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

Right. Fantastic. Welcome back, everyone. I'm very happy, very pleased to welcome Todd Pollock, Chief Revenue Officer of Marqeta, back again to the conference. Todd, thank you so much for coming back.

Thanks for having me.

Why don't we jump in with a relatively high-level question, which is just embedded finance. You guys have used the term, investors hear it a lot. Define it for us. What does it mean to you? What's the sort of opportunity of embedded financing?

Yes. I think if you look back maybe 5, 10 years ago, Marqeta's business was essentially with fintech customers. And these were all start-ups of venture-backed and they had to build their own audiences. And that means not only do you have to be skilled at financial services, program management and really understand the payments ecosystem, but you really have to start from scratch in terms of building your cardholders. And that takes time, energy and a lot of sophistication and a little bit of lightning. So that the hit rate with those customers is probably not what you would want it to be from a likelihood of quality and scaling of the program. And you see actually recently, there's news of some of these companies that started like 5 or 10 years ago doing competitive business with Marqeta or against Marqeta announcing that something like 40%, 50% of their customers are not succeeding and are going under. So if you think about it in finance, the transition is really about finding businesses that were serviced by those fintech startups. And those companies are now saying, I want to take those services in-house and do it myself as part of my platform and a service that I provide. So an example would be Ramp is a big winner in fintech, right? They came out, they have an expense management program. That's not embedded finance, right? But AffiniPay, which is a customer that we work with is a platform for attorneys that provides all kinds of services. And what they're saying is we want to issue cards and expense management, similar to Ramp as a competitor but it's embedded in their experience and their platform so they can do reconciliation, they can do all kinds of things that Ramp can't do that become ancillary to their business. And so the other big difference, I would say, is a fintech is highly, highly reliant on processing, and that becomes the main profit center of their business. In embedded finance, really, what you have is it's an ancillary product line. And it's not typically seen as the primary driver of the business. It can either be a breakeven proposition that winds up kind of increasing either engagement, loyalty for the core assets of the company. And so there's this massive shift away from my entire business is predicated on processing and making money through interchange or whatever it might be to I am using this as a means to drive my core growth of my platform business or whatever you're doing. And so we think that, that is where the future is. We are preparing for that, et cetera.

So for those clients, it's not just about an ancillary revenue stream, it's also about engagement and deepening their relationship with their customers, et cetera.

Correct. It is very common to hear someone say, look, as long as we break even on this program, we see this as being a huge opportunity. And an example would be, think of like an embedded player that does streaming services or whatever it might be, they might have a card program, not because they believe it's going to be wildly profitable but because they're a lot like Amazon, and they know that by having a card on file, they're going to increase the loyalty, the amount of purchases that happen on the platform, et cetera. And so a streaming provider is not in the payments business, but they might look at it as a way to deepen your likelihood to rent movies from them, et cetera.

That makes a ton of sense. Block continues to be your largest customer, but this weighting has been declining. The non-block revenues are growing faster. Maybe you can help us kind of dive into the non -- the drivers of non-block growth a little bit. What's beneath the hood of that sort of shift you're seeing?

So we love Block. They continue to grow. But if you kind of look at the shape of our business, I think we announced this quarter or Q1 a percentage point decline in their overall contribution. I think it's now at 45%. If you go back a year ago, it's 4 points less -- 4 percentage points less than it was. So that's a result of the success of leaning into other growth areas of the business, specifically, financial services is growing over 100%. BNPL is growing a little bit faster than our average growth. And then you've got companies in Europe, we now have $3 billion TPV volume customers in Europe. So we're -- our programs are scaling. And I think it's just a testament to the fact that the business has been successfully, I guess, distributing its revenue over more customers.

I guess it also speaks to the size of the -- maybe the secular opportunity of embedded payments more broadly speaking, obviously, just with one customer or more broadly speaking, that you're -- there's opportunity out there that you guys are able to address and that secular shift may be compel -- driving higher growth.

