Adyen, Stripe, Checkout, & Payment Acquirers

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:02:42} We are always looking for companies that have strong competitive advantages and long runways for reinvestment, managed by good people. We found Adyen two years ago, have a small investment in it, and are looking to learn more. Your background is perfect for today's discussion. We can kick it off by discussing how Adyen's volume-based pricing works.

{audio:0:04:51} Adyen's rack rates are public online and they charge tier-based transaction fees of 10 or 12 cents, with the more volume you give them, the higher the tier. In addition to that, they also charge an acquiring markup. The rack rate for that is 60 basis points and the more volume you give them, the lower the tier you pay. If you have up to 10,000 transactions, you pay 10 cents and 60 basis points, and between 10 and 20,000 transactions, you pay 8 cents and 55 basis points. Adyen sets up those pricing tiers in two ways. Once you hit a new tier, all transactions get that pricing applied, meaning if you hit 28,000 transactions, you get that tiered pricing. Transaction fees are usually a fixed cent-based fee and the acquiring markup is usually in basis points. There are additional fees associated with risk management, and Adyen for Platforms has fees around onboarding and payout. There are also fees associated with additional features and functionalities and product services, such as real time mechanical data, network tokens and local payment methods. I can go into detail but that's a high-level overview.

{audio:0:07:41} Is there a floor in basis points Adyen would charge its largest customers?

{audio:0:07:56} No floor but larger customers get much lower pricing than the rack rate, especially in the US where pricing has been reduced to less than 1 cent, because they are competing with the likes of Chase Payment Tech. When you use Chase Treasury Services for your corporate banking, you get payment services almost for free. There is no floor to pricing; it comes down to the volume and absolute margin Adyen makes per account.

{audio:0:08:53} How does Adyen compete with Chase Payment Tech on absolute margins?

{audio:0:09:05} With a large enterprise client, you could win volume of several billion. If they pay 1 cent per transaction, you would see how many transactions they do per month and what that equates to in absolute dollars. You would also check if any technical work is required to win the business or if is it fairly straightforward online and/or in-store, and simply needs integration and management of that client. If development resources are required or if there is a complex business case, they may do an in-depth review to ensure the absolute margin covers the assigned resources. For a brand name, it could be worth giving them a very low fee to win their business. There is no one size fits all when it comes to pricing, because it depends on the absolute amount we will make from that client on a monthly or yearly basis.

{audio:0:11:11} Adyen has such high EBITDA margins as an entity. How low would they be willing to go to capture larger US customers where they have to compete with Chase?

{audio:0:11:35} We never looked at EBITDA margin when negotiating price, for both new and existing deals. In the beginning and at the very end of my career with Adyen, the absolute amount we were making from each client was the most important thing. Take rate was taken into consideration, but it was not the main factor.

{audio:0:12:21} Management always says they don't manage to a take rate but that is vital for investors to figure out over time. We want to know what the trajectory of the take rate might be over time. They were 17 basis points on total transaction volume for net revenue last year; is there a way for us to think about where that might go over time?

{audio:0:12:57} Assuming Adyen is successful, continue to grow their volumes and don't lose any significant clients, their take rate will most likely continue to decrease. The longer a client remains on your platform, the more the price will decrease over time, because after two to three years, that client renegotiates the terms of their contract. One caveat is if a client launches significant new volume in additional markets such as Australia, Europe, Japan or Brazil, where you can charge higher fees than in the US. That would cause take rates to increase slightly, or if they add products, features or functionalities. It's a numbers game and usually the take rate will continue to decrease as Adyen continues to grow more volume, especially with their existing clients.

{audio:0:14:54} Did Adyen compete on price or more on the quality of its service?

{audio:0:15:09} It has and always will compete on product performance rather than price. Nine out of 10 times they will not play that pricing game. They want customers to use Adyen because they believe they have a superior product platform and performance.

{audio:0:15:36} How low are take rates of competitor processors for enterprise customers?

{audio:0:15:49} Transaction costs are substantially lower than Adyen, especially with US legacy acquirers such as World Pay, Global Payments and Fiserv. The newer FinTech providers like Stripe and Square can charge higher fees because most of their clientele are not large enterprise clients.

{audio:0:16:42} Is there an asymptote where take rates will continue to decline until they reach a point where they wouldn't likely go any lower, and what might that number be?

