visa and Mastercard are open-loop networks. They route transactions between cardholders and merchants while various banks and financial institutions are responsible for issuing cards to consumers, extending credit (if necessary), and acquiring merchants. Discover and American Express are closed-loop payment networks, meaning they issue cards, extend credit, acquire merchants, and route transactions all within their own network. Here's a quick tour of payment networks in the US:

• Diners Club is widely considered the first charge card in the US. It was first introduced in 1950 to a group of businesspeople and restaurants in New York City. More charge cards popped up over the next decade as did a new model, credit cards.

• Visa started off as the BankAmericard program in 1958 via the infamous "Fresno Airdrop," kicking off the credit card boom in America. From 1960 to 1966, there were only ten new credit cards introduced in the United States, but from 1966 to 1968, banks around the country introduced ~440 new credit cards [source]. Not only did Bank of America begin licensing the BankAmericard program to other financial institutions in 1966, but other regional players took notice and began competitive programs.

• Mastercard was formed in 1966 and went by the name Interbank initially. Interbank was formed by a group of regional bankcard associations in direct response to the success (and threat) of the BankAmericard program.

• American Express has been around since 1850 and has been involved in financial services since 1857 but it wasn't until over 100 years later, in 1958, that they launched their first charge card to compete with Diners Club. They launched their first credit card in 1987.

• Discover is one of the more recent networks to reach scale and can trace its roots back—through a series of spinoffs—to Sears's foray into financial services in the 80s. Discover has been an independent company since 1996 and now owns Diners Club International.

• Networks from other regions, such as JCB in Japan and UnionPay out of China, and more recently Alipay and WeChat Pay, have chosen to partner with the US open-loop networks (i.e. Visa and Mastercard).

• The regional ATM and debit networks that were ascendant in the 80s and 90s—Pulse, Star, Accel, Cirrus, and Interlink—have now all been acquired by major North American networks and payment processors.

• Maestro, a debit and prepaid card network with over 400M cardholders across Europe, was introduced by Mastercard in 1991. Mastercard just announced that they'll phase out the Maestro brand and cards by summer 2023.

• PayPal rode the internet—a massive communications and commerce paradigm shift—to prominence in the 2000s. PayPal's breakthrough success came from being the preferred payment method for eBay sellers. That attachment to both merchants and consumers made PayPal's digital wallet unique vs. other digital wallets that didn’t have commerce use cases. eBay bought PayPal in 2002 and spun it off as a separate business in 2015.

• Venmo was launched in 2009. Although early use cases like buying merch at concerts showed commercial potential, Venmo has been a notoriously difficult network to monetize. Instead, Venmo has mainly been a P2P payments app that rode another paradigm shift—mobile and social in this case—to scale. Today, Venmo has 65M users and has been able to scale revenue through a combination of instant deposits, merchant payments, and card issuing. 

• Online payments company Braintree acquired Venmo in 2012 and Braintree itself was acquired by PayPal in 2013. Both PayPal and Venmo struggled to control fraud losses as they grew their networks. The founders of both companies have shared publicly how close to going out of business they were. 

• Square launched Cash App in 2013 as part of a hackathon. The app was mainly focused on consumers making P2P payments at the time but had rolled out merchant-focused accounts by early 2015. 

The Value of Owning the Network

Looking at some of the numbers behind the big four networks can help explain why there's been so much competition in this space over the past half-century and why Square has bothered to put in the effort to scale both the merchant and consumer sides of their network over the past decade. Payment networks are highly valued due to their attractive margin profiles, something Square’s overall business currently lacks. 

Look at Square relative to the big four in terms of EBITDA margin. The following chart shows that investors expect Square to grow into its market cap by increasing its margins. The most straightforward way to do that is to cut out the middleman.

