Building a Better Internet: How Stripe ‘Disrupts’
In 2007, Patrick Collison dropped out of Massachusetts Institute of Technology to build a software company with his brother, John. Patrick was 18 and John was 16 at the time. Their company built software tools for a specific sect of eBay users and — in collaboration with another UK firm — had made their product worth millions only a year later. This was Auctomatic (called Shuppa initially), and not Stripe. They would go on to sell Auctomatic to a Canadian company in March 2008 for $5 Mn. And Patrick, at only 19, would take up the director of engineering role at the company’s new base.
John — the younger of the two brothers — was not even old enough to legally drink in most countries by then. But he was not any less brilliant for the same. A pilot and a pianist, he would go on to study at Harvard in 2009 — only to drop off a year later to build Stripe.
Stripe
In an interview with the Silicon Republic in 2011, John defined Stripe as a product that makes it easier for developers to incorporate payment systems on their website. The idea was to reduce the developer’s effort in accepting payments on the website and to improve the platform design. There was a novel cause attached to it as well. The brothers hypothesized that if making money off the internet was easier, people would be incentivised to set-up more businesses on the web.
Even at that early stage, the company was backed by Peter Thiel and Elon Musk — both PayPal cofounders. And not without reason of course — in two years, the Stripe team was able to build software so simple that it required developers to add less than ten lines of code to handle payments through their website. This was all in 2011.
Roughly ten years to that interview, the company has maintained its core vision to simplify the payment infrastructure for the internet. The software and APIs, however, have seriously branched out to cover most aspects of the digital payments — building payment checkout interfaces, reducing e-commerce frauds, automating recurring subscriptions, routing payments to marketplaces, and providing a single dashboard to manage all your business payments.
Famously, the mission of Stripe has become one “to increase the GDP of the internet”, and the results are often measured in the value the Stripe-led internet businesses have generated. This approach is validated by International Data Corporation (IDC), a market intelligence giant, whose survey in 2018 showed that the organisations realise ~7% more revenues by running on Stripe — a significant number by any measure, and one that does justice to its mission.
Now, in these ten years, Stripe has taken giant leaps. But before diving deeper into their business model, a glance through what the team has achieved:
- A valuation of ~$36 Bn with a total funding amount of $1.6 Bn, as per Crunchbase — of which $600 Mn was early this year
- #1 on the CNBC’s Top 50 Disruptors list of 2020
- A user base of millions of companies — and giants including Google, Amazon, Salesforce, Microsoft, Shopify and on and on — across 120+ countries that use Stripe to process hundreds of billions worth of payments every year
- Direct integrations with all six major card networks in North America, Latin America, Europe, and the Asia Pacific,
- And a team size of 2500+ spread across 14 global offices that — if their careers portal is anything to go by — is only expanding every day
The Business Model: Building Roads and Collecting Tolls
Stripe was built with developers in mind and although the positioning today is more towards unlocking the economic opportunity for online commerce, it continues to make developers the center of its products.
This developer-focus is highlighted in how the core business for Stripe still remains the payments platform integration. And naturally, for developers, the quality of APIs and documentation largely dictates the utility of Stripe’s platform to them. All the other applications on the layer above are rooted in that payment infrastructure. This would become more clear when we learn how its payment platform works.
1. Payments Platform: Behind the Scenes
It helps to understand how different and complicated payment processing was for e-commerce in 2010. A basic transaction would involve a customer willing to purchase a good or service (say, a book by Penguin Random House) with a credit card. Think of a customer standing on the checkout page. This is where your website would now transfer the customer’s billing information, including the card details, to the payment gateway (say, Razorpay). At the back end, the payment gateway would take the information and tap the credit card company (say, Mastercard), who confirms the possibility of the transaction with the customer’s bank account and relays back the answer to the payment gateway. Imagine that the transaction is valid — this response would now be forwarded by the gateway to the merchant account (Penguin Random House’s bank account) and to your e-commerce website as well. Once everything looks good, the payment gateway approves the transaction and the customer is back on the website with a successful transaction.
There are of course more details at each level — but this is the basic premise. A payment gateway, a merchant account, and the credit card company work in association to complete a transaction. Sounds complicated because it is. But Stripe tweaked that a little.