{audio:0:17:12} The floor would most likely be the take rate of the legacy acquirers, but I don't have a sense where the take rate could go, because as a payments consultant I'm not focused on that. As a commercial guy within Adyen, we did not consider take rate as much as the absolute dollar amount we made from a company that we worked with.

{audio:0:18:15} Adyen's one platform product is vastly superior to Fiserv from a technology standpoint, but if Adyen ends up competing more with Stripe or checkout.com over time, how do these companies compete against each other?

{audio:0:19:05} I agree that Adyen has a superior platform compared to the legacy players, because the latter have multiple platforms with inconsistencies across their platforms. Adyen competes with Stripe and Checkout by offering superior geographic coverage, better performance and products specific to customer's needs. The best examples are marketplaces or third-party platforms, where Checkout lacks a good product but Stripe Connect and Adyen for Platforms are the two strongest candidates in the market today.

{audio:0:20:40} Is geographic coverage, performance and product sustainable over time?

{audio:0:21:12} Yes. A retailer who integrates Adyen into online and in-store in North America, US, Mexico, Europe, Australia, New Zealand and parts of APAC, has a superior advantage over other companies who provide similar online and in-store services. Stripe and Checkout cannot do that for large enterprise today. They could build out something similar but it will take them three to five years to reach parity with Adyen. Digital companies, like Uber and Netflix, who have geographic coverage, want to acquire their transactions domestically, wherever they have a local entity, so the more Adyen expands their geographic coverage and applies the same machine learning and performance, the more volume they will get from these companies. 

{audio:0:23:00} When they expand network tokens and real time account data to increase authorization rates, that is applied across all geographic countries where Adyen has an acquiring connection. Stripe could launch an acquiring solution in Japan, but it would take 12 to 24 months to get up and running in a new country, then you have to get to a certain maturity state and ensure everything works and performance is on par with the payments industry. Adyen has a current advantage and Stripe can get there, but I assume Adyen will add countries on top of the ones that have today, and will increase performance in the countries they are already in, and add products in those regions.

{audio:0:25:11} We spoke to several experts who told us that improved authorization rates come more from the fact that Adyen has a single platform than a certain amount of data in a country, and it was an advantage that could be replicated by Stripe or Checkout. Is that true or can Adyen get a sustained competitive advantage with authorization rates?

{audio:0:26:00} Checkout and Stripe can replicate what Adyen does over time, which is apply machine learning and data insights onto their processing capabilities. Adyen has figured out that issuers prefer to get transactions routed to them in specific ways, down to the type of card. If you have Bank of America debit versus credit card, you could route and process those transactions slightly differently. One prefers network tokens submitted for their debit card whereas another would prefer to get the PAN. You learn this over time as you start processing and collecting data. Adyen has an advantage as they have been working with clients such as Netflix, Uber and Facebook, who are all extremely data-focused and are able to share their learnings and insights with Adyen who can apply that onto their transactions.

{audio:0:28:15} If Adyen dominates the Dutch iDEAL payment method, does that convey any advantage for them over a processor who might want to break into that market?

{audio:0:28:43} Their main advantage is a lower price with a provider such as iDEAL. The other provider may pay 10 cents per transaction, where Adyen only pays 1 cent. Learnings and experiences with that provider have made Adyen's product better than the new provider who is only about to start offering something similar to Ideal.

{audio:0:29:46} In which regions does Adyen have the strongest advantage?

{audio:0:29:55} Europe, because they have been the longest and have learned the most, but there are still markets in Europe where they are improving and maturing. In addition to that would be the US, Australia and Brazil.

{audio:0:30:37} Did you interact with senior management team during your time at Adyen?

{audio:0:30:45} I reported directly to the COO at one point, and indirectly to him and the President of North America. Also, on a weekly and sometimes monthly basis, with the CFO and CCO, which were Roelant Prins and Ingo.

{audio:0:31:11} What did you think of the recent development where Ingo was promoted to co-CEO and some other positions were shuffled around? Will that change the company?

