4 ms·

The real question is, how do any of these companies (payment service providers) get to be worth more than a few billion? It's obviously an extremely low margin

by s17n 3y ago

The real question is, how do any of these companies (payment service providers) get to be worth more than a few billion? It's obviously an extremely low margin commodity business in the long run; this miss is only the beginning.

ralph84 3y ago
Low margin is fine if you process $trillions like Visa. Investors are betting on who will be the next Visa.
- lotsofpulp 3y ago
  Payment gateways / payment service providers are not in the same business as Visa. https://www.macrotrends.net/stocks/charts/V/visa/profit-margins https://www.macrotrends.net/stocks/charts/V/visa/profit-marg... Visa is a network, with network effects that cannot be substituted, hence their enormous profit margins. Visa's competitors would be other networks like Mastercard, AmEx, Discover, JCB, China UnionPay, etc.
  - toomuchtodo 3y ago
    > Visa's competitors would be other networks like Mastercard, AmEx, Discover, JCB, China UnionPay, etc. Or FedNow in the US. I've heard lots of payments folks shrug this off, but the evidence from PIX in Brazil and UPI in India is that it decimates credit card rail revenue. If you can process a payment up to $100k, $500k, etc for ~5 cents a transaction, I'm definitely not going to eat 3-5% as a merchant. Margins will compress as system participants coalesce around a utility at utility pricing. https://bfsi.economictimes.indiatimes.com/news/fintech/brazils-pix-payment-system-surpasses-credit-and-debit-card-transactions-in-q1/102221920 https://bfsi.economictimes.indiatimes.com/news/fintech/brazi...
    - lotsofpulp 3y ago
      Ideally, but investors in the market do not seem worried based on share price movements for the aforementioned businesses.
      - toomuchtodo 3y ago
        Voting machine, weighing machine, all that jazz. Lots of unsophisticated money out there. Tell me about the investing prowess of Masayoshi Son or the Saudi sovereign fund. If you want to hear the gods laugh, tell them your valuation and projections.
    - nightski 3y ago
      Speed of payment wasn't really the issue though? I mean after all credit cards take multiple days to post. They tackle a lot more than just speed.
      - toomuchtodo 3y ago
        There is a credit and fraud component, for sure, but fundamentally credit card rails are used when someone wants to know the person presenting a card is good for the funds. Successful auth? High confidence funds will settle assuming no fraud exceptions, etc. Fraud mitigations and credit can still be provided by other mechanisms in an instant payment system (based on how the other 54 instant payment systems in the world operate). Payers who don't need fraud protections can make payments without it, payers who do can pay an additional fee for it (or rely on the legal system for that capability, as we do for cash, checks, wires, and other non credit card value transfer mechanisms).
        deleted 3y ago
        [deleted]
        deleted 3y ago
        [deleted]
    - TylerE 3y ago
      As a customer, you're going to have to cut your prices MORE than 3-5% for me to give up the fraud protection. Like, maybe 10% gets me to think about it, but probably not for very long.
      - toomuchtodo 3y ago
        There is some nuance. Merchants are permitted to surcharge credit card fees, pushing them on to the customer. Some of course will pay this fee for the fraud protection, but large merchants (like Walmart, who publicly commented on these fees as part of the FedNow comment period [1]), will push customers towards the cheaper rails. Incentives, like discounts, matter, especially at volume. There are some merchants I'd absolutely want the fraud protection for, but most merchants I interact with I'm fine without and not paying a credit card fee pushed on to me to have. People drive miles to save a few cents on gas, so 3% savings is