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

All right. Thanks, everyone, for joining. My name is Will Nance. I cover payments and Fintech here at Goldman. We're really excited to have Simon from Marqeta today with over 25 years of experience in B2C and B2B companies, Simon joined Marqeta in 2022 and was appointed CEO in 2023. Simon, thanks for being here.

Thanks for having me. Appreciate it.

So Simon, great to have you here to discuss the business. Maybe we could start off by just talking about the market opportunity for embedded finance and modern card issuing. How would you frame that opportunity today?

Let me first thanks for having me, and great to meet you all. I'd say that -- I mean, let's start with the market, the big picture. If you look at kind of the processing volume, which is basically the spend on a card with Mastercard and Visa in the U.S. and the EU, it's about $15 trillion annually. And if you look at our volume, which has been growing nicely, about 30% year-over-year and getting close to $300 billion annual, it's still just 2%. So we've got 98% to go. And we believe that this market is all available. And the good thing that we always think about is that have many vectors for growth. The first one I'd say is the market itself. We have all these great fintechs that have won and continue to win and they want to do more with us. And then we have these brands that have looked at these great fintech products and they want to distribute them to their large audience, and that's embedded finance to me, I consider that as a second stage booster. And then the third thing I'd say is international, which is growing very fast for us. And the fourth thing is the new cohort, when we got our go-to-market motion right, the new cohorts are performing to plan, and that's a big growth vector for us. So I feel pretty good. I mean it's early, but the trajectory we're on is -- points to really good growth.

And when you think about Marqeta penetrating that market opportunity over time, we've got incumbent solutions as well as a handful of challenges that look more similar to Marqeta. What do you think differentiates Marqeta the most from those competitors?

Well, the incumbents provide, I'd say, scale and resilience and the challengers provide innovation. The beauty about Marqeta is we provide both. So we've got the scale, but at the same time, we move fast, to meet the needs of the embedded finance players and the new economy. So I mean, international would be an example of that. Like we've got a customer that launched in 17 countries at the same time. I mean, the concept of a global financial solutions product is nascent. But we're on our way there. Like if you look at Big Tech, and I come from that space, we know how to build a widget and scale it everywhere. This concept that I have to think country-by-country, we're not wired to do it well. So with platforms like Marqeta, I think they can do that. So I think that differentiates us, which is the ability to combine scale with innovation on a global basis, and we've invested a lot in program management. And with this new regulatory environment, it's paying off. So I think we're very well differentiated. And I think the moat is going higher.

Yes. Makes sense. You mentioned kind of scaling country by country. International is a big opportunity. We've seen some really rapid adoption trends in consumer fintech in certain parts of the world. So arguably a lot faster even than what we've seen in the U.S. I think earlier this year, you spoke about launching Trade Republic, and the growth that you're seeing from that customer, what kind of trends are you seeing in international? And how do you see it kind of moving ahead?

I'd say, in some ways, the European market is developed faster than the United States and is actually accelerating. So I mean, we have to understand kind of why. The interchange is kind of capped. In Europe, interchange is what actually it gets collected when there is a transaction done with a card, it's capped. So the Europeans had to press harder for innovation and figuring out different business models and they have. I mean I've got some of them are making money from performance advertising. And so the market is moving faster when for us, the growth has been phenomenal. I mean in the -- I'd say the first half of this year, our growth is 100% from the first half of 2023. And we've got 6 customers right now, they're doing over $1 billion in total processing volume. And you mentioned Trade Republic in 6 months from 0, they're now in the top 10 Marqeta customers. So we're very excited about that. And I'd say we expect that growth to continue because you've got a lot of U.S. companies that are eyeing the European market, and they've developed on Marqeta, and they can seamlessly transition to Marqeta to Europe and vice versa. You've got a lot of EU-based customers with a hit product, and they want to move it to the United States. So we are investing in Europe, and we opened up an office in Poland, where we're doing a lot of program management work at the low-cost solution compared to the U.S. so they can support the growth in Europe.

