Transcript: Going deep on Payments with Mostly Borrowed Ideas (MBI)
Transcript: Going deep on Payments with Mostly Borrowed Ideas (MBI)
Transcript of Podcast #12
Below is the full transcript of this episode. You can listen to the audio here:
Liberty:
Hello, my friend. How are you?
MBI:
I'm good. Good. How are you doing, Liberty?
Liberty:
I'm good. Thanks. Thanks for joining me. We're going to have a lot of fun, I think, talking about payments, right? What's more exciting than payments. Everybody is like... It's their favorite topic, I'm sure.
MBI:
Yeah, yeah. Am I the first guest to be, Liberty, on a podcast with you a second time?
Liberty:
I think so. Yes. You're officially like a... What's the word then? Alumnus of the podcast now.
MBI:
Great. Glad to be here.
Liberty:
So, payments. Just for context. I don't pretend to know a ton about the field. I'm no expert. I'm still learning. I think I've been paying attention for a few years just because to me, it's inherently interesting. Right? It's like in the same way that logistics is the circulatory system of the world moving things around, I feel like payments is the same thing, but for money, and money as the core is information. Right? It's sending information around the world to make stuff work better, so telling the baker to make another cake, saying GM to make cars. Right? So that stuff is interesting to me as a system. But then, as I started paying a bit attention to it, I realized just how complex it is. Right?
Everything, every transaction is five, six, seven parties. Everybody is doing something. The acquirer in the bank, and the issuer, and the processor, and someone is doing fraud detection. Sometimes it's all the same party doing a few of those things. Sometimes they're all split up. Our mutual friend, David Kim, has written a bunch about it. I think he started with Visa and MasterCard. That's where I started, and he covered Adyen, and Stripe, and Fiserv, and Global Payments, and Square, and PayPal. So he wrote a bunch about it. I learned a lot from him. I learned a lot from our other mutual friend, Jerry Capital.
MBI:
Yes.
Liberty:
He's been doing his own deep dive into payments for a few years, and now I've also learned a lot from you. You've done a bunch, I think, starting with Shopify, which is partly payment.
MBI:
Yeah.
Liberty:
Then, you've done Square, and Adyen, and now PayPal. So I thought it was a great occasion to start to bring it all together and talk about it a bit. So that's my long intro, but I also have to point out before I forget that if anyone is interested in the history of PayPal, you got to check out the book by Jimmy Soni. It's called The Founders, and it's very, very excellent. I did a book giveaway a while ago, and I can announce that I'm going to do another giveaway for this book and another of Jimmy's book about Claude Shannon. So this is a great one to start with, but where you want to start?
MBI:
Yeah.
Liberty:
How did you get into payments?
MBI:
The one thing that I've picked up from your intro is a sense a dichotomy of what the consumer experience is when it comes to payments and what's really working behind the scenes. Right? So, for a consumer or even for myself, before really getting into the details of payment value chain, it was always very simple. I just pull out my credit card and use it on point of sales, or I just click some box, usually, it's automatically populated in my browser or in a particular website, and that's it. It feels very simple to me.
Liberty:
Right.
MBI:
But the reality is probably it couldn't be any more different. Right? It's this incredibly complex system, as you mentioned. There are six, seven parties involved in a single transaction, which takes seconds to complete, but there's a lot of work that's being done behind the scene. I think it is very much unappreciated how complex it is not only by the consumers, but also, many investors. I didn't probably appreciate how complex it is until I actually did the work.
Liberty:
Yeah.
MBI:
Now, I realized that it's just an incredibly complicated value chain where a lot of incredibly valuable companies have been created. Because it's very complex, it can be challenging to predict where it's going. There are lots of segments here. One is in the legacy payment players, and there's next generation payment players. Also, there's crypto. Right?
Liberty:
Mm.
MBI:
So to where exactly this is going 5, 10, 20 years from now can be challenging, and I think it's a challenge for existing incumbents, the next generation payment companies, and also, like I said, crypto. To what extent the potential of crypto, the crypto optimist that talk about us is going to be realized will have a profound impact and implication for the current payment value chain as well. So it's an interesting space, I think, and it'd be really awesome to follow this space.
I feel like my knowledge has compounded a little bit after doing three or four companies, but again, it is nowhere complete. Right? Nowhere close to be complete. It will still require closely following the space going forward to be able to because I feel like it's very dynamic. Amazon is coming up with this Amazon Buy with Prime. I can definitely imagine some scenarios that some investors probably do, how that can profoundly impact PayPal or Shopify. Right? But these companies are incredibly dependent on their payment revenues, right, on their checkout revenues, and also, there's also this Facebook Pay, Google Pay, Apple Pay. Right? So it's all a very complex value chain we can probably talk about for hours and hours.
Liberty:
Yes. As our friend Jerry would say, it's going to be so many buttons, right? You're going to go... To check out, there's going to be 15 different buttons. There's a stat I got, I think, from your PayPal deep dive. Something like 20% of online transactions are declined. Right?
MBI:
Yes.
Liberty:
So most of these companies are in the business, basically, of trying to increase sales by removing all of this friction, and catching the fraud, and all that. I think you put it very well. From the customer's point of view, it's very simple, but it's like a Wizard of Oz kind of thing. There's the wizard behind the curtain that's juggling 15 balls. Just looking at PayPal, say, let's start with PayPal because that's your latest deep dive. It feels like they, on one hand, have a very good product in that it increases this completion of transactions for merchants. Right?
MBI:
Mm-hmm.
Liberty:
But the question always seems to me like, how much of those economics are going to the merchant, and how many are going to PayPal? Not to jump to the conclusion, but that was my main thing when I was reading your deep dive about PayPal. I was like, "Okay. They started with this 'Checkout' button, and they are sending money via email. That was super great." Over time, they did so much M&A to diversify into other things. Right? So now, Braintree is a huge processor, and they got Venmo in there that's growing nicely. But at the end of the day, this "Checkout" button is so profitable for them getting the... You said the CEO said something like, "'Checkout' is to PayPal, 'Search' is to Google." Right?
MBI:
Yes.
Liberty:
That's a big statement, right?
MBI:
Yes, an apt statement, I would say.
Liberty:
So, to me, the main question I would ask if I was a PayPal shareholder would be, with all this competition coming, like this sea of buttons coming, is PayPal thinking too short-term about its advantage? Because if I'm a merchant and I put a PayPal button in there, and now, all of a sudden, I make a lot more sales, well, whatever I'm paying in fees to PayPal, as long as I'm making more in sales, I'm going to be happy. Right? But then, PayPal has been cranking up the fees and charging more. I think now it's almost 3.5% plus 50 cents.
MBI:
Yeah.
Liberty:
At some point, the merchant is going to be like, "Okay. They're getting me more sales, but am I keeping it in my pocket, or is it all going to PayPal?" So as a merchant, it's becoming less attractive. So I may be tempted to be more prominent with Shop Pay, or with Apple Pay, or with Amazon, or whoever is charging less. Is it going to be a race at the bottom, do you think?
MBI:
Yeah. Now, that's a great question. I have my own business. I use Stripe to process my payments on my website, MBI Deep Dives, and I have my, let's say, own personal grievances in terms of how the whole system works, especially now that I know. Some of these companies like an Adyen is extremely profitable. Right?
Liberty:
Right.
MBI:
Stripe is probably nice. It's not publicly listed, so we don't know exactly how profitable it is, but I guess expectation is Stripe will also be incredibly profitable. I don't like the fact that they don't have different pricing tier. I understand like if I'm processing $10,000 per year, there can be chargebacks and all that, and you need some protection to process my payments. I can totally understand if you charge me... For example, on Stripe, if I'm processing $10, $12 transactions, I pay 5%, 6% of that amount to Stripe.
