Marqeta, Inc. (MQ) Earnings Call Transcript & Summary

Good morning, everyone. I'm Ashwin Shirvaikar, Citi's global head of fintech research. And we're on day 3 of Citi's 11th Annual Fintech Conference. Going strong so far, and glad you're with us. [Operator Instructions] So with that said, next up, we have Marqeta. And from the company, it's my pleasure to introduce Founder and CEO, Jason Gardner. Jason, welcome.

Ashwin, thank you for having me.

Yes, good to see you again. Jason, I thought it would be a good idea to start sort of with -- because Marqeta is still relatively new to public market, to start with sort of a big picture. Who you are, what you do. What's the value proposition of modern issuing? Where in the value chain of payments do you sit?

So Marketa is a platform for companies that want to build payment cards like credit, debit, prepaid. They can be on Visa or Mastercard. They can be tokenized cards that fit into Apple Pay or Google Pay or Samsung Pay. They can be virtual cards or your traditional physical plastic cards. So we are part of the 4-party model of card issuing. You have acquiring, which is something we do every day. We buy things at the point of sale whether online or off-line. Then you have an acquiring bank. You have an issuing bank, which issues cards like Marketa. And then you have what's called an issuing processing system. And think of the 16 digits on your card as an address. So when you swipe that card or tap that phone or enter digits online, it routes to us. And ultimately we are the system of record of that transaction, and we ultimately decide whether to authorize or decline that transaction. So a great example is DoorDash, a customer of ours for a long time. Very similar to other customers that we have on our platform like Instacart, Favor, Postmates, Uber Eats; the ability to place an order. So I place an order. Ashwin, you're the driver. You say, "I'm going to pick up Jason's order." So that DoorDash card, which is powered by Marqeta, then goes from a terminal state to on. You drive to the restaurant. You walk in the door. And you swipe the card or you tap the phone. And it generates a message at the point of sale. This is the same message that's generated from every point of sale across the world from these points of sale devices or online, except Visa and Mastercard. We receive that. We then convert that to a message that we send to DoorDash. DoorDash says, "Is Ashwin on shift? Is he in the right merchant, the right amounts, right order?" If all that's correct, they say, "Okay, Marketa, authorize that transaction." We then send that back to the point of sale. And you go on your way. Your DoorDash card powered by Marqeta goes to a terminal state again. We do that millions of times a day across a ton of great customers from Klarna and Affirm and Afterpay to Square, Instacart and Expensify. So we allow companies to become the issuer processor, which is a model that did not exist before Marqeta. We brought that to the world. We see $6 trillion of card volume here in the U.S., $30 trillion globally. And we today process a very, very small fraction of that. So the opportunity ahead of us with the modern card issuing is immense.

Yes, yes, absolutely. Now if I ask you the question who are you disrupting, it's sort of -- that disruption question always sounds like you're going after a traditional player. But that's often not what, in my mind, true disruptors do. True disruptors create new markets. So do you want to actually compete and go after this slower growth but very large issuance market that the traditional issuance processors have built? Or is it primarily the untapped new world thing that you're going after?

So traditional issuer processors do a lot more than just issuing and processing. They're typically on-prem solutions. There's a very high sort of total cost of ownership of managing that. We're fully cloud-based, but we're disrupting the model. So we completely turn the model on its head where traditionally when you wanted to go. You're a commerce disruptor like Brex or Divvy or Bill.com or others. And you wanted to add a card product to your portfolio. You would go to a bank to go and find that. And the bank typically provides the same card they provide to everybody else. So it was very much sort of fitting a square peg in a round hole. And the company got started because I thought it would be cool to figure out how to put a bunch of Groupon coupons onto a card. And when I spoke to banks, there was no ability to get access to APIs, or application program interfaces, so that I could put together a solution myself and go solve that. So the only way we could solve that was we had to go build the issuing processing system from scratch. And then we ended up in 2014, delivered that via an open API, and found product/market fit. And what we found was there is a whole host of companies out there that we refer to as commerce disruptors in the buy now pay later space; on-demand delivery, expense management, e-commerce, that really need to build purpose-built cards. So arrange the APIs and build these card products where they can authorize their own transactions, and that becomes really operational within their core business. So we completely flipped the model on its head. To your word, we created our own category, which we refer to as modern card issuing. Now we've seen where we've obviously have found success in the commerce disruptors. We've moved into digital banks like Square and Lydia in France. We've then moved into large tech giants. We've spoken publicly about Google and Uber. And now moving into the large financial institutions where we typically see the legacy issuing processing on-prem solutions where they do a number of cards, and we live alongside them. So we've announced JPMorgan Chase; we've announced Marcus by Goldman Sachs, where either we're solving a problem like tokenization as a service. So the ability for Chase to tokenize cards and create a much better consumer experience, so you sign up for a card, it instantly becomes tokenized. And you're using it at the point of sale, much better consumer experience in the JPMorgan Chase example. And then in the Goldman Sachs example, a 160-year-old bank wants to disrupt banking. They want to build a debit card. They want to build a debit card that has really good -- a great ability to create a nice consumer experience. These traditional platforms are building that -- or traditional banks are building that on our platform. But today we live alongside the legacy issuer processors.

