Stripe announced that it raised $6.5bn this week, valuing the company at $50bn. This was a sizeable deal, but still a notable “down round”, with Stripe valued nearly half as much as it was at its peak.
The payments provider is backed by Silicon Valley’s best and brightest, including Andressen Horowitz and Peter Thiel’s Founders Fund, and even added big-name Singaporean funds Temasek and GIC to its investor list. But these funds are not a war chest for what is becoming a much tougher market for fintechs. The money is required to help Stripe employees exercise their restricted stock units before they expire and then fund a tender offer for employees to sell shares.
Compared to the flashy boom and bust of crypto and its degens, payments providers have been overlooked as beneficiaries of the fintech bubble, and possible casualties of its deflation. The Collison brothers were the intellectual north star of the current crop of private-sector fintechs, much like Larry Page and Sergey Brin were during the US dotcom boom of the early aughts.
But a quick look at the wider field in payments shows that valuations of tech unicorns that took the escalator up in recent years are taking the elevator down.
Just last year, Europe’s own Stripe, Checkout.com, managed to announce both a huge up round and a huge down round. Klarna, which pioneered the “buy now, pay later” model, has also seen its valuation slide.
Public-market valuations across payments and merchant acquirers had tanked even before the collapsing fintech bubble started taking down banks like SVB:
These falling valuations look more and more like the “new normal” for five major reasons: the normalisation of ecommerce and small-to-medium enterprise spending, fierce competition, mixed network effects, labour-intensive investments and IT technical debt.
Let’s start with the normalisation of ecommerce and SME spending. The former turbocharged growth for players like Stripe, Adyen, PayPal and Checkout.com, which make virtually all their revenues from this area.
But the strength of the US economy and of SMEs post Covid has also underpinned other payments firms whether it is Square or the three legacy merchant acquirers. All US payment processors are dependent on SMEs for the majority of their revenues given the higher fees they can charge in this segment. Now spending at (and by) SMEs looks like it could slow, as US consumers have largely run down their pandemic-era savings.
Secondly, competition is fierce and likely to get even tougher. Stripe and Adyen have taken market share from legacy players given their strength in ecommerce as well as superior functionality. For instance, for smaller ecommerce vendors, the likes of Stripe were early in offering white labelling. But the weakest and second largest of these legacy players, Worldpay, will probably make big efforts to catch up after it demerges from FIS. It could also actively pursue more deals. First Data has also found success under Fiserv ownership, with its Square-like Clover product and its Carat operating system.
Traditionally, banks have looked at their merchant-acquiring businesses as non-core, which has led to many of the roll-up opportunities in the industry. But they have refocused on building more platform revenues, and with armies of technologists running around, they are likely to be more formidable players going forward. The leader of this pack is JPMorgan, and Jamie Dimon has been vocal on the need for aggressive investments. Chase is by far the leading bank-owned merchant acquirer in the US, and is winning market share fast.
Unlike the duopoly card networks Visa and Mastercard, or other financial market infrastructure like exchanges, the network effects in merchant acquiring are more limited and localised. As the experience in countries like Brazil illustrates, there are local disrupters as well as incumbents. Scale benefits are more on the supply rather than demand side. In other words, global merchant-acquiring businesses will probably remain locally competitive oligopolies, rather than achieving the “escape velocity” of monopoly status.
Then there’s payments tech. Over the past decade, private equity has been instrumental in consolidating that industry; Worldpay and Nexi serve as two good examples. And while the logic of creating economies of scale was simple, this created a spaghetti of IT technical debt with disparate systems, which hampered the speed of innovation.
The size of the bureaucracy and lack of automation in legacy banking and payments technology is illustrated well by FIS’s group headcount of 69,000 at the end of 2022. This comes to a revenue per head of a mere $210,000. Fiserv’s is about twice that amount. So while headcount growth at newer players like Stripe have attracted significant attention, they aren’t dissimilar to legacy providers. Adyen is of course highly profitable. And taking Stripe’s rumoured net revenue of $2.8bn and its current headcount of 7,000 gives a revenue per head of $400,000, which suggests its biggest issues are compensation levels and other costs.
The problem is that firms that dominate industries, like Visa and Mastercard, typically have revenue per head of around $1mn. Similar levels can be seen in other financial-technology businesses, like exchanges. Merchant acquirers that are scale players with cutting-edge technology infrastructures should aspire to that level of revenue per head, or the 60-per-cent operating margins that fintech monopolies enjoy. Given the different competitive dynamics, those goals could serve as more of a ceiling. But it does show there is room for improvement for the whole merchant acquiring technology industry. Adyen, for its part, is ahead of the game: it generated almost 60-per-cent operating margins in 2021.
