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May 22, 2021

Finance – Marqeta IPO

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The $MQ ticker is about to go live in June and investors are hoping the share price gets marked-up, as another Fintech disruptor goes public in 2021. We take a look at some of the business-model data in Marqeta’s S-1 to better understand the details of how the company expects to make money now and into the future.

None of the below should be construed as advice. The information is presented for analytical purposes only. All data taken from Marqeta S-1 unless otherwise linked.

Unlike many of the other recent consumer-facing Fintechs to list publicly, Marqeta is a next-generation infrastructure play, a combination of physical and digital debit cards (with credit cards now in the mix as well) connected to a ‘modernized’ digital payments infrastructure. They create a platform and APIs for other digital platforms to issue virtual/physical cards and process transactions.

The company was launched in 2010 and is now used to power the payments infrastructure of innovative companies like Square, Uber, Instacart, DoorDash, Klarna and Affirm, among others.

Marqeta S-1 – Page 105

One of the features that has differentiated Marqeta from other companies in the market is the creation of their card-issuing API, allowing companies to issue virtual debit cards. Their product consists of Marqeta Issuing, Marqeta Processing, and Marqeta Applications.

Marqeta S-1

In the upcoming IPO, the company is raising $100 Million for expenses related to “acquiring new Customers, developing its brand, expanding into new geographies, developing the existing Platform infrastructure, and creating new products for Customers.” In other words, Platform R&D and international expansion.

The valuation of the company has not been finalized, but according to some speculation online it could list in the $16-$17 Billion range. That would be an exponential 4X markup on its last valuation at $4.3 Billion back in May of 2020 when the company raised $150 Million privately from a U.S. institutional investor.

The lofty expectations being placed on the Fintech infrastructure company can be attributed to the fact that even after its exponential growth over the last year or two, they still only account for <1% of transaction volume in the U.S.

In 2020, the Marqeta Platform processed $60.1 billion of volume. This is less than 1% of the annual $6.7 trillion of transaction volume conducted through U.S. issuers in 2020, as estimated by The Nilson Report.

Marqeta S-1 – Page 8

With the likes of Square, Klarna, DoorDash, N26, Uber and others as their clients, Marqeta makes more money as their clients’ platforms scale-up (usage-based pricing model).

The Marqeta Business Model

Business Model Canvas – Payments

Marqeta earns the majority of its revenue from interchange fees related to the payment processing volume of its user base.

Marqeta S-1

Up until recently, all of Marqeta’s transaction volume has been linked to debit cards, which earn a significantly lower fee than credit cards. Marqeta has recently added credit cards to its API, which will enable them to earn higher interchange fees in the future as more of their platform partners’ customers use credit cards. One advantage for Marqeta in the debit interchange fee market has been their partnership with exempt banks in the US, enabling them to earn higher fees per debit transaction.

The amount a bank can earn on interchange fees is subject to Dodd-Frank regulation called the Durbin Amendment, which limits debit fees that larger banks can charge. However, banks with less than $10 billion in deposits are exempt from those restrictions. Marqeta noted that it currently only partners with exempt banks — including its major partner, Sutton Bank — meaning it can earn the higher rates on swipe fees.

Business Insider

Across the more than 300M card users that leverage Marqeta’s technology, the company processed $60.1B in Total Payments Volume (TPV) in 2020, which was up 177% from 2019 due to the digital-payments acceleration brought on by the pandemic. On that volume, the company earned $290.3M in revenue in 2020, a Take Rate of 0.48%.

Marqeta S-1 – TPV Growth, Page 72

Their own take rate is highly dependent on customer mix and the nature of transactions (card present vs not present, commercial vs retail) as is seen in their take rate dropping from 0.66% to 0.48%.

Marqeta S-1 Teardown

The company’s Take Rate is consistent with other Payment Processors, whereby the interchange fee (whether through debit or credit) is split with the Card Networks (Visa, Mastercard, etc.) and the Issuing Bank (the consumer’s bank) among other parties.

While the company’s principle revenue stream is interchange fees, they also generate revenue through other ‘processing services,’ defined as “monthly platform access, ATM fees, fraud monitoring, and tokenization services.