Liberty:
Yeah.
MBI:
Right? That's fine. Let's say if I'm doing $10,000 payment processing, and I understand Stripe needs to make money from every single customer. They're underwriting. But when I'm scaling from $10,000 to $100,000, $100,000 to $200, $500 million, right? Unfortunately, it remains the same, and I feel like it shouldn't be. Right?
Liberty:
Yeah.
MBI:
I think these companies, they should have different pricing tiers as my payments processing from their margin scales, but that usually doesn't happen, and what ends up happening is these businesses become exceptionally profitable. Now, that's great news for shareholders of those companies. Right? But I do wonder whether there can be pressure on that front or whether one business may want to take the opportunity like, "You know what? I want to have different pricing tiers for different margins," depending on their sales. There is pricing tiers, but the differences are exceptionally wide for enterprise customers.
Liberty:
Yeah.
MBI:
Those are more bespoke and ad hoc. You need to talk to their sales team and to negotiate with them. But the difference is so large, like it's really... For people like me, I'll never probably be enterprise customer for Stripe. Right? Stripe makes a lot more money from me than any of the vendors or any of the... I usually use, say, Twitter as my top of the funnel. Right? I think all the vendors or all the products that I'm using to run my business, Stripe makes the most money out of my business. Right?
Again, it just goes on to show how payment business can be incredibly valuable because they just needed to convince me once that I need to use Stripe. Once I did that, as I'm scaling, Stripe is scaling as well, and the profitability for Stripe is actually increasing exceptionally. Right? There is probably a very little cost to keep me. They don't have to do any advertising or anything to keep me. Right?
So even for companies like PayPal, what they would say... or even I think Stripe would say the same thing, and most of these payment companies will say the same thing. When they're raising price, let's say, or not decreasing price, they're basically saying... I think PayPal says this, that when users or consumers see "PayPal" button, they trust that button. Right? They don't abandon the carts, and PayPal would also say their authority rate is high, probably that the sale is complete is exceptionally high compared to these other buttons. Right? So it's tricky. It's very hard to say with conviction that PayPal is raising prices at the expense of the margins. Right?
Liberty:
Yeah. We don't have the data to be sure how much value they're adding. Right?
MBI:
Right. If it's true that 50% of users basically abandon the cart if they don't see a "PayPal" button, yes, then definitely, PayPal is probably adding a lot more value than they are taking from the transaction. But I guess the question that I come back to and when you think about competitive forces, again, as a consumer, who do you trust more? Which button do you trust more, Apple Pay or PayPal? Google Pay or PayPal? Right? I don't know. Again, I personally probably trust Apple Pay more, right, or Google Pay more. Just I think people may misinterpret what I mean by trust. Let me put it this way. Which one I'm more inclined to click?
Liberty:
Yeah. That's a good test, right? Revealed preference.
MBI:
Exactly, and I think I'm probably more tempted to click Apple Pay.
Liberty:
What if Amazon Pay was there too or Shopify? I'm curious. If all of them are there, is there one at the top of the stack that you would click first? I'm trying to think for myself which one it would be. Maybe Amazon. I don't know.
MBI:
No. It depends. If I'm paying with Amazon Pay and it ensures me that the product that I'm buying is going to be delivered in one day or two days versus, let's say, if I'm paying through PayPal or Shop Pay, and there is no such guarantee, right, in terms of delivery schedules. So, in that case, yes, I'd be tempted to click "Amazon Pay." Right?
Liberty:
Yeah. I think that's their way to add value. They're leveraging their huge logistics that nobody else has. Shop Pay may be the best implementation in many ways that I've tried for the software. The flow, when you click on it, was very, very good. But even if Amazon is not quite as nice, if I get free shipping with Prime and I get it the next day, or...
MBI:
Yeah.
Liberty:
I think that beats a lot, right? That's hard to compete with.
MBI:
That is such a classic Amazon way to get into the space. Right? I was talking to Jerry about this, and Jerry was mentioning that... how Amazon is basically leveraging the hard mode, which is logistics. You can't really replicate Amazon's logistics and Apple's conflict. No payment companies can possibly even dream of replicating what Amazon has built in their logistics capabilities. So they're leveraging their hard mode investments to get into... which is perhaps a more easy mode space in the sense that it's easy to. Like I said, once you get a customer, once you get a merchant to sign up for your... or to allow your button to appear on their website, then you probably don't have to do a lot more. Right? You can just milk that relationship for years and years. The retention rate is probably a lot higher from that relationship.
Again, if Amazon can deliver the Prime-like benefits with that button, I can definitely see why Prime members specifically would be very, very tempted to click that button instead of any other button that's out there. By the way, I was listening and looking at... As we are recording this on 29th of June, and yesterday, Pinterest announced a new CEO. The CEO, I think, I forgot the name, used to be at Google looking at their shopping ambitions and all that, but he also used to run Braintree and Venmo at PayPal.
Liberty:
Oh, right.
MBI:
So I'm wondering whether there will be a new button. Maybe "Pinterest" button or "Pins" button. Right? So the buttons are definitely not declining in numbers. It's only increasing, but yeah, there's definitely a bit of a hyperinflation in terms of button over the last 5, 10 years.
Liberty:
Yeah, and we didn't even talk about the buy now and pay later stuff. Right? All the Affirm, and Afterpay, and all that is coming too.
MBI:
Yes.
Liberty:
It's going to be quite a jungle of buttons in there.
MBI:
I do think at some point, I think the window is closing. Yes, it's definitely possible for me to imagine "Pinterest" button on Pinterest, but I think it would be hard for Pinterest to be pervasive in other websites. Right? But ultimately, I don't expect Apple, Google, Meta or Facebook... I think Facebook is rebranding it as Meta Pay. So Apple, Google, Meta, Amazon, Shopify, Samsung. Right? I don't think these are going anywhere. I mean, obviously, PayPal. Right?
Liberty:
Yeah.
MBI:
So these buttons will be there on every... not every single website, but most websites over time. So, ultimately, it will come down to the customers who are going to be more tempted to click those buttons. Like I said, buttons are extremely profitable, and so I don't think the big tech companies are going to give up their ambitions on the payments.
Liberty:
I wonder if this is going to follow an inverted-U shape, right, where at some point, more buttons is going to decrease conversions and going to just confuse customers.
MBI:
Yeah.
Liberty:
So are we in the moment early into that where everybody is throwing whatever against the wall, and then at some point, is it going to be a power law, right? Is it going to be just a few that really stick, and at some point, merchants just clean up their checkout page because it's getting too much? Then, whoever is left at the top is probably going to be extremely profitable because it's a scale business. This is fixed-cost business, so the more volume you drive through it. That's why we're seeing Adyen's margin keep going up and up. At some point, it's like, "Okay. There's a ceiling at 100%." Right? It's going to stop growing up at some point, but so far, they've been scaling very, very well. I think Adyen has basically never raised capital. It's incredible capital-efficient they are. I guess we can talk a bit more about Adyen later, but... So is PayPal going to be one of those remaining winners? The other thing that stood out from your deep dive, which is making me question... It's PayPal's positioning in self, right, is about management. Right?
MBI:
Mm.