Stripe Model: Stripe is a full-stack solution, or in a more human language — an aggregator that acts as both a payment gateway and the merchant account. What this implies is that once Stripe takes the customer’s billing information as a payment gateway and verifies the same with the credit card company — it simply deposits that amount in the merchant account maintained on Stripe. No more back and forth required. This reduces a degree of complexity by removing the need for a merchant bank account. For the user — this means that you simply sign up on Stripe and start accepting payments.
On the back end — it is more complicated since Stripe is not really processing payments but instead aggregating them, but ignore that for the time being. Remember that your business does not have to deal with multiple charges by the payment gateway and merchant account, and just need to pay Stripe now.
Why is it popular?
Understand that from a bird’s eye view, the payments platform serves one single function: allows the transfer of money from the customer’s account to your business account. Now, imagine you are a business looking to process payments on your website. And given that payment is the crucial last-mile link to a customer purchasing from you, you NEED a payments platform to work well. Given your business need, you would roughly want the platform to score well on these five parameters:
- Acceptability: What payment methods does it allow processing of? Are cards, wallets (and perhaps UPIs) accepted? What currencies and countries does it allow payments from?
- Ease of Integration: Is it complicated to integrate into the website? Will customers be able to understand and use it easily?
- Reliability: What is the expected uptime? Are there significant unplanned outages? How secure are the transactions? Will it help me detect and block fraudulent transactions?
- Platform Management: What processes are automated? Which ones require constant management? Will the platform provider respond to my queries?
- Pricing and Costs: Is the platform costlier than the others? Does it help reduce our company’s operational costs?
Stripe’s answers to these questions help us understand why it is so incredibly popular.
To start with, Stripe’s partnerships with all major card networks, and support for digital wallets such as Alipay, Apple Pay, and Google Pay, and for bank debits and credits among other methods across 135+ currencies make it seem almost ubiquitous. There is a great likelihood that whatever part of the world your customers belong to — they can transfer your money over Stripe’s platform.
Once we find that the platform supports the desired currencies and payment methods for our business, Stripe also promises comprehensive integration support for developers with its developer tools — detailed documentation, libraries in multiple languages, testing environment, and continuous API updates. Moreover, the simplicity of calling Stripe APIs across all sorts of commerce platforms has earned it quite a reputation.
Adding to the developers’ delight, even platform management is made easier with the heavy automation of processing. In all, the IDC study pointed out that Stripe’s customer developer teams see ~59% more productivity in terms of work they can handle. Impressive.
Interestingly, the statistics for reliability are as flattering. A newsroom update in April ’20 mentioned the following:
Stripe now handles more than 250 million API requests a day — and often upwards of 10,000 per second — while maintaining 99.999% uptime
Efficiency and scale — two metrics a business would find comfort in from Stripe. Even if the stats above were not impressive enough, the IDC study also highlights that Stripe’s customers see ~81% less unplanned outages in payments processing. Combined with all this, the platform boasts of an impressive security infrastructure and focuses hard on ensuring that all the required compliance certifications are in place. Overall, the reliability of Stripe’s payments platform is a big green tick. Onto the pricing.
While the distribution of revenues for Stripe is not public, the volume-based payment charges of 2.9% and 30¢ per successful card transaction (same as PayPal) would make the majority share of revenues for the company.
It seems then that whatever lens we use to judge Stripe on, it holds up well. There are a few other technologies that make the payments layer more robust.
Connect: a relatively smaller part of the payments layer in the Stripe stack, Connect is built to allow payments for platforms and marketplaces that themselves have multiple sides to carry out transactions between. These businesses face more compliance issues than others and for such businesses, Connect provides easy UIs to handle KYC and compliance requirements of users on top of the complete functionality of the payments platform described before. Moreover, it also transfers a great degree of control over the flow of funds through Connect’s payout engine and global routing to the user. Without really getting into great detail, Connect is a valuable addition for the internet age business models such as Lyft, Doordash, and Github, and is available in three models: standard, express, and custom — each with a separate set of features.