To keep things simple, let’s assume that when Square processes a credit card they charge about 3% of the transaction value as a take rate. They would then pay out about 2/3rds of that to the network and bank that issued the card to the person making the purchase. Square would keep the remainder for themselves. In actuality, Square has more small-dollar transactions and debit cards than the average merchant so they would likely keep more than 1/3rd of the total take rate. One can also imagine the risk of fraud being much lower for Square than other networks because Cash App knows a lot more about the financial lives of its users than the average credit card issuer. 

But the point remains. Imagine if Square Sellers were able to accept Cash App as a method of payment and Square was able to keep the entire merchant discount rate for themselves. By doing so, Square can substantially increase its take rate. No dues and assessment fees because Square is the network. No interchange because the customer is using Cash App, not a Chase-issued credit card. This is the "Holy Grail of payments." 

Checkout options such as Apple Pay, Google Pay, Amazon Pay, and Shop Pay run on top of existing payment networks like Visa and Mastercard, simply charging credit/debit cards that are part of the existing payment networks. As a result, they end up giving away the bulk of the take rate to the issuing bank in the form of interchange and don't have the same opportunity to disintermediate the networks.

In the US, only PayPal has come close to pulling off what Square is about to do by cutting out the middleman and settling transactions from wallets they own to merchant accounts they provide. But, since 2016 and under the guidance of CEO Dan Schulman, PayPal and Venmo have decided to play nice with the networks, focusing instead on "enhanced consumer choice." Of course, a huge amount of their total payments volume comes from funds stored in users’ account balances, so the opportunity for PayPal to compete directly with the major networks is still there, but their posture over the past few years has suggested other goals. 

In September, when Square first announced they were bringing together their Seller and Cash App ecosystems, I tweeted that Square is now the most credible candidate for the fifth major payment network in the US—ahead of PayPal. With antitrust investigators from the Department of Justice looking into Visa's relationships with fintech companies like Stripe, Square, and PayPal, I feel that Square's odds of becoming the fifth major payments network are even higher. Whether it's true that Square worked with Visa on the payment processing side, it's worth pointing out that Cash App's clever use of the Visa and Mastercard networks is actually what allowed them to build up the scale needed to compete as a payments network in the first place.

Cash App's Counterintuitive Growth Tactics

The early Cash App team faced a cold start problem. The benefit of Cash App came from the ability to send and receive money easily to others on the network, but there was no one using the network at the time. What could they do to acquire and retain users? They could offer incentives and referral bonuses (which they did very effectively) but there's still an inherent amount of friction in getting someone to use a brand-new P2P payments app:

1. Sender downloads the app

2. Sender creates an account

3. Sender uploads money into their account balance (in the US, this can take 2-5 days)

4. Recipient downloads the app as well

5. Sender sends money to recipient

6. Recipient receives the money into their account balance

7. Recipient may want to transfer the money into their bank account (in the US, this can take 2-5 days)

Ayo Omojola and the early growth/product team at Cash App went about removing friction by making it fast, easy, and free to move money in and out of Cash App. When Cash App launched it was an entirely debit-based P2P service. Instead of using bank transfers (ACH) like everyone else for (steps #3 and #7 above), Cash App used unreferenced refunds on Visa and Mastercard’s networks. Just enter in a 16-digit card number and, like magic, money would instantly appear in your bank accounts. Later, Cash App used the debit card rails to move the money—still instantly and still using Visa/Mastercard. Remember all those networks Visa and Mastercard launched or acquired in the 80s and 90s? They were now being used to remove friction from a new Cash App user’s experience. That frictionless experience drove the adoption of Cash App. This approach was counterintuitive at the time because most banks and P2P services were doing the exact opposite, locking money in their networks by making it harder to move funds out.

With instant deposits leading to early user growth and downloads, the Cash App team turned their attention to making it easier to get money out of the Cash App ecosystem another way—purchases. They did this first by launching a virtual debit card, followed by a physical Cash Card. This might seem like an obvious thing to do but it again showed that Cash App had a deep understanding of how to use existing networks to jumpstart their own—similar to how Instagram used Twitter’s social graph in the early days to jumpstart their social network. A debit card is the most straightforward way to give Cash App users access to the Visa and Mastercard networks. Instead of only being able to send money to other Cash App users or spend money with merchants that happen to accept Cash App, a debit card allows a Cash App user's balance to be accepted as payment at Visa/Mastercard's 70 million locations, which encourages Cash App users to keep more money in their account. 

