8 ms·

Credit Card Processing is a Hard Business

87 points by zt 13y ago

pdsull 13y ago
Chrome flagged this as a potential phishing attack. Anyone else seeing that?
- sengstrom 13y ago
  yup
- zt 13y ago
  Ya, I'm seeing that myself. (I'm the author). Sorry about that! I think it's because it's my first post and it's about credit cards, processing, and commonly phished sites like PayPal, Braintree, Stripe, etc. I've entered my site on Google's reporting tools...I'm not trying to get any financial information from anyone!
  - iza 13y ago
    Most likely because the word paypal is in the actual URL.
- Killswitch 13y ago
  I too am getting it. Proceeded anyway.
  - jburgueno 13y ago
    Used the report error to google option to, so they can fix it.
purephase 13y ago
I love Stripe as much as the next guy but this post seems a bit biased in that direction. 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.
- zt 13y ago
  I'm obviously a Stripe fanboy but I hope my point comes through that I think all credit card processing is a hard business where it is hard to make a lot of money. Stripe is best in class in my mind right now - but being the absolute best in a commodity business can be a hard position to be in.
  - jareau 13y ago
    Is your thesis that Stripe will follow a similar path as Braintree's...to low margins and acquisition?
    - zt 13y ago
      No, I don't think so. My read is that Patrick and John have a long-term vision (not one that I'm particularly privy to in the details) and clarity in their desire to go all the way.
- jacquesm 13y ago
  I've done some work for a competitor so feel free to call me out for being biased. 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.
  - chrischen 13y ago
    I agree they seem like an awesome company, but that doesn't mean there aren't other equally awesome (or almost equally awesome) companies. Balanced Payments is an example. Recognizing one's merits while disregarding another's merit (whether by malice or ignorance) has similar effects to just undeservingly trashing a company.
jimktrains2 13y ago
I wrote a little post on processing credit cards and some of the challenges I've encounted: http://jimkeener.com/posts/everyday-numbers-1 http://jimkeener.com/posts/everyday-numbers-1
toadi 13y ago
Indeed there is a lot of overhead in Fraude detection and avoiding and PCI compliance. This is a big cost in payments. It's all about financial risk mitigation. A small bug or issue can have severe financial consequences! For the party that is impacted: merchant, bank, processor and clients.
deleted 13y ago
[deleted]
ape4 13y ago
I know nothing abut the biz. But getting a slice of a great many transaction seems like a pretty sweet position to be in.
dcc1 13y ago
The future is bitcoin or bitcoin type/derived currencies with a proof of network at their core
jusben1369 13y ago
Sooooo. A company started in 2007 and sold in 2013 for $800 million. I feel like the author is a little lost in the trees and not seeing the forest. Stripe came along much later and by most accounts was valued at $500 million at their last round. Now, Braintree had reasons for why it couldn't get all the way to IPO so there were some challenges. However, I would take a guess that less than 1% of all startups have an $800 mil + exit after 6 years. And now there's another one right behind them (Stripe).
- jareau 13y ago
  Agree! Congrats to Bryan, Bill, and the whole Braintree team. They've built a great company and operate with integrity.
uladzislau 13y ago
Credit card processing is becoming commodity and low margins are very natural at this stage until the monopolist arises. Then due to the sheer volume and monopolist power the business becomes very lucrative and easy.
ballard 13y ago
Sometimes just getting credit card processing merchant approval makes EV2 SSL look like the Stripe API.
pjg 13y ago
@zt 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.
- zt 13y ago
  Thanks for your thoughts. I think you're right that taking payments and comparing it to a normal software model is a little unfair. 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.
ballard 13y ago
If anyone's in the market, compare gateways on https://feefighters.com/ https://feefighters.com/

87 points by zt 13y ago

pdsull 13y ago

Chrome flagged this as a potential phishing attack. Anyone else seeing that?

sengstrom 13y ago
yup
zt 13y ago
Ya, I'm seeing that myself. (I'm the author). Sorry about that! I think it's because it's my first post and it's about credit cards, processing, and commonly phished sites like PayPal, Braintree, Stripe, etc. I've entered my site on Google's reporting tools...I'm not trying to get any financial information from anyone!
- iza 13y ago
  Most likely because the word paypal is in the actual URL.
Killswitch 13y ago
I too am getting it. Proceeded anyway.
- jburgueno 13y ago
  Used the report error to google option to, so they can fix it.

purephase 13y ago

I love Stripe as much as the next guy but this post seems a bit biased in that direction. 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.

zt 13y ago
I'm obviously a Stripe fanboy but I hope my point comes through that I think all credit card processing is a hard business where it is hard to make a lot of money. Stripe is best in class in my mind right now - but being the absolute best in a commodity business can be a hard position to be in.
- jareau 13y ago
  Is your thesis that Stripe will follow a similar path as Braintree's...to low margins and acquisition?
  - zt 13y ago
    No, I don't think so. My read is that Patrick and John have a long-term vision (not one that I'm particularly privy to in the details) and clarity in their desire to go all the way.
jacquesm 13y ago
I've done some work for a competitor so feel free to call me out for being biased. 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.
- chrischen 13y ago
  I agree they seem like an awesome company, but that doesn't mean there aren't other equally awesome (or almost equally awesome) companies. Balanced Payments is an example. Recognizing one's merits while disregarding another's merit (whether by malice or ignorance) has similar effects to just undeservingly trashing a company.

jimktrains2 13y ago

I wrote a little post on processing credit cards and some of the challenges I've encounted: http://jimkeener.com/posts/everyday-numbers-1 http://jimkeener.com/posts/everyday-numbers-1

toadi 13y ago

Indeed there is a lot of overhead in Fraude detection and avoiding and PCI compliance. This is a big cost in payments. It's all about financial risk mitigation. A small bug or issue can have severe financial consequences! For the party that is impacted: merchant, bank, processor and clients.

deleted 13y ago

[deleted]

ape4 13y ago

I know nothing abut the biz. But getting a slice of a great many transaction seems like a pretty sweet position to be in.

dcc1 13y ago

The future is bitcoin or bitcoin type/derived currencies with a proof of network at their core

jusben1369 13y ago

Sooooo. A company started in 2007 and sold in 2013 for $800 million. I feel like the author is a little lost in the trees and not seeing the forest. Stripe came along much later and by most accounts was valued at $500 million at their last round. Now, Braintree had reasons for why it couldn't get all the way to IPO so there were some challenges. However, I would take a guess that less than 1% of all startups have an $800 mil + exit after 6 years. And now there's another one right behind them (Stripe).

jareau 13y ago
Agree! Congrats to Bryan, Bill, and the whole Braintree team. They've built a great company and operate with integrity.

uladzislau 13y ago

Credit card processing is becoming commodity and low margins are very natural at this stage until the monopolist arises. Then due to the sheer volume and monopolist power the business becomes very lucrative and easy.

ballard 13y ago

Sometimes just getting credit card processing merchant approval makes EV2 SSL look like the Stripe API.

pjg 13y ago

@zt 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.

zt 13y ago
Thanks for your thoughts. I think you're right that taking payments and comparing it to a normal software model is a little unfair. 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.

ballard 13y ago

If anyone's in the market, compare gateways on https://feefighters.com/ https://feefighters.com/