We field a TON of calls from investors.
In fact, if you asked us to stick our finger in the air, we’d estimate that 90% of our readers are those deploying capital.
The next largest cohort are founders and data people.
And like 5 of the readers are merchants, because that demographic categorically does not self-discover anything.
One of the consistent disbeliefs from investors is how the sausage is made at legacy payment companies.
“What do you mean they aren’t growing organically?”
“How can they just increase fees?”
“You’re sure you’re not just talking about some small phenomenon in their portfolio?”
Dude.
Do you even know how payments work?
In an effort to teach-a-man-to-fish and avoid repeating ourselves 1,000 times, let’s start with the basics:
THERE IS NO PRODUCT IN PAYMENTS.
Unlike any other industry where you have to invest a ton of time and money to uncover pain and solve a problem, payments processing requires nothing of the sort.
Plug into one of the two duopolies (Visa and Mastercard, often through an arm’s length relationship with one of the large, legacy processors) and make money.
That’s it.
The only required investment is your time to do sales, which is about as capital-light as any startup could possibly be.
In fact, in the 1990’s and early 2000’s it was so easy that people who would never make it through the first rounds of an ibanking or consulting interview wound up centi-millionaires and billionaires.
Then software involved itself the 2000’s and ruined it for payments people who couldn’t spell R&D.
Now for the problem… at least for the old school payments companies.
Payments was built on sales.
Good, ol’ fashioned door-to-door sales.
But when software verticalizes payments, you can’t sell into those accounts anymore (except you actually can, but this software tool is in closed beta and will be announced later).
So the payments companies that were relying on knuckle-draggers to fleece mom and pops notice that they can’t close new deals.
And the merchants they do have are now starting to source payments from their software, which the payments company doesn’t offer.
The first reaction from these payments companies was to lure software companies to work with them as their payments provider.
But turns out competing with a payments company that spends literal billions a year in R&D (Stripe, Adyen) is practically impossible.
So what do you do?
You turn the crank on your existing customers.
There are smart ways to turn the crank and dumb ways to turn the crank.
The smart way is to cohort merchants, increase rates/fees/revenue, measure the results, make adjustments, and go on to the next cohort.
But this is too much work for a payments bro.
So they indiscriminately increase fees across their entire portfolio as necessary to make their numbers.
Sure, some will leave (but very, very few since merchants love to sign things without understanding what they’re signing), but the ones that stay will more than make up for the ones the leave.
Here’s some simple math.
100 merchants each do $1 a year in GPV.
You charge these merchants 1% in payments margin.
So $100 GPV -> $1 payments margin.
Time to make the quarter and you’ve not signed any new accounts.
Anyone with a vestige of morality would figure out how to increase customer value to drive not only new customers, but more business from existing ones.
LOLz.
How idealistic.
That’s not how payments works.
What the payments company does is add a 40 bps fee.
Now these 100 merchants are slated to pay you $1.40 annually assuming all of them stay and GPV doesn’t change.
Well, 4 merchants see their rates go up and leave.
GPV falls from $100 to $96.
But guess what?
We’re making 1.4% on that $96.
Revenue goes from $1 to $1.34.
That’s value, baby!
You can bet your ass this is what every. legacy. payments. company. does. to make numbers.
The math is so infallible, in fact, that it’s the entire thesis behind Shift4 and Global Payments:
- Buy software company that has “undermonitized” payments
- Attach payments and jack up rates
- Some merchants leave, but the ones that stay pay back the acquisition in < 24 months
- EV of the asset on a go-forward basis is now ~8x what you paid for it since payments = 100% EBITDA
What’s never been practically and systematically put to the test is a class claim of tortious interference here: can these processors legally crank fees like this with absolute impunity?
Not sure.
But a reasonably intelligent 14-year old can run the playbook that the legacy payment companies execute.
Fiserv.
Global.
Nuvei.
Paysafe.
Shift4.
Worldpay.
And if that reasonably intelligent 14-year old happened to be in payments in the 1990’s and early 2000’s, they’d be wealthy enough to fly into orbit today.
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