Marqeta: The Story of Cards

Marqeta filed its draft S-1 registration last week and is planning to conduct its initial public offering later this month. Marqeta powers many of the services we use today, from obvious payment connections like Square to less obvious ones like Instacart and DoorDash. These services all work through “cards,” although many of these cards are virtual or embedded in an app.

I first heard about Marqeta in the spring of 2012 when I was raising capital for my last startup, Wallaby Financial. Wallaby was trying to build a digital wallet that would consolidate all of a user’s separate physical credit cards onto a single physical card connected to a digital cloud wallet. (Keep in mind, this is in a pre-Apple Pay/Google Pay era.) At the time, Marqeta was building a digital wallet to keep all of your vouchers or coupons on a single physical card, so you didn’t have to carry a bunch of gift cards around. You can see some of the similarities.

While it took me a few meetings and extensive searching to find Marqeta (initially, in hearing the name, it was too close to Marketo), I connected with Jason Gardner and several early team members. As each of our startups wound their way through initial product development, we took very different paths. As you can see in the S-1, Jason’s was a much better path! Like so many direct-to-consumer payments play, Marqeta pivoted to an infrastructure provider and found its way to success.

Marqeta operates a powerful processing platform that is very different from the legacy players in the space. Originally designed to support the digital wallet capabilities, the Marqeta platform supports key capabilities like virtual cards, instant card issuance, and just-in-time funding. It is a truly modern platform and comes to market as a technology and operational partner for emerging technology companies and forward-looking financial institutions. Traditional processors like Fiserv, FIS, and TSYS are hobbled with complex legacy software and challenges with speed and innovation.

When you use your Square debit card or your Ramp commercial business card, order a meal from Doordash, or buy food from Instacart, you are using Marqeta. It’s one of those beautiful ideas that is obvious when you look at it with a truly developer-friendly and flexible card processing stack.

My favorite example to explain the power of this comes from the Instacart-style use case. On several occasions, I used TaskRabbit to order up some desks from Ikea. The tasker would go to Ikea, buy the goods, and deliver them to our office, which Ikea didn’t do for a reasonable price at the time. There was a big problem, though: the tasker often didn’t have the cash to make the upfront purchase. Not being sure I trusted the tasker, I didn’t want to send them money. Marqeta’s virtual card solution solved this. When you order through Doordash or Instacart, a virtual card is issued with just the right amount and limited to the store in the task. The gig worker can’t misuse the funds. The gig worker also doesn’t have to bear any risk themselves. It’s an elegant payment solution to a now-common problem.

Issuing cards instantly, creating digital or virtual cards, managing those cards, funding them, limiting them, and more, enable complex payments to become simple and to be used every day.

Outside of these fantastic core capabilities, one other thing stands out to me about how Marqeta (and some other new banking-as-a-service programs) go to market. Marqeta brings its bank relationships to the table and acts both as a processor and a form of a program manager. As a result, they earn both transactional processing fees and a share of the interchange, predicated on volume. Traditional processors act more as a utility, charging processing fees, but requiring the end customer to be (or to bring) a bank and do not earn interchange. Earning interchange is a powerful shift in economics to Marqeta’s advantage.

I don’t make stock predictions, and, as we have seen many times, fundamentals are often not aligned with stock prices. That aside, I believe in Marqeta and their continued success.

Upheaval in Cards

As I’ve noted many times in the past six months, the pandemic caused many fascinating effects on consumer payments. Card issuers are struggling to understand what the new world looks like and how to address it properly. Credit card debt is falling, which is abnormal for an economic crisis, which reduces bank income. (Banks want you to carry a balance and pay it off, which is better than paying in full or not paying at all.)

Banks, seeking to increase card volume, are attempting to lure consumers with some of the highest sign-up bonuses I’ve seen. On the other end of the spectrum from sign-up bonuses, banks are looking at cash flow underwriting for thin or no-score consumers (previously the domain of fintech startups). Broadly, beyond cards, banks seek to loan more dollars and are making loans easier to get.

Consumer payment behaviors have changed, and those habits are looking to be quite sticky. We’ve experienced an acceleration in the shift to digital payments, with more e-commerce followed by local delivery. Even if you’re vaccinated and the CDC says you’re safe, you might be pretty happy to pay someone $7.00 to go to Whole Foods and deliver your groceries to you.

Businesses and consumers have developed habits around digital payments, even when we are in stores and restaurants. These habits will not change. The new habits will drive business at modern enablers, like Marqeta. It will shift more payments from cash to cards. It will shift payments from physically swiped cards to card-not-present transactions, which cost merchants more. Square saw a 34% increase in card-not-present volume in its most recent earnings.

The shift to CNP will continue to stress merchants who are complaining about interchange. It isn’t looking like banks and networks will win this time, with the Federal Reserve under pressure to adjust debit card fees. While I used to think that too many Americans love their airline miles for Congress to do anything about regulating credit interchange, if there is a time it will happen, this is probably it. There is a meaningful argument that interchange represents a wealth transfer to wealthier customers and that has certain negative moral implications.

If the shift on debit card fees extends to smaller banks (“unregulated” debit card payments), then the business models of Square Cash or Chime are at risk, as they depend on interchange for huge portions of their revenue. Regulators are attempting to reign in neobank behavior, as Chime agreed to be more clear that it is not a bank, but consumers probably don’t care. I don’t know that consumers are paying such close attention to the fine points. Green Dot is shouting that it does matter, but I’ve read a lot of research that says consumers are only aware of a card being from Visa or Mastercard, let alone the underlying card issuer.

Meanwhile, newer entrants, such as Mission Lane, are making progress as an alternative issuer for the millions of Americans who have limited budgets and less than perfect credit. Mission Lane announced it passed one million customers on its mission to be the next Capital One (though, again, Mission Lane is not a bank).

Cryptocurrencies are having their most significant moment yet. While my awareness of dogecoin (and my last dog being a Shiba Inu-mix rescue) failed to cause me to buy any of the skyrocketing (volatile) currency, more and more banks and consumers are engaging with crypto. Corporate card startup Brex announced it will partner with Coinbase and TravelBank to enable redemption of rewards directly to crypto, joining the SoFi consumer credit card and upcoming credit cards from BlockFi and Gemini. (Plus, you can earn crypto rewards with debit cards from Coinbase, Crypto.com, and others today).

Finally, cards are coming after business payments in a big way. The consistent drumbeat of news here continues with Citi announcing new corporate spending deals and startup Rho adding corporate cards to its business banking solution.

Cards are far from perfect, but they are the fastest growing form of payment for consumers and businesses alike, with billions of dollars in investments in the past few years and much more to come. Much of this spending no longer takes place with the physical swipe of a card, but we will continue to call them cards nonetheless. Whether it’s debit, credit, corporate, or virtual, cards are going for the win in a post-pandemic economy.

CardsFTW

Thanks for reading CardsFTW, a weekly newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, Founder, and CEO at Vertical Finance, a challenger credit card startup. If you’re looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com. If you enjoyed this, please share it with a friend! Follow me on Twitter @magoldman.