Startup news are all about fintech. The most fascinating one: Axios reported that a little-known fintech startup recently raised money at a valuation north of $5 billion. It is a debit card SaaS company in the interchange wonderland.

Interchange is a fee charged to a merchant to process a card payment. It is generally within 2 and 3% of the purchase. So when you pay $5 for your cappuccino, your local coffee shop gets only $5*-3% = $4.85, 15 cents is the interchange. There are lots of intermediaries here — merchant acquirers (whoever provided the card reader terminal), merchant’s bank, payment network (like Visa), cardholder’s bank, others (e.g. a SaaS company). So everybody has a share from those 15 cents. And any intermediary would be lucky to get 1%, meaning 5 cents of it.
Let’s try to do a simple valuation following prof. Damodaran’s advice. According to the Federal Reserve’s payments study total value of debit card payments in 2017 was $2.88 trillion. Rounding to $3 trillion. Let’s assume a card startup is so good, it can capture 1% of it. It means the total addressable market is worth $30 billion. Then, assuming it is such an impressive company that it grabs 10% of the market, i.e. it crashes old banks and all neobanks and takes their customers — $3 billion in annual revenues. Now, let’s say brilliant engineers figure out a code that it doesn’t cost them much to acquire customers and process transaction (they also get underpaid), they somehow avoid regulators and any associated regulatory costs and as a result they get 20% net margin, i.e. $600 million in annual profits.
Now let’s come up with its cost of capital — 15–17% (r) for a great startup. Let’s assume the market size (payments volume) continues to grow at 5.5–6.8% (g) annually. We get a present value of $600 million/(r-g) = $5–6 billion.
So $5–6 billion is the peak for such company. Who is investing? SB&MBS?