Liberty:
You have Peter at Adyen that's a founder, is thinking super long-term, is always thinking about many years ahead, and you were talking about PayPal's management, and it's a bit less certain there. Right? How long-term are they thinking? Is the CEO like, "Okay. I'm going to be out in a few years. So if I crank up the fees in the meantime, the profits are going to be super great. I get out of here?" But yeah, in five years, in 10 years, is whoever is in charge of PayPal going to realize that they've burned some goodwill with customers that they've opened up an umbrella under which competitors are doing a very good job at a lower price can get a footing? Then, once these competitors start having the scale to compete, they get more possible. They can reinvest more. It's like the Stripe model of always launching new products and trying to expand into new areas. Is PayPal really doing that well? They've been buying tons of companies, but it's still the "Checkout" button that seems to be the big engine. So that's a good question.
MBI:
So Dan Schulman, who is the CEO of PayPal... I think it's not about Dan Schulman specifically. It's just a system on that he operates. He's not the founder. Right? He can be easily fired. Right?
Liberty:
Yeah.
MBI:
You can't probably fire Peter, or the Collison brothers, or Zuckerberg.
Liberty:
Good luck. Right?
MBI:
Tim Cook, Sundar Pichai. These people are probably not going to be fired even if their business stumbles for a couple of years. Right? But yes, I think someone like Dan Schulman can definitely, can certainly be fired if he doesn't deliver. Right? So it's not about PayPal. It's not about what Dan Schulman is doing. That's the system he's part of.
Liberty:
Yeah. The incentives, right? Even the management incentives. You pointed them out as bonuses are tied to... relatively easy to meet targets.
MBI:
Yes. Like I said, first, I saw the 2021 medium term incentives was 50%. It affects neutral revenue CAGR, and then FCF, Free Cash Flow CAGR over the last three years. The range was 3% to 5%, 3% growth, 4% growth, 5% growth. If they attained 5% growth, then they would get 200% of their payout, and that, at first, surprised me why by generating 5% FCF CAGR, they're being paid 200% of their payout. Then, I realized, "Okay. So the low number is probably because of some adjustments that they had to do. Whatever." But even then, the range is just so low 3%, 4%, 5%. 3% for 50% of the payout, 4% for 100% of the payout, and 5% for 200% of the payout. Right?
When I looked at some other... So the proxy statements in 2018, 2019, 2020. You will see there's a significant difference. Sometimes, let's say, their target is... Let's say, on the high end of FCF category is 20%. What did they deliver? 31% or something like that. So that tells me those numbers were not demanding enough. If your high range is 20% only and you end up delivering 30%, 40% CAGR growth, that means either the board fundamentally underestimated the business's potential, and they're not really setting up targets in a way that should be difficult enough for the management to exceed.
If you look at, let's say, the compensation for the named executive officers this... they're four or five, and they've been paid $200 million over the last three years. Just three years. Right? Dan Schulman gets paid $30 million. Yeah. He got paid last year. That's what I mentioned. He's under pressure. He has to deliver. He doesn't have as much longer time horizon as, let's say, Peter even does, or Collison brothers, or Zuckerberg has. Right? So it's just the system he's part of, and if he doesn't deliver... Yes, and that's why I think he's much more prone to take decisions to deliver near-term results, which may or may not be good over the long-term.
Liberty:
Exactly. There's always the results that you get, but how did you get them? Right?
MBI:
Mm.
Liberty:
So especially with these financial businesses, there's always some levers you can pull to, in the short-term, increase free cash flow, or margins, or whatever. Right? If you're the CEO and you're thinking like, "Okay. I'm going to be out in two years. Well, if I slow down hiring for a while, maybe margins are better, and I get 200% of my bonuses," but maybe you've mortgaged the future of the company because they have less R&D or some people working in the fraud department don't have the resources. That could be something that you won't see immediately. But over time, you compound some problems. Right? If you increase the fees to your merchants from 2.9% to 2.49%, they're not going to all churn out the first year. Right?
MBI:
Yeah.
Liberty:
For a few years, the profitability is going to look great, but that's not going to be good at the margin of... Well, that's confusing. The margin for merchants, right?
MBI:
Yeah.
Liberty:
I mean, the marginal merchant that's like, "Yeah. Should I keep PayPal? Should I not? Should I try something else?" if they're sitting on the fence and you increase price on them, they're going to churn sooner than later.
MBI:
Yes. If Stripe raises price for my website, let's say, yes, I will be actively looking for alternatives.
Liberty:
Mm-hmm.
MBI:
Right? I may not switch instantly because it's a cumbersome process to switch your payment processor, but you can bet I'd be looking to switch. Like I said, I'm already not happy. The fact that this payment fees is a variable expense for me, I think they should be able to scale it better for the margins, and that's why I think it's possible the big tech companies, they may not look to generate 50%, 60% margins from this business. The problem is basically there's too many parties in the system. So I don't think the card networks are going to take lower basis points as you scale, so those... Some of these numbers are fixed, right?
Liberty:
Yeah.
MBI:
So from the merchant, the querier, and the processor, and some other... the companies who are doing settlements and all that, they are the ones. They may have to decide. Right? They may have to decide to lower their take rates. So that's the question, like why does Adyen deserve to generate 70%, 60% in a margin? So that's the question I grapple with.
Liberty:
Well, it feels to me like right now, in the world that they're playing, right, Adyen started at a super high hand, like huge multinational companies, and they come into Adyen because they're in 50 different countries, and they have tons of currencies, and Adyen was the best at dealing with that, and because partly, they have this stack that they've built themself. It's all vertically integrated. They play the role of multiple of the parties in the chain, and so they can provide a more value add service to their customers, which increases the authorization rates. Basically, it pays for the higher fees that Adyen has compared to others. So that feels at the high end. That's the value proposition of Adyen.
It feels to me like this is putting them into a nice position for going down market because they have these high margins, and right now, they don't have to cut them. They're still growing like crazy. But if they go and attack Stripe, say, at the lower end, well, it's not going to be easy because it's not the same market. It's much more fragmented and everything, but Stripe is getting these much higher take rates because the market is so fragmented, and small customers don't have the leverage, right, to negotiate better pricing the way that Nike or whoever with Adyen.
MBI:
Mm-hmm.
Liberty:
But if Adyen goes down market, they could take their fees down significantly and still be decently profitable, and that could be the way that they can buy growth in there, that they can come under Stripe and the others, and bring some competition to the lower end. I don't know if they have any plans to that. I don't. Maybe there are reasons that I don't know about that would prevent that, but it feels to me like they have this huge margin that they can play with. If they can decide to squeeze the margin, all of a sudden, this is going to buy them growth. Right?
MBI:
Yes. So I think I need to rephrase what I say. So it's actually more probably relevant for other players than Adyen. It definitely plays in the enterprise market, and their take rate is minuscule, 20 bits. But because of the scale, that margin is enormous, but I don't think like... Obviously, the companies they're dealing with, the enterprise customers they're dealing with, they have negotiating leverage. Right? Almost all of them have multiple PSPs. So it's not like they are completely beholden to Adyen. The fact that even despite that, Adyen still has 60%, 70% incremental margins goes to show that the business is just... The cost structure of the business is just much better. Right?
Liberty:
I say it's a beauty.
MBI:
Right. Yeah. So, basically, the only cost is, basically, salaries to employees after net revenue, and most of their employees are based in Netherlands, and because of some regulations in Netherlands, their bonus cannot be actually more than 20% of their base salary, which is a nice cap compared to someone in Silicon Valley.
Liberty:
Yeah.
