Payments across borders!

How Stripe truly increased the GDP of the internet.

In 2010, two prodigious brothers from a small village in Ireland, Patrick and John Collison, dropped out of MIT and Harvard, respectively, to start Stripe. The inspiration came when Patrick, who was working on a few side projects, kept complaining about how difficult it was to accept payments on the web. They sold their first, Auctomatic, for $5 million in 2008, when they were 19 and 17.

Stripe is a $95Bn(valuation) company with ~$7.4 Bn revenue in 2020. Millions of users across 120 countries rave about its simple-to-use product that makes something as complex as payments just work. It handles payments for companies like Amazon, Booking.com, Lyft, Deliveroo, Shopify, Salesforce, and Facebook.

Payments, however, is such an obvious problem. Why did no one solve it before? Paul Graham describes it beautifully as Schlep Blindness.

Solving Hard Problems

“The most striking example I know of schlep blindness is Stripe, or rather Stripe’s idea. For over a decade, every hacker who’d ever had to process payments online knew how painful the experience was. Thousands of people must have known about this problem. And yet when they started startups, they decided to build recipe sites or aggregators for local events. Why? Why work on problems few care much about and no one will pay for when you could fix one of the most important components of the world’s infrastructure? Because schlep blindness prevented people from even considering the idea of fixing payments. Probably no one who applied to Y Combinator to work on a recipe site began by asking “should we fix payments, or build a recipe site?” and chose the recipe site. Though the idea of fixing payments was right there in plain sight, they never saw it, because their unconscious mind shrank from the complications involved.”

– Paul Graham, SchlepBlindness.

Stripe earns from multiple sources, and a lot of them are high-margin products

Stripe's core product is to help businesses accept payments in the simplest way. It is a developer-first platform and has advanced features. Thus, you need a developer to integrate it with your platform.

It is a payment processor or aggregator and now, also has multiple arms like Stripe lending, Stripe Atlas, Stripe radar, etc.

• Stripe Connect can handle more complex marketplace transactions.

• Stripe Billing optimizes subscription and invoice management.

• Stripe Payouts and Stripe Issuing facilitate the movement of money with instant cashouts for gig economy workers and virtual card issuance, respectively.

• Stripe Atlas (business incorporation tool) and Stripe Sigma (business analytics and reporting) can help simplify business operations.

• StripeTreasury helps platforms offer embedded banking-as-a-service features.

• StripeClimate allows businesses to direct part of their revenue toward carbon removal projects.

• Stripe Capital provides access to fast, flexible financing.

• Stripe Radar helps in fraud detection and making payments secure

Typically, Stripe charges 2.9% of the total value and $0.30 for each transaction. After paying banks and credit cards, Stripe’s take rate is typically somewhere between 0.5-1% of the transaction value. Clearly, Stripe succeeds when more people buy more things online.

Didn't Paypal start in 1998, what did Stripe do differently?

For years, the growth in e-commerce outpaced the underlying payments technology. Companies wanting to set up shop had to go to a bank, which processes payments and set up a gateway to connect the two. Needless to say, it was a time-consuming and complicated process.

Paypal – designed to simplify payments – actually made this worse. The company infuriated startups with its restrictions – once turnover hit a certain level, Paypal automatically put the business on a 21 to 60-day rolling reserve, meaning that up to 30 percent of a company’s revenue could be locked up for up to two months.

While running Auctomatic, the Collisons realized that, despite PayPal’s success and banks’ participation, accepting payments online was too hard. They felt that with more businesses starting online, engineers would decide which payment tools to use, not finance people, and built a product that engineers loved.

Who else would have understood this problem better than the founders of Paypal themselves? Thus, John and Patrick went to the founders(Peter Thiel and Elon Musk) to raise their first round of funding and to tell them that the growing startup ecosystem needs a better way.

“It’s a little impetuous to go to PayPal founders and say payments on the internet are totally broken,” says John with a wry smile. “But look, you can WhatsApp anyone around the world and it’s free. It’s a remarkable act of coordination between the telcos and ISPs and the people who own the fiber underneath the sea to create this global communications network. Then, if you look at the economic infrastructure, we haven’t even started.”

Where will it go from here?

While Stripe has a moat in multiple ways- customer acquisition(most of the revenue came from word of mouth in the first few years), market (Big and growing), and product (has switching costs and economies of network & scale) - 3 out of 5 moats described by YC, there are still a few factors which can make for a bear case:

• Payments has become commoditized: Ten years ago, it was revolutionary to let companies accept payments online with some code. Now, a lot of companies do it. Stripe’s data and scale would probably provide them some leverage here.

  

• Stripe isn’t truly global: While Stripe accepts payments from people in 195 countries, it only allows businesses in 40 countries to accept payments. Adyen positions itself as a more global solution, and as a result, has more large corporate customers including Uber, Microsoft, eBay, and Spotify.

• High customer concentration: By one estimate, even before the pandemic, Stripe was generating $350 million in revenue from Shopify alone. That number has likely nearly doubled since January. That gives Shopify a lot of power over Stripe - the threat of spinning up their own payments solution on the back-end to match its front-end Shop Pay solution keeps Stripe’s take rate with Shopify razor thin. If Shopify leaves, that’s a material hit to Stripe’s revenue.

Despite the above factors, Stripe remains one of the most valued internet companies and for the right reasons. However, as John mentioned, they are just getting started. Global payments infra has just scratched the surface and there is an opportunity to make it as simple as domestic payments or the communication infrastructure.