Marqeta Files for IPO

Marqeta, a fintech that makes it easy for software companies to issue credit cards, filed to go public.  There are already good S-1 teardowns available here and here.  As a result, I’m not going to focus on the financials, I’m going to focus on two things:

• Describing in more detail the types of transactions Marqeta supports and
• Drilling down on the unit economics of the business

Marqeta: A Modern Credit Card Issuing Platform

Unless you are deep into payments, you may be wondering why the world needs new ways to issue credit cards.  After all, most banks issue cards of all kinds with the help of giant issuer/processors such as Global Payments (TSYS), Fiserv (First Data), and FIS.  But that is precisely the problem.  Those are giant, legacy companies not known for their technology and nimble adoption of APIs.

Marqeta has built a platform that allows software companies to issue credit cards without having to deal with the banks, networks, and legacy companies.  And that’s a godsend if you have a unique payment use case as many software companies do these days.

Marqeta Use Cases:  DoorDash and Instacart

Marqueta’s customers such as Klarna, DoorDash, and Instacart share a common theme in their use cases: a multitude of parties are involved in the flow of funds.  The company’s use cases involve much more than just a merchant and consumer.

1.  Consider a DoorDash transaction.  There’s you (the consumer), the restaurant you are ordering from, DoorDash, and a driver who is a gig worker.  (And don’t forget the transaction may also include a tip that is supposed to go directly to the gig worker.)  Your money has to flow through that system accurately and without fraud. The DoorDash delivery person uses a DoorDash branded (Marqeta-powered), zero balance debit card at the restaurant.  When the card is swiped, the network sends a signal to Marqeta. Marqeta only approves and funds the transaction if it matches what is in DoorDash’s system and is coming from the right restaurant.  The card is then funded on a just-in-time basis.   (Marqeta adds other fraud protection capabilities as well.  The company can also use tokenized virtual cards.)
2. An Instacart transaction has many similarities.  Again, there’s you, Instacart, a retailer, and a gig worker all involved.  (And again some controversy regarding tips that are supposed to go to the worker!)

Marqeta’s Main Use Cases:  Square

The company’s main use cases are with Square.  Square accounts for a whopping 70% of Marqeta’s revenue.  Square uses Marqeta in two ways:

a.  A merchant who uses Square to accept payments gets a free Square Card that acts as a Mastercard Debit card.  Once a merchant receives payment in their Square account, the merchant can use those funds immediately using the card.  Otherwise, the merchant would need to wait 1-2 days for funds to transfer to their bank account. Voila, slightly better cash flow on the cheap.

b.  Square also owns Cash App the peer-to-peer money transfer that competes with Venmo (PayPal) and bank-owned Zelle.  Cash App offers a Marqeta-powered Visa Cash Card which can be used physically, or virtually, to make payments in-store or online from the Cash App account.  Cash App also uses Marqeta functionality for consumers to make ACH payments or receive direct deposits.

Marqeta’s Revenue Sources

So that’s what Marqeta does, but how does the company make money?  Marqeta has three sources of revenue:

1. 80% of revenue comes from net interchange fees. (It is a usage-based model.)  Interchange fees are transaction-based and volume-based fees set by the card networks and paid by an Acquiring Bank to the Issuing Bank that issued the payment card used to purchase goods or services from a merchant.

You would be right to ask, “Who is the issuing bank in this case?”   The answer is Sutton Bank, a bank you have never heard of.  But Sutton Bank has two important characteristics (among others I’m sure):

• In return for a small fee, Sutton Bank agreed to provide all of the interchange to Marqeta and
• Sutton Bank is small enough to be exempt from government regulations limiting the amount of interchange it can charge on debit transactions.  (It’s a long and sordid tale.)

You would also be right to ask “Why is it called net interchange?” It’s called “net” because Marqeta shares some of the interchange with its software company clients.  In fact, the more these companies process through Marqeta products, the greater the share of interchange they receive.  Remember, software companies want into payments for a reason!!

2.  Approximately 17% of Marqeta revenue comes from processing and other fees.  These are monthly fees to access the platform, ATM fees (generated when customers use their cards to withdraw money), fraud monitoring, and tokenization services.

3.  Finally, and somewhat quaintly, Marqeta derives approximately 3% of revenue from fulfilling physical cards for their clients!

Breaking Down the Transaction Economics

Perhaps the most fascinating aspect of Marqeta’s S-1 is the insight it gives us into how transaction fees and revenues are shared between various parties.

Marqeta tells us that the company had 57 million active cards in 2020 which processed 1.6 billion transactions representing $60.1 billion in total payment volume (TPV).  (That’s 28 transactions per card per year and an average of $37.50 per transaction.)  On this $60.1 billion TPV Marqeta:

• Earned net interchange of about 39 bps (36 bps in the 3 months ended March 31, 2021)
• Paid Sutton Bank 3 bps
• Paid the card networks 24 bps (21 bps in the latest 3 months)

Determining how much interchange Marqeta shares with its customers is a less exact science.   But given that exempt debit averages about 140 bps in total interchange (and looking at the revenue share payables on Marqeta’s balance sheet), I’m estimating that Marqeta’s customers receive 75-80 bps of the interchange.  That makes the whole picture look something like this:

 

Summary

Marqeta is a great company, but it has a lot of customer concentration risk and the competition is coming.  Adyen and Stripe are coming from the acquiring side of the credit card world to the issuing side.   The legacy players might be waking up, and vertical players like WEX and Fleetcor are still around.  It will be important to watch if the software customers are able to squeeze more and more of the interchange out of Marqeta and into their pockets.  This has certainly happened with large buyers in the commercial card market.