Max Friedrich at ARK does a particularly good job of laying out the series of product releases that fueled Cash App's growth. I highly recommend you read his research.

From 2013 until 2017, Cash App was the only mainstream financial service that enabled instant bank-to-bank transfers for consumers for a majority of bank accounts in the US. Venmo and PayPal launched similar features in 2017. The Cash Card was launched in 2017. Venmo launched its debit card in 2018, but by then Cash App had amassed 18 million monthly active users and a growth flywheel had taken shape. Eventually, Cash App began to focus on keeping funds inside its ecosystem, launching a rewards program called Boosts, direct deposit, and Bitcoin purchases from the app. They also began to use more conventional growth tactics like referral incentives, but instant deposits were still valuable, driving retention rather than adoption. Later, Cash App began to monetize, charging a 1.5% fee for instant deposits and receiving interchange for purchases made on Cash Cards. All of this relies heavily on traditional payment networks.

The key insight of the early Cash App team was that adding more utility to an account balance makes it stickier. That utility can be moving money in and out, the ability to spend it, incentives, etc. It doesn’t matter as long as users have a reason to keep their money in their Cash App account. Cash App’s counterintuitive starting point was to use the Visa and Mastercard networks to reach scale rather than trying to bypass those other networks altogether. Today, they have network effects among 70M consumers, but that's only half of the equation. Square also needs merchants to create a closed-loop payments network.

Square's Missing Merchants

I might be one of the only people who own $SQ stock AND thinks it's not nearly lived up to its potential as a payments company. I've just laid out my case for why I think Cash App's early growth tactics are underrated. Now, allow me to lay out my case for why I think Square is an overrated payments company:

• Not only is Square facing increasing competition from vertically-focused software companies with embedded payments like Lightspeed and Toast, but Clover, a subsidiary of a fifty-year-old legacy payments provider Fiserv, has been doing more payments volume than Square since Q4 2020 with no signs of slowing down. 

• Square's core point-of-sale (POS) card acceptance offering is available in only 7 countries (US, UK, Canada, Japan, Australia, Ireland, and France). Adyen, by comparison, offers POS acquiring across all EU countries plus 13 others.

• Square's online payments capabilities are in even worse shape. Despite rumors I've heard that Square was interested in buying either Braintree or Adyen years ago, they've basically ceded online payments to Stripe. Their most significant investments in API-driven payments started in 2019 with the In-App Payments SDK. A year ago they introduced the Terminal API to help apps bridge online and in-person commerce. Smart moves but feels like too little, too late. Instead, they've spent the past decade trying to develop e-commerce capabilities through single properties such as Square Market, a strange partnership with Eventbrite, and most recently the acquisition of site-builder Weebly.

I bring all of this up to explain why Square spent nearly $30B on Afterpay. Square has roughly 3 million merchants on its platform today but it's missing a massive amount of merchants that it needs if it wants to build a payment network on the scale of the big four. I'm not an expert, so I'll let others wax poetic about BNPL, but what's clear to me—a payments/eCommerce guy—is that Afterpay gives Square a shot in the arm with 100K e-commerce integrations into some of the world’s top retailers. This is important because if Square wants to make Cash App Pay a common checkout experience online AND in-store, they have a lot of ground to cover, specifically online. Recall that, in 2012, PayPal attempted to do something similar by partnering with Discover. The partnership never really found its legs but it points out an important payments insight. Users just want one payment method for online or in-store purchases. This is the reason Mastercard is phasing out its 400M Maestro debit cards by 2023. Users could use their Maestro cards in-store but often had to use another card for online transactions due to the unique 19-digit card number the Maestro network supported but most e-commerce gateways did not accept.

