Adyen? Square? Stripe? The Truly Global Payments Company – Adyen Part 3

Introduction – Adyen

In our previous post [https://moneywisesmart.com/adyen-square-stripe-the-truly-global-payments-company-adyen-part-2-target-market-business-model/], we explained Adyen’s target market and business model, including how it makes money.

Today, we will discuss the payments industry that Adyen is in (including the competition) and its competitive advantage to help it fend off competition and earn high returns on capital in this capitalistic world.

The Payments Industry Adyen Is In

Adyen is in the global electronic payments industry, a very huge market.

In 2017, the total global card payments volume was around USD 23.0 trillion and was forecasted to grow at a compounded annual growth rate (CAGR) of 10% to USD 52 trillion in 2026. In 2017, Adyen processed around EUR 108 billion of payments volumes, so around 6% of the total market, thereby having a long runway in a market that is growing fast.

As shown in the diagram below (extracted from a report in our Multibagger Research Series), online payments can be categorised into many different markets, with the largest one being e-commerce and travel.

Within the online payments industry, there are some markets that were projected to grow much faster than the others. Adyen happens to have major customers in these fast-growing markets, and hence has the benefits of a strong tailwind. When the customers grow in revenue, since Adyen charges its settlement fees as a % of transaction volume, the revenue that Adyen gets grows too. In other words, Adyen gets to piggyback on these high-growth customers’ revenue growth, regardless of whether those customers actually generate profits or free cash flows.

For example, from 2016 to 2026:

The sharing economy market was projected to grow at a CAGR of 20.4%. Adyen has exposure to this tailwind through its customers in this market, e.g. AirBnb, Uber, Grab and Ofo.
The e-commerce market was projected to grow at a CAGR of 11.0%. Adyen has exposure to this tailwind through Wix, Etsy, eBay, Alibaba, etc.
The media delivery services market was projected to grow at a CAGR of 10.7%. Adyen has exposure to this tailwind through Spotify, Netflix, Dropbox, SoundCloud, etc.

We hope you have gotten the point we have been trying to make now. If not, let us repeat and make the point more explicit. We are saying that since Adyen has a diversified base of customers in some of the fastest growing sectors, and that Adyen takes a % cut off every transaction, regardless of which companies in those sectors win and whether they make profits, Adyen wins. As long as the markets are growing (and Adyen has the few biggest players in those markets as its customers, which it does), Adyen will earn lots of money.

And if you have forgotten, just look back at the names of Adyen’s customers discussed above and in our previous articles (Part 1 [https://moneywisesmart.com/adyen-square-stripe-the-truly-global-payments-company-adyen-part-1-business-overview/] and Part 2 [https://moneywisesmart.com/adyen-square-stripe-the-truly-global-payments-company-adyen-part-2-target-market-business-model/]), and decide for yourself if they have high revenue growth.

Adyen’s Competition

Now let’s talk about the competitive landscape.

We will keep this simple, because as you would see in the diagram below, the payments landscape is incredibly complex – If you prefer to know more, feel free to check out our detailed research in our Multibagger Research Series.

So, let’s start by saying that there is no one single way to categorise the different players in the payment space into different standard categories of players based on the function they perform. But the broad categories in the diagram are good enough.

Across the payments chain:

First, on the consumer end, we have the payment methods, which can be credit/ debit cards, eWallets including PayPal, Venmo and Square, etc.
Next, we have the gateway that processes the transactions at the beginning.
Next, we have the acquirer that is the overall player dealing with the merchants to help them accept payments on the front end.
Next, we have the payment processor that does the actual back end processing work.
Next, of course we have the card network that most transactions in the world are still dependent on (hence the strong moat for Visa and Mastercard).
Last, we have the issuer financial institution, which is likely the consumer’s bank.

As you can see in the diagram, the various players sometimes do not just stick to one category of function and can be doing multiple. For example, Square or Stripe does the acquiring and gateway, simplistically saying. Then, Adyen also does processing on top of those two functions, hence its integrated advantage. Then, we also have players that do the whole chain from payment method to processor like Affirm and Klarna (but they are small and mainly localised in certain geographical markets), but still need to go through the card networks. But we also have players that completely cut out the card networks and do their own closed loop network like Alipay and Wechat Pay in China.

In addition, certain players could be partnering with other players in certain parts of the chain, but also competing with them under different parts of the chain. For example, Adyen accepts PayPal wallet as a payment method, but it competes with PayPal in the gateway segment (with PayPal’s Braintree), and in the acquiring segment (with PayPal itself).

To cut the long story short, the payments landscape is very fragmented globally. The legacy large acquirers, despite huge and growing due to their distribution moats (read our article on distribution moats using them as examples here), have very old legacy technologies and systems patched together.

Together with the traditional bank acquirers, they are the low hanging fruits that Adyen and the other modern payments players (like Square and Stripe) would have the easiest game gaining market share over.

Within the modern players, Adyen is the only true global player, accepting many local payment methods around the world and focusing on the large international merchants. For a simple comparison, Adyen accepts more than 250 payment methods and is in around 190 to 200 countries (in 2020). Stripe accepts around 25 payment methods and is in around 95 countries (in 2019).

In our research, we did find another modern company that competes with Adyen and offers more than 150 payment methods in more than 100 countries. It is also doing things that could help the other payment companies accept more payment methods easily and could pose some competition to Adyen. We cover these in detail in our Multibagger Research Series if you are interested.

Adyen’s Competitive Advantage/ Moat

Adyen has been growing fast and earning high returns on capital on its business over the past decade.

In this capitalistic world, whenever a business is highly profitable, everyone would want to come into the industry and eat a piece of the cake too.

Without strong (and ideally expanding) moats, Adyen would find it difficult to continue such growth at high profitability and returns on capital in the long run. This is particularly important given that a lot of growth expectations have been baked into Adyen’s current traded share price.

So the million-dollar questions are, does Adyen have moats or competitive advantages? And how strong are they?

We have identified a number of advantages and moats for Adyen, with one of them being its strong proprietary integrated global technology platform developed from scratch and refined over the years (i.e. intangibles moat/ advantage).

However, having just a strong technology platform is definitely not sufficient at all. Adyen would need much more than that if it were to continue compounding its value and become a multibagger in many years to come (which is what we look for under our Multibagger Research Series).

Does Adyen have other strong moats to complement its technological advantage? We address this question in detail for our subscribers of the Multibagger Research Series, after thinking and researching about it deep and long, as we know that’s one of the most important questions to answer.

Summary – Adyen’s Industry & Competitive Advantage

That’s all for today on the payments industry that Adyen is in (including the competition) and its competitive advantage.

To recap:

Adyen operates in the global payments industry, which is huge and has strong tailwind;
The payments landscape is incredibly complicated and is very fragmented globally;
Within the modern players, Adyen is the truly global payments company accepting many local payment methods;
The legacy acquirers with outdated technologies and systems patched together are the low hanging fruits for Adyen to gain market share over;
To continue to grow fast and earn high returns on capital in this capitalistic world, Adyen would need to have strong moats and competitive advantages. We have identified several, and one of them is its strong proprietary integrated global technology platform developed from scratch and refined over the years (i.e. intangibles). However, that alone would not be sufficient.

In our next and final post, we will discuss Adyen’s management, risks and financials, so you definitely won’t want to miss out on that!

Do watch our summary analysis on Adyen in the video below too!

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