Payments

A look inside Stripe’s business model

Stripe has been “notoriously cryptic” about financial metrics, though it does posit that margins are closer Adyen than Square

Stripe is one of the biggest players in the B2B payments space, but what exactly makes this company tick?

CB Insights released a report that dives deep into Stripe’s business model, looks at how the company’s “developer-first approach” set itself apart and explores how it came to be the fintech rockstar that it is today.

Anisha Kothapa, Intelligence Analyst at CB Insights said that how Stripe makes its money has a very transparent structure to it. The company charges 2.9% plus about 30 cents for a payment transaction, she explained. The company’s bottom line, what remains after bank service fees, are typically up to 2.5% on payment volume.

“Then they also incur fees like additional costs through their other services, like payouts, they have Billing, they have Stripe Connect, Radar, Terminal, all that stuff,” Kothapa said. “That’s basically how they make money.”

San Francisco-based Stripe has been known over the years for building out “payments infrastructure for the internet.” Millions of companies of all sizes — from startups to Fortune 500s — already use the company’s software and APIs to accept online payments, send payouts, and manage their businesses online.

“Unlike Square’s PayFac model, Stripe’s model is available to merchants in 43 countries and supports 135+ currencies, allowing businesses to sell anywhere in the world…”

ANISHA KOTHAPA, INTELLIGENCE ANALYST AT CB INSIGHTS

But when it comes to financial metrics, the company is “notoriously cryptic,” the report explains. Although the company claims its margins are better than its peers, the report says likely its margins are closer to global payment giant Adyen, which is about 55% than Square’s which is about 20%.

Stripe is also moving into new verticals like lending and corporate cards. Back in December, we reported that Stripe announced it would offer banking services through its new Treasury platform, according to its blog post. The business wants to help companies of all sizes with their banking needs via Treasury, its new banking-as-a-service API. In its blog post, Stripe said: “Stripe Treasury provides the modular components you need to build a full-featured, scalable financial product for your customers.”

But with new moves and expansions, Stripe also will have to expose itself to credit risk and an uncertain interest rate environment, the report explains.

Let’s also chat for a moment about Stripe’s Payfac model. Stripe PayFac enabled it to underwrite and onboard new merchants fast, the report said. What is a PayFac? The term is short for payment facilitator and the payfac model made the merchant onboarding process much easier for companies like Stripe, Square and others by allowing them to use a “master” merchant account instead of applying for their own. Kothapa explained in a follow-up email that its approach to payment processing is to become a “one-stop-shop for all online sales, a model that is not exactly mimicked by competitors.”

“Unlike Square’s PayFac model, Stripe’s model is available to merchants in 43 countries and supports 135+ currencies, allowing businesses to sell anywhere in the world,” Kothapa said. “Stripe’s model supports larger clients like Shopify, while Square’s model attracts low-volume merchants that make both in-person & online sales. Additionally, Square doesn’t match Stripe in terms of the number of API integrations it provides.”

“If [Stripe] wants to go into every aspect of the financial product space, insurance would definitely have to be one of them…”

ANISHA KOTHAPA, INTELLIGENCE ANALYST AT CB INSIGHTS

Going forward, the world is Stripe’s oyster. Kothapa said she sees Stripe even going into insurance because it’s such a large industry.

“If [Stripe] wants to go into every aspect of the financial product space, insurance would definitely have to be one of them,” Kothapa said. “Because it’s a very important area, if they can have everything go through their platform when it comes to small businesses, it generates more revenue for them.”

But will Stripe go public this year? Kothapa said she couldn’t give a concrete answer. What we do know is that Stripe remains a large payments player that has a lot of funding from its $600 million Series G round that gave it a valuation of $36 billion. But so far, the future is looking pretty bright.

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