{audio:0:31:28} It won't change the company much with Ingo being co-CEO and Ethan CFO. The biggest question mark will be who replaces Kamran Zaki as the new COO. The other announcement did not surprise me because Pieter's health was not great over the past few years, and reading between the lines, his health has deteriorated. He already took a step back from the day-to-day but I am sure he will remain an advisor to Ingo and his management team, and Ingo will take a more active role. Even when I was there, Pieter did not have a very active role in managing the company. He delegated that to Sam Hall, the previous CEO, and the trio of Kamran Zaki, Roelant and Ingo. Arnout the CTO was also involved, but was replaced by Alexander Matthey.

{audio:0:33:04} Is Ingo involved with the high-level strategy and direction?

{audio:0:33:21} He has been involved in the execution of high-level strategy and big decisions over the last few years. He will continue to stay involved in setting the strategy going forward, but not in the day-to-day decision making or execution.

{audio:0:33:56} We heard the Adyen formula is unique and something that feels quite real. What was it like to work at Adyen and is their culture a real advantage?

{audio:0:34:23} Prior to Covid, it was a true advantage. Their formula is not simply written on paper, it really is the culture. People are expected to talk straight and share feedback, which is a very Dutch mentality where you say what's on your mind. Being politically correct is not an option; not being honest or open is seen as a negative. Adyen tries to evolve and iterate on anything and everything. Even though it processed 700 billion in volume last year, it remains a fairly nimble and agile company who wants to break down barriers and innovate, and want the right people to buy into that. It's not a company who will sit there and analyze, discuss, re-analyze, do research and market surveys then three to six months later try to launch a product. They would rather see how many of their clients could benefit, talk to the top clients to get their input and launch, improve, iterate on and learn from it. 

{audio:0:36:30} They want people with that entrepreneurial mindset who are willing to take responsibility, not only for their own role, but the company as a whole. You are encouraged to get involved with projects outside your own role. Before Covid, travel was highly encouraged to do exchange programs in various parts of the world, to share your learnings with other cultures and better understand the difference between working in Sydney, Sao Paulo or Amsterdam. 

{audio:0:37:38} Is Adyen considered a desirable place to work for most employees because we're just always amazed by their ability to pay reasonable compensation and avoid paying a lot of stock-based compensation, especially to American peers?

{audio:0:38:06} That is one challenge from a hiring perspective, but they have a superior product platform and still have a culture where they want to have fun while changing the payments landscape. They will not pay you the best in the market as they don't want you simply work for them based on the pay they offer you; they want you to help them revolutionize and improve the product, platform and payment space. If you become a top performer, they will compensate you for what you are worth, but that might still not be as much as you would have got from Visa or PayPal, who pay top dollar to attract the talent because they don't have the same culture Adyen does.

{audio:0:39:46} If you were a talented engineer living in the Netherlands, would there be other attractive interesting problems to solve at other companies, compared to working for Adyen? How high on the desirability list would the job be, ignoring compensation?

{audio:0:40:10} There are definitely companies in the Netherlands who are equally attractive to smart engineers, but not as competitive as Silicon Valley or San Francisco. Companies such as booking.com, Uber, Netflix and Mollie, a new growing payment company. Adyen is trying out something new by opening up development hubs in Madrid or Chicago, where they know they can find talent easier and pay them less, but still get that top-notch talent versus places such as Amsterdam or San Francisco.

{audio:0:41:58} Is the need for geographic expansion happening because the company hit a certain scale where it has to do that?

{audio:0:42:08} Yes, and they also want to test it instead of paying more for talent in Amsterdam or San Francisco. They realized they have an opportunity to expand in the US. It is good from a geographic standpoint to have a development hub in the Midwest versus the Pacific time zone. The same is true for Madrid and Spain is a growing market so they want to improve their offering, not just in Europe from a development speed perspective, but also they want to grow in the Spanish market. It is a way for them to attract talent and have resources closer to their clients in multiple areas, without paying 1.5X the amount they would for the talent in Amsterdam compared to Madrid.

{audio:0:43:28} Does Adyen do well in keeping the employees it wants to keep?

{audio:0:43:39} Yes, they always made sure to keep top performers by promoting them and giving them new projects to work on. For those they want to keep, they pay them above average for that role or give them slightly more stock incentives. The top 10% of the talent pool was consistently kept happy and retained, which is proven by some of the latest management changes like Ethan and Alexander Matthey being promoted.

