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

All right. Thanks everyone for joining. This is the session with Marqeta. My name is Tien-Tsin Huang. I follow the payments sector and really excited to have Simon Khalaf here, CEO of Marqeta. We're going to do a fireside chat. We'll take questions as well. Thank you for being here, Simon.

Thank you for having me. Appreciate it.

Always enjoy talking to you and Michael and team. We were just talking before, embedded finance seems like it's moving into the mainstream. I hear it a lot at industry conferences when I'm meeting with different operating committees and boards. We're talking about fintech. That feels like it's the big theme and when I think about Embedded Finance, I think about Marqeta. As an enabler, I know you guys are pushing really hard into Accelerate Wage Access, B2B, co-brand credit. We'll talk about all of that. But the one thing that I get questions about and I'll ask you, Simon, is in fintech sometimes things get created before they are ready -- before the market is ready. Do you feel like the market is ready for this Embedded Finance theme based on what you're seeing? What the pipeline is like? What's happening on the ground?

I think the short answer is, yes, but I do have to say we're really in the early days of adoption. I mean in Silicon Valley, I agree with you, we get the idea right, we get the decade wrong, but I think our decade has come. So if you look at like with us and the core 3 use cases, the first one is Accelerated Wage Access. Where we see the biggest traction is for organizations that have a large contingent workforce. So either like retailers or like the gig economy, but also the liquid marketplaces. So these organizations are definitely looking to offer all the neo banking features and instant wage access to their contingent. So that's definitely an area where we're seeing a lot of great traction. The second one is the new generation co-brand. And I'd say we're starting -- the digital brands are starting to look at their payment card as a digital product and as an engagement product, which is not that intuitive to the old folks because the card was a loyalty product. So now that the card is a digital product, it can bring engagement, increase engagement, while reducing the cost of user acquisition or cost of traffic acquisition. So that I think is now starting to pick up fast. And the third one is SMB Credit. And first, this is what we did not anticipate. We thought when we made the investment in credit, most of the focus of our product team was on the consumer side. But we were surprised about the demand for SMB credit. And then if we think about it, okay, you take a step back, you look at, for example, SMBs account for about 47% of our GDP and over 50% of the employment. But when you look at the credit that was the debt that was issued by JPMorgan Chase was $1.3 trillion last year, only 2.6% of that went to SMBs. So there's a huge gap between what they're delivering and what they're taking. And that is translating to us seeing demand from aggregators or platforms, whether they're marketplaces or aggregators, that have great visibility into the performance of an SMB that want to give them the working capital and the expense management and implement in Marqeta software, what they traditionally written in covenants that no one reads, put it in the drawer. So though, I'd say, if we look at those 3, Accelerated Wage Access, which is blending into neo banking, as well as the new generation co-brand and the SMB Credit, that's I think what we're seeing in terms of accelerated demand and readiness. But again, I want to caution, we're still in the early phases of adoption. It's very, very promising, but it's early.

So when you talk about next generation co-brand, I've heard you talk about this before. And it's very different than how we grew up. So you're thinking like the YouTubes, the TikToks, those kind of engagement. Can you just elaborate on that?

Yes, yes, of course. I mean, if you look -- I mean, I don't come from the payment industry. And I think this is a good thing, because a lot of folks in payments overcomplicate things. But it's okay. I mean, if you look at when you are in the direct-to-consumer business, you look at 2 metrics. One is daily active users. And the other one is ARPDAU, which is average revenue per daily active users. If you're advertising sponsored, like the sessions, which is the time -- the visits within the day of that DAU matter a lot. The most addictive product in the market today is TikTok. Okay. Adjusted to the U.S. population reach, a consumer reaches to TikTok 2.1x a day. But a payment card, people reach out to a payment card 2.2x a day. So it is the most addictive product on the market today, invented by humankind. Excellent. It used to be a piece of plastic. It cannot engage you, can't send you an SMS, can't send you an e-mail, can't even change its color. Now it's a digital product. It's the most engaging product ever invented. So every digital brand that has direct-to-consumer practices or ambitions is looking at this and say, "Hang on just a second, this is more addictive than SMS, more addictive than push notification, more addictive than e-mail, and I want to use it as an engagement hook." And that's, I think, what we're going to see the co-brand happen. And the second one is all the previous co-brands had this 1.5% cashback. So which one are you going to use? Whatever, the one that I have in my pocket. But if you look at the Marqeta platform, it has the ability to issue dynamic rewards, to change consumer behavior. So I don't have to give you 1.5% cashback, I might have to give you 10% on this deal, because it's much better. And then the second one give you nothing. So the ability to do dynamic rewards do not just intercept consumer behavior, but they can alter consumer behavior. So that's why I think our platform is kind of like has been built for this.

Yes. So let's dig into that. I know, as much as I'm going to these conferences, I know a lot of others are and they're touting their embedded finance capabilities. And again, so while I think about Marqeta as being early with this, building out that category, others are building it out as well. So what's the edge that Marqeta has? Do you see multiple providers going after this market and succeeding?

