Differentiating Between Payments Businesses

  • Old ISO businesses were more valued on net revenue, factoring in customer attrition

    • ~4-5x net revenues if you are just buying the book

    • sometimes could have bought an ISO for 1-3x

  • Valuations today

    • If there is an EBITDA people are paying 30-40x EBITDA now if there is high growth

    • if only net revenue, 40-50x net revenues are not unheard of either

  • Unit economics of note

    • Margins

      • ISV: ~50bps

      • not unusual to see payfacs targeting larger businesses to price ~10bps above their margins, which are around 30-50+

      • margins should be rather rich if you automate sales and have an attractive value prop

      • okay to start low in margins then increase prices over time if you can show you are adding value

    • CAC

      • $300 is pretty good

    • Huge focus on customer attrition, something that doesn't really develop for months if not years

      • How long does it take to get to 100k accounts given x% attrition?

    • Can they sustain their growth if they're an early business?

  • Differentiators

    • Are you actually a processor? aka How much of the stack do you own?

      • If you handle authorizations, settlements, underwriting, AML, KYC, etc. then you are the processor even if you are designated payfac because you have a BIN acquiring sponsor in the back. This is the same with Square / Stripe. Owning the merchant agreement and economics is critical.

    • Value prop value prop value prop!!! Basically added services and softwares that demonstrate you can cater to your customers' needs BEYOND payments. Building a payfac is becoming commoditized.

      • If not strong enough, you're just participating in a price war. price compression overall will just be an unknown issue you have to wrestle with.

      • Make sure your value prop can scale with you

      • As a payfac you also bear tons of risk and potential losses

    • Standalone device payments = a shrinking market. Integrated payments is now king

      • power shifted from those who sell merchant accounts to those who sell software

      • controlling operational software = controlling payments

      • software drives decisions

    • Focus on merchant composition cohorts - where are they are winning? there is probably a payfac that already serves a vertical. why are you better?

  • Why Stripe is fucking expensive but still wins

    • Most integrated players use Stripe Connect Payfac in a box as their backbone

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#payments