Yes. I think there's 3 opportunities really for Marqeta, right? One is we have this incredible existing customer base where we continue to see them add programs, add geographies. And that is a huge driver of growth for our business. I think the second thing is we were big winners in first wave of fintech 101. So you have companies like a DoorDash or an Uber, who continue to grow at significant rates. And that's -- so their core programs are growing. So we get organic growth off of our existing book of business. And then I think we've been very successful in the marketplace, acquiring new programs, given that our platform happens to be one of the few modern players that are operating, not only at all with reliability, program management capabilities, but also capability. And those are kind of the 2 pieces that really matter to folks as they start to evaluate who they want to work with.

Speaking of 1.0, I heard some echoes of FinTech 1.0 and that you linked a deal with Bitpanda that you announced this quarter. And I remember crypto was kind of a sleeve or an opportunity that when it was -- when that ecosystem was expanding, you guys were sort of right there, it kind of feels like we might be seeing a bit of a redux of that. So maybe tell us a little bit about that particular partnership. And maybe if you can drift into whether -- what the sort of crypto pipeline might look like at this point, generally speaking.

So it's old is new. Crypto, I think everybody thought was the second coming when it first started. And with all new industries, it takes longer than people think for these things to catch on. I think with Bitpanda specifically, one of the things that's really, really nice for us. Number one, it's one of the first programs in Europe that we've stood up at a flip. So immediate revenue, right? There was an existing card portfolio there that we migrated over. And not only that, but the entire sales cycle to actual live program launch with cards active in market was a quarter. So really, really fast. So that was really great. And specifically, that is now, I think, 1 of 3 programs in Europe that we are program managing. So program management is brand new for us in Europe. We've been doing it in the United States for years, but we hadn't had the capability in Europe. And so we're really, really excited about that opportunity. I can't speak to future pipeline, but we've been doing, as you said, this for a while, crypto has been something that we've been translating in fiat currency, I think since the beginning. So it's not a new use case for us. It's just -- I think in Europe, it's really exciting to see this taking off. The idea that it's a flip, the fact that we did very quickly in 1 quarter, and then also the idea that this is going to be managed by a program, program management for us. So all exciting firsts.

I think the other -- another deal that you talked about in the quarter Perpay was also a migration, if I'm not mistaken. So I guess maybe touch on that deal, the significance of it, but then also sort of maybe comment on -- there are a couple of migrations you're announcing. What does that say about market share about your guys' ability to maybe take share in the marketplace?

Yes, I think it's a great question. And it kind of goes back to -- if you think about this market 5 years ago, lots of competitors. And people are making decisions with less than perfect information, meaning you're not -- it's not clear who the winner is going to be in the marketplace. So Marqeta is competing against lots of folks. People make decisions in the early days, again, based on imperfect information. And what we are now seeing is people bumping up against the limitations of those initial partners that they may have selected. And that could be anything from they didn't get to scale, so they couldn't invest in new capabilities, they couldn't invest in the scalability of the platform, this is a pretty common occurrence now. And so Perpay is a perfect example of a company that made a decision to choose a partner in the early days. And then that company while seemingly looked like it would be one of the winners ultimately did not succeed. And as a result, they had latency issues, they weren't investing in the platform, so they went looking for a partner, they came to Marqeta and now for us, the muscle is how do we make sure that we make these very seamless transitions because migrations are complex. And so we announced the capability where we now have kind of a packaged offering around migrations to make it simple, fast, easy, so we can do more of them because we do anticipate that there will be more. And we're starting to see more and more companies both from the legacy side and some of the modern smaller players really start to come to us and ask, can you look at our program? And is this something that you could stand up within the next 6 months?

Interesting. So there's a little bit of a shaking out in the industry in terms of who's made it across the finish line and who hasn't been.

Yes. And this one is interesting specifically because it's credit, right? It's consumer credit. So for us, we made a big investment in Power a couple of years ago and acquiring those capabilities for program management for true credit and consumer. So for us, this is a big milestone, too. It will be our second consumer program that will stand up this year in credit. We had commercial programs that will stand up in credit. So we're on our way.