MBI:
Most of the Stripe employees are, and the difference between those employees based in Netherlands versus employees in the Silicon Valley is order of magnitude higher in terms of salaries expenses. Also, Stripe has 7,000 employees versus Adyen's roughly 2,500. Right? That is an enormous difference, and that's why I think Adyen is, definitely, is way more profitable company compared to Stripe. Although Stripe processes more payments, like 10% more than Adyen did in 2021, we know that for sure because Stripe disclosed it, but we don't know about the profitability, but even I think we don't need to know based on what we know in terms of the number of employees and based on what we know where those employees are based for Stripe versus Adyen. It is abundantly clear that Stripe's profitability is nowhere close to Adyen's, and I wonder whether they'll ever be close, anywhere close to Adyen because Adyen has some structural advantage. Those are regulatory advantage. It's not necessarily, and maybe yes, Stripe can do that if Stripe bases their headquarter in Netherlands and starts hiring people there. Right? But I don't think that's really a feasible solution.
Yeah, I think my comment, earlier comment about why Adyen deserves to generate 60%, 70% margin is probably more relevant for other players, right, because the players who are dealing with merchants like me who have no negotiating leverage. Right? So that's a question, right? If, let's say, in some future time, Stripe is generating, I don't know, 60% margin or 40$, 50% EBIT margin, Adyen can probably say, "You know what? I don't need to generate 50% EBIT margin from this segment." Right?
Liberty:
Right.
MBI:
"I want to compete in price." Right? If their authorization rate is similar to Stripe even in this segment, at some point, they may want to get into this place. I don't know because these are enterprise and SMB are just so different. It's not easy to decide and get into both segments. So who knows? It may take years and years, or probably it may end up being too difficult for Adyen to get into SMB space, but that's a concern, right? If someone who's operating in the SMB space, dealing with customers with no negotiating leverage ends up finding competition from other PSPs who wants to give better rates for these SMBs, then yes, the companies who are operating in the SMB space may not end up generating as high margin as, let's say, Adyen and [inaudible] in the enterprise space.
I think that implicit assumption by most investors investing in Stripe is basically Stripe will be able to replicate what Adyen did in the enterprise market. That remains to be seen. We don't know. Again, since Stripe is not public, we don't have as much data to really compare and do a more concrete analysis with their cost structure, and profitability, and everything. But I'm not too optimistic that Stripe's profitability number will ever be anywhere close to audience.
Liberty:
Yeah. That's when I wish Jerry was here because I think he's done a pretty good deep dive into what we know about Stripe, and his conclusion seem to be that the way Adyen is vertically integrated and does a lot of things in-house is partly what makes them perform well, but also, what makes their structural profitability, and Stripe doesn't quite have that. I'm going to make a terrible analogy that doesn't work, but hopefully, it's an intuition pump. Right?
MBI:
Mm-hmm.
Liberty:
So let's say that Adyen is more like Apple. So they're vertically integrated. They make the hardware, the software, the product. They build the whole widget. Right? Because they control all of it, they can make it better, basically. Stripe, there can be more than one way to win, right? So Apple is winning one way, but maybe Stripe's way of winning is more, say, Amazon. So they have lower margin, but maybe they grow faster, they have more volume, and they build all these other businesses around it. Right? They have Stripe Capital and Stripe Tax. They have these no code tools for small merchants' website. They're easier to deploy everywhere, and because of that, they grow more virally or something. My payment processor is also Stripe. At some point, there was a feature that was missing for me. I was like, "I can do this. I can send a payment link, no code. But if I want to have a customer page where they can change their information, I have to build it on a website."
MBI:
Yeah.
Liberty:
Right? So I went to Patrick McKenzie on Twitter who works at Stripe, and I wrote to him like, "Hey, I wish this feature existed." Well, Stripe has people monitoring Patrick's replies. I don't know if Patrick forwarded it or they just looked, but I was contacted by people of Stripe, and a couple months later, they came back to me and said, "We built the feature you wanted. You want to beta test it?" So I was on a call with two Stripe engineers, and we tried the feature. They enabled it on my account, and I'm... It's like, "Okay. That's an important advantage as a culture to be able to move Fast, listen to your customers, have tentacles everywhere and try to feel the market, and adapt to it."
Adyen's culture, I don't know if it will do as well with that kind of thing, right, where you have to have a lot of customization for small players. I think Adyen is basically trying not to have customization for customers. They're trying to keep their stack monolithic in some ways, which has many advantages, but may have some problems at other parts of the market. I don't know. So I feel maybe both Stripe and Adyen are going to be the winners in their way and keep taking share for a long time from Global Pay, and Fiserv, and all of the other legacy players that are like 50 different companies cobbled together through M&A, and they have all these different internal systems that don't quite talk to each other, and that will never be as smooth an experience as Adyen. But even if Stripe is not as streamlined internally like on the technical side as Adyen, maybe they can make up for it by building this ecosystem of services and products around it that make them still the most value added choice for a lot of merchants and people needing payments.
MBI:
Yes. I'm definitely more optimistic about Stripe chances to process more payment volume than, let's say, Adyen, right?
Liberty:
Mm-hmm.
MBI:
In fact, they already do. It's possible that the difference between Adyen and Stripe can increase over time in terms of the payment volume being processed, but, I know, my comment was basically mostly related to the profitability.
Liberty:
Yeah.
MBI:
Right? So the margins. You're right. Yes. You don't have to generate 50% margin for Stripe to be successful. Right? Stripe can be very, very successful company even with significantly lower profit margins than that if they just become a pervasive payment processor. As you mentioned, Worldpay, Fiserv, and some of these legacy engine-working payment tech, the largest incumbent payment processor companies, they still generate more than $4 trillion payments. Right? So people who don't follow payments market can be surprised how large this market is. Right? So because it's such a large market, it doesn't necessarily have to be either/or. Right? If Stripe wins, it doesn't mean Adyen loses. If Adyen wins, it doesn't mean Stripe loses. They both can be successful, especially if they both are successful in taking market shares from their current legacy incumbent players.
Even not only just top three. There's a long list of companies. Right? These are very disparate systems across the value chain. Even after the top three or four incumbents, there's still a significant amount of market share that can be taken from the legacy players in the payment value chain. So, yes. It's definitely feasible for multiple players to be big winners, but at the same time, it all depends on valuation and all that. That's also a big factor. Right? I think I should also probably should have mentioned this in the very beginning of this podcast. I want to disclose that I own Google, Facebook or Meta, Amazon. Square or Block. Right? I also own Shopify. Right? So a lot of the companies, I understand. I don't own ask Adyen, or Stripe, or PayPal. So there can be some biases as I speak about these things, but yeah, it's possible that both Adyen and Stripe can be successful companies.
Liberty:
So I have a question for you, and it's impossible to answer it precisely, but I'm curious about your sense of the direction. Right? So when I look at these companies, I like to think of them not only a static point, like where are they today, but as vectors. Right? They're moving in certain directions. Some are faster, some are slower. So the question is, do you think the new kids on the block, right, Adyen, and Stripe, and PayPal is like late teenager by this point? I don't know, but are they improving than the legacy players are improving? Are the legacy players catching up? At some point, is it going to be not a free-for-all, but like a cage fight between all of them because they're all at the same point, right?
As Global Pay and Fiserv are already integrating all this M&A and streamlining it, at some point, they're going to have a really good system, or are they falling behind, and the new ones are running away with an impossible lead? So in 10 years or 15 years, the new ones are going to be the new incumbents with a massive share, and we'll see if others come in, but I'm just curious in your sense, is legacy catching up in the same way that, say, for electric cars, some people may say, "Well, okay. Tesla was alone for a while, but now GM, and Ford, and Volkswagen are coming," or no, is the new guy building a lead that's very hard to catch up?