Got it. Okay, okay. One common question I get, which I also got today, is what is your competitive moat that would be difficult for next-gen entrants like Stripe or Adyen to replicate?

Yes, John and Patrick at Stripe built a great platform. The Adyen folks have built a great platform. They mostly focus on the acquiring side of the ecosystem. There are thousands of acquirers across the world that generates 99.99% of the revenue. That is a very, very hypercompetitive space. And they have built specific platforms to really take advantage of the growing space within e-commerce and some of the on-prem solutions that they brought to the market. We built modern card issuing. 100% of our business is -- or most of the business is generated in modern card issuing. That is orders of magnitude more complex. There are only 200 issuer processors across the world versus the thousands of acquirers. We probably compete with 2 to 3 companies a day. They maybe compete with 50 companies a day. Stripe has entered the market 4 years ago. We know that Adyen entered the market 2 years ago. This is a very different animal, a very different type of very, very complex technology. We're by far the most complex part of the payment card ecosystem. And we have over 11 years of doing this in Marqeta, and you can't reverse engineer operational experience. So we built this from scratch. We've operated it obviously today at massive scale across 36 countries. And we will continue to do that, knowing that we're only scratching the surface in this space. So as we think about growing the business, the ability to build issuing and processing in cities and towns and countries and continents across the globe is very, very attractive to us. So we want to continue to do that. We continue to build those very deep moats, very tall walls within issuing processing. Because we know that not only is that growing, we see it 5% here in the U.S., 8% in Europe. Asia is going to become one of the largest card markets in the world in the coming years. There is a lot of greenfields and opportunity for us to continue doing what we're doing at enormous scale.

Right, right. But just to kind of go back to one of the points that you've done this longer, right? Is it specific technology like your just-in-time issuance? What is it that perhaps they cannot build? Or is it the underlying data and the problem solving of what you're exactly doing for entire industries, like online delivery and so on and so forth, that is difficult to replicate?

So it's the technology that's difficult to replicate. Scale is everything, so operating this at massive scale. Like I've always said in the past, you can build great technology; but once you turn it on, you're going to punch it in the face 50 times before you really understand what scale means. And then over time, you're going to get -- continue to get challenged based on that scale. Now our business runs every second of every day, 365 days a year. That experience at the point of sale is incredibly important to us. I've always said, build wonderful technology and love your customers. And our goal is to tell them to go here. And we create that model, that experience for them to go build. Now when our customers have tens of millions of plastic cards in market or they have cards on iPhones or Android phones or Samsung phones, the whole lot across the world; when we help companies like Klarna come to the U.S. and then help them go to Australia; and then help companies like Afterpay go from Australia to the United States; when we help companies like Affirm build a number of different products both in the off-line world and the online world, they end up building a lot within our platform. We've talked about Square is our biggest customer, great customer. They have advantage of a lot of surface area in our platform, both physical plastic cards, both tokenized cards with virtual cards through Square Card and the cash app. That building on top of our platform is incredibly sticky. And when we see companies get tens of millions of cards in market, it's very difficult to replace that. Now we continue to service our customers with the best platform, the best technology and the best people. We will continue to do that. And that obviously we'll continue to build above and beyond just the technology in our surface area, continue to build those deep moats and tall walls; as we continue to not only experiment with new types of technologies like crypto, but we head into different geographies as they think about where they want to spread their wings across the world.

Got it. Got it. And just an incoming question from an investor, and I think it's important to get to. As a program manager, what are the 2, 3, 4 important things that you do? And contractually, is it all bundled? Or can a client outsource something to you but in-source some other things? How does that work?

