Adyen? Square? Stripe? The Truly Global Payments Company – Adyen Part 1 – Business overv
- Rupam Deb
- Feb 15, 2021
- 6 min read
Introduction – Adyen
In recent years, all the talks have been on the technology and payments stocks, like Square, PayPal, Visa, Mastercard, Stripe, Ant Financials, Adyen, etc.
But have you heard of the Dutch payments company, Adyen? Do you know that many large fast-growing global companies are using Adyen as their payment service providers? Think AirBnb, Facebook, Booking.com, Spotify, Expedia, Uber, Netflix, Grab and Tesla! What’s the buzz about Adyen?
And if you haven’t noticed, the share price of Adyen has grown to 3.5x its price after its IPO in June 2018.
Today let’s debunk all these for you, and tell you exactly what Adyen’s business is and whether it could be a good business to own for the long term.
We will start with explaining what the business is first, and then cover the other aspects of the company in the next few posts. Let’s get the ball rolling!
Adyen’s Business Activties
Adyen is a (payments) acquirer which connects the merchants to the card network and banking systems. It basically allows the merchants to accept payments from their customers in doing their business.
Adyen also acts as a payments service provider (PSP), which is a broader term than acquirer, as PSPs perform functions outside of acquiring too.
This 1-minute video below will help in explaining this.
Before we talk about Adyen in detail, we need to understand the payments chain first, in particular what happens behind-the-scene when a payment transaction is initiated.
The diagram below shows the traditional payments value chain, and what problem Adyen is trying to solve.
As shown in the diagram, when a customer makes a payment transaction with the merchant (e.g. buy a laptop on Amazon), the below happens:
The transaction is accepted and processed by the gateway. A gateway is the equivalent of the point-of-sale (POS) device that you use to pay by cards in brick-and-mortar stores.
Then, that transaction data is flowed to a risk management provider that checks whether that transaction could be fraudulent or not, and approves accordingly.
Then, the transaction is processed by a processor to be passed on to the card networks like Visa, Mastercard, or UnionPay. That processor can be part of the acquirer entity/ bank, or it can be a standalone party engaged by the acquirer.
Then, the card network sends the data to the issuer, i.e. the financial institution that the consumer’s card (debit card, credit card, etc) is with, and requests for money.
Then, the issuer checks and verifies the data, including whether the consumer has sufficient money in his/ her bank account. If approved, the issuer informs the card network so. That approval information then gets passed on all the way back the same chain to the merchant, and the consumer’s payment with the merchant is accepted and business is done.
As you can see, there are many different parties (up to 6, or even more if a transaction is cross-border) involved in one simple transaction. These parties can be all different entities, making things complicated and not seamless, since everyone uses their own different technology and systems.
Due to how the payments industry has evolved traditionally over the years, it now comprises a patchwork of providers and legacy systems resulting in fragmented merchant services.
This issue is what Adyen aims to change. As shown in the diagram above, Adyen has built a single global platform that connects the merchants directly to the card networks. Therefore, instead of having 4 different parties involved between the merchants and the networks, Adyen deals with all of them by itself.
This therefore makes the whole process seamless, resulting in data flowing through faster and captured and processed more accurately. This is because all the activities are handled by the same party using the same technology and system. Adyen had to build this platform and technology from scratch which took several years, as there were no existing solutions that address this.
Benefits Offered by Adyen
So how does Adyen help the merchants exactly? There are many benefits and we will just outline a few here.
First, Adyen helps to significantly improve the authorisation rates of payment transactions.
Have you ever made a payment online and then for reasons you are not aware of, your transaction is rejected? Don’t worry – it’s likely not your problem. In the card not present (CNP) world, i.e. you pay but you don’t have to present your card physically, e.g. when you pay online, 1 in every 5 payments is declined.
This is because in the traditional payment chain, many parties with different systems, algorithms to detect fraudulent transactions based on different combinations of data fields, preference on criteria to accept the transactions, are involved. In addition, not all the data are retained when they flow through the chain based on how the parties process them. Thus,
if one of the parties does not receive the data they want or prefer to see, then they would likely reject the transactions. What’s more problematic is also that the reasons for rejections are not communicated seamlessly across the chain, so no one knows why a transaction is rejected and how they can do to improve the authorisation rate.
However, since Adyen does all the things in between the merchants and card networks itself using its proprietary integrated system, it has complete oversight and control of all the information. Through its Adyen Checkout and RevenueAccelerate solutions (details in the image below), Adyen can help the merchants improve their authorisation rate. Adyen does this by drawing on its direct access to the card network data, machine learning, data mining and AI techniques to build intelligent logic to adapt both the format and route of each payment request in real-time, targeting the highest chance of an approval from the issuing bank, etc.
Second, Adyen helps global merchants to deal with the complexities of various local payment methods all over the world.
Do you know that there are at least 300 local payments in the world? Despite the popularity of debit and credit cards, each country has its own local payment methods which could be more popular.
different parts of the world, and they don’t speak to each other!
Now imagine if you are a global business, say Nike or Spotify. You have customers all over the world, say in 150 countries. Traditionally, you might have to speak to and do contracts with tens or hundreds of acquirers and/ or PSPs for you to offer popular payments methods in all these countries. What a fun task to have.
In addition, you don’t get singular reporting and integration across the data in different countries, so you miss out on a lot of actionable intelligence on your data. And if you are new in a geographical region and want to go into 10 countries in a region, it takes several months to set up payments with different parties there separately.
With Adyen, all these problems get solved! One contract for all the countries in the world. One technology/ system integration for all channels and countries (including future countries you are not in yet). A singular overview of all payments data. And if you want to go into 10 countries, you can get it done in days if not weeks (and not months)!
Imagine what a life saver Adyen is for the large global businesses.
In addition to these two benefits covered here, there are many other useful benefits that Adyen offer to the merchants, which we cover in detail in our Multibagger Research Series.
Summary – Adyen’s Business Overview
That’s all for today on Adyen’s business overview.
To recap:
Adyen is a global payments acquirer or PSP.
The traditional payments value chain is a patchwork of many legacy providers and systems that are not integrated, hence comes with lots of inherent problems.
Adyen is solving many payments problems through its proprietary single integrated technology platform that it has developed from scratch.
Adyen helps to significantly improve the authorisation rates of payment transactions (Benefit 1).
Adyen helps global merchants to deal with the complexities of various local payment methods all over the world by integrating all in just one contract, one integration (Benefit 2).
In our next post, we will discuss Adyen’s target market and its business model, in particular how it makes money!
Do watch our summary analysis on Adyen in the video below too!
P.S. If you have enjoyed this article, do share it with your friends so that more people get to learn about this amazing company and provide their comments on it!
Do join our investment forum on Facebook too where we discuss interesting investment concepts and ideas.
Check out our other articles here.
コメント