{audio:0:45:22} Could we discuss some of the major tailwinds supporting Adyen's business? Did Adyen have a view on how much further we have to go globally in terms of the cash to card conversion that has been propelling payments businesses for a very long time?

{audio:0:45:52} No, it was simply ensuring that however the customer wants to pay, because in some markets like Indonesia, Philippines, Southeast Asia or Mexico, card penetration is less than 10% but there are ways to allow customers who don't pay with a card to pay online. Adyen focused on ensuring those payment methods were made available to their customers. In markets where cash is still king and the migration is not moving as fast, they were able to support those and take those customers online.

{audio:0:46:50} When Adyen operates in those places with a low penetration, is that simply a greenfield opportunity? Are there still local payment processors they compete with?

{audio:0:47:17} Yes, they definitely compete with local processors but they also partner with them, because those local providers want to work with Microsoft, Nike and Uber, which Adyen brings to the table. The greenfield opportunity is helping Adyen's large customers improve their payment offerings in those countries.

{audio:0:48:04} How will the larger players like Adyen and Stripe be interacting with the local providers over the next five or 10 years? We understand that Adyen has been taking market share mostly from local providers over the last few years, which is the reason their growth rate is so high; how will that market share shake out over time?

{audio:0:48:40} If they offer localized products in those markets, they will continue to gain market share because it comes down to who the regional competitors are. In many places, the regional competitors are legacy financial institutions like banks or legacy payment providers who have not upgraded their systems or processing platforms, which is where Adyen's technology can play a big part. They will continue to win volume from the legacy players, both regional and/or global, in most industries, because there are still industries where legacy providers continue to dominate.

{audio:0:50:15} Which industries are those? 

{audio:0:50:18} Education, healthcare, government and grocery stores. In the US, you have started to see innovation in hospitality, and Toast is gaining volume. The legacy players still have an upper hand because to truly compete in US grocery stores, you need access to process the full US debit network, including benefit cards and food stamps. Not many FinTech providers are able to build out enhancement for that immediately.

{audio:0:51:51} Adyen reports a churn rate of less than 1%; why is their product so sticky?

{audio:0:52:09} I am not concerned about the sustainability of it as long as the support and performance remain as good as they have been. One reason it is so low is because companies do not want to switch payment providers. You could switch a payment provider within three months if you really wanted to, from a technical standpoint, but from an operational standpoint, so many dependencies are built around your payment provider. You can make it stickier by solving the challenges some of these companies are facing and want to solve for, making them more integrated into your system, such that ripping out and replacing that system becomes harder. 

{audio:0:53:34} Until the day that either a payment provider can no longer support your growth or provide the same level of support and performance – and by performance, I mean latency, up time or other issues – there is no significant reason for them to leave Adyen. They know that leaving Adyen would take them six to 12 months and will be a big cost for internal resources. What is the true ROI on that? It is usually not significant enough for them to leave. If they were to tell Adyen they would leave, it would be most likely because they got a good pricing proposal from another company. There is no floor limit for Adyen, but if it's not an outrageously low transaction fee or pricing, I'm sure Adyen will work something out. 

{audio:0:55:14} In some cases, those companies will leave, and I actually had two clients decide to leave when I was in the account management team, because they got outrageously low pricing from a legacy provider. They both came back to Adyen less than a year later because the performance was so far off from what they were used to, that the pricing did not compensate for the lack of performance.

{audio:0:55:52} Why would Adyen not be as successful as it is today 10 years from now?

{audio:0:56:10} If they stopped innovating and building based on customer feedback, or if they did not hire the right talent to provide the same level of customer support their customers expect from them. They could have a PR fiasco if they are hacked, which could cause them to lose significant volumes. They could also face a significant amount of issues, like World Pay was faced with five years ago, but have since had similar issues where they had too many hiccups that customers were too fed with operational headaches around chargebacks not being processed correctly, reporting not matching, up-time was reduced significantly, and all of those challenges.

Adyen: Pricing, Culture & Talent

Former VP Account Management at Adyen

inpractise.com/articles/adyen-pricing-culture-and-talent

Executive Bio

Former VP Account Management at Adyen

Interview Transcript

Adyen has such high EBITDA margins as an entity. How low would they be willing to go to capture larger US customers where they have to compete with Chase?

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