Payments Primer (Introduction)
Demystifying the payments landscape
Payments is a sector that, in my opinion, needs no introduction. However, it is also significantly difficult to dissect and explain what each player does precisely and what each company specifically does. After all, many of the players claim to be the "best in class" in terms of innovation and features, and all players are also experiencing significant growth rates over the past decade.
One of the key questions that I would like to answer and simplify is - What exactly are the key players' roles, what is their value proposition, and what gap are they addressing? I will also be talking about the competitive dynamics across the players because, after all, what I am interested in finding out is, among all the players, who are the ones that will stay and thrive, and who are the ones that are in a structurally disadvantaged position.
So, what got me interested in payments? Well, the answer is Adyen. Adyen is one of the fastest-growing and best-performing stocks over the past 5 years, until it didn't. In 2023, Adyen's share price declined a total of 75% from its high, down to a price level 50% higher than its IPO, but yet its financials have changed significantly over the past 5 years, both in terms of scale and profitability.
Source: Google
This made me wonder - why did this once golden boy suddenly become one of the most avoided stocks in the world? As a value-oriented investor, this made me curious. Furthermore, the fact that I once investigated this sector but was unable to clearly define the role of Adyen made me want to revisit this segment too. Only this time, with much more effort and direction.
So, over the next few posts, I will be posting a 3-part primer on the payments value chain while sharing my insights and key takeaways as I dive into this sector. Payments have always been an interesting sector to me because it is one of the few sectors that we have seen rapid growth and multi-billion-dollar companies emerge over the past decade. The business models of the most successful companies, Visa and Mastercard, also sit at the very top rankings of reputable value investors globally. These companies, which are generally termed as "Open-Ended" Networks, also seem to have a good revenue and profit pool, with an extremely strong and steady foreseeable future.
Payments Industry Profit Pools (FY2022)
Source: Hedgehog Capital Own Estimates
Questions that I will be answering over the next few posts.
Are the profit pools changing?
Is Adyen a value trap?
What happened to PayPal?
Who are the legacy players? Are they winning or losing?
What are the needs of the modern day customers?
What is the % split of Small business / Total Payment Volumes
What is the current state of the payments volume landscape (Card Networks vs ACH vs Fintech)
What are the relative moats of each players and what role do they play?
& more …
Till then, take care!
Best,
Ryan