MBI:
Yeah. Yeah. So let me start from Adyen and tie back to your question. So when I was looking at Adyen and I wrote my deep dive on add end, one of my concerns was, basically, how sustainable is their margins and how they can possibly attract great talent without paying common salaries or compensation compared to Adyen's peers. Even if I look beyond the regulation stuff like Netherlands versus Silicon Valley and all that, even in the US, Adyen pays considerably lower compared to, let's say, Stripe or big tech companies. So I had this concern, and I still had that concern, but I was also thinking power laws are pervasive. Right? So power laws are everywhere.
Liberty:
Yeah.
MBI:
I was wondering whether Adyen may win because of the decision that they consciously took, and the power law distribution of one decision may just end up compensating for all the possible shortcomings that they may have in other decision points. So, for example, let's say their decision to not pay commensurate salaries in the US versus Stripe or some other companies, this is flawed, right? But if Adyen basically exists, because of the problems that this legacy incumbent players have created through endless acquisitions, right, so they have acquired tens of companies over the years, and decades and decades went by as they kept in acquiring more and more companies, and because payment value chains has increasingly become more complex, and I think it's not becoming simplified as years go by, Adyen is trying to build a solution or a system where it's very seamless where every part of the system can talk to each other. Whether you are buying from the store, online, omnichannel, all these different ways consumers can buy products and services, Adyen's solution is just much more seamless compared to not only the incumbent, but also, I would say, even the fellow disruptors. Right?
Liberty:
So I just want to point out for listeners who may not be as familiar with Adyen, the founders of Adyen are payment insiders who used to work in the industry. I think they sold a company.
MBI:
Right.
Liberty:
Basically, Adyen, the name, even the name means start again, and so they basically looked at... Like the founders of Snowflake, right? They were in the business, and they saw all of the problems and the mistakes that others were making, and they thought, "We can do better. We're going to start with a clean sheet of paper and do it right this time." So I think you're right. The dependency of taking this choice when nobody else has made the same choice almost could make up for a lot of other problems.
MBI:
Yes. Yeah. So it may not just matter, like all the other possible shortcomings. Obviously, every company has their flaws and shortcomings. Right? The question is whether that matters. Right?
Liberty:
Yeah.
MBI:
So, I wonder at times. The fact that it is on the Adyen, who has chosen the path to do no M&A, whatsoever. They're the only company in this whole space, and people probably estimate this. I think it takes enormous courage to take this path because it's so tempting to just echo a company. Let's say you are now in Africa. Right? You can buy just a company which is doing business in Africa and integrate... I mean, who knows how much this integration is happening, but let's say you try to integrate that company to your system, and then in a while, you have a footprint in Africa. Right? You don't have a particular product in your system that the customers are demanding, and you say, "You know what? It will take probably six months to build this in-house. Let's just acquire this company, right, and then try to integrate that and serve this customer."
So it is extremely tempting to do accusations in the payment space, and that is why everybody does it. Right? The fact that Adyen has never done it... Again, at a static point of time, like sitting in 2022, it can be difficult to appreciate the long-term impact of this one decision, one rigid decision. Right? You can't build Excel model that has power law implications. You can't, right?
Liberty:
Yeah.
MBI:
You'll always be afraid like, "Oh, no, no, no. This company is not definitely not going to grow at 30% in 2030. That's nonsensical." Right? Think about Amazon. Amazon has kept growing at 20% rate for 25 years, more than 20% rate. Nobody would have the courage or guts, no analysts or investors would have the courage or guts to forecast that level of persistence of revenue or growth for such a long time. So it's so easy to underappreciate the power of such decision, if it is indeed a power law decision. Right?
So I'm mindful of that progress, but it's possible that despite some of the aspects that I may disagree with Adyen, I don't know. I'm not a payment insider, so I'm thinking just from first principles here, but it's possible that if that decision is actually so apt that your quality of business declines as you acquire more businesses, and the power will exponentially increase. The impact of the decision will just exponentially increase over time. Right? So, yeah. So I actually forgot what your original question was at this point. [inaudible] with you.
Liberty:
It doesn't matter. We're in a good vein right now. I think the question was something like, in the future, are the next gen players running away? Are they improving faster than the legacy players could catch up?
MBI:
Right. So, yes. I think yes. That's why I was mentioning like it's possible. So, obviously, the incumbent players are riddled with acquisitions, riddled with many, many, many different platforms. Right? They are having a hard time in responding to market's needs. There are so many ways of monetizing on the internet now. Right? The incumbent players are having difficulty in responding in an agile manner. Some of these next gen or disruptors like Checkout, Stripe, Adyen, they are much better in responding to this new way of monetization in the internet. But even within that, and that's why I started with the Adyen that I want like all these other fellow disruptors are also... They're not as willing or they haven't been riddled with as many acquisitions as legacy incumbents are just by the virtue of being young companies. But if they continue to do it for the next 5, 10 years, and maybe in 2030, they will look just the legacy incumbents look today. Right? But if Adyen remains the way it is, then they will always seem very agile, very updated, and they just keep chugging along longer than probably many investors or analysts appreciate.
Liberty:
So I'm thinking about what we said earlier about PayPal's management and having different shorter-term incentives. Right?
MBI:
Right, right.
Liberty:
So maybe we can basically do a cut and paste on this discussion and apply it to Fiserv and Global Pay. Are all these companies run by hired management that it's...
MBI:
Yeah.
Liberty:
Their incentives are just like that. Right? You can't blame them personally necessarily.
MBI:
Yeah.
Liberty:
They're doing what they think is best for the incentive that they have.
MBI:
I don't think you and I would do any different even in those positions.
Liberty:
Yeah, exactly.
MBI:
Yeah. If I were PayPal CEO, I would look at what my incentives are. I would look at, "Oh, I'm actually getting paid to increase net new actives." Right? That's another thing that I didn't mention when I was discussing incentives. PayPal increased significantly net new active like, I think, probably 49 million last year and 71 million. These numbers may not be exactly correct. I'm obviously speaking from memory. They increased more than a hundred million of net new actives over the last two years, and now they're saying a lot of these net new actives were low quality. They basically joined because of promotion and all that. But if you look at the incentive, they do get paid if their net new active is exceeding some threshold. So was PayPal mentioned consciously running aggressive promotion to increase net new actives? Possible. Right? Then, it goes onto the... The board has to take the responsibility there. Board accepted and decided that incentive system for the management.
Liberty:
Yeah.
MBI:
Yes. If I knew that I get paid by having more net new active, even if they were lower quality and I need to save my job in the next couple of years, 9 out of 10 people would do what PayPal management did, potentially did. I'm not sure that's what exactly they did, but potentially what they did would be exactly other people would do.
Liberty:
That's the thing, right? It's almost a cliche at this point to talk about like, "Oh, founder this, founder that. Founder. It's so important to have a founder," or at least founder mentality, right, because some founders are not so great.
MBI:
I'm starting to think for a change, Liberty. Sorry to interrupt. I'm starting to see some opinions. I know. In 2021, it was so consensus. "Oh, founder-led businesses are so great, and they have corrective vision, and incentives, and all that." But I think the tide is changing a little.
Liberty:
Yeah.
MBI:
Right?
Liberty:
I was thinking with Tobi at Shopify, and some people getting criticized for the same thing that they were getting praised before.
MBI:
Yes.
Liberty:
Right? That's the halo effect right there.
