Adyen? Square? Stripe? The Truly Global Payments Company – Adyen Part 2 – Target Market
- Rupam Deb
- Jul 24, 2021
- 6 min read
Introduction – Adyen
In our previous post [https://moneywisesmart.com/adyen-square-stripe-the-truly-global-payments-company-adyen-part-1-business-overview/], we explained Adyen’s business, in particular the fragmented payments value chain and Adyen’s role in it, Adyen’s modern technology platform, and the benefits that it offers to the merchants.
Today, we will discuss Adyen’s target market and its business model, in particular how it makes money and grows!
Adyen’s target customer segment
By now, you would have known that Adyen has many large global merchants as its customers, like AirBnb, Facebook, Booking.com, Spotify, Expedia, Uber, Netflix, Grab and Tesla.
You would probably have guessed that Adyen’s target customer market is large international merchants. If so, you are right – This market represented 98% of Adyen’s processed volume in 2018!
This is because one differentiating factor of Adyen’s solutions is its ability to offer many local payment methods (more than 250 methods in 2020) in one easy single integration. This compares to around 25 payment methods offered by Stripe and Braintree (part of PayPal). This benefit of vast acceptance of payment methods by Adyen is very attractive to the large international merchants that had to go through the pain of negotiating and entering into contracts with many PSPs and acquirers in different markets, a very time-consuming effort.
At the same time, Adyen has also expanded into the mid-market segment, which is the natural adjacent segment for them. This mid-market represented 3% of its processed volume in 2018, so it is still a small segment.
Within this mid-market segment, Adyen is attractive to small- and medium-sized businesses (SMBs) that are either operating in, or have future plans to operate in, various countries. This is because once the SMBs have used and integrated themselves with Adyen’s system in a country, in the future when they enter into new markets, they do not need to do any further integrations as Adyen’s global system is seamlessly integrated.
To expand into Adyen is a very simple thing for Adyen in terms of product offerings. Adyen already has lots of good and complicated offerings, which are actually beyond what’s needed by these smaller SMBs. Thus, what Adyen has done is actually to understand better what these SMBs need most, and then slice, and mix and match its existing solutions to fit them best, and not overwhelm them with features that are not useful for them yet.
Adyen currently does not target micro-merchants. Hence, it is not in competition with other modern PSPs like Square in that segment (although Square is gradually going upstream into the mid-market where Adyen is in).
Due to the nature of its large international customers, Adyen operates in many countries in the world (around 190 countries, with >20 offices worldwide in 2020).
Adyen’s target verticals
In terms of verticals, Adyen mainly targets the verticals with the most complex needs, as that’s where Adyen has the most to offer due to its modern technology and can charge more.
Some of these verticals include:
Retail (e.g. Adidas, GAP, H&M) in which unified omnichannel commerce is becoming increasingly popular and necessary for retailers to remain competitive;
Quick service restaurants (QSRs) (e.g. McDonald, Subway) with complex omnichannel sales channels (retail, online, mobile, etc) across geographies;
Hospitality (e.g. AirBnb, Expedia), with the same international travellers using those companies’ services in multiple geographical markets when they travel around;
Platforms/marketplaces (e.g. Uber, Etsy, eBay), for which Adyen can offer platform-specific features like payments-as-a-service to them. This allows these merchants to offer their sub-merchants or customers the ability to offer and accept various payment methods with incredible features.
Adyen has had great successes in these verticals, with large renowned customers shown in the two images below, for retail/ QSR, and platforms/ marketplaces in turn.
In addition, in terms of service offerings, Adyen has been focusing on the acquiring side, working on the best acquiring solutions for the merchants. Starting in 2020, Adyen has also started to build an equally (if not more) complex technology platform for the issuing side too. It is still early stage, but we think that that could potentially be a very powerful business for Adyen in the long term. We have been talking to the company’s investor relations (IR) team on this topic (amongst others), and cover these in detail in our Multibagger Research Series.
What’s Adyen’s business model?
Now let’s look at how Adyen earns money, to generate revenue, profits and free cash flows for shareholders.
Adyen earns revenue from the following three main components:
Processing fees
Settlement (full stack) fees
Other services revenue (e.g. forex service fees, sales of point of sale (POS) devices, and third party income), which is small
To understand the first two, let’s look at what types of fees are generally involved in a payment transaction, using the illustration below.
Let’s say a shopper purchases a product online and pays EUR 100 using a Citibank credit card. The merchant receives only EUR 98.24 in its bank account.
Meanwhile, the different parties involved in the payment chain collect fees totalling EUR 1.76, broken down as follows:
The shopper bank (or issuer), i.e. Citibank in this example, collects Interchange Fees of EUR 1.00, in return for providing the card services for the shopper and for bearing the default risks in case the shopper does not pay his credit card bill, etc.
The card networks (or schemes), e.g. Visa or Mastercard depending on which is tied to the credit card, collect Scheme Fees of EUR 0.50.
The acquirer, i.e. Adyen, collects Acquiring Fees of EUR 0.20.
The processor, which happens to also be Adyen in this case, collects Processing Fees of EUR 0.06.
In this illustrative example above, Adyen earns a total of EUR 0.26, from both the Acquiring Fees (as an acquirer) and Processing Fees (as a gateway processor), off a EUR 100 purchase, i.e. a 0.26% take rate (the term used in the industry). This 0.26% take rate is for illustrative purposes. In 2019, Adyen’s actual take rate was 0.21%. The take rate is contractually agreed with each individual merchant, and is generally lower for merchants with larger volumes.
For Adyen, it acts as a full stack acquirer for most customers, where it provides both the acquiring services and the processing services, hence the term full stack. For some customers, Adyen only provides processing services, thereby earning only the processing fees.
The benefit for providing full stack services (compared to just processing) is that Adyen gets to earn more revenue off the same amount of transaction, leading to a higher take rate. The acquiring fees are charged as a % of transaction value and have higher margins. Meanwhile, the processing fees are charged as fixed fees per transaction.
However, full stack services come with higher risks, as by being the acquirer, Adyen could be underwriting the settlement risks if any parties default or if any disputes happen. Meanwhile, the processing services do not entail such risk, as they involve only authorization, reconciliation, risk management, tokenization and payout services.
In 2019, non-full stack merchants were 27% by payment volume for Adyen. These merchants are mainly airlines, as Adyen does not want to underwrite such customers which generally have higher underwriting risks.
Now that we understand Adyen’s revenue model, the big question is can Adyen grow fast for many years in the future years? What are the growth drivers for Adyen?
We cover these in detail in our detailed research under our Multibagger Research Series.
Summary – Adyen’s Target Market & Business Model
That’s all for today on Adyen’s target market and business model.
To recap, Adyen:
Has been targeting large international merchants, which find much value in its ability to offer many local payment methods in one easy single integration;
Has expanded into the mid-market segment as a natural adjacent market to pave way for the long term;
Generally targets verticals with complex needs, like retail, QSRs, hospitality and platforms/ marketplaces, as those are the areas where it can offer the most value due to its modern technology and can charge more;
Has started building an equally (if not more) complex technology platform for the issuing side, on top of the acquiring side, which could be very powerful in the long term;
Earns revenues mainly from, in sequence of materiality (from highest to lowest), (i) settlement (full stack) fees, (ii) processing fees, and (iii) other minor services revenue. The full stack fees have higher margins, but come with higher (underwriting) risks.
In our next post, we will discuss the industry that Adyen is in (including the competition in the industry), and Adyen’s competitive advantages or moats if any!
Do watch our summary analysis on Adyen in the video below too!
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