Terminal: With Stripe Terminal, users can accept payments at the point-of-sale on their devices. It connects with Payments, Connect, and Billing to unify the entire payments stack and allows a business to handle payments across both online and offline channels.
2. Business Applications
Going a level higher, we see multiple business applications that stand well in line with the Stripe’s vision to make online commerce payments easier.
Radar
Radar is an add-on application that allows detection and blocking of fraudulent payments with the use of machine learning algorithms trained on billions of data points. Stripe even claims that ~89% of all cards in the world have been through its network at some point — making the Radar system exceedingly robust by accessing data from financial partners, from payments over the Stripe network, and from checkout tools for buyer patters.
Apart from the credibility, the dashboard interfaces with fraud performance and dispute rates among other metrics, and the feature that allows setting up custom fraud rules greatly improve the experience as well for the businesses. The cost of this feature is 5¢ per screened transaction (outside the accounts with standard payment structure) and goes up to 7¢ for advanced tools and to 0.4% for chargebacks.
Sigma
This add-on provides businesses access to their Stripe data, which can be extracted using simple queries, and is mostly used by teams across domains in the organisation to generate customer insights. The costs for Sigma are variable and depend on your infrastructure and charges per month.
Atlas
Probably the most unique of all the solutions, and in line with the company’s mission — Stripe Atlas works to simplify the incorporation of new internet businesses by taking care of the lengthy paperwork, and by allowing them to set up their initial ownership structure as well. The set-up fee is flat at $500 for Atlas.
Billing
An add-on solution to create and manage subscriptions and invoices, Stripe Billing is a useful tool for businesses to iterate on their pricing strategies from among one-time, subscriptions, usage-based, tiered, and other methods. Moreover, the support for global currencies and check for your country based compliances are services that Stripe offers along with Billing — all easily accessible using the dashboard as well.
Stripe Billing also automates tricky wire transfers and ACH transactions — along with reconciliation — which improves its usefulness for B2B payments immensely.
3. Financial Services
The payment platform and the additional business applications made up the entire Stripe stack twelve months ago. But since, the company has ventured into financing by building solutions for its business customers.
Stripe Capital
Stripe, like almost all businesses in financial services, entered lending last September. Anyone who says that this wasn’t expected is lying. The goal, in more business terms, of Stripe Capital, is to cut through the red tape and provide fast and flexible financing to online businesses. This is a definite value addition for businesses, and with its user network of businesses — it makes all the sense for Stripe to enter the arena.
The process for businesses already on Stripe is hugely convenient as well, and asks one to follow only four simple steps: check eligibility on your dashboard, select the loan amount — which will define the repayment rate and loan fee, receive funds (typically within one business day), and make automatic repayments towards the loan daily off the sales you generate.
Corporate Card
As is usually the case, a lending business and a credit card go hand-in-hand. Announced a few days after the Stripe Capital last September, the Stripe Corporate Card offers an alternate way to manage the company’s spending. But it is hardly another credit card. With a cashback of ~2% on your top spending categories (automatically adjusted) and partner benefits such as free AWS credits, Shopify 3-mo subscription, Notion 50% cashback, as well as expense management features incl. integration with Expensify, Quickbooks, etc., the Corporate Card is uniquely designed for internet businesses.
Moreover, the Card is immediately offered in the virtual form and added to your Apple Wallet as you wait for the physical card to arrive, providing another (small) point of differentiation. Connected with millions of SMBs through its payments platform, Stripe can cross-sell and even detect defaults based on the banking and revenue information it already collects on businesses. Besides, by expanding its suite of financial products, Stripe is capturing a greater share of wallet for e-commerce companies on its platform.
Stripe Issuing
The latest to the pack of financing products, Stripe Issuing, is also the most innovative. The product allows creating, managing, and distributing virtual and physical cards in seconds with only a few lines of code. Yes, with code. Along with easy issuance, the level of customisation in design and spend control is fascinating in the least.
This, surprisingly, has more wide-reaching possibilities than we would imagine at first. Postmates, for example, creates cards using Stripe Issuing for its fleet of couriers, setting up spend controls such that the transactions would be approved only at the assigned merchant of the courier. Similarly, several other businesses use it to offer one-time-use virtual cards and generate a great value of spend control options as well. This is akin to a fund transfer, but imagine doing so on a scale of thousands of workers and for only a well-defined purpose — it then becomes a fast and convenient budgeting tool.
