Thread by @SecretCapital_

Payments interview from JP Morgan

It simplified the payments facilitator's role in the payments ecosystem. Overall quite useful

h/t @BlueToothDDS

markets.jpmorgan.com/research/email…

Software is taking over payments. Consumers want to interact with software and not banks. Historically payments were integrated with banks who would own the relationship. Over time, they started to work with payments companies working with merchants. Banks partnered with these

software companies and offered the payments piece, and sent a cut to the software providers. Payment facilitators (payfacs), like Square, Shopify, etc. now offer the payments piece and earn the economics of it. Before SMBs would engage with banks when they started, so it was

easy to sell the payments piece. Now companies are more concerned with the front-end tech of the business, so these tech companies sell the payments now. Ex: before even getting a bank account, an entrepreneur will likely set up a site on Shopify, so SHOP has distribution.

Merchant acquirers and payments facilitators can go out and acquire relationships with merchants (Global Payments, Chase, BofA, Stripe, Wix, etc). 100$ from consumer. 3$ of that is split up between many players: 2$ to the issuing bank, 0.15$ to V/MA, 0.10$ to the merchant

processor and 0.75$ net to the payfac. Before the software company used to get only 25 cents, not 75 cents. But then they became payfacs/merchant acquirors and started owning the economics. Merchant acquirors and merchant processors can be the same entity (ex: Chase, FirstData,

etc). For the payfac, the 3$ is the revenue and 2.25$ is the COGS, gross profit is 0.75$. Industry average churn for payfacs has been 15-20%, but it’s lower when integrated with technology. Retention is higher in an integrated model. But the bigger a merchant gets, the more

volume discount they want, so merchant processors compete on price. Paypal/Square outperformed the legacy merchant acquirers, because spending shifted to larger, enterprises during the pandemic, which have much lower margins for payfacs, who saw rev growth slow down a lot.

Payfacs are tech companies that provide services to merchants, and aggregate all their merchants, so to their processor, it seems like there’s only 1 merchant, which allows for better pricing. Merchant acquirers doesn’t aggregate their merchants. They do provide the same function

though. Paypal is both an issuer and a payfac. Figuring out who has the best distribution in this ecosystem helps figure out who can build the best platform with the most offerings, but each has their own niche (ex: Stripe with developers, Adyen with online enterprise, etc.)

If world spending moves more towards marketplaces and large enterprise, it will hurt the economics of the entire payments ecosystem because the big customers have much more leverage in payments negotiations.

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