Yes. Maybe talk a little bit more about credit about that offering. It seems to represent a pretty big opportunity. I know you guys, to your point, have made the investments and it seems like the deals are starting to get signed. So maybe talk a bit more broadly about that opportunity, how it fits into the broader opportunity set.

Yes. And the way I think about great companies or great companies that I've ever worked at, is that regardless of the economic cycle of where you are, you have the opportunity to sell something that is meaningful to your customer. And if this was only a debit business, meaning Marqeta was only in the banking and money movement or debit business. You're limited to who's willing to do business in that particular area. And as I mentioned, the big percentage of customers that we work with, our growth comes from them expanding into either new geographies or additional concepts to their program. Most banks make money from lending. And at the end of the day, it's really important that we are there to provide those services to these companies. And what we are seeing is with our existing customer base, most eventually who started on the banking and money movement side want to consider some form of lending, whether that's the NPL or true lending revolving credit. These are things that have become a big percentage of opportunities that we're looking at. And we're being very, very cautious and thoughtful purposefully because, as you know, lending is a fraud business, and you obviously want to be very thoughtful about who you work with and what you take on and how much and how fast is certainly in the early days. So we see lots of opportunity in the market. I think we're well positioned and I think we're being very prudent about how we go about it. So.

And so you're seeing customers who are basically saying, look, our model is evolving in a certain direction where we need to basically pair credit with debit, and that's -- so basically, that's sort of driving you guys to provide the full suite.

Yes. The way I think about Marqeta is we want to be there for you for the entire life cycle of the company or for your servicing of the prospective end cardholder. So a great example is Flex. Flex is something we announced. It's interesting theoretically. I don't want to say it's a big driver of the business. It's not yet. But I think it's interesting theoretically. And what it does is it says look, you are a debit cardholder, but for your transactions, you want to be able to, let's say, borrow money, but you are not creditworthy, full true revolving creditworthy. So I'm going to BNPL enable your card. And so what we do is we take our existing BNPL partners, Klarna, Affirm et cetera. And then we take the issuer and we say, we will give you these capabilities on the debit card. So this person who needs access to capital for whatever reason and can't get true revolving credit, either because their FICO score is too low or what it might be, thin file client, whatever it is, those people get access to BNPL directly on the existing card they have. The only company that can do that today is really Marqeta because we own both sides of the equation, and we can match the issuers with the BNPL providers, and we have a unique insight into how those people spend. So it's an existing opportunity, but I don't want to oversell it and say it's something that's a massive growth area for us. But it just shows you how the market has evolved.

It could be someday. It could be. It could be.

It's a bridge between true debit and true credit. And so what you want is a spectrum, right? And that weighing on who your end user is, you have lots of options of how you might service them.

So in terms of the competitive -- that competitive environment, you talked about some competitors who may be falling away in terms of them not having gotten successfully from Point A to Point B. But when you do have an RFP type process, how would you characterize the competitive environment among those folks who would still -- do have some sort of chops to compete?