Where next for Stripe?
Given the acceleration of online commerce, combined with Stripe’s expansion into emerging markets, the company is well-positioned to serve as a global toll operator for internet commerce.
Conor Witt, Fintech Analyst at CB Insights
Already valued at a massive $36 Bn and with the push towards online commerce only accelerating with COVID, the opportunities for the existing products of Stripe are immense. Especially with the share of E-commerce in retail sales at only ~16/18% today, the growth in e-commerce doesn’t seem close to its end anytime soon. This e-commerce push and the quality of Stripe’s payments and financing products should allow it to keep become a greater part of the internet’s infrastructure with each passing day.
But, it doesn’t seem to be done with expanding its product portfolio or with raising funds as well. So, what can we expect next from Stripe?
IPO
Many consider a Stripe IPO to be almost inevitable. The speculations have been high and optimistic for a 2020 announcement, but the brothers do not seem keen for an IPO and have rather strayed away from making any public comments over the last year — apart from a “we have no plans to go public” in an interview in Feb 2019.
Many believe that with the growth in online commerce expected to remain favourable, with the private funding for Stripe already reaching new highs, and with a strong balance sheet (>$2 Bn) — it is time that the public gets to share the pie and, perhaps, the private investors get a chance to exit at this high valuation. We can only speculate and wait meanwhile.
Neo-banking and Insurance?
Stripe Capital, Corporate Card, and Issuing are logical extensions for a business with access to data and relationships with millions of internet businesses. But the branching out will not end here in the slightest.
Square — a competitor to Stripe and a leader in the payments space — has been expanding at a much faster pace and presently has 20+ product streams. Of all the products and services Stripe can offer, it would be most attracted to ones that make the lives of businesses on its platform easier.
That is where the neobanking and insurtech products might take precedence. Access to a company’s banking details by allowing businesses to open new business accounts with Stripe digital banking would add a great depth of information on the capital flows of the businesses — apart from the information on revenues it can already extract — and would make cross-selling other products even better. This can also have a direct implication on the pricing of solutions such as Sigma and Radar.
Next, InsurTech has been the big buzzword — and with reason. Partnerships with specialized insurance institutions to cover for unique digital risks in this internet age (re: cyber insurance) would allow Stripe to earn on commissions from each deal — limiting its risk as well as increasing its value proposition to the businesses using its payment platform.
Cryptocurrency
Stripe’s relation with cryptocurrencies has been complicated. In 2014, the company became one of the first major payments company to offer support to bitcoin — but with Bitcoin’s falling utility for payments, the support was withdrawn in early-2018.
The founders, however, still seem excited about cryptocurrency and its potential towards payments. With the prospect of central banks in more countries coming to terms with digital currencies with CBDCs, there is hope and Stripe is smartly keeping a few weapons up its sleeve. Presently, it has investments in Stellar — a decentralised payment network like Bitcoin, but, unlike Bitcoin, one that also supports transactions in currencies such as USD, EUR, crypto, and any other arbitrary currency. And with different forms of cryptocurrencies being designed still — Stellar, Litecoin, Bitcoin Cash, etc. — it would be interesting how Stripe innovates and integrates the digital currencies to its platform. So, we must keep an eye on this space.
Too Long; Didn’t Read
Stripe has changed how businesses accept payments on the internet, but with a great hold on payments — it is now extending its stack by adding more business-centric applications atop its infrastructure as well as offering financing solutions. These not only give Stripe additional revenue streams but also more information on the businesses running its platform. Crucially, it is this data from across products that is its biggest asset.
To add to this — the company maintains its core focus towards perfecting the economic infrastructure on the internet, and much like in the physical world, the ability to control part of the infrastructure gives it powers that we might not fully realise now. I have not made any predictions in this piece, but if I were to — we are possibly looking at a $100 Bn company in the next five years that should be standing strong as one of the most powerful companies in twenty years.
Hope you found the article informative. Feel free to add a response below or to send me your thoughts over Linkedin. Thank you for reading!