While the company serves many notable and fast-growing platforms, as noted above, 70% of the company’s 2020 revenue came from Square, including from its Cash App and seller cards. The Revenue Share agreement with Square is tiered based on volume – “The Revenue Share provisions include increased rates of Revenue Share when processing volumes reach specified volume tiers” – meaning that Marqeta makes more revenue as their clients’ volume scales (usage-based pricing). Equally, the relationship with each client is different, meaning there will be different Take Rates for different platforms depending on a variety of factors.

Via Twitter

Despite impressive growth on all levels in 2020, the company still swung to a Net Loss of roughly $47.7M in 2020, down from $58.2M in 2019. Gross Margin declined marginally in 2020 to 40.6% from 42.1% in 2019.

Marqeta S-1 – Page 70

In Marqeta’s case, the lion’s share of their ‘Cost of Revenue‘ is related to Card Networks. They pay the Issuing Banks a fixed fee for the service, while Marqeta itself keeps the revenue processed through its Partner bank (Sutton Bank) minus a small fee.

Costs of revenue consist of Card Network costs, Issuing Bank costs, and card fulfillment costs. Card Network costs are generally equal to a specified percentage of the processing volume or a fixed amount per transaction processed through the respective Card Network.

Marqeta S-1

MARQETA S-1 – Card Network Fees, Page 80

In 2020, on a Cost of Revenue of $172.385M, $145.617M (84.5%) of that was to Card Networks, while $19.785M (11.5%) was to Issuing Banks, with the the rest $6.983M (4.0%) was from Other.

As seen above, the majority of their Operating Expenses are labelled as ‘Compensation and Benefits,’ making it challenging to breakout how the expenses are categorized on a functional basis. Beyond that, the major expense is ‘Technology,’ which makes sense since their technology platform is their major asset and source of competitive advantage. ‘Marketing and Advertising’ represents a very small % of their expenses.

Personnel is the other main cost item at 45% of revenue (~500 employees, of which 80 were salespeople)

Marqeta S-1 Teardown

Overall, Marqeta’s business model is fairly typical of a Payment Processor with their success linked to the TPV (Total Payments Volume) of their collective user base (320M currently) and corresponding Take Rate (0.48% in 2020).

Payment Processing Market Dynamics

>Marqeta does not compete with the Card Networks (Visa, Mastercard, Discovery). In fact, both Visa (2017) and Mastercard (2020) have invested in Marqeta. Marqeta brands itself as a Payment Processing platform in the “modern payments ecosystem”

Marqeta S-1 – Page 106

>Their competition, according to the S-1, comes from a mix of legacy Payment Processors like Fiserv and FIS, and digital Payment Processors like Adyen and Stripe

When it comes to competition, Marqeta named infrastructure giants Global Payments, Fiserv, and FIS, fintechs like Adyen and Stripe, and players like Comdata and Wex, which target the trucking industry.

BUSINESS INSIDER

Business Model Canvas – Payments

>The big-picture global payments market is huge. $30T+ in value are exchanged in value every year across card networks, both debit and credit, which are roughly equally split on a volume-basis in the U.S. market. Credit cards earn much higher fees (interchange fee of 2 – 3%) however. Of the $6.7T card volume processed across debit and credit cards in 2020, Marqeta’s volume was less than 1% of that, showing the size of the opportunity that lays ahead for them

Euromonitor projects that global money movement will exceed $74 trillion in 2021, representing approximately 4 trillion individual payment transactions. The Nilson Report estimates that in 2019, approximately one-tenth of these transactions was carried out across global network cards, representing approximately $30 trillion of value exchanged. In 2020, the Marqeta Platform processed $60.1 billion of volume. This is less than 1% of the annual $6.7 trillion of transaction volume conducted through U.S. issuers in 2020, as estimated by The Nilson Report.