Yes, so there's 2 different models within -- that we have within issuing processing. There's what's called Powered By where we are the issuer processor. And then there's program management tools. So we have a number of our customers that use our program management tools. And what we find is that when companies want to build card products, they think about, "Okay, what are all of the services, things that we need to get done to go manage a card program?" Our customers are not obviously issuing processing systems. They use ours to go do that. Since we're delivering the messaging to them, they operate just like the issuer processor. So they're authorizing and declining transactions. And there is a whole host of regulatory compliance and tools to go manage that. Everything from managing chargebacks; or managing data; or managing fraud or managing AML, KYC. So a majority of our customers leverage our tools, which we call program management as an industry term, to go manage those programs. Obviously, we have a range of revenue we make from using our tools and also providing issuing processing, also providing our platform to medium to jumbo enterprise businesses. But ultimately we have found over the years -- and even I found when I started building this, and I knew nothing about issuing and processing when I started building this system -- we are very much like the engine room of the ship. Everyone sees the ship move, but they don't really understand what happens at the heart of that system. The heart of that system is very complex. It's very regulated. We operate at enormous scale across lots of different types of technologies and platforms. To make that look very easy to our customers is deceptively complex. So our customers really depend on us for all of these tools within program management and then issuing and processing, to service their customers whether that's consumer use cases or commercial use cases.

Yes, yes, yes. It's probably safe to say that there are probably customers of yours who tried to do this themselves and said, "No, it's really not worth it."

We hear that often.

Yes. I want to shift gears. I want to talk about the week right around Money20/20 was like super busy for you guys. And before I get to all the announcements, though, was this your first post-pandemic public experience with a large conference? I want to get your broad takeaways from the event.

Yes, it was pretty weird, I think we're all experiencing as human beings like being in crowded settings with folks. I'm triple vax-ed. So -- and wore a mask at the show in the place we were supposed to wear them. And it was just actually great to see Marqetans, like see the team and spend time with them. I haven't spent time with them in a long time. And just to see them and hug them and say hi and "How are you doing?" in person was wonderful. We had ultimately decided we actually weren't going to do the show. And then about 3 weeks or 4 weeks beforehand, I think they had 2,000 people signed up. And then leading up to the show, they had close to 8,000 people. So we mobilized. We had 30 people there. It was great to meet with customers and prospects. And it was something I loved. I'm a pretty extroverted person. So being in the presence of not only Marqetans but the industry itself is very, very energizing. I think like many of us, we're looking forward to getting back to that. But it was a great conference, even despite the conference being held during a pandemic.

Yes, yes, cool. Let's talk about some of the announcements, though, that came out. And I want to start with Uber Freight. And this, to be quite honest, I've been surprised to not get as many questions about this as I probably should, given the potential size of the opportunity. Can you talk about sort of what you are doing here? What is Marqeta's role? And do you think -- obviously a massive industry if this takes off. What is the opportunity like for you?

Well, the value is immense. The carriers that work on the Uber Freight platform would typically get paid in 30 days. Now they can get paid in 2 hours. So the ability to sort of stream that money into a wallet is a huge value proposition for folks. So we partnered with one of our customers, Branch, partnered obviously with another customer in Uber, specifically Uber Freight, to provide much better solutions versus the 30 days that you would wait to get paid. And we think about this in a number of different veins, not only in this industry, but how do we think about the ability for people to get paid faster. Like what is the value proposition there? And how can we work with our customers in this network of networks approach, to come together with them and build these purpose-built solutions to go solve what we see as real problems, which is people should be able to get paid faster. This obviously creates stickiness for the Uber Freight platform. Their success is our success. Branch being a customer, the same methodology applies. Their success is our success. So putting together partners inside of our ecosystem, where we have this mutually beneficial relationship, is important to us.

Got it. Okay, okay. And the other big announcement, this might have come maybe a couple of days after Bill.com. How did that come about? How long does it take to sort of ideate and then develop something like that? What will you be doing for them?

So with Bill.com, they -- we all know that these small/medium businesses are the engine room of the economy. And Bill.com is squarely in that space. And we know this space well. We power Divvy, which is now a Bill.com company. We power companies like Brex and Expensify, and ramp the ability to do sort of expense management. And now there's this focus on the platforms. The ability for Bill.com, which is starting with virtual cards where their bank partners can generate these cards and make payments, is really important to them. Now an interesting part of our model is companies come to us to make money. So we share interchange back to them based on volume. And that's always a very interesting conversation for companies that want to go enter this market. Now Bill.com have thought about this for some time. They ran an RFP process. Ultimately, we won that RFP process because of our scale, our understanding their ability to build not only their first product, potentially multiple products on our platform. Which is how we work with our customers. We work with them in regards to we know the space incredibly well. And we help them see where they want to go based on their vision and their products and what they're trying to do. And then we help them, as I said, sort of put them in the direction of where they want to go with regards to building these products. And we look to obviously have these long-term relationships with them. This is actually what I'm really excited about because I've known René Lacerte, the founder and CEO, for close to a decade. We're both payments nerds. We're payments people. We understand how to bring our technologies together and builds for the future. So just really excited about this one. Not only that I get to work with a friend of mine, but we also get to work on some greatest solutions for their customers.