not trivial to a lot of folks. I admit it'll be an interesting natural experiment to see how volume shifts across systems, but UPI and PIX provide some evidence as to how it'll play out. [1] https://news.ycombinator.com/item?id=36012866 https://news.ycombinator.com/item?id=36012866 > Walmart has observed a severe misalignment of incentives that has plagued the payments system in the United States for decades. Certain incumbents and large participants enjoy massive profits by stifling innovation in payments, ensuring that account access is limited to a small number of networks, and perpetuating barriers to entry for alternative solutions. Controlling this access allows the dominant players to extract rents from other payments system participants, ultimately resulting in higher costs for all consumers, particularly consumers who are unbanked or underbanked.
- fauigerzigerk 3y ago
  Margin is a share of revenue and these trillions are not revenue for payment processors or card schemes. Also, of all the companies mentioned only Paypal actually competes with Visa.
Workaccount2 3y ago
They use AI and machine learning? Hello?
codexb 3y ago
They have access to non-anonymized sales data.
- doctorpangloss 3y ago
  It’s insane to me how much money is sloshed around data that is given away by Valve for Steam completely for free. Investors don’t comprehend that on timeframes that matter, data is the opposite of a moat.
hibikir 3y ago
People always think of these companies as if all they were doing was simple credit card processing, delegating a lot to a bank. If that was the case, then yes, they are commodities with no moat. Reality is far more complicated. It's not that a large merchant needs to support one payment type for one country: They need a collection of payment types that work on each country, without having to dedicate engineering to every single one. For companies that are marketplaces, like Amazon or Uber, you need to have payments, both ways, including onboarding. And for online companies, there's the shadow of fraud: Not just fraudulent purchases, or card testing, but, as a marketplace, fake merchants. And the larger your payment company is, the easier it is to do good fraud detection. When you put it all together, the amount of engineering effort those companies are saving you vs 'use bitcoin LOL' is enormous. And instead of shrinking every year, it's growing. So, for instance, see how Amazon decided that maybe they wanted to do fewer payments in house, and have Stripe manage it for them. It's not as if Amazon lacks engineering capacity, or if they started without a payment system: It's that there's a bunch of value there, and they thought that it'd be more profitable to delegate more and more of the system to one of those not-so-commodity businesses. But yes, if all you needed was the simplest payments, in a lone jurisdiction, it's a low margin business. The moat is elsewhere.
- Retric 3y ago
  Covering more countries isn’t a 20+ billion dollar moat. There’s plenty of room in the market but people are going to be competing head to head not safe behind a giant moat.
- Johnie 3y ago
  This guy Payments.
- s17n 3y ago
  I'm not saying that what Stripe, Paypal, Adyen, etc do isn't a lot of work, I just don't see how there's a moat there. For example I'd be shocked if the Amazon deal wasn't on terms that basically give Stripe very little profit - like you said, Amazon is capable of doing it themselves, it would only cost them XX million worth of engineering salaries, and Jeff Bezos isn't known for giving away money. Fraud detection on the other hand I'd believe could be a very high margin business, the "moat" being proprietary techniques that perform better than the competition, better data (as you mentioned), etc. However I've never heard anybody sing the praises of any of these platforms' fraud detection products - is that really where they are making their money?
WeylandYutani 3y ago
Low margin of all internet retail is still a lot.