Yes. So look, one of the nice things about where we -- sit currently as a business is that we have both achieved a certain scale and reliability that few others in the industry have achieved. Certainly, of the modern players. There's almost none that have achieved the size and scale of our processing business. And then you have legacy players who are bigger, and they're reliable and scalable to a 10th degree like they're much bigger than us. So they are seen as is incredibly reliable, but they're also incredibly inflexible. And then on the other side, you have modern players who have lots of capabilities and look really great when you look at their front-end capabilities, their APIs, but they're not tested and proven on the scale side. So most of the RFPs we're in, we're competing against either players who have a lot of scale and reliability and program management or they have capabilities, but not both. And Marqeta tends to sit right in the sweet spot in the middle there, where we've achieved this unique status. We are seen as reliable and proven. We are doing program management at scale. We have big customers in debit and in credit. We have all the BNPL providers. So we're -- we have a unique set of experiences going from very small to very large programs and everything you learn over managing those programs as well. So we are truly differentiated when we go out into the market because those smaller players don't have programs with 1 million cardholders. So it's -- you're really not competing. So again, it comes down to capabilities and reliability and scale. And it's much harder to build scale than it is to build capability. So Marqeta's opportunity is to build capability at a rate that makes people excited about, we're not only a leader in the market from a -- to make it interesting enough to someone at that business that they're going to support and they're going to look at it as this is a future growth opportunity for this company. If you get to that -- what happens next is what other capabilities can I add that will drive deeper engagement that will increase the revenue of the program, that will get users to pay more attention to my card and get to the top of the wallet. So one of the things that happens over time, and we see this pretty classically is, first, it's new geographies. I want to take the contract that's working, and I want to move overseas. And that's the first thing. And the second is, okay, well, now that I've done that, I want to add capabilities. And so if you're a BNPL player, and I want my own -- I started with virtual cards. Now I want my own card. I want to own the cardholder. I don't want to rely on the merchant. I want to do it myself. That's like a good example. I want to do it in multiple geographies. And it's -- if you're a platform like Ramp, you are -- I have all these capabilities, and now I want to be in more countries. And so what we see is the companies that are successful tend to grow, and they grow on either multiple dimensions or single dimensions. So what you're really after is programs that you believe are going to get to scale. And so one of the nice things about working at Marqeta, at least for me, is I get to pick and choose what I do and do not want to do. And not everybody is in that particular space yet. So for us, when we talk to a prospect, we're evaluating them as much as they're evaluating us because we have resources, make investments in them in the early stage of the program. One of the really great things that's happened over the last 2.5 years, as I would say, we've talked a lot about moving up market. That is a very conscious decision. We are prepared now to work with programs that are only committed to actually getting to scale.

That was my next question about moving up market. Okay. Talk about that strategy and what the opportunity is and how you get there.

Yes. For me, it's like a homecoming. Other companies in the C-suite, talking to CEOs, convincing them to do things that they didn't want to do. And Marqeta is now at a place where we've invested significantly in hiring an enterprise sales force, adapting our products so that they're prepared for the enterprise. And what that means is everything from build an app, a white labeled app so that the company doesn't have to actually add directly into their website, the bigger the company is, the less likely the buyer is going to control the website experience. So you have to have the ability for this person to launch without having to touch that core asset. So we've invested in the UX toolkit, which we launched and announced, I think, last quarter. And then -- the other is the migration piece, right? We're investing in that for that exact reason as you move upmarket, most of these people have. One of the nice things about moving upmarket is the likelihood that those companies will get to scale, they have existing user base. They have marketing engines, right? They have huge investments in their marketing. They have strong brands, consumers are usually or their business users are usually already high, high loyalty affinity. So none of that has to be built. So for me, moving upmarket is a testament to, we have achieved a level of success where we don't have to play in the -- I'm going to make bets on 100 companies this year and 10 of them are going to get to scale.

Do you have all of the kind of organizational type capabilities that you need to kind of pursue that move up market?

So I would say for the last 2.5 years, that has been the focus, to try and develop into a true enterprise class sales organization. And I would say you're always building and you're always in your journey, but I'm incredibly pleased with the progress we've made, and we don't have any brands to announce, but the strategy, I would say, is not only taking root, but it seems to be bearing fruit.

That's great. Earlier in our conversation, you called out some of the recent signings that you had, which were in Europe. Talk about Europe. How is that going? How does it differ from the U.S.

Europe is fascinating. It's almost like it was start-ups, neobanks, right, trading platforms, et cetera, crypto, and that has continued. Whereas in the U.S., we've somewhat moved beyond that, but the growth in Europe is massive. You're talking about 100% beyond kind of like where we were a year ago. So TPV volume there is massive and growing really, really fast. We're enjoying these very, very successful fintech start-ups that at the core of their business, Marqeta is powering their entire business model, and we're successful which is great. I think now we're anticipating the future, which is we have to move upmarket there as well, but the move upmarket is not quite where we are here in the U.S. It's not embedded finance all the way. It's really more about program management capabilities, right? And those are things we didn't have in Europe 2.5 years ago. So incredibly proud of the ability now to manage programs at scale. We announced TransAct Pay, which is an acquisition we made so that we could have an electronic money license for our customers. So we're no longer reliant on third parties for BIN sponsorship, which is a major improvement for us in Europe and something that table stakes if you're going to move upmarket. So while I would say we are -- like Europe is slightly behind the U.S., it's in that really interesting fast phase of growth where you've got these really, really and talented fintech leaders who are fundamentally changing the fabric of the market there. And they're competing with historically very traditional banks, and I would say, money trading partners or trading platforms.