Yes. Makes sense. One -- I guess one more on the big picture. You shared a lot at your last Investor Day about the acceleration in bookings momentum. You kind of referenced it earlier about what happened once you got to go to market, right? Are things progressing as you'd expect 1 year later? And how would you kind of characterize what pipelines look like today?

So I mean the nice thing about our industry and once we've developed the experience, we got a predictable business. So honestly, I look at a curve, and we're hitting everything in the curve. So I'd say things are exactly what I expected them to be, which is awesome. And at our Investor Day, we actually said that the new cohorts, which is the deals we've closed after Q4 2022, when we change our go-to-market motions, will contribute $20 million in 2024 in revenue, $50 million in 2025 and $150 million in 2026. And today, I feel confident about those numbers, which is, look, it talks to the predictability of our business, but also speaks that look, it's early, all right? But if you look at the trajectory, $20 million, $50 million, $150 million right, and we're on that trajectory, that's growth. In terms of the pipeline, it's actually growing fast. I'd say there's 3 categories of deals in the pipeline. First one is fintech companies that are launching more programs either in the United States or in Europe, if they are U.S.-based and vice versa, if they are European, they're launching in the U.S. So that's one category. Second one is embedded finance, which is brands, massive brands that have massive distribution looking at fintech as an engagement tool versus a monetization tool, and we can talk about who the poster child is but I mean there's quite a few. But that's another big chunk of our pipeline. The third one is credit. We've got a lot of customers that we have been working with them and launching great programs on the debit side, and they want to add credit. That's both commercial and consumer. So our pipeline is growing very fast.

Got it. I guess as a follow-up, you also announced Varo Bank this past quarter, a 5-year exclusive deal and a migration from an incumbent issuer processor solution. So in that deal, what do you think differentiated the Marqeta platform that enabled you to kind of win it?

Sure. I mean, first, Varo is a tech bank, and they have, I think, the only one that has a charter license in the U.S. First, we're humbled by the selection and the partnership, and we like Varo use they're early, they have 5 million cards, but they have great ambitions. And also, they want to innovate, and they were looking for a partner that can innovate with them. It's as simple as that. So -- we see eye-to-eye, they have great ideas. We have great ideas, we can implement them at scale. So that's what's, I think, the core of that partnership. But I want to say -- I want to make sure that people understand that, look, this is part of our plan. There's not like a bluebird and it's over and above our plan. This has been factored in. These deals take a lot of time. And -- but they're predictable. That's the nice thing. It's like now I and myself and our CFO, when a deal materializes, I plot it on the curve and now understand when it's going to generate gross profit. And the standard deviation -- the deviation from the curve is small. So we're very happy with Varo, but it is in our plans factored in.

Yes, makes sense. So one of the 3 things you talked about expanding fintech, more embedded finance and credit. Historically, the company has been mostly focused on the debit side. With the Power acquisition, you brought on credit capabilities, how do you frame the opportunity and the time lines around winning on credit?

Sure. Yes, most of the volume that Marqeta has established comes from debit. Credit was through the acquisition of Power. And early on, we put together a plan saying we're going to integrate the technology in Q2 2023, and we're going to pick a few customers to kind of like test and optimize the combined solution. So we've delivered on those. And it's early, but that's why we want to get it right. So I would say that we are being very selective in terms of credit, and there's, I'd say, 2 opportunities that we are chasing and is chasing us. So the first one is commercial, and that was a surprise for us because we did not expect commercial to be that strong. So on the commercial side, we're looking for either marketplaces or aggregators that want to extend credit to their suppliers. So that's one thread. I mean they have phenomenal data about the financial performance of their suppliers. And no, I'd say, traditional bank is lending to SMBs right now. So these folks are actually extending the credit because they have phenomenal visibility. The second one on the consumer side, we're not looking for the traditional co-brands. We're looking for the brands, I mean, either big tech brands or retailers that are thinking about 1 app to rule them all, that are thinking about engagement and not just monetization, and they want to create top-of-funnel opportunities because that card is addictive. I mean people talk about social media being addictive. Social media is used 2.2 times a day, right? And a card is used 2.2 times a day. So those are the opportunities we're after. So in terms of contribution, we're going to start seeing that in 2025.

