Embedded Finance Briefing: What’s going on at Marqeta?

A red flag was raised when the firm published its Q3 2021 reports. The bottom line on Marqeta’s income statement remained red, with the company posting a net loss of $45.7 million in the quarter, as against $12.3 million in Q3 2020. When reviewed under the year-to-date lens, the firm’s losses mounted to $127.1 million in 2021, nearly quadrupling from its losses of $33.9 million in the same period in 2020.

Though the company attributed these losses to rising expenses, it nevertheless alarmed investors. As Marqeta pushes for expansion, these expenses were attributed to an increase in the firm’s headcount, as well as compensation and benefits for existing employees. Q3 2021 was Marqeta’s largest hiring quarter, adding a net 77 new people to its ranks.

Decelerating revenue

On the revenue side too, the report sparked caution. Net revenues grew 56% YoY to $132 million. This figure signifies a drop in the firm’s revenue growth over the year, from 123% in Q1 2020. 

The firm’s TPV went up 60% YoY to $27.6 billion. That too decelerated from 167% YoY in Q1 2021. These numbers indicate that Marqeta’s revenue and TPV growth are slowing down. Marqeta views its TPV as an indicator of the market’s adoption of its platform, customer usage trends, and the growth of its business. With all this in mind, it is apparent why investors, especially short term, were cautious with the firm, and why its stock price is seeing a decline. Since its Q3 reports, the firm has seen a 48.3% decline in its stock price to date, from $26.50 on November 9, 2021, to $13.71 today.

Growing verticals

Marqeta saw over 300% growth in its BNPL business in Q3, as it powers key players including Klarna, Affirm, and Afterpay. Arguing that BNPL is finding a firm footing in the market, Marqeta’s founder and CEO Jason Gardner said, “We're really seeing just strong sustained growth in this area. We’ve seen in a survey that 71% of buy now, pay later said they're going to increase their usage from last year. Based on what we've seen in the market, 40% of consumers tried buy now, pay later last year.”

Gardner also confirmed that Marqeta is powering Affirm’s Debit+ card, though refraining from commenting further until the product is in the market.

In addition, on the earnings call, Gardner spoke about how Marqeta is seeing growth in its crypto vertical. The issuer has also built a gateway for cryptocurrencies and fiat currencies as the space where they can make a difference in the industry. Their gateway tries to mainstream crypto payment solutions with customizable debit and credit cards.

He detailed how the firm’s just-in-time funding technology is being used to enable a new wave of innovative cryptocurrency card products. 

“Just-in-time funding used in tandem with our open API allows fiat currency to be spent at the point of sale from a crypto wallet and for consumers to earn cryptocurrency rewards on traditional spending, highlighted by companies like Coinbase, Bakkt, Fold, and Shakepay,” Gardner said.

Beating expectations

Technically, however, Marqeta exceeded revenue expectations. Analysts estimated the quarter to end at $119.2 million in revenue, but the firm reported $131.5 million. This may be why initially after the reports were released, the firm’s stock rose 15%.

Marqeta’s gross margin was up 3% YoY in Q3 2021. After payouts to card networks and issuing banks, its margin for Q3 2021 stood at 45%, against 42% in the same quarter of 2020. Marqeta amended one of our card network incentive agreements, under which the firm will not only receive higher incentives going forward, but also earned a $2 million catch-up benefit.

“Excluding this one-time benefit, our gross margin would have been 43% in the quarter,” said Marqeta's CFO, Tripp Faix. “Furthermore, for the nine-month period ended September 30, we have achieved a gross margin of 43%.”

Marqeta’s financial results are sensitive to changes in its margins, as they are subjected to fluctuation quarter to quarter based on factors like interchange and network fees. Faix said that rather than paying too-strict attention to quarterly gross margin results, the firm is committed long-term to a gross margin target of between 40% and 45%.

The firm’s adjusted EBITDA came better than its guidance. It ended the quarter at a negative $4.9 million, while in the guidance, the firm estimated an adjusted EBITDA between negative $13 million and $16 million. This urges the question of whether the higher than expected result is due to Marqeta’s revenue strength, or if it's because the firm improved its operating leverage and efficiency.

Faix said two factors contributed to this. Firstly, the firm saw higher than expected revenue growth, with verticals like digital banking, BNPL, and expense management performing well. Secondly, the amendment in one of their card network arrangements benefited the firm.

Efforts to diversify the business

Analysts noted Marqeta’s growth acceleration outside of Square, which is the firm’s largest customer. Marqeta’s business, outside of Square, grew by over 40% in Q2 2021, while in Q3 2021, it grew by over 70%. “It underscores the diversification of the business and the strength in the categories, whether it's BNPL or expense management or crypto,” Darrin Peller, an analyst at Wolfe Research, noted.

What is Marqeta doing to differentiate itself in the space it pioneered, now that newer players are entering and the older ones are beginning to find their feet?

For the near future, it’s about crypto.

“As we think about new verticals, we've always been very thoughtful about when we want to go enter a vertical, we want to create the best experience, the best technology, people who really understand that vertical to go and capture that,” Gardner said. “And that is very clear with crypto. We leveraged JIT.”

Gardner also detailed how Marqeta’s relationships with firms, both big and small, help the firm build a barrier to entry by earning their clients’ trust. Not only does Marqeta help firms release new products, but they also play a role in future planning. 

Analogously, Gardner said, “We're going to hit the puck, we're going to tell you where it's going to go and we're going to help you get there.”

What’s ahead

Marqeta has recently entered into a partnership agreement with Bill.com, under which the two will work on a new application of modern card issuing in the payments landscape. Bill.com wants to offer virtual card payment capabilities to its FI partners and customers, which will see SMB gain access to tools currently unavailable to them, like automation of the accounts payable and receivable processes. In addition, in partnership with Branch, Marqeta’s new card for Uber Freight drivers allows them to receive payments in two hours, as opposed to 30 days.

“We will be starting 2022 with a larger revenue base than we anticipated. And I would not expect growth rates in 2022 to be as high as 2021,” Faix said.

Chart of the week

Source: Accenture

In 2020, global SMB banking revenue was $291 billion. By 2025, Accenture forecasts that figure will stand at $469 billion – a baseline growth of $86 billion. Two components make up that revenue: The first reflects the revenue generated by traditional banking channels and is forecasted to be worth $377 billion. The second component represents the revenue generated through embedded finance offerings and is forecasted to be worth $92 billion. 

The report claims that $32 billion of the revenue generated through traditional banking channels will be at risk, as embedded finance offerings will have the potential to claim it. Incumbent banks are slow in adopting technological advances, and that puts them at risk of revenue erosion. Accenture estimates that in 2025, embedded finance could capture $124 billion, or 26%, of the current SMB banking revenue pool.

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