Adyen and PayPal are feeling the 2023 heat. While Adyen is battling dropping shares and low revenue growth, PayPal is busy tackling an antitrust lawsuit for violating the US competition laws due to its anti-steering policies.
Adyen’s revenue pickle
Adyen’s recent earnings call revealed that the company’s revenue fell short of expectations, which caused shares to drop and wiped out $20 billion in market value. All of this was new for Adyen, which has been growing steadily since its launch in 2018, and has ridden the pandemic payments boom.
Adyen’s promise and threat were most visible when eBay opted for the company as its payments provider instead of its former subsidiary, PayPal. “When I joined Adyen, we were about 120 people, with maybe ten offices around the world. And now, we’re processing north of half a trillion dollars in payments, with 2300 employees around the world, and 25 offices. But I think the core of what we’ve been doing really remains the same, which is to have one global platform that meets the needs of companies all around the world,” said Brian Dammeir, president of North America at Adyen, in a Tearsheet podcast in 2022.
Adyen’s strong growth in Europe had set it up for an expansion in the US, and at the start, this expansion seemed to be working out well for the company. “North America accounts for about a quarter of Adyen’s overall business, and we’re growing 70% year-over-year,” said Dammeir last year.
But the company’s aggressive expansion rate has had a direct impact on its profits. Earlier this year, when most companies were laying off their employees Adyen was in hiring mode. Even then, operating expenses were starting to bring down profit margins, with the company reporting only a 4% YOY growth in H2 2022, but with a 64% YOY growth in operating expenses.
For H1 2023, Adyen reported $804.3 million in total revenue which was 21% more than last year but below the 40% YOY growth investors had grown to expect. Adyen saw an 83.2% increase in wages and salaries since last year. But overall the company’s outlook remains cautiously positive. Adyen’s shareholder letter said “We know that growth will not always be linear, and while we saw net revenue growth decelerate in H1, we did not see any substantial developments that structurally change our medium to long-term opportunity. In addition, we anticipate our business model's high operating leverage to kick in as we move out of this accelerated investment phase in 2024.”
PayPal’s tiff with merchants
Earlier this month, a class-action lawsuit was filed against PayPal in California and Georgia, alleging that the payments company’s contract restricts merchants from steering customers to more cost-friendly payment options using price incentives. The plaintiffs added in a statement that PayPal’s anti-steering rules result in consumers paying millions in excess charges annually.
According to the lawsuit, PayPal’s anti-steering rules are embedded into merchant contracts and control what actions merchants can take in certain scenarios. Without these rules, consumers would be more able to make informed choices and be in a position to delineate between PayPal’s rates and those of its competitors like Stripe and Shopify, according to the plaintiffs. Merchants are also barred from telling customers that other payment options are more economical and cannot present these options earlier in the checkout flow.
The company’s anti-steering rules state that “in representations to your customers or in public communications, you must not mischaracterize any PayPal or Venmo services or exhibit a preference for other payment methods over PayPal or Venmo services. Within all of your points of sale, you agree not to try to dissuade or inhibit your customers from using PayPal or Venmo services or encourage the customer to use an alternate payment method.”
According to the plaintiffs, these anti-steering rules are very similar to those imposed by Visa and Mastercard before they were sued by the DOJ in 2010. Due to the lawsuit both card companies rescinded their rules and were able to resolve the DOJ’s claims. At the time the DOJ claimed that such anti-steering rules “impose a competitive burden on merchants, restricting decisions to offer discounts, benefits, and customer choice. Visa and MasterCard will not be required to make any monetary payments as part of the settlement.”
The concessions made after the case allowed merchants to incentivize customers using a particular form of payment and also enabled them to communicate preferences and costs associated with each type of payment. But Visa and Mastercard were not expected to make any monetary payments as part of the settlement.
But there is a twist here: The DOJ did not only sue Visa and Mastercard, it sued Amex as well. While Visa and Mastercard settled, Amex didn't, and despite the federal court’s initial ruling that anti-steering laws constricted competition, Amex was able to take this fight to the Supreme Court which reversed the ruling, stating that Amex's business model depended upon merchant swipe fees instead of the interest paid by cardholders. Visa and Mastercard have different business models and would be able to push Amex aside in the absence of anti-steering rules. At the time, Amex’s market share in terms of transaction volume was second to Visa’s.
In 2023, Visa and Mastercard, which are operating without anti-steering clauses, held the top two positions in transaction volume for the first three quarters of 2022, according to data by Bankrate. And in third place, American Express does use anti-steering clauses. Despite the anti-steering settlement, Mastercard was able to knock American Express off second place, and Visa still remains on top.
Although the anti-steering suit against PayPal is intended to foster competition, the dissection of the Visa, Mastercard, and Amex cases show that anti-steering laws may not have a big impact on market share, and it may take much more than this class action lawsuit to unseat PayPal from its position.