Credit Card Processing is a Hard Business
blog.zactownsend.com
blog.zactownsend.com
You say payments processing is a hard business - mostly because margins are commodity unlike software business where margin is exponential. This is an apples/oranges comparison
If one is evaluating startups/enterprises how does one determine market value ? Mostly by growth potential and the profit margin. However before profit margin there needs to be growth
In a startup there are 3 basic ways - either ad based - need to have 10s of millions before one can start monetizing, freemium - need to have millions before any significant monetization or transaction based where the very first user/customer makes the startup "post-revenue". Doing a payments startup negates the question "how/how much will you monetize" to simply "how will you scale" This reduces the startup problem by an order.
Add to this equation that payments defies that standard dictum of entrepreneurship i.e. "if I can only get 1% of the total pie I'll be a billion dollar company" In payments if one gets 1% of of the total pie it is indeed a multi-billion dollar company e.g. Paypal at ~$150B/year annual volume is less than 1% of total ACH volume and only about 2% of total VISA/MC volume
In short payments is a volume business and if done right volumes can get high very quickly and hence valuation can increase equally quickly. As for the long term growth potential witness VISA and Mastercard still doing a good 14-16% CAGR in the past 20 years after being founded 40 years back. Certainly "long term" wouldn't you agree ?
And now about profit margins: Do you know the size of the "interchange pie" - even with Durbin amendment and Debit becoming low cost, its still more than $150B/year. That's greater than the entire semiconductor revenue industry combined. Traditionally large processors e.g. FDC etc. have not been able to intermediate themselves to threaten the interchange monopoly of banks but with online space volume increasing exponentially its possible for an online 3rd party processor to get big enough in size to eventually challenge status quo. The valuation of such a company particularly if it can intermediate itself to become a consumer brand could be as high as the next google.
That being said, the margins are low no matter how you slice it. It's hard to run a business on thirty or forty bps, before risk and marketing. And, recall that PayPal almost collapsed because of risk.
It's a volume business as you say and you need a ton of volume for it to make sense. I am not saying that Stripe, Braintree, Balanced, etc, are bad businesses. In fact, I think they're very impressive exactly because they operate in an extremely tough, highly competitive, razor-thin margin business.
It's interesting that you point to PayPal in the way you do. I would agree that they have a small part of the ACH and card networks. I would also argue that the parts that they do have are very lucrative. They make the vast majority of their money through charging too much for ACH and through their foreign exchange fee. Ultimately, most of the ACH network's transactions aren't going to go through third parties no matter what you do.
Comparing the growth potential of an independent sales organization like Braintree and Stripe with a card network like VISA or Mastercard is an apples/oranges comparison. If you can create a payments network that meets the three criterion for a a good system - ubiquitous, perceived to be secure, and successfully transmits value - then god bless. I think you'll have 14-16% CAGR. I'm not sure anyone can do that though - and many have tried. I'll eat my words by being so categorical but talk about a schlep business.
I think you're absolutely correct that if a processor could intermediate itself and become a consumer brand, that it could be the next Google. In general I am skeptical that one company will win. I think there will be a ton of large, public, companies in this space but between different processors, pay by GMail, Square moving in to this space, MasterCard's Simplify, etc, I am not sure that there will exist a monolithic winner that will get to that size.
You've added the caveat (and it's appreciated) but saying someone/something is the best at anything is a tall, tall order. Never align yourself to a tech, service or company so much that you miss anything else on the horizon.
Stripe rocks.
Documentation, interface, team, vision, customer service etc, it's all a notch above the expected. If there ever was a company that I wished that I could have invested in early stage this was it. Dropbox, Airbnb & Heroku are all great companies, Stripe has the potential to be an awesome company (no offence to Dropbox, Airbnb & Heroku intended).
That I like the founders on top of all that makes it an even better story, what's not to like about Patrick & John?
Stripe is a story worth knowing about, even if you're not in the payment industry, this is how you do a start-up tackling a tough problem.
Recognizing one's merits while disregarding another's merit (whether by malice or ignorance) has similar effects to just undeservingly trashing a company.
However, there are others doing similar work that deserve similar accolades. Balanced is one example. I think the work that Square and now Shopify are doing in the POS space is laudable.
It's just a matter of seeing the forest through the trees. Stripe is a big tree, obscuring a lot at the moment (with good reason) but it behooves us to continually look around and find new opportunities lest the entrenchment of companies like Paypal take root again.
A small bug or issue can have severe financial consequences! For the party that is impacted: merchant, bank, processor and clients.