Publicly traded FinTech companies to watch in 2022 and beyond | Infrastructure
The last couple of years were extremely productive in terms of FinTech companies going public: Root (October, 2020), Upstart (December, 2020), Affirm (January, 2021), Coinbase (April, 2021), Marqeta (June, 2021), Robinhood (July, 2021) and Nubank (December, 2021) are just the most notable ones, while the list is much longer. The services that these, now public, companies offer range from insurance, to consumer lending, to payments, to investments, to software and cover pretty much every surface of the FinTech attack on legacy financial players.
I have identified around 20 publicly traded FinTech companies across multiple segments (Payments, Consumer lending, Infrastructure, and Investing) and will follow their journey in this newsletter: will describe what they do, break down how they make (or plan to make) money, as well as report on their progress after quarterly earnings calls and other major milestones.
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This is the third part of the series “Publicly traded FinTech companies to watch in 2022 and beyond”. Please find the first part, covering Paypal, Block (formerly Square), and Affirm, here, and the second part, covering Upstart, SoFi, and LendingClub here. This time we focus on the companies providing infrastructure for Fintechs and legacy financial institutions.
Marqeta | MQ
Market Cap: $5.3B | 1Y share price change: -68% (went public on June 8, 2021)
Revenue (Q4 ‘20 - Q3’21): $450M | Last quarter revenue growth (YoY): 56%
Marqeta was founded in 2010 by Jason Gardner and went public in June, 2021, raising $1.2 billion at a $15.2 billion valuation. The company provides a modern card issuing and card payment processing platform to numerous clients, which are primarily fast-growing technology companies. For instance, it boasts serving such customers as Block, Inc. (Cash App), Affirm, Klarna, DoorDash, Uber, and many others. Marqeta’s platform also powers cards issued by Goldman Sachs’ Marcus, as well as virtual cards issued by J.P Morgan.
In a nutshell, when a company, such as Block or Affirm, decides to offer debit or credit cards to their customers, they need a piece of software to securely store and manage information about these cards (card number, expiration date, payment, and cash withdrawal limits, CVV, PIN, etc.). In addition, Affirm and Block would need to connect to the card schemes, such as VISA and/or Mastercard, to make sure that their cardholders can make payments with their cards at the points of sale and online, as well as withdraw cash in ATMs (this is called “payment processing”). Instead of handling all these complexities, such companies turn to Marqeta.
The company is not alone in the space (the company claimed to power 57 million active cards at the end of 2020, while there were over a billion credit cards in the United States alone). Previously, card issuers had to buy software from FIS, Fiserv, or other legacy vendors, install it in their on-premises data centers, establish connections to the card schemes (or a card processor), and then operate these systems ensuring complex security and compliance requirements (i.e. PCI DSS, PSD2, GDPR, etc.). Marqeta handles the process of card issuing and card payment processing end-to-end providing their clients with a SaaS solution and a set of APIs. Essentially, Marqeta did not invent the industry or the solution, it just built a modern, cloud-based, API-first, solution that allows their client to build innovative customer-facing applications.
As the result, their client roster, at the moment, primarily includes other Fintechs and technology companies. These are the companies whose demands were not met by the legacy vendors due to their outdated technologies. So far Marqeta essentially grew together with their clients: i.e. close to 70% of its revenue come from Block’s Cash App, which went through explosive growth during the pandemic. However, I believe the main potential unlock for Marqeta will come from the legacy issuer moving away from their on-premises solutions to the cloud and SaaS solutions. For example, Capital One has already completed migration to the cloud, and J.P Morgan announced their plans to move their 50+ million cards to the cloud in their latest earnings call.
What to watch in 2022:
Growth of Marqeta’s clients. Growth of Marqeta’s clients, such as Block (Marqeta powers cards issued by both Cash App, and Afterpay), Affirm (virtual cards and the upcoming Debit+ card), and others, is the key current driver for Marqeta’s revenue.
New client acquisition. As mentioned above, besides growing together with their existing customers, Marqeta will continue growing through acquiring new customers, especially if those are large legacy issuers looking to move away from their outdated solutions.
Global expansion. Most of Marqeta’s revenues come from US-based issuers. However, the company is expanding rapidly into other regions, including Europe and Asia. VISA and Mastercard are global card networks; thus, Marqeta’s product offering (with additional compliance requirements and certifications) should be scalable across the globe.
Growth through acquisitions. Marqeta is not profitable yet; however, the $1.2 billion that it raised in its IPO gives it a lot of power to grow through acquisitions. I think they might go for both acquiring companies in the card-issuing space, as well as acquiring companies with a complementary offering.
Blend | BLND
Market Cap: $1.8B | 1Y share price change: -63% (went public on July 15, 2021)
Revenue (Q4 ‘20 - Q3’21): $184M | Last quarter revenue growth (YoY): 221%
Blend was founded in 2012 by Nima Ghamsari, Eugene Marinelli, and Erin Collard, and went public in June, 2021 raising $360 million in new funds. The company started by offering mortgage lenders a suite of products that digitized their loan application and underwriting processes; however, since then expanded into a wider set of products, as well as acquired a title insurance company, Title365. The company boasts Wells Fargo, US Bank, Republic Bank, Opendoor, and over 300 others lenders among its clients.