Got it. You touched on kind of the concept of a next-generation co-brand just now also at the Investor Day and talking about kind of rethinking how the market thinks about co-branded cards. What do you think is missing from today's co-branded card landscape?

Yes. I mean the traditional co-brand, they've never envisioned a digital product, right? If you look at a digital product, it's all about engagement. And the brands we are talking to have millions, tens of millions, hundreds of millions, in some cases, 1 billion users, right? And no one will underwrite that volume. It's impossible because if you look at the most successful co-brand, whether it's Costco or United or what have you, they are a very small percentage of the audience that these brands have. So the concept of a super card, which is either a debit or a debit plus Buy Now Pay Later or a revolver, right, is what they are seeking. And they're seeking it in a way that integrates into their application, right? I'm a United member, and I love United. I've been a United customer forever, right? Why do I need to go to the Chase app to look at my United miles? It just does not make sense, right? I mean the -- so the co-brands we're looking at are the ones that want an engagement tool. They want it inside their app, integrated into the workflows and at the same time, can provide what I call the spectrum, which is debit, debit plus Buy Now Pay Later and then revolver in the super card, whether it's a wallet or a card. That is completely different than with the old day or traditional or incumbent co-brand.

Yes. That makes a lot of sense. Maybe pivoting towards kind of like the larger FI discussion. I know that the plan that you shared with us last year doesn't contemplate any revenue from larger FIs. But what are your conversations like with that cohort today? And what do you think will be the catalyst for them to evaluate making the switch in the future.

Well, I mean, we did talk about the LFIs being horizon 3, I think, in our investor, so 3 years out. And I think, we're still on that time frame. They're great companies. They do great work, but they're notorious at how slow they are. And -- but I would say that the experience we are assembling, which is migration, which is volume, the scale we have, the resiliency, the program management prepare us to handle those programs when they occur. So we're still on the same time horizon. And we'll -- there's always the -- when will they come, right? I think they will come when their franchise is threatened. And I think on the commercial side, it's going to happen before the consumer side, and I think we're going to see them move slightly faster. But from a big picture, these programs take a while. So I don't think we're changing our horizon in terms of when we start seeing massive amount of revenue from large financial institutions side.

Makes sense. So maybe pivoting a little bit to accelerated wage access. This product has a few different forms in the market. You've got kind of those on the bank or the neobank side, sort of early delivery of your paycheck that's either for a fee or not. And then you've got more of the employer-sponsored solution. So -- and I think that's where Marqeta has the most significant partnerships, Walmart, Uber and Rain. How do you think about just the macro trend of allowing consumers more real-time access to their wages? And what are the benefits from both consumers and companies?

I mean, first, I'll start -- this is a $2 trillion market. So it's huge. And if you look at the U.S. population, in our labor force, we have 80 million that are gig and shift workers. And in our survey, 70% of them want immediate access to their funds. They live paycheck to paycheck, and they barely live paycheck to paycheck. So -- and you look at our -- the interest rates right now, I mean, for all practical purposes, for subprime, it's about 29% APR. So for every dollar they make, they lose $0.30. So if they can get paid 2 days in advance, they save $0.30 on a dollar. So it's math. It's rational. So it's a big business. The second thing, you're absolutely right. There's many ways to do it, but our solution is so unique. There's actually no loan involved. So the way it works, we actually without being too geeky on the payment side, we move the ledger, we don't move the money. So we go to the company and say, "Do you want to pay your users immediately?" As they finish this, they swipe. So we let them know there's money in their account. But we don't charge the company anything until that consumer spends. So the money stays in -- the working capital stays in the bank of the employer, and it accrues interest and then it takes time for all of them, not everybody when they get paid, they go to Costco and Safeway and just buy everything. So that working capital stays with the company. So that's an opportunity for us. And we've done very well with our customers that have adopted our solution. But going forward, we have, I'd say, given the size of the market, we have, I'd say, 3 channels that we're pursuing. First one is ISVs like Rain, which we announced. They have a great solution, and they plug Marqeta in. The second one is labor marketplaces that are mushrooming everywhere. I mean -- and we plug into those. And the third one is going direct to the large employers. So it's kind of like a pyramid. The top of the pyramid, we're going to go direct, the mid-market, we're going to work with labor marketplaces. And then for the smaller, which is the bulk of the market, we'll work with ICs.