Right, right. And in terms of just kind of building, because you do this on repeat, right? Customers come to you with a vision. "Here is what we want to achieve." You kind of the engineering heart of what gets it done. From a payments perspective or an issuance perspective, how long does that process typically take? If there's such a typical word as typical in this.

It really depends, I mean the ideation and how to go build it out. So we're one part technology. We're also a very regulated company. So we operate in the card issuing space. So where there are very specific rules with the payment card industry, we have to apply ourselves to. There's bank. We have bank partners. They issue our cards, like Sutton Bank or MetaBank and others. There's the compliance side of that. So we're sort of regulated through the banks by the FTC, OCC, FinCEN. CFPB applies to some of the things that we do based on the consumers that we're working with. So there's a lot of work to do to make sure that what we're building can really spread its wings and take flight. So companies use us, it's really about speed. So if you went to -- we talked about sort of the legacy systems. For you to get up and running in a legacy system, it could take 9 to 18 months. We can get up and running with a customer within weeks. So them knowing what they want to build and then being able to iterate on the platform is really kind of half the battle, versus us really coming together as 2 companies and deciding, "This is what you want to go build. Here's the APIs and how to arrange them." And then we move through the compliance parts of the ecosystem. But it is really about speed to market and in our experience in the verticals that we operate in to help customers really take flight, and ultimately their success, which is important to us. I mean that's how we make money is based on their success. So we spend a lot of time making sure that they're going to be successful based on the products that they want to go build.

Right, right. One question I got incoming, which is what does open banking and account-to-account payments mean in terms of impact to you, given you're tied to the Visa Mastercard ecosystem. Is that a fair question? How do you think of that?

Yes, it's a fair question. The account-to-account payments, I believe, is very minimal. We think about different payment types definitely over a continuum. Like I think it will be years before account to account is even beginning to disrupt the point of sale. Today we do a couple of things as people. We do kind of me to me, which is I'm swiping Venmo card and then I'm filling that. Like I'm moving money from one account to another account to fill that. The account to account, which is giving you my credentials, my ABA routing number and account number to my bank; we do not see that at the point of sale. We do not see that in really e-commerce transactions. You want to be able to have things like chargeback rights. The payment card industry has built that out. You want to have some protections around that. That has all been built out. That has not been built out within account to account. There's obviously companies like Plaid and Trustly and Finicity and Akoya where I can log in and use my credentials to go and do this. Now I think we're in the early days of this, the ability to move account to account. Ultimately in this sort of world of open banking, we've seen open banking certainly take flight within Europe. We see account-to-account transfers become successful in the U.K. But these are small pieces in very specific parts of the world. Now how we're going to see it here, let's see what happens over the coming years. Like even FedNow, which is instant payments or real-time payments, we're not even going to see really until 2023. And then again, we're still continuing to see significant growth in the card industry, the reduction of cash. And as consumers, we all have cards in our wallet. To somehow change human behavior where I'm going to be spending through my bank account at the point of sale, in the sort of 2-sided business worlds, really remains to be seen. But we keep our eye on it, and more to come on how we think about certainly account to account transfers. We have joined the announcement with Plaid in regards to how to go build this out. But ultimately we're here for our customers, and what they want to do is how we'll present new technologies and solutions to them.

Right, okay. Can we maybe dive into 2 of the larger use cases you had a lot of success, BNPL and then crypto? And I mean you work with most of the large players, but I want to start by asking about Mastercard, what you're doing for the installments program.