MBI:
Right. Right, right. No. When you're stuck making the stops going up, now people are saying, "Hey, why are you not making money? Why? You see, no, we don't care about revenue. Show us some free cash flow or profit." I think the difference that I see between founders and management-led companies is basically, founder-led companies are generally speaking with enough voting power. They can afford to think from first principles perspective, even when things get difficult. Right? I don't think all companies should optimize for free cash flow in the near term. Right? It depends on where you are in your life cycle, what sort of growth trajectory that is left, right, what sort of business you are in, or industry dynamics, and all that. There's a lot, too many variables to have a generalized rule of thumb. But if you're management-led and you know that your contract is up, and you know how you're incentivized and all that, yes, then it can be more tempting for management companies to stop thinking from first principles and think more about how do we deliver this percentage of free cash flow growth in the next whatever years. Right?
Liberty:
Yeah.
MBI:
Two years, three years, or next year even. So, again, not all founder-led companies is going to work out. Just because you are thinking from first principles and all that doesn't mean that you will win or your business will thrive, but I do think the base rate should be higher for companies that are led by people who are thinking from first principles.
Liberty:
Yeah. I agree. I think if you adjust for the number of each, right, because there are a lot of fewer founder-led companies that are certain size, right, by the time they're public and everything.
MBI:
Mm-hmm. Yep, yep, yep.
Liberty:
The number of those that are huge, huge success, there's a disproportionate amount that are founder-led or have the strong stamp of their founder. Right? Even if the founder is not there anymore, they're still going on the inertia of what the founder created. When you said it's the management's responsibility with the incentives, I think technically, that's correct. But I think in practice as a shareholder, if you're relying on the board to save you, you're already lost, right, because management is...
MBI:
Yeah.
Liberty:
They basically do what they want with most boards. Right? They're totally toothless. Right?
MBI:
Yeah.
Liberty:
They don't know anything. They know what management tells them. So if management wants to paint a rosy picture, and go play with golf with them a few times a year, and be charismatic around them, most boards, I don't feel, are super useful, unfortunately. Some are really value added, but not that many. There's one company we didn't talk much about, and it's Block. I just can't get over the name. It takes so long to build a brand, right?
MBI:
Yes.
Liberty:
To get everybody to have it in your head. That's why I still have "Liberty" because some people change name all the time on Twitter. They change avatar. It's like, "No. It takes so long for people to imprint," and so don't change it for silly reasons. Right? I think I get what Zuckerberg was doing at Facebook with the Meta thing, and it's more conglomerate now like Alphabet, Google. I'll still call it Facebook, and I'll still call Google, Google, but I get his reason. But at Square, I don't get it. But anyway, I'm curious what you think about Square's chances there. They have different strengths, right, with the Cash App and more of the SMB point of sale stuff. Yeah. I'm curious what's your read on that company and where they're going.
MBI:
I think Block is one of those companies that I worked on earlier in my payments knowledge journey.
Liberty:
Yeah.
MBI:
Right?
Liberty:
It was the first step, the first block in the wall so to speak.
MBI:
Yeah. First block. Right. First block. Right. Yes, as I mentioned before, almost all payments companies have potentially exceptionally large market to address. Right? Block is not exception, and they have been incredibly successful in terms of building multiple businesses within this company. They started at the seller segment. They started to just serve the micro margins, right, who were terribly underserved. So they started as a company to serve the micro margins. Now, they are going up market from micro to small to mid. Right? They also ended up building this in a Cash App business, right? Now, the challenge that... Oh, and by the way, they also acquired Afterpay last year, which was a new acquisition.
Liberty:
Yeah. Oh, yeah, so they go on.
MBI:
Right. Thankfully, they bought it with stocks. Well, I mean, if they bought it with cash, it would be considerably worse. So, obviously, still, shareholders got diluted because they paid in stocks. But if they paid $30 billion cash, it just would've been disaster.
Liberty:
Wow. Yeah.
MBI:
Right? So this was like, obviously... and they could have probably bought it at a fraction of what they paid. I think they diluted 20% of their shareholders.
Liberty:
Look at Affirm's stock in the meantime, right?
MBI:
Yeah.
Liberty:
Afterpay would probably have followed a similar trajectory, so.
MBI:
Yeah. Yeah. I think, yeah, Afterpay would just be probably down at least 50%, if not more. Right?
Liberty:
Yeah.
MBI:
50% being conservative. So they are the three different businesses here. You're right. Well, I guess broadly, two, Square Seller Segment and Cash App. One is consumer-facing, one is merchant-facing, and the big, basically, ambition for Block is to close the loop. Right? So customers would just go to the stores, physical stores, and they would pay with Cash App. So they can just subvert the card networks, and issuing, and the payment value chain altogether.
Liberty:
Yeah. Bypass everything, and Block would keep all of the margin, and it would be cheaper for the customer.
MBI:
Right. Exactly.
Liberty:
That seems like a great idea if you can pull it off, and that's the hard part.
MBI:
Yes. Everybody dreams of that. Almost nobody can pull it off. I do think that Block has perhaps better than average probability to be able to pull it off. I still clearly think that, but I think a lot depends on how they integrate Afterpay, what sort of incentives they give users or consumers to pay via Cash App instead of, let's say, Apple Pay or credit cards in general. That remains to be seen. I do worry about Afterpay or any sort of BNPL services.
Initially, I thought this is more a demand generation for the merchants, and almost every BNPL company says this, and I think this is true. I'm not saying this is not true. This is certainly true that when you provide BNPL on your website, your average order volume increases, sales increases, conversion increases. Those are all true. Right? Obviously, the flip side of that is you are taking credit risk.
Liberty:
Yeah.
MBI:
Right? So when the economy is going through a soft period or basically, recession, the thing that I worry about Block or any sort of BNPL companies is if we go through a stagflationary period, this is particularly worse for any sort of BNPL companies. Stagflation means you have inflation, but real GDP growth is negative. Right? So if inflation goes up, the failure will probably keep raising rates, right? Rates, short-term rates will go up. So your funding cost goes up, but I don't think these BNPL companies will be able to pass that cost to their merchants. Right?
So Afterpay currently charges 4%. So close to what, let's say, merchants pay for processing credit payments. Tight? The MDR for credit cards. So it's usually, let's say, 250 to 300 basis points if you are accepting credit card payments. But since BNPL raises your conversion, sales, every sort of volume, you should be more than happy to pay the extra one percentage point. But the business model may not be able to function if your funding cost raises too much, but you are not being able to... If Afterpay says, "Hey, we can't make the business work with 4% take rates. We need 7%, 8%." Right? Because the fade rate is 5%. Whatever. I'm not saying fade rate is 5% or going to be 5%. I'm just giving you an example.
Liberty:
Yeah.
MBI:
So if that happens, then the economics... and again, I'm just talking about unit economics here. I'm not even touching on the fact that in a recession, you obviously have more credit losses.
Liberty:
That's the thing. Right? They can squeeze them both sides.
MBI:
Yes.
Liberty:
The funding costs go up, but they also get more credit losses, and people not paying on time, and...
MBI:
Yes. Yes, and there are companies like Apple is also getting into BNPL and all that. They may not need to jack up those take rates to the merchants. They can say, "You know what? 4% or whatever." They can just give the lowest, right?
Liberty:
Yeah. They have a pile of cash that's just sitting there. Right? They may as well use part of it and couple billion here, couple billion there, and they're funded.
MBI:
Yeah. That's definitely a potential problem, like how block is going to with that. Also, because it's a transaction business, right, if economy go through... I think there would be a pretty high correlation in terms of what's happening with the economy and how Block's payment businesses is going with. So I think it can be challenging for someone like Block if the economy goes through an extended recession,, right, period. We don't we don't know to what extent. We don't know the depth and breadth of this recession, potential recession. Right? So, in a way, we are taking a macro call there if you are bullish or bearish to our way for Block.