Yes, makes sense. And maybe just thinking about the benefits from consumers, like I'm sure you get some kind of insight into opt-in rates. Just what's the consumer response been to kind of products like these?

Huge. Like I mean we're talking -- like I hate to say the numbers are hard to believe, but like almost everybody wants it. The other thing, which is interesting, that a lot of the customers working with the employers, they are making the default payment option because they save money. The payroll run cost on nothing. They actually get paid because they take -- I mean Marqeta keeps its rate, and we give the interchange to them, and they reward their consumer, but they keep some. So what was a cost line, now it's a revenue and flows straight to the bottom line. Like they have no cost. So it is a win-win-win. And -- but the most important thing is, I mean, the workers themselves are actually saved from the $0.30 on the dollar abuse. So of course, the adoption rate is huge.

And I guess just with partners like Walmart, I mean they're often kind of price setters in the industry famously. What do you think this does to sort of competitive dynamics between retailers? And could this be like a watershed partnership that leads a lot of their competitors to then follow through?

We believe so. I mean the adoption we're seeing because a lot of those retailers go to the labor marketplaces to expand their workforce in an elastic way. And today, if a labor marketplace doesn't offer Instant Pay, they're kind of out of the market, like people will go to another labor marketplace. We do have a labor shortage, especially in low scale or average scale. So that will create a massive competitive advantage, if people don't offer Instant Pay.

Yes, makes sense. So okay. So switching to Buy Now Pay Later. It's one of the fastest-growing parts of the fintech ecosystem. Marqeta has been an integral partner to pretty much all of the major providers in this space. So kind of big picture, how do you think the BNPL market is evolving?

I'd say, which is very interesting, the Buy Now Pay Later market is witnessing what I call the mainstream moment. What I mean by that is what people perceived was a niche on the checkout is now a mainstream product. And let me kind of like -- just to put kind of the order of magnitude to where BNPL is, and what the put -- what shifts we're seeing. So I think e-marketer or many analysts have said that the BNPL market in the United States is $80 billion. That's 2024 estimates. We think it's higher, but let's take $80 billion. And then 70% of that, just for the sake of calculation, is interest free, which is paying for. So now we're talking $64 billion of float or TPV. Now if you compare that to that 25% APR, then you're looking at $16 billion. Just to put it in an order of magnitude that was injected by the private market into the retail industry. That's huge. I mean, just to put it in perspective to what the government tries to do to spur the economy. So it's making sense. But what we're seeing in Buy Now Pay Later is the big shift from insertion into specific retailers or basically at the checkout to creating the BNPL anywhere. So the ability to attach Buy Now Pay Later to a consumer card or to a wallet, and you can go use it anywhere you want. And if you look at the industry, most of the processing volume is in the very long, long tail. So by enabling it, right, to be used anywhere, not the Select2 that BNPL was able to reach through business development, right? You're going to see an exclusion in Buy Now Pay Later. That's only going to be capped by the ability of the BNPL providers to underwrite. But they've gotten the numbers correct, right? The unit economics is working. And now it's a question of distribution and getting it into the hands of the consumers. I think the other stat that I love is that I think the Board in Boston -- Fed Board in Boston, said it's only 9% penetration. So there's 91% to go. And I think that new construct, which is tying BNPL to a card or to a wallet, which Marqeta enables and our moat is much higher there right, is what is going to unlock a new second stage booster for BNPL.

So maybe flex credentials is a part of that. Marqeta is the first issuer processor to support the new Visa flex credential product with the firm. Visa has positioned this product as kind of reimagining what the card could look like, so a single credential that references both credit and debit products. How do you think about the flex credential in the context of Marqeta and BNPL?