Is it more so than -- is the opportunity there more sort of on the fintech side of things? Or is there also an embedded finance opportunity in Europe or...

Yes. If it wasn't clear, it's -- there's a progression. It's -- we're going from this very, very fast fintech growing business to now program management and the next phase of growth being, we have to be able to be a bin sponsor for our customers and not rely on third parties to do that for us or rely on the partners themselves to do it. It was almost that necessity. In Europe, we had a lot of customers who were their own bin sponsors or we go out and find a provider or a bin sponsor for them. And that's not something Marqeta would provide. And that forces you into a box. You can't compete with everybody when you're like that. Thus the very, very savvy fintech strategy, right? Let's go after very, very savvy fintechs and know how to do this stuff themselves. I think the next phase of growth in Europe is moving into the -- we can be your BI sponsor, and we have program management capabilities. Embedded finance is probably another 2 years off is what I would say.

I see. I see. And what about the overall, the kind of regulatory environment? This isn't necessarily a European-focused comment, but we've certainly seen a lot of changes in the regulatory environment here in the U.S. I believe, at least the headlines would suggest. And so I'm just curious if that has had any bearing on your own business, meaning comparing what was maybe a year ago to what's today, that time frame.

Here's what I will say. I think you see fewer wild ideas in the market. I mean we used to -- people would come and they'd have hair brain schemes that you -- they were very, very clever on paper. Someone funds an inefficiency in the market they could exploit. And all they need is a real change or all they need is something that never existed before, if you could just build this for me. And Marqeta at one point, was very happy to chase that. I think you see fewer and fewer of those ideas coming through to Marqeta. And that's not because of Marqeta, it's just naturally, I think the environment has changed. And somewhat for the better because I do think that those particular ideas have a lower hit rate, meaning less likelihood to succeed. And you find yourself doing a lot of things and you learn a lot, but you don't necessarily get the return on investment. I think now what you see is the use cases are very, very standard with a slight competitive advantage that the brand thinks it has or it has a dynamic that exists with its customer base that it believes it can exploit through a very common use case. So there's maybe 5 things that we see over and over and over again now that are the same use case that people want with a slightly different flavor. But you don't see these massive like disruptive things anymore.

And a question I meant to ask you on the European side in terms of the sort of economic model in Europe, I know there's a kind of a regulated interchange environment over there. How does the program economics kind of differ there in U.S. versus Europe?

Yes, in some respects, it's funny. I used to say startups are -- start-ups that are lean and have fewer resources tend to be wildly successful because they have to force to manage within the confines of what's possible, right? Like I worked at Google. The problem that Google has with innovation is that it has too much -- almost too many resources, too much money. And so everything is like they want to create a business overnight, that's a wild success. It's not really the way objective success happens. And so one of the nice things about the European environment being that interchange is lacking is that these companies are finding ancillary ways to make payments business drive their core business. And this is what I was talking about before. We have a customer, we've talked about them before, a trading platform that's giving away 1.5% cash back on a debit program in Europe, how can they make that possible? Well, it's based on their ability to monetize their trading activity on their platform. And so their users are subscription folks, they actually sign up, they pay a regular monthly fee to have access to the trading platform. And so this business interchange aside is viewed as it has nothing to do with the card program being profitable as a stand-alone business. It is about driving the core assets and the core functionality of it -- of the platform. And that is -- you see that much more in Europe because there's this scarcity of revenue on the card program. So they have to be more creative in what they do.

Interesting...

So we can probably learn some things from that.

I think we probably can. Fantastic. We're out of time. Great pleasure to talk to you.

Thank you so much.

Thank you.