What Fintechs does Marqeta power?
Square and Klarna to name a few.
The $MQ ticker went live in June, 2021 and investors are hoping the share price gets marked-up, as another Fintech disruptor opened its books to the public.
Marqeta Business Model
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
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
- Marqeta Applications
In the IPO, the company raised $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.”
The valuation of the company was floated around the $15 billion range. That was an exponential 3-4X 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
How Does Marqeta Make Money?
Marqeta earns the majority of its revenue from interchange fees related to the payment processing volume of its user base.
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%.
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%.
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.“
Marqeta serves many notable and fast-growing platforms, as noted above; yet consistent with Power Laws, 70% of the company’s 2020 revenue came from Square, including from its Cash App and seller cards.
Marqeta Agreement with Square
Marqeta P&L Leading to IPO (2021)
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
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).
Marqeta Competition & The Market Opportunity
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”
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
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.