So I think it's going to be difficult for a payment company such as Block, and also, even for a Cash App business, they have... I think their large demography is low-income population. Right? They can be even more affected because of potential recession. So there are too many variables for anyone to have really high conviction, I think, how the business is going to fair. I guess market definitely reflects that. I think the stock is down 80% or something that. So yes, I think market... The range of outcomes is widening for Block and some of the other players in their space as well, like Affirm and some of the BNPL players. I was just looking at Klarna, which is a private company, but they're raising money, and they are decreasing their valuation by, I think, more than 50%, 60%, or something that. So yeah, it's been a difficult period for a lot of these payment companies.
Liberty:
There's another interesting dynamic in this space I wanted to talk about. It's the relationship between Shopify and Stripe because Shop Pay is its own thing, right? Its own animal, its own competitor in the race, but Stripe is powering Shop Pay, and Shopify is Stripe's biggest customer as an aggregate across the Shopify network of sites. So what I've heard, I think, from Jerry and others is basically that Shopify is driving a ton of volume through Stripe, but at very, very low margins, basically, because they have incredible leverage over Stripe. Right now, they're the best of friends. Right? They're partners. Tobi and the Collison brothers seem like personal friends even, but the dynamic is very interesting because any day, push came to shove, right? Shopify could turn around and say, "Okay. Now, our processor is Adyen," or whoever else. Right? Checkout or something.
MBI:
Yeah.
Liberty:
So Stripe doesn't have much leverage with such a big customer. Maybe years ago, it was a bigger percentage of the total Stripe volume, and now it's probably getting smaller.
MBI:
Yeah.
Liberty:
So maybe that part is improving for them, but it's still a... I don't know. I think it's an interesting dynamic, right, because business, right? They're not doing Shopify a favor. They're not like, "Oh, yeah. We're going to do it at a low margin out of the goodness of our hearts." It's probably just they don't have to leverage against Shopify, but I wonder, is this leverage going to flip at some point if Stripe has grown enough outside of Shopify, and can they try to increase rates there? I don't know. I'm curious to know if you have any thoughts on this.
MBI:
Yeah. No. I think that's an interesting dynamic, for sure. You're absolutely right. I think a few years ago, I saw somewhere Shopify was, I don't know, 20%, 25% of Stripe's TPV, Total Payments Volume. I think right now, it's probably low double-digit or mid-10s at best. So, definitely, Stripe's dependence on Shopify is declining. Right?
Liberty:
Mm-hmm.
MBI:
I don't know what really is the extent of that relationship between Shopify and Stripe or what really thought process was from Tobi to be fully dependent.
Liberty:
Do we know if it's exclusive? Is Shopify not using any other processors at all? I think so, but I'm not sure.
MBI:
Yeah. I'm not 100% sure, but yes, that is the impression I have that it's predominantly Stripe. I think even if they're not using Stripe, it's probably because Stripe is not there.
Liberty:
Right, in some countries maybe.
MBI:
Yeah, because Shopify payment is basically available, I think, in less than 20 countries right now. I don't exactly remember how many countries Stripe is available, but I'm pretty sure it's more than 20 countries.
Liberty:
Okay, because the normal playbook for someone who has tens, and tens, and tens of billions of payment would probably be to have three, four, five different processors, and splitting the volume among them and like, "Okay. I'm going to give this much to Fiserv and this much to Global Pay." So if Shopify is not doing that and is exclusive with Stripe, Stripe has probably given them something in return, probably those very low rates, and so they've been synergistically growing together. But at some point, this may break, and this may be an interesting moment in this space.
MBI:
So I own some Shopify as well, and I probably feel better if Shopify had relationship with, let's say, both Adyen and Stripe or some other companies. Because payment is such a huge revenue, yes, I think Shopify still has leverage in that relationship between Stripe and Shopify. But if Stripe keeps growing and if Stripe grows at a much faster rate than Shopify does, and Shopify becomes less than 5% or whatever GMV or TPV for Stripe, and if Stripe thinks that, "You know what? We are very much entrenched in that relationship, and we haven't made any money..." That's impossible to know. I'm just speculating here.
Liberty:
Yeah.
MBI:
Stripe founders can say, "You know what? We haven't made any money at all from Shopify, even though we have processed all this volume for so many years. So let's do some renegotiation and basically, ask for some margins." Right?
Liberty:
Mm-hmm.
MBI:
Even if it's 500 basis points extra margin, let's say, I'm not sure what their margin is basically, but let's say they're generating, I don't know, 10%... 5% gross margin or something like that, let's say, and they wanted to increase to 10%. Right? That can definitely strain that relationship, and I think Shopify is in a place where there can be many other PSPs who would be vying for that position. Right?
Liberty:
They're going to get good prices from these other processors.
MBI:
Yes.
Liberty:
Right? Because they have so much volume. Basically, they're in a great position negotiating with anyone at this point.
MBI:
Yes. So I'm a little surprised that they have chosen to be... I'm pretty sure. Like I said, probably Stripe doesn't make much money at all from that relationship, but that sort of dependence can be a source for fragility over the long... Again, Tobi talks about building company for a hundred years. Right?
Liberty:
Yeah.
MBI:
So if you take the horizon, in a hundred years, let's say both Stripe and Shopify is alive. Right? Do I really want to build a hundred-year company with an exclusive relationship with dependence on another company when payment is such a huge part of my rake revenue, right?
Liberty:
Yeah.
MBI:
So I'm really surprised with the dynamic of that relationship, but in business, those relationships can change.
Liberty:
Yeah. Well, to me, it feels like an artifact of the moment in time when both companies came up. Right?
MBI:
Yeah.
Liberty:
They grew up together. They were probably personal friends. They were both trying to do things a bit differently, and they were a very good match for one another. But I would be very surprised if in five years, it was still an exclusive relationship. At some point, it's like the sums of money are just too high. You're a public company. It's not a startup anymore. It's not like, "Oh, I'm going to hire my friend," or at some point, I think that's going to change.
On the margin side, if Stripe is giving them a great deal and not making much money, I guess Shopify can't complain too much. Maybe it's on the technical side if there's ever a big outage of Stripe, right? They have technical problems and Shopify loses a ton of money because they can't process transactions for a while. Maybe they have a backup processor that we just don't know about, and this is all taken care of.
MBI:
Yeah.
Liberty:
I wouldn't be surprised if that's the case because these are very, very smart people. So they probably have Plan A, B, C, D, and E. Right?
MBI:
Yeah.
Liberty:
But still, even with the majority of the transactions, most giant companies seems to be constantly... They pull on different levers and like, "Okay. Today, we're going to give 30% of our volume to Adyen and 20% of this one," and they play them one against the other, and they constantly test like, "Is the authorization rate really that much better with this one? How about this one? How about in this country? How about in this currency?" They're always fiddling with all this stuff. So I wouldn't be surprised to see Shopify become more, I guess, typical in that way.
MBI:
Possible. Yes. I wouldn't really doubt. I don't have any timeframe in mind whether that can change in 5 years, 3 years, 10 years, 20 years, but yes, the longer time horizon I think about, the less likely it seems that Stripe will be an exclusive partner with Shopify. So, right now, what? Amazon and Shopify itself is more than 50% of US's e-commerce GMV. Right? So these two companies... I don't think any payment companies are making money on these companies.
Liberty:
Yeah. I don't think Amazon is giving much margin either.