Yes. I would start with we purpose-build solutions. So we discover industries early on in regards to what they're trying to accomplish. Like we met Klarna back in 2014, 2015 at Money20/20 Europe. I have never heard of the payment type. Like I had never even heard of buy now pay later. And when we were listening to what they're trying to do, which is, "How do I integrate with the merchant? How do they solve the last mile issue?" So when I pay with Klarna or pay with Affirm or pay with Afterpay or pay with Zip, how do I create the selling experience? And how do I do it with speed? So how do I get up and running fairly quickly where I don't have to go integrate with a merchant, spend a lot of time with their engineers, and then support this integration over time. So when we first met with them, I was thinking, wow, this is another payment type I've never heard of. I always refer to it as kind of a reverse layaway. So instead of paying of, and then when you pay it off, you get your goods; you get your goods upfront and then you pay it off over time. We've seen obviously the success of that. I think 40% of the gen X Americans last year used this payment type. We see a lot of people now use payments. I've paid with Affirm and paid with Klarna before. In the East Bay of California where I live, the Bay Area, there's [ a mall ] in Walnut Creek. We see lots of Klarna signs about paying in the off-line world. There's a card on there that's our product. So we're now seeing this sort of pervasiveness of this new payment type. So we're excited about buy now pay later. We power all of the major players in the space. And we're helping them spread their wings. We're helping them gain more merchants on the platform. We're helping that from a speed perspective. We're helping them enter other countries. Klarna coming to the U.S., Klarna going to Australia, Afterpay coming here. We're pretty excited about the work that we're doing there, and there's definitely more to come. We've seen companies like Affirm wanting to build products for the off-line world. We said in our earnings call, there was a question about Debit+ for Affirm. We are powering on -- powering that. More to come once it's GA to market. And so excited about this. And then crypto is the same thing. So we purpose-build solution for crypto. We provide a gateway between crypto and fiat currency. In the DoorDash example I provided, when a Coinbase holder or Bakkt or Fold or Shakepay holder swipe a card at the point of sale or tap a phone or enter their information online, we send them a message. They authorize that message. They control the FX on the back end, so you're converting crypto to fiat. We then send a message back to the point of sale. And they -- and the consumer goes on their way. And we do that within milliseconds. To purpose-build these solutions is significant. And we knew that these holders and these exchanges, it's a kludgy process of converting crypto to fiat currency and then transferring it to your bank. You should just be able to swipe a card and buy things as if you would buy anything else. And then obviously, that provides a real value proposition to somebody who has crypto in those exchanges. Because now you're paying for -- it feels to them like they're buying things at the point of sale like using crypto. But behind the scenes, there is just an enormous technological capability to make this look very, very simple.

Okay, okay. Got it. We're kind of running up on time. If you can spend maybe a minute on -- a very short time, on your -- the progress that your credit platform is making. And I had a clever pun here. "Was an eventual move into credit always in the cards?" But that's terrible. I'm well known for my dad jokes, but...

Yes, so am I. I always tell the "How do you make a tissue dance? You put a little boogie in it." I have a 13-year-old -- I have a 20-year old son and a 13-year old daughter, and they don't find my jokes funny anymore. So credit is pretty interesting. Credit is a massive opportunity for Marqeta. 52% of Americans still use credit cards. We focus on today, which is the issuing processing space of credit. Now we've done credit for a while. We have pieces that operate like a charge card. We use credit BINs or bank information numbers. This is specifically is consumer revolving credit, something that you and I probably have credit cards in our wallet, be able to buy something. And then you have an APR associated with it. That is not only -- the technology around that is very complex, but it's also another regulated space. And we like regulation. We like playing in that space. Because regulation is really important, because it allows you to sort of have the walls that you can operate in. You can still really innovate in that space. So like anything, we purpose-build. We think years about how we're going to enter the space. We spent about 18 months just studying the credit market. We saw that pretty much every single credit card was the same versus -- except the rewards program associated with it. And we really wanted to create a much, much, much better experience for companies that want to build credit products. So we started off today with the issuing processing part of that. We have partners in the program management part of consumer revolving credit. We would look to probably enter that space at some point as well. But today it's really about getting sort of the early commerce disruptors on the platform. Just like M1 Finance, which is a really great platform, the rewards are in crypto. It creates a really nice consumer experience. Like the simple things, it's like where did the transaction occur, getting that in real time, whether it's an in-app message or a link within a text. Being able to create really good contextual marketing within that space, so driving people to in-store or online merchants. We've really rethought it, and it's really the heart of how we think about products. We look to create experiences and sell solutions at the same time.

Great, great. 30 seconds, a quick message for investors, takeaways.

It's our second quarter as a public company. We are having a lot of fun being a public company. This was new. We're in our 11th year, heading into our 12th year in '22. I started the company by myself back in 2010, and I just continue to be excited about the opportunity within the issuing and processing space. Today, we process far less than 1% of the card volume within the U.S. And this is a phenomenon that is going to go on for a long time. The exchange of value between consumers and merchants, and consumers and consumers. And Visa Mastercard have integrated every single merchant on the globe that want to accept cards online or off-line. And we believe we're at the heart of that with modern card issuing.

Great. Thank you, Jason. [ Great to see you. ]

All right, Ashwin. Great seeing you. Bye-bye.

Yes, okay. Bye.