Well, I mean, the embedded finance market is in trillions. So even if we don't have competition today, we will. So by the way, like my frame of reference is in embedded finance, you have effectively 3 core players. First, you have the issuers like us that are focused on a brilliant consumer experience. Then you have acquirers, modern acquirers that are focused on the merchant experience. And you have the network. So it's Visa or MasterCard that are focused on the money movement experience. All of us have a symbiotic relationship to lift this ecosystem. And we kind of like feed off each other, but all of us are moving this up. So the -- and we get that -- we get asked that a lot, is going to be synergies here and there? I don't think so. I mean, the 3 of us are going to work hard in order to make embedded finance work in a very symbiotic way.

So let's drill down on a few things. I do want to talk about the network side of the equation with some of the products you talked about. Before we do that, let's do credit because I get a lot of questions on credit. Your opportunity from Marqeta, you've had a couple of wins there. Give us an update on what's happening. How are you differentiated there from a product?

Sure. Yes. I mean, let me talk about our broader differentiation within the embedded finance and then we'll get to credit. Yes. So if you look at like why does Marqeta win? I always think about it. The #1 thing is the breadth of our platform. We can do debit, we can do BNPL, we can do credit. So we cover the basis from a lending perspective. We have a very strong program management layer. So because a lot of the embedded finance players don't want to deal with the regulatory issues, like when you talk to them about Reg Z and Reg E, it's just 2 letters of the alphabet, right? To us, it's an entire practice. So we have a program management layer that is designed for embedded finance. They just don't need to understand any of it. We take care of it. And then the second one is the scale we operate at. Some of the digital brands we're talking to have tens of millions, if not hundreds of millions of users, right? And they need to operate at the scale we operate at. They cannot go with somebody that's not going to operate that. And then the last but not least, we have economies of scale. Like when you look at the consumer side of the house, there's disputes, there's chargebacks, there's customer service. I mean, we've been building the stack for a long time. We've got AI. We've got all kinds. We've got IVRs. We've got chatbots. We've got all of these. So I think we have an advantage over that. Now, moving to credit. Like I said, we are -- when we made the acquisition, we had the consumer credit in mind, but we've gotten a lot of demand from the SMB side. So we have -- we announced to 2 customers, AffiniPay and ITS, that are focused on effectively SMB credit and travel. And we're very focused on launching those. The pipeline is growing very fast. So we're being selective. So -- and let me be clear what's selective. It's not that we're not taking customers. We're focused on, I'd say, 2 markets that we're very excited about. The first one is the co-brand and I say digital native, digital brands. And the second one is the SMB Credit through an aggregator or marketplace. That's the area of focus, I'd say, for us over the next 12 months. And there's plenty of opportunities around that.

So is this more, I'm curious just to build on that. Is it experimental discovery mode for a lot of these players that you're describing on both of those sides? Are they ready to launch something at scale? Tell us how that might mature.

Yes. I mean, these are not customers that are building a product and wishing it good luck, right? They have the audience. They have the SMBs. They've aggregated them. they -- I mean, just to give you a number, like look at Square. They've issued more small business loan than JPMorgan Chase last quarter. I think it's 1.2 compared to 1.13, right? So they have restaurants. It's not that if we offer credit through them or when we offer credit through them, they're going to have to recruit restaurants. So they have them. So I'd say that that will move very fast. I don't believe that's going to be a long, long customer recruitment. So I'd say they are ready.

So before we talk about some of the customers and the deals, I did want to make sure up front, I ask you, there's so much change in the market, Simon. Visa last week launched a bunch of different products. One of them was Flex Credentials, which is almost like a carousel or rotation around funding, which is fun. But there's been a lot of questions from investors around, okay, how do you actually enable it? How do you get into the market? Who are the providers that do that? Of course, we thought of Marqeta. So can you quickly talk about what Flex Credentials is and will Marqeta play a role in this development?

Yes, absolutely. We have been very involved. And we are playing and will continue to play a very active role in this. This is a big step in the ecosystem. This is not a small step. And let me explain why. So what this enables, I guess, consumers and merchants or the ecosystem to do is separate the loan from a payment card. So the card technically becomes the wallet, but let's stable that analogy. So it allows consumers to have ultimate choice on a transaction by transaction level. So you have 1 payment card and you say, "Oh, for the banana and orange juice, I'm going to pay in debit. And, hey, for the -- whatever, for this new drill that I'm going to buy, it's going to be credit." So without having to swap cards or carry multiple cards. So that is kind of like what the consumer behavior is going to be like. However, so this use case, which is the debit/buy now, pay later at the hands of the consumer, is something we have innovated and honestly launched on our own with our buy now, pay later customers like Affirm and many others. And that use case over the last year has grown 7x for us, 7x, not 7%, 7x. And the run rate right now running through those pipes is over $4 billion in annual spend. So we have great product market fit, okay? Now what the Visa announcement allows us to do is now that we've demonstrated that this construct work, we can take it mainstream. We can take it to scale, meaning we can attach buy now, pay later to any debit card, not just the debit card issued by Affirm, Klarna, Afterpay and it goes on and on. So Marqeta becomes the distribution channel for our partners and it moves away the value addition from the acquiring side to the issuing side. It cleans up the clutter at the checkout because right now, go to checkout and you see checkout by Affirm, checkout by Klarna, checkout by whatever, checkout by PayPal, checkout by Apple. And what happens? The consumer will pick the brand they're most familiar with. They click on Apple. So now there's going to be 1 checkout by them, which everybody has talked about, right? But the power is in the hand of the consumer, which is something that is very pretty. And to Marqeta, this is a big, big development because we will be able to give, A, the consumer the choice. We'll be able to distribute buy now, pay later to any debit card. So you expanded the market beautifully for us. And last but not least, all these buy now, pay later folks don't have to go merchant by merchant, especially with a long tail and try to recruit them. They just go through us as a distribution partner.