Square has a lot of ground to make up internationally as well. Visa has cardholders in 200 countries. Cash App has users in 3 (US, UK, and Spain). Visa is accepted at 70M merchant locations. There are only 2-3M Square Sellers. And, for the same reason explained above, consumers want to be able to use the same payment method whether they're making purchases at home or abroad.

The Afterpay acquisition doesn't completely fill the international gaps for Square but Afterpay can be used to expand Cash App into several markets it's not in today and there's a nice geographic overlap between Square Sellers and Afterpay customers (US, UK, Canada, Australia, France). We might even see Afterpay installment payments available for in-person point-of-sale transactions.

What’s Next?

This is the most dynamic payments landscape I’ve witnessed in nearly a decade. New payment networks are rising up in other regions and seem inevitable in the US: 

• Investors and analysts can’t tell if Buy Now, Pay Later is good for the networks or will rival them. 

• Regional banks in the EU, Brazil, and India have planned to or have already launched homegrown payment networks to undermine the big four US networks. 

• Plaid recently announced that they’re moving deeper into payments.

That’s a lot of competition but I still think Square is in a great position to become the next big US-based payments network. They've already done the hard work of scaling Cash App to tens of millions of users. On the merchant side, they have a ton more work to do, but with the acquisition of Afterpay, they’ve shown a willingness to spend big to claim the Holy Grail of payments.

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To answer these questions, I looked through PayPal’s recent acquisitions and product announcements to see what they might be up to. As I did, a clear shape started to form in my mind of what the assembled pieces could turn into. I think PayPal is trying to build a sales funnel, not just for one website, but for the entire internet.

Sales Funnels and Growth Loops

The sales funnel (often called a marketing funnel) was invented in 1898 and is considered the first formal marketing theory ever created. The idea is that at the top of the funnel someone who has never heard of your product or brand becomes aware of you for the first time. Some subset of that group will consider buying your product. Then, some smaller subset will actually purchase your product or service. Finally, some subset of customers will remain loyal and purchase from you in the future. The number of users gets smaller and smaller at each step, which is why it’s considered a funnel.

For sustained growth, you need to retain customers and continue to attract more and more customers into the top of the funnel. One trick internet companies, like Pinterest, figured out is that you can use existing customers to increase the chances of finding and retaining new customers. This is why more modern versions of the sales funnel concept are envisioned as “growth loops” instead:

Pinterest is not the next eBay

One theory I saw on Twitter suggested that PayPal is trying to find its next eBay. This would allow PayPal to see the entire sales funnel from top to bottom on a commerce property it fully owns. This isn’t a wild idea. Recall that online marketplace pioneer eBay actually owned PayPal from 2002 to 2015. PayPal buying an online marketplace like eBay (or more likely Etsy) would give PayPal a new property that could produce more gross payments volume (GPV) and revenue. But Pinterest is not a shopping destination like eBay or Etsy.

Instead, Pinterest is a place where shopping begins for 450M+ users. And there is a TON of shopping intent on Pinterest:

• Pinterest users shop slow but spend more: People on Pinterest are 35% more likely to take a week to make purchase decisions and spend 2x more per month than people on other platforms.

• Most searches on Pinterest are “unbranded”: 77% of weekly Pinners have discovered a new brand or product on Pinterest. Meaning advertisers have the opportunity to influence a shopper before they have made up their mind about what type of brand they want.

• Pinterest behavior indicates intent: Pinners are more than 7x more likely to purchase products they’ve saved.

• Pinterest can predict the future: People come to Pinterest to plan, which often leads to a purchase. In 2020, Pinterest predicted 100 trends, of which 80% came true.