MBI:
Yeah. Right. So, yes. As long as Shopify just keeps growing at a rapid pace, yeah, Stripe may never be able to find themselves in a position to really ask for better margins from Shopify, but you're right, and it's possible that they may have other relationships, which we just don't know a lot about. It's possible Shopify utilizes them from time to time, but I have looked at Shopify's 10K for some time before. So I don't exactly remember whether they're exclusive, but definitely, Stripe is processing 90% of... at least 90% of Shopify's shop-based volume.
Liberty:
I think it's funny to think about how Stripe has high take rate because they're mostly in SMBs, right? So it is very fragmented. People don't have leverage over them, so they can charge more. If Stripe was processing the payments for all of Shopify's merchants individually, they would make great money. But because Shopify has aggregated them altogether, now Shopify is not SMB anymore. It's a huge enterprise contract, and on enterprise contracts, you make the money Adyen's way, right, by being more efficient and being super great at authorization. You don't make the money by having leverage over the customer. So it's like Stripe is making most of its profits in this hugely fragmented market. They probably wish sometimes that Shopify had just left payments entirely up to each merchant, and most of them probably would have gone with Stripe.
MBI:
Yeah.
Liberty:
But now, because they they're all together in one big bundle, well, suddenly, it's an enterprise deal.
MBI:
Yeah, yeah. Absolutely.
Liberty:
So that's about what I have for the big ones, but before we go, I just want to ask quickly about some of the ones that we haven't talked much about, but that maybe like they may come out of nowhere and become big players, like Apple Pay and Google Pay. We talked a bit about Amazon, the Pay with Prime. I think they have this differentiated angle, but any thoughts about Apple Pay, Google Pay, and maybe Checkout?
MBI:
Yeah. I think we touched on this, and yeah, Apple Pay, Google Pay, Meta Pay, WhatsApp Pay, right?
Liberty:
Oh, yeah.
MBI:
WhatsApp is pretty big outside US. Right? I think Meta is definitely trying to monetize the WhatsApp part of the business more seriously than ever before. Apple Pay is already way big.
Liberty:
Yeah.
MBI:
We don't know the exact numbers. I think they process more than PayPal. Right?
Liberty:
Really?
MBI:
Yes.
Liberty:
Wow. Okay. That's impressive.
MBI:
I don't know exactly whether the TPV is higher than PayPal because PayPal's TPV includes not only their branded processing, but also their unbranded processing. Right?
Liberty:
Right, Braintree and... Yeah.
MBI:
Yeah, but Tim Cook actually said in 2019, so it's been three years now. He mentioned something like, "We processed more than PayPal last quarter." Think about like if you have a billion install base of iPhone users, which are perhaps the wealthiest billion in the world.
Liberty:
Yeah.
MBI:
So I wouldn't be surprised if this 1 billion iPhone users' purchasing capacity is actually higher than the...
Liberty:
The rest of all of them.
MBI:
Yes. Possible. Right. That's possible, and if you have that... I bought iPhone this year, right, and got an Apple Pay. I got apple card, and I think they have me. Right? So, yeah. Yes. I think I'm going to use Apple... The only way I will use any other... so I will click any other button is basically if Amazon ensures that they're going to deliver this one day, in one day or two days if I click their button. Other than that, it's going to be very challenging for other players or other buttons to tempt me to click. Obviously, if I'm buying something from Instagram, and Instagram gives me only Facebook Pay option, then obviously, I'll have to click that, but PayPal doesn't have that power. Right?
Liberty:
Yeah. The distribution is...
MBI:
Yeah. So the other thing that I've been worried about was... So PayPal is not on Amazon. Right? But they are on Shopify-powered stores.
Liberty:
Right.
MBI:
In 2015, 32% of Shopify's GMV went via Shop Pay. Right? They processed 32% of Shopify's GMV. In 2021, that was almost 50%. So from 32% to 50%. So if you move forward another 5 years, 10 years, probably Shop Pay will process 70%, 75% of their total GMV. Who is losing share? PayPal.
Liberty:
Yeah, unless maybe Amazon Pay with Prime really takes off in the meantime.
MBI:
Yeah. So PayPal is not on Amazon and may gradually lose share on Shopify. Those two are the largest. So, right now, they are more than 50% of e-commerce GMV in the US, and I don't think it's nonsensical to assume that in 2030, the GMV share in the US for Amazon and Shopify could actually be even larger. Right?
Liberty:
Yeah.
MBI:
It could be just in a pure parallel distribution. If that's the case, PayPal is in a tough spot. Right?
Liberty:
Yeah, because most of the profits come from that branded checkout. Right?
MBI:
Yes.
Liberty:
Even if it's not a huge part of the revenue, it's a huge part of the profits.
MBI:
Yeah. No. It's still a huge part of the revenue, more than 50%, but probably on a profit basis, gross profit basis, or operating profit basis is probably, I don't know, 70% or something like that.
Liberty:
Wow. Okay.
MBI:
So Apple Pay doesn't allow users to add PayPal as a payment method. Right? Google Pay does, Facebook Pay does, but what is a guarantee that Google Pay, and Facebook Pay, and Samsung Pay will always allow you to add PayPal as one of the methods? Right? So they're in a tough spot from those angles. Like I said, payment business can be very, very profitable. For a lot of the big tech companies, they have such a valuable property on the internet or property... The iPhone is a very valuable property and to have a billion install base. I think they're just trying to figure out how to monetize these relationships. Right? If basically Facebook or Google notices that, "You know what? PayPal is making most of our payments relationship, revenue from our payments relationship," they'll really squeeze PayPal, even if they allow...
Liberty:
The margin won't be there.
MBI:
They'll squeeze them. Right? They'll say, "Hey, they're actually clicking on Google Pay, but they have PayPal as a payment method. But if they click Google Pay, you have to give this percentage, you have to share this percentage with us." Right? That can go very high. There's no limit in terms of how much they can squeeze, unless the antitrust committee has a different opinion on those in a revenue share.
Liberty:
Yeah. Though payment companies are not the most... Politicians won't win a ton of votes by defending them. So they may not get attention that something more citizen-facing would get.
MBI:
I don't want to underestimate Lean Account's ambition in terms of making big tech lives difficult.
Liberty:
Yeah, that's true.
MBI:
So I want to rule that out.
Liberty:
That's true. It feels PayPal is a child of the open web era, and so as long as everything was going on in the website somewhere, they add this equal playing field. Right? But now, we're more in the world where everything is happening inside of platforms or on their iPhones and inside of apps. Even Shopify is a commerce platform.
MBI:
Yes.
Liberty:
So PayPal doesn't own any of those platforms. They're this thing that's graphed on to something else. Right? But any day, they could wake up, and some door could slam in their face. Right? So that's a tough spot to be in.
MBI:
Yes, yes. That's my concern as well.
Liberty:
All right. I think this was a pretty good overview for payments. I feel like my brain is going to explode with all of this stuff now. So I'm going to digest this for a bit. Thank you so much for doing this. I hope the listener has learned a few things and enjoyed the ride. Have a good day, my friend. Take care.
MBI:
Thanks again for inviting me. We probably rambled a lot more on payments. So it is onus on the listeners to find the coherence they got on it.
Liberty:
If there's any.
MBI:
If there's any. Right, right. Yeah.
Liberty:
No. If the listener wants some coherence, I'm going to link your deep dives in the show notes. So if anyone listening to this is not super familiar with payments, that's a great place to start. I'm also going to link David Kim's write-ups.
MBI:
Yes. I think that'd be great. I appreciate conversation and to do it some point again. Maybe I'll be the first person to be the third guest on your podcast.
Liberty:
Well, you're in the lead, so there's a good chance. Have a good day, man. Bye-bye.
MBI:
Yeah, you too. Bye.
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