And the key, Sam, is you've already done this at scale and you've already built this out from a debit plus perspective and some of these BNPL players, correct?

Yes. And we, I mean, I'll defer to Visa to announce the exact date they're going to market, but we are ready. We've been working on this for a year with them.

No, it's exciting. It sounded like a big breakthrough. It kind of reminded me a little bit, right? A lot of the hard work up front got done with Apple Pay, and then you replicate that and you've seen it with Google Pay, Samsung Pay. And this seems like with you, you at the beginning, you solved all the hard work upfront and now it's going to get expanded and exposed to others.

That's right.

We'll ask Visa tomorrow. Stay tuned, everybody. So let's do some of the deal activity. I think the one that stood out to us in the first quarter, I know you announced that intra-quarter was with Rain on the human capital management side, the payroll side. Can you tell everyone a little bit more about that? Why did you choose to work with Rain and vice versa? And why is that one so unique from a partnership perspective?

Sure. Yes. I mean, we've mentioned multiple times the accelerated wage access or instant wage access is an important space for us. We've publicly talked about Uber. We've publicly talked about Walmart. So for us to broaden the solution, we have to go through multiple distribution channels. So the market is a $2 trillion market and there's concentration. There's concentration at the top, there's a fat middle market, and then there's a long tail. So the labor marketplaces is a great distribution channel for us. But for the others in which you do have folks that are W-2 employees versus 1099 employees, right, you have to actually get into the how much people are going to be paid and when, not just the money transfer part, which Marqeta handles beautifully. So Rain allows us to do so because they are managing the timesheet effectively of that labor. And their focus is on the franchisees, not labor marketplaces or the very high-end retailers or warehousing or B2B, so on and so forth. So that opens up a big market for us. To Rain, they also got a good distribution partner. I mean, we've built a sales organization, they know how to call on the enterprise, and we're having those conversations. The first thing that comes, they ask, can you do our payroll for us? I'm like, no, we're not a payroll provider. We only move the money. So we can bring Rain into the account and offer a bigger solution.

Okay. Should we expect more deals like this, Simon? Is this the beginning of something new?

Yes. I mean, we already work with ISVs. I'd say we're working with Wagestream in the U.K. around that. So there's quite a few of those that are regional players that we'd work with.

Yes, no, because I think the payroll side is interesting. I know we get a lot of questions around Walmart and whatnot, but it feels like it's well understood, this opportunity, no or?

It is. It is. Absolutely. I mean, for contingent workforce, it's great. For W-2 workforce, Rain gives us a clean answer.

So really, a few more topics I want to hit upon. But let's do expense management. We have a lot of expense management companies at the conference here. That's accelerating for you, I think, in the first quarter. You've been gaining share at some of your customers. We've been hearing more and more, I call it load management. We will have more than 1 provider that's doing virtual card processing for expense management. How do you gain share at an account beyond price? What else is the vendor looking for?

Yes. I'd say that we started working with those highly innovative expense management companies around real-time spend management and all the controls that you can put on the Marqeta platform. And that has gone really well. And where we have seen kind of like the load balancing is on the virtual one-time usage of that, mainly in bill payment, more than it is a consumer taking a corporate card and spending. But what we've seen lately, and it's reflected in our Q1, is a lot of the expense management customers that started distributing, as the load started growing and realizing, well, hang on, at scale, life is not that easy compared to when you were starting. So they're coming back to Marqeta, I'd say, for 2 to 3 reasons. I mean, the first one is service. This is not easy. So the customer service that Marqeta provides is enterprise quality versus what others offer to long-tail customers. So if you're starting, you might distribute, but as you grow, you have to come back to great customer service. The second one is credit. There is a nice blend. All these folks have expense management solution, they want to provide working capital in elastic fashion, and they want to provide more financial services. The breadth of the Marqeta platform helps them do that and reduce the cost. The third thing, which is international expansion. Like, when these guys go sell to larger organization that has a distributed workforce, well, guess what? That distributed workforce is not in the United States, and they need those corporate cards. So they came back to Marqeta and said, can you guys light me up in those countries? I'm like, absolutely. And then they beg the question, well, why the hell then am I distributing this? So they're coming back to us. So we are very happy with where we stand in this market.

I mean, just thinking about some of the hot markets you've been in, expense management, BNPL, on-demand delivery, we've seen ups and downs, at least reflected in the stock prices. But your bookings have been strong, and it sounds like things are running a little bit ahead of plan. How healthy would you say your core end markets are?