Marqeta S-1 – Page 114

>Overall, this market is still nascent in the digital infrastructure sense for Fintechs. A lot of the transaction volume goes through legacy software platforms developed by Incumbents whose Market Caps are generally > $75B. The challenge is the fragmentation of the Payments ecosystem and the rapidly increasing competition

Business Model Analytics

>One of the graphics Marqeta presented in their S-1 was the Cohort growth based on TPV. As Square represents ~70% of Marqeta’s volume, we can see how this type of graphic can play out in the long-term in relation to the Marqeta business model. They develop long-term customers whose growth can scale exponentially, which is turn benefits Marqeta on both the top and bottom line

Marqeta S-1 – TPV by Cohort, Page 73

>On the flip side, this type of concentration risk can have downside if the particular platform itself doesn’t grow at similar rates, or worse starts to decline. As a comparison to Galileo (owned by SoFi), which offers a similar service, we can see how the concentration risk between the two platforms differs

Via Twitter

>Where Marqeta may begin to differentiate itself is through product innovation, where it can sell new products – like JIT (Just-In-Time) Funding for example – to its current customer base. In this way, they can create revenue streams and sell them to their current customer base without needing to compete at the margins with other players in the industry

Using Marqeta’s industry-first JIT Funding functionality, Customers can programmatically authorize and fund each transaction while participating in the approval decision in real time, freeing up capital and increasing cash flow.

Marqeta S-1 – Page 110

$MQ Overall Sentiment

With all the hype in markets over the last year – especially in Fintech – Marqeta has been a story that has developed under the radar due to the fact that it is an ‘infrastructure’ play on modernizing financial services, rather than a sexy consumer play.

While the company hasn’t received the press and attention of many of its front-facing Fintech peers – many of whom are Marqeta clients – the company’s valuation has exploded. From a valuation of $2 Billion on a $260 Million raise in May of 2019, to a valuation of $4.3 Billion on a $150 Million raise in May of 2020, to now a prospective valuation of $16 – $17 Billion on a raise of $100 Million in 2021.

Marqeta’s most recent fundraise came at a $4.2B valuation. However, shares have been trading in secondary markets at $33-$35 per share, implying a valuation of ~$16-17B. At a current median ~20X NTM revenue multiple for high growth SaaS2, the implied valuation assuming 100% y/y revenue growth rate would be ~$12-13B.

Marqeta S-1 Teardown

The company is no doubt a pioneer and market-leading innovator in digital-payments infrastructure. The major competing platform mentioned above – Galileo – was acquired for $1.2 Billion by SoFi in April of 2020. Marqeta has almost 5X the number of users (320M vs. 70M), which puts it in a dominant market position that should enable it to continue to scale their platform rapidly, especially into international markets, which account for less than 2% of their revenue currently.

The question will remain more around valuation and the company’s ability to grow in a way that becomes profitable. In an era of “disruption” across the Financial Services ecosystem, seizing market share has been the top priority over the last several years. In what has already been a record year for Fintech IPOs, Marqeta will be another growth name that lists publicly during a period when investors are starting to rebalance their expectations of growth vs. profitability.

The major banks have seen market share being eroded in many of their top revenue-generating business units, with Payment Processing (which accounts for 39% of bank’s revenue globally) at the top of that list. While Marqeta is backed by one of the biggest banks in the world, not all banks will be equally happy with the rise of the fast-growing, digital-first Fintechs. That’s why it seems like the market is at the point where banks will likely need to tilt their strategy towards M&A, which will in turn create a market that pushes companies like Marqeta to innovate even more rapidly and potentially even engage in M&A themselves now that they will be public.

In addition, there has been a recent increase in large merger and acquisition transactions in the payments industry, and future mergers and acquisitions by these companies may lead to even larger competitors with more resources.

Marqeta S-1 – Page 24

Marqeta notes in their S-1 that the additional funding gives them “greater resources to make acquisitions and investments,” and it is likely that this will play out in the mid-term as competition in payment processing and retail banking heats up.

Overall, the short-term performance of the soon-to-be-launched Marqeta ($MQ) stock remains to be seen given the rapid growth the company has seen in its valuation in the last year. But overall, the IPO is likely only the beginning for the company, as Fintech infrastructure shifts more permanently to digitization and competition heats up across the Payment Processing industry.

None of the above should be construed as advice. The information is presented for analytical purposes only. All data taken from Marqeta S-1 unless otherwise linked.

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