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IPO Report: Marqeta IPO: 5 things to know about the fintech company serving Square, DoorDash and others

Investors could soon have a new way to play the payments infrastructure behind some of Silicon Valley’s hottest companies.

Companies from Instacart to DoorDash Inc.
DASH,
+3.37%

to Affirm Holdings Inc.
AFRM,
-5.68%

rely on card payments to facilitate customer purchases, allowing delivery workers to pay for just the items in orders, for instance. Marqeta Inc.
MQ,

offers card-issuing technology that lets businesses build out these functions, and the financial technology company is now in the process of going public.

Oakland, Calif.-based Marqeta, which was incorporated in 2010, says that’s it putting a modern spin on the practice of issuing customized cards. The company offers application programming interfaces, or APIs, that let companies leverage Marqeta’s relationships with banks and card networks while building out virtual and physical card programs.

Square Inc.
SQ,
+1.07%

is Marqeta’s largest customer, relying on Marqeta technology to power Cash Card debit cards that let users spend the funds from their mobile wallets. Marqeta also enables a function that lets Square’s Cash App users receive direct deposits from employers or the government, according to the prospectus Marqeta filed with the Securities and Exchange Commission ahead of its initial public offering.

Marqeta is looking to offer about 45 million Class A shares priced at $20 to $24 apiece through its IPO, while founder and Chief Executive Jason Gardner, as well as early investors, receive class B shares with 10 times the voting power. The company would raise almost $1.1 billion at the high end of that proposed range while fetching a valuation over $12 billion. Underwriters, led by Goldman Sachs and JP Morgan, have access to an additional 6.8 million shares. Marqeta expects to list on the Nasdaq exchange under the ticker symbol MQ.

Here are five things to know about Marqeta ahead of offering its shares, which are expected to begin trading on June 9.

Doubling revenue, but still in the red

Marqeta generated net revenue of $290.3 million last year, more than double the $143.3 million that the company recorded a year earlier. For the first quarter of 2021, Marqeta saw revenue rise to $108.0 million from $48.4 million.

The company is still losing money, though losses narrowed in the last fiscal year. Marqeta posted a net loss of $47.7 million in 2020, compared with a loss of $58.2 million in 2019. Marqeta lost $12.8 million in the first quarter of 2021, compared with $14.5 million in the comparable period a year prior.

Marqeta’s total processing volume, or the dollar value of payments processed through its platform, increased 167% in the first quarter to reach $24 billion.

Squarely its biggest customer

Marqeta is highly reliant on Square, which accounted for 70% of the company’s net revenue last year and 73% of its net revenue in the first quarter of 2021.

“Although we expect the net revenue from our largest customer will decrease over time as a percentage of our total net revenue as we generate more net revenue from other customers, we expect that net revenue from a relatively small group of customers will continue to account for a significant portion of our net revenue in the near term,” the company notes among the risk factors listed in its prospectus.

“It’s unprecedented to see a company going public with that much of business coming from one customer,” Jordan McKee, a principal analyst at 451 Research, told MarketWatch.

Marqeta’s Cash App contract term ends in March 2024, and its contract for the Square Card — a separate product meant for businesses — expires in December 2024. Both agreements can automatically renew for successive one-year periods after that.

Bernstein analyst Harshita Rawat sees little risk that Square moves its business to another card-issuing platform, since the other companies offering this technology are those Square competes with in other areas of its business. The bigger long-term risk is that Square develops card-issuing capabilities in-house, in her view.

“While it is very hard to definitively say whether Square is considering building an in-house solution or not –— we believe precedence exists with Stripe and Adyen, and as such this customer-concentration risk should be baked into Marqeta’s valuation,” Rawat wrote.

Meet the competition

Marqeta concedes that it’s in a competitive market, as the company goes up against more traditional players like Global Payments Inc.
GPN,
+0.40%

and Fiserv Inc.
FISV,
+0.30%

as well as “emerging providers” like Stripe and Adyen NV
ADYEN,
+3.44%
.

Rawat wrote that the more old-school financial-services players “don’t have adequate capabilities and speed-to-market to compete effectively in new-age issuer market,” though she’s “closely watching Stripe as one of the most formidable competitors for Marqeta over time.” Stripe has existing relationships with merchants as well as a more “off-the-shelf” product.

While Rawat highlighted Stripe’s more generalized offering as a possible benefit for that company relative to Marqeta, which has a more customizable product, Jefferies analyst Trevor Williams saw things differently after a number of industry conversations, including with a former Marqeta product vice president. Williams pointed to the customization options as an advantage for Marqeta and said that there are high switching costs of moving to a new platform.

“Our expert believes switches are unlikely unless a business need is not being met by Marqeta,” he wrote, citing the “engineering resources needed to manage a conversion, especially if card products are noncore for the customer (e.g. DoorDash isn’t dependent on interchange).”

MKM Partners analyst Rohit Kulkarni wrote that the upstart fintech competitors have “similar but arguably less sophisticated offerings.”

About interchange

Marqeta generates most of its revenue from interchange fees, which are fees that merchant banks pay card-issuing banks when a customer makes a transaction with a credit or debit card. “Our agreements with issuing banks provide that we receive 100% of the interchange fees for processing our customer’s card transactions,” Marqeta notes it its prospectus.

Card networks set interchange fees, but the Durbin Amendment in 2010 capped debit interchange. Some smaller banks are exempt from the Durbin limits, however, and Marqeta “currently only contract[s] with issuing banks that are exempt from the Durbin Amendment when we provide program management services,” according to the company’s prospectus.

“In a nutshell, Durbin-exempt interchange [percentage] across consumer and commercial card transactions (both of which Marqeta is exposed to through its different offerings) is likely 1.4% average for consumer (there is a wide range depending on the type of transaction) and >2% for commercial spend,” Bernstein’s Rawat wrote. “This is in contrast to 0.5% average interchange for Durbin-regulated transactions.”

Rawat believes that Marqeta’s work with Durbin-exempt issuers helps the company generate higher revenue “yields” than more traditional partners that work with larger, nonexempt issuing banks, meaning that the company can keep a greater portion of volume as revenue. While she said that investors should monitor the risk of potential changes to exemption rules, she also wrote that “there doesn’t appear to be a willingness by the regulators or government to repeal Durbin exemption or make it harder for fintechs or tech giants to benefit from this.”

A big market

Marqeta processed about $60 billion of volume last year, which it notes is less than 1% of the $6.7 trillion of volume that flowed through U.S. issuers in the same period, based on estimates from The Nilson Report, a payments-industry publication.

“We believe that our share of this massive opportunity will continue to increase due to our unique platform, competitive advantages, and a strong culture of innovation,” the company said in its prospectus.

Rawat wrote that Marqeta’s “growth runway is immense.” Further opportunities include greater international expansion and progress with recently launched credit-processing initiatives, in her view.

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