by s17n 3y ago

ralph84 3y ago

Low margin is fine if you process $trillions like Visa. Investors are betting on who will be the next Visa.

lotsofpulp 3y ago
Payment gateways / payment service providers are not in the same business as Visa. https://www.macrotrends.net/stocks/charts/V/visa/profit-margins https://www.macrotrends.net/stocks/charts/V/visa/profit-marg... Visa is a network, with network effects that cannot be substituted, hence their enormous profit margins. Visa's competitors would be other networks like Mastercard, AmEx, Discover, JCB, China UnionPay, etc.
- toomuchtodo 3y ago
  > Visa's competitors would be other networks like Mastercard, AmEx, Discover, JCB, China UnionPay, etc. Or FedNow in the US. I've heard lots of payments folks shrug this off, but the evidence from PIX in Brazil and UPI in India is that it decimates credit card rail revenue. If you can process a payment up to $100k, $500k, etc for ~5 cents a transaction, I'm definitely not going to eat 3-5% as a merchant. Margins will compress as system participants coalesce around a utility at utility pricing. https://bfsi.economictimes.indiatimes.com/news/fintech/brazils-pix-payment-system-surpasses-credit-and-debit-card-transactions-in-q1/102221920 https://bfsi.economictimes.indiatimes.com/news/fintech/brazi...
  - lotsofpulp 3y ago
    Ideally, but investors in the market do not seem worried based on share price movements for the aforementioned businesses.
    - toomuchtodo 3y ago
      Voting machine, weighing machine, all that jazz. Lots of unsophisticated money out there. Tell me about the investing prowess of Masayoshi Son or the Saudi sovereign fund. If you want to hear the gods laugh, tell them your valuation and projections.
  - nightski 3y ago
    Speed of payment wasn't really the issue though? I mean after all credit cards take multiple days to post. They tackle a lot more than just speed.
    - toomuchtodo 3y ago
      There is a credit and fraud component, for sure, but fundamentally credit card rails are used when someone wants to know the person presenting a card is good for the funds. Successful auth? High confidence funds will settle assuming no fraud exceptions, etc. Fraud mitigations and credit can still be provided by other mechanisms in an instant payment system (based on how the other 54 instant payment systems in the world operate). Payers who don't need fraud protections can make payments without it, payers who do can pay an additional fee for it (or rely on the legal system for that capability, as we do for cash, checks, wires, and other non credit card value transfer mechanisms).
      - deleted 3y ago
        [deleted]
      - deleted 3y ago
        [deleted]
  - TylerE 3y ago
    As a customer, you're going to have to cut your prices MORE than 3-5% for me to give up the fraud protection. Like, maybe 10% gets me to think about it, but probably not for very long.
    - toomuchtodo 3y ago
      There is some nuance. Merchants are permitted to surcharge credit card fees, pushing them on to the customer. Some of course will pay this fee for the fraud protection, but large merchants (like Walmart, who publicly commented on these fees as part of the FedNow comment period [1]), will push customers towards the cheaper rails. Incentives, like discounts, matter, especially at volume. There are some merchants I'd absolutely want the fraud protection for, but most merchants I interact with I'm fine without and not paying a credit card fee pushed on to me to have. People drive miles to save a few cents on gas, so 3% savings is not trivial to a lot of folks. I admit it'll be an interesting natural experiment to see how volume shifts across systems, but UPI and PIX provide some evidence as to how it'll play out. [1] https://news.ycombinator.com/item?id=36012866 https://news.ycombinator.com/item?id=36012866 > Walmart has observed a severe misalignment of incentives that has plagued the payments system in the United States for decades. Certain incumbents and large participants enjoy massive profits by stifling innovation in payments, ensuring that account access is limited to a small number of networks, and perpetuating barriers to entry for alternative solutions. Controlling this access allows the dominant players to extract rents from other payments system participants, ultimately resulting in higher costs for all consumers, particularly consumers who are unbanked or underbanked.
fauigerzigerk 3y ago
Margin is a share of revenue and these trillions are not revenue for payment processors or card schemes. Also, of all the companies mentioned only Paypal actually competes with Visa.

Workaccount2 3y ago

They use AI and machine learning? Hello?

codexb 3y ago

They have access to non-anonymized sales data.

doctorpangloss 3y ago
It’s insane to me how much money is sloshed around data that is given away by Valve for Steam completely for free. Investors don’t comprehend that on timeframes that matter, data is the opposite of a moat.

hibikir 3y ago

People always think of these companies as if all they were doing was simple credit card processing, delegating a lot to a bank. If that was the case, then yes, they are commodities with no moat. Reality is far more complicated. It's not that a large merchant needs to support one payment type for one country: They need a collection of payment types that work on each country, without having to dedicate engineering to every single one. For companies that are marketplaces, like Amazon or Uber, you need to have payments, both ways, including onboarding. And for online companies, there's the shadow of fraud: Not just fraudulent purchases, or card testing, but, as a marketplace, fake merchants. And the larger your payment company is, the easier it is to do good fraud detection. When you put it all together, the amount of engineering effort those companies are saving you vs 'use bitcoin LOL' is enormous. And instead of shrinking every year, it's growing. So, for instance, see how Amazon decided that maybe they wanted to do fewer payments in house, and have Stripe manage it for them. It's not as if Amazon lacks engineering capacity, or if they started without a payment system: It's that there's a bunch of value there, and they thought that it'd be more profitable to delegate more and more of the system to one of those not-so-commodity businesses. But yes, if all you needed was the simplest payments, in a lone jurisdiction, it's a low margin business. The moat is elsewhere.

Retric 3y ago
Covering more countries isn’t a 20+ billion dollar moat. There’s plenty of room in the market but people are going to be competing head to head not safe behind a giant moat.
Johnie 3y ago
This guy Payments.
s17n 3y ago
I'm not saying that what Stripe, Paypal, Adyen, etc do isn't a lot of work, I just don't see how there's a moat there. For example I'd be shocked if the Amazon deal wasn't on terms that basically give Stripe very little profit - like you said, Amazon is capable of doing it themselves, it would only cost them XX million worth of engineering salaries, and Jeff Bezos isn't known for giving away money. Fraud detection on the other hand I'd believe could be a very high margin business, the "moat" being proprietary techniques that perform better than the competition, better data (as you mentioned), etc. However I've never heard anybody sing the praises of any of these platforms' fraud detection products - is that really where they are making their money?

WeylandYutani 3y ago

Low margin of all internet retail is still a lot.