While I’m a big fan of Pinterest—their commerce potential; not their discriminatory treatment of Black women—I’ve long been critical of their ability to build a native shopping experience. Yes, Pinterest is planning to relaunch on-platform transactions by the end of the year, but it has not been a great place to buy most items. First of all, many of the purchases shoppers plan on Pinterest are for larger items where having the ability to checkout on Pinterest doesn’t meaningfully impact conversion rates. Imagine you’re using Pinterest to remodel your living room. If you’re buying a $2000 sofa you need to see reviews, compare photos, maybe even see the item in person. For lower-cost, impulse purchases, the product has lacked feature parity with other shopping apps. A small example, but the buyable pins product circa 2018 didn’t even have a place where shoppers could enter in coupon codes. For these reasons (and more) shoppers often start planning their purchases on Pinterest but complete those purchases elsewhere.

And that’s exactly the point.

Deconstructing the sales funnel

At its core, Pinterest is more like Google than eBay. It’s a search engine that conducts over 5 billion searches per month for fuzzy, hard-to-describe ideas where pictures, rather than words, are often the best place to start. It also has a growing ads business that produced $613M last quarter, up 125% YoY. With Pinterest, PayPal would be buying the top of the funnel—the awareness and interest stages—for millions of websites on the internet. PayPal would provide Pinterest with the bottom of the funnel, allowing them to see the purchases that result from shopping that began on Pinterest.

Imagine if PayPal could use their core product and the commerce assets they’ve acquired over the past five years to build a deconstructed sales funnel, not just for one website, but for the whole internet.

This is actually the stated goal behind PayPal’s 2019 acquisition of Honey (which cost $4B and everyone thought was crazy at the time). As PayPal put it in their press release (emphasis mine):

Honey will enable PayPal to reach consumers at the beginning of their shopping journeys and will enhance PayPal's ability to help merchants acquire and convert consumers by delivering offers that are personalized, timely, and optimized across channels.

In April 2020, Thomas Paulson, principal and founder of Inflection Capital, published a very compelling proposal for how Pinterest and PayPal could benefit each other in a merger. His main point is that PayPal and Pinterest can form a flywheel where purchase behavior is fed into Pinterest to increase ad relevancy and targeting, which will then lead to more transactions on PayPal. I highly recommend reading the whole thing, but one slide jumped out to me in particular:

If you follow Paulson’s logic, you can begin to see a sales funnel taking shape with Pinterest at the top of the funnel (which is differentiated vs. other search engines like Google), Honey influencing purchases/cart size in the middle of the funnel, and PayPal/Venmo increasing conversion rates at checkout. And all of these assets are spread out across millions of user browsers and merchant websites across the internet. PayPal is trying to own the entire commerce experience, not just for one property, but for the entire internet, which might be necessary to do if Apple has anything to say about ads and commerce on the web.

Competition & ATT

The idea of PayPal assembling a deconstructed sales funnel for the internet is notable in the context of Apple's App Tracking Transparency (ATT) policy, which is starting to squeeze other ad networks out of their primary source of revenue. With these assets all under one $PYPL umbrella, a shopper’s journey from awareness to purchase to loyalty would all be "on-platform,” thus avoiding the ATT cookie restrictions. h/t @ElliotTurn.

It’s very likely that ATT has spurred Google and FB to move aggressively into more “on-platform” commerce. Amazon is building a giant ads business on top of their commerce engine to keep everything in-house. Shopify is going the opposite direction, partnering with every major social platform in an attempt to bring advertising and transactions more closely together. If you host your site on Shopify, you can use their integrations to bypass certain ATT restrictions because it’s all considered first-party data.

At the bottom of the funnel, PayPal’s Braintree has been getting whooped by pure-play payments processors like Adyen, Stripe, and Checkout for the better part of the past decade. And new entrants like Bolt and Affirm are beginning to scale elegant checkout solutions that threaten PayPal’s core business, online checkout via a digital wallet.

Will PayPal buying Pinterest be enough to respond to these competitive threats? I’m not sure. Many of their previous acquisitions haven’t exactly worked out. But it’s a bold move and, ultimately, I applaud their audacity of attempting to build a deconstructed sales funnel for the internet.