We love it. And honestly, we've been involved from the get-go. We spend a lot of time with Visa and Mastercard talking about this concept because it is so important for the ecosystem to provide the underlying construct for Buy Now Pay Later or the switch between debit and credit because look, I mean, if you look at every industry where tech has penetrated, whether it's advertising, media, news, whatever you want, you've got machines making decisions on behalf of people, it's called algorithm, right? So the ability for -- just in time to make a decision between buy now -- sorry, pay now, pay later or revolve, right, you need the infrastructure to support us as a platform to support the consumers to do so. And I think the Visa flexible credential now only does debit to BNPL. But you can imagine it's going to do a revolver, and we're working with both Visa and Mastercard. So we're very excited about it. But -- and we were the first issuer to support them. And honestly, we've been working on it. It's not that we woke up one day and did it. But it also honestly demonstrates the power of our platform that in a short period of time, we're able to support that. And it's not a small change in the ecosystem because you also have to support the merchant part. You've got to tell them that this card is actually a consumer credit card and not a consumer debit card. So anything they need to do around the program management, which is direct fees, chargebacks, which we do as well, right, they have to prepare for that. So that speaks to the nimbleness of our platform.

Yes. The -- so I guess one of the kind of technical impacts of flex credentials was allowing kind of issuers to kind of step up, get credit interchange on those transactions as opposed to kind of the baseline debit. A lot of BNPL today gets done to direct integrations at much higher MDR. So just how do you think about pricing and unit economics in the BNPL space, particularly as you move into the POS?

Sure. Yes. I mean if you look at the -- some BNPL is direct integration into retailers, and now the checkout box has become so complicated like you go to check out, and they give you so many options, check out with PayPal. Checkout with this, checkout with Apple Pay, check out with this. So guess what consumers do. They go to the brand, they love the most, which is Apple. They click on it, and there you go, right? So -- but that doesn't make sense because you are confusing the consumer at the point of checkout. So the right implementation is nothing on the checkout you see press checkout, it launches the wallet and the machine will choose which BNPL player that needs to be selected based on algorithms and what have you. That's where we're heading. And the beauty here is that you can use it anywhere, #1. The second thing is there's no confusion like some retailers are confused, like, is this debit or is this commercial credit? Or is this construct? What should I do? Reg E versus Reg C by going and working with Visa and Mastercard saying, folks, let's stop this debate. It is consumer credit whenever a loan is issued, if no loan is issued, it's debit. So if it's debit, and we will inform the merchant in the transaction, if it's debit, it goes to Reg E and has Reg E Standards, if it's credit, Reg C. And we're done and the regulators are not confused. So that's the beauty of what this thing does. I hate to call it standardization, but that's kind of what it is. So now from an economics perspective, yes, is commercial credit more than consumer credit? Yes, it's a few basis points. But would you trade that over massive distribution, of course, any day, right? You can definitely make that up in volume and a lot more. So I think it's a win-win-win.

And I guess, just lastly on this topic, what are you hearing from more traditional credit issuers in the space? And how do you think about the future of flex credentials and kind of the traditional FI space?

I'm going to say a joke and then get to this year. Look, there's a reason dinosaur died, I mean like -- like you got a comet that hits Planet Earth, and it couldn't figure out how to breathe, right? I mean it's the same thing here. Look, that's not the sandbox -- in all fairness to them, they have great businesses, right? And that's not the sandbox they play in. So if you look at the folks that are working with Marqeta, it is the innovators. And it doesn't mean like a Silicon Valley venture from the company. You have innovators at Walmart. You have innovation at Google. You have innovators at Facebook, list goes on and on and on. You have innovators at Target. And what they want is they built a really, really good product that integrates with their massive audience, and they can go from debit to BNPL to credit in a very seamless way, right? Those are the folks we're working with. And I don't believe that's the folks that the incumbents are working with. So now they've got plenty to work with over the next decade, we got plenty to work with. I mean, again, these markets are in trillions of dollars, which is 4x or 5x the size of the entire advertising industry, which has been feeding all Silicon Valley. So there's plenty of room for both. But honestly, we -- it's a completely different -- like the Venn diagrams barely intersect, right?

