
Credit Card Processing is a Hard Business - zt
http://blog.zactownsend.com/thoughts-on-braintree-paypal-stripe-and-payment-processing
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jusben1369
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).

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

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pjg
@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.

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zt
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.

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

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zt
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!

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iza
Most likely because the word paypal is in the actual URL.

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purephase
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.

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jacquesm
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.

~~~
purephase
I'm not knocking Stripe. I use them and love them for what they provide.
They've taken an extremely difficult problem and made it easy and they deserve
a lot of kudos for that.

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.

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ape4
I know nothing abut the biz. But getting a slice of a great many transaction
seems like a pretty sweet position to be in.

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toadi
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.

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jimktrains2
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)

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uladzislau
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.

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ballard
If anyone's in the market, compare gateways on
[https://feefighters.com/](https://feefighters.com/)

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

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dcc1
The future is bitcoin or bitcoin type/derived currencies with a proof of
network at their core