Blend rode the wave of digitalization and automation of lending processes, which was accelerated with the pandemic. Moreover, it went after the most “handicapped” customer base (smaller banks and credit unions that have limited IT capacity and budgets), and the product (mortgages) that is not heavily contested by Fintechs (fintech lenders primarily focused on personal loans). As the result, the company’s management estimates that Blend will be powering 23% of all mortgage transactions in the United States once all signed clients are fully onboarded.
However, Blend is hitting the growth limits in its initial niche (mortgage solution revenues grew only 14% YoY in Q3 2021). Therefore, it started expanding the depth of its services with the mortgage lending segment (i.e. by providing income verification and title insurance services), as well as took on a mission to build a platform that “powers end-to-end customer journeys for any banking product”. The logic is that it will upsell extended offerings to help their customer base with other products, such as credit cards, auto loans, and even account opening.
In Q3 2021, revenue from their consumer banking platform constituted only 7% of the total quarterly revenue ($6.6 million) and grew 26% YoY. Overall, revenue from both mortgage lending and consumer banking platforms constituted only $33.9 million, or 38% of the total revenue in Q3 2021 (with the rest coming from title insurance and professional services). Therefore, I think, Blend is in a critical moment, where they need to figure out how to sustain growth to justify their valuation multiples. It will be interesting to see if they double down on their software business with the consumer banking platform, or financial services, such as insurance (and who knows, perhaps, start lending themselves by launching a consumer-facing business).
What to watch in 2022:
Mortgage platform revenues. A higher interest rate environment might represent a headwind for Blend’s customers (in the form of lower refinancing volumes). Thus, the company cannot rely on its existing customers to deliver growth and needs to acquire new ones.
Insurance and other financial services. As mentioned above, the acquisition of Title365 changed the mix of Blend’s revenues. As of Q3 2021, they look more like an insurer than a software company in terms of revenue, so it will be interesting to see if they continue drifting away from the software business.
Consumer banking platform. As they approach the limits of their mortgage lending niche, the consumer banking platform is expected to become the key revenue driver (in the software segment). On one hand, they have a customer base of 300+ financial institutions, on the other hand, they are going against a new set of competitors with this offering.
Paymentus | PAY
Market Cap: $2.5B | 1Y share price change: -27% (went public on May 26, 2021)
Revenue (2021): $396 M | Last quarter revenue growth (YoY): +31%
Paymentus was founded by Dushyant Sharma back in 2004 and went public on May 26, 2021 raising $210 million. The company provides a cloud-based solution for companies (“billers”) to issue electronics bills to their customers and the company’s mission is dead simple: “…to simplify how bills are paid.” The company serves 1,700+ organizations, such as utilities, governmental institutions, insurers, and lenders, and processed 251 million payments in 2021 worth $63 billion. The company supports bill payment through both its own channels, as well as through integrations with digital banking apps and mobile wallets, such as Paypal (whom they call “partners”).
In September 2021, Paymentus used the IPO proceeds to acquire Payveris (for approximately $145 million in cash and stock) and double down on its mission. Acquisition of Payveris, another player in the bill payment and management space with the focus on financial institutions, expanded Paymentus customer base with “265 banks and credit unions”. In the same month, Paymentus also made a smaller acquisition in the same space, paying $12.9 million for Finovera. As per the earnings call, the company will be opportunistically looking at potential acquisitions also going forward.
One should not expect Paymentus to go outside of its core domain, which is bill payments; however, the company set an ambition to grow 30% annually, which makes it interesting. There is a clear network effect playing out here: the more “billers” the company onboards, the more inclined potential “partners” will be to integrate Paymentus solution into their customer applications, which leads again to higher interest from “billers”. In addition, Paymentus is using some of their “partners” as a sales channel: thus, partnership with J.P Morgan includes the later promoting Paymentus solution to their clients, small and medium businesses.
A quote from the company’s latest earnings call exemplifies this network effect: “Our payment volume for the full year jumped 68% to $63 billion. To provide and additional context, it took us 15 years to get to $30 billion in annual payment volume”.
What to watch in 2022:
Processed payment volume growth. The key metric for the company is the number of processed payments, as this is how it earns money. Growth will come from both the existing customer base, and from acquiring more billers and partners.
Larger partnerships. The company is not shy of signing large partnerships. Thus, it managed to partner with such giants as Paypal, Amazon and J.P Morgan. Such type of partnerships increase company’s exposure to end consumers; thus, giving it a leverage in signing up more “billers”.
Growth through acquisitions. The company’s management said they are open to opportunistically growth via acquisitions, especially, if such acquisitions allow tapping into new customer segment (i.e. Payveris sizeable footprint in financial institutions)
Consistency. If you think about it, Paymentus business is dead simple and they do not indicate any intentions to deviate from it. So if they indeed consistently deliver 30% annual growth, the market should price the stock quite quickly.
Marqeta reports Q4 and FY 2021 results on March 9, 2022, Blend reports on March 22, 2022, and Paymentus already reported their results on February 16, 2022 (see Investor Relations).
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Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.