Yes, makes sense. Maybe just switching gears to a different industry topic in the kind of commercial virtual card space in B2B. I think this past quarter, we started to hear kind of a widening out of some of the issues around virtual card acceptance in the B2B space. And I'm just wondering what your thoughts are on that trend and just how you think about the sustainability of virtual card as a payment matter...

Sure, sure, like on the B2B side. Yes. I mean, we see -- this is like a cyclical thing. I mean we see merchants saying, "Oh, we're not going to take a virtual card." Like 6 months later, they come back. But also the addition of new merchants is a lot more than the churn. So in our model on the B2B side, we actually predict it. So it's baked into our -- like some merchant losses is expected especially when they do ACH integration, but it's not something we worry about at all. I mean, there is a lot more additions than churn.

Got it. And so I guess, like broadening it out, it sounds like you're still pretty optimistic about the growth in sort of that AP spend category.

Yes, absolutely. I mean the savings that you get -- I mean a lot of people don't understand that in B2B that the interchange is negotiable, like you can set it to zero, if you want to. So I think there's a lot more market because the savings from integration into AP software like the operational savings, the cost of software saving and time saving right, especially when working capital is about 7%, right? It's definitely a massive opportunity going forward.

Yes. Got it. Got a couple of minutes left. I go to the audience in just a second. But Block has been a big partnership -- a big partner for you for a while. I think this past quarter, though, you called out 10 of your top 20 partners growing at over 50% in the second quarter. So just how do you kind of think about the Block revenue mix over time and kind of the mix of growth between the 2?

Sure. I mean, right now, our Block revenue is about below 50% and from a gross profit perspective, is a few points below. So look, I mean, our non-Block business is growing faster than Block. But I have to say that there's still tremendous opportunities with Block. I mean the card adoption is only 40% of the installed base, only 10% of cardholders are depositing their paycheck into Cash App. And the company made a decision to take more and offer more banking services. So we are going to see growth with Cash App, but I mean, there's at some point in time, you hit the -- some form of a growth rate ceiling. So our non-Block business will grow much faster.

Makes sense. Still in the last minute here. I wanted to see if there was any questions in the audience. Simon, just maybe to close this out here. Would you mind sharing your thoughts on capital allocation. You've done some smaller tuck-in M&A over time. You also announced a new $200 million buyback in May. The margin profile of the company is expanding. So how do you think about the capital allocation framework as the free cash flow generation continues to evolve?

I mean we believe that the price of our equity is very low. That's why we keep doing buybacks. And from an M&A perspective, we have a full stack, and we have a great solution. But I'd say some of the M&As will be like tuck-ins and something our CFO says, only a payment geek would like, but we have a very good stack. And I think that we are extremely uniquely positioned, especially when you look at the brands that have reach in Europe and the U.S. So we have some, I'd say, gaps in program management or on the -- be able to support multiple banks so on, and we hope to fill them either organically or through M&A. But our focus right now is continue on a stock buyback because we believe our equity is extremely undervalued.

Got it. Makes sense. That's about all the time we had. Any final thoughts you'd like to leave us with today?

I mean I didn't come from payments. I joined the industry from Big Tech. And I tell you like there's so much opportunity. Like if you look at it as an industry, our tech industry spent $1.1 trillion on optimizing advertising to make you click on an app, right? If you take 10% of that industry and apply it to underwriting, apply it to payments, you can create accretion in the trillions of dollars and increase purchase power, right? It is actually significantly easier than it is to guessing, when people are going to click on an app. So we're very excited. The pipeline that we have is growing so fast. And I mean I consider this is 1913, and we're building cars. Not a lot of roads have asphalt, but it's big. And the trajectory, I mean, is predictable. So we're very excited about this.

Great. Well, Simon, thanks for being here today. Really appreciate your time.

Thank you.