There are a few brands that are synonymous with the modern financial services tech stack: Stripe, Galileo, Square. Marqeta is definitely in that list. Founder Jason Gardner stepped down recently and the firm named Simon Khalaf CEO. Simon was previously chief product officer at the firm and joins us on the podcast to take a look at the current market dynamics in this complicated time for financial services and technology.
Simon talks about Marqeta’s recent acquisition of credit card program manager Power and takes us behind the scenes to share why customer demand led to this acquisition. With Power and credit along side the firm’s tech in debit and prepaid, it sounds like cards have a lot of room to provide intelligence and guidance to their holders going forward.
Simon Khalaf is my guest today on the Tearsheet Podcast.
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The following excerpts were edited for clarity.
What’s going on with the market
Marqeta has been early to embedded finance – we just didn't call it embedded finance. So to give you an example, Marqeta has started growing fast supporting neobanks, then on demand delivery, which we consider a very strong embedded finance use case. Most on demand delivery players, their core business is not finance – they just wanted financial services. Then we moved into expense management, and then many other use cases that we consider embedded finance.
I think what we're seeing right now is a very interesting trend, which is that very well established companies that are non fintechs are looking at what fintech has done and the innovation that fintech has done to make money accessible early to the constituents. They want to embed those into their own workflows. So whether it's a marketplace, retail or digital; whether it's a payroll company or labor marketplaces; whether it's retailers that want to have point of sale lending. So everybody's looking at what fintech has built and said, I want one of these.
Value at different places in the ecosystem
The global financial system is complicated. And if you look at folks that are delivering digital experiences today, they're used to the simplicity of app development. They are used to the simplicity of being able to get a great idea, disrupt the market, post everything on AWS, and then use the Apple development tool. And there you go: they have an app with a press of a button that can scale globally in 250 plus countries. That's the mentality of innovation.
And if you also look at large companies, they're starting to think this way. But in order to do that in financial services, it's hard. There's local regulations, money licenses that you have to acquire in every country, and issuing banks that have to work with Visa and MasterCard. So the complexity of the underlying infrastructure is high for the innovators to be able to embed financial services into their workflows.
So think of Marqeta as kind of the operating system that allows them not to worry about this complexity. Do what you do phenomenally – which is innovate – and we'll take care of the rest. So from an issuing perspective, we work with issuing banks, we work with regulatory environments to make sure that everything you're dreaming of is actually safe and compliant.
And we get you up and running on top of the financial ecosystem. And then we support how the money moves, how the credit facility is set up, how paying receivables or selling receivables are done – all these constructs are hidden, that complexity is hidden. What they see is an API. They use it, they integrate it.
Behind the Power acquisition
The great thing about Marqeta is when we talk to our customers, they want more from us. And you sit down and you say, Hey, what are your plans and how can we support you? Credit was top of mind. And credit comes in multiple forms, right? It's not just a credit card. You do have the B2B business with working capital at about prime plus 3%. That's 8%. It's becoming expensive. So the idea of credit is actually prevalent. A lot of people came to us and said, look, you've done a great job on debit and prepaid, we want to get credit from you.
So we started working with partners, like FNBO and Deserve, and we've had good successes. But a lot of folks wanted – this may sound cheesy – the credit card to come alive. They don't want a piece of plastic anymore. On the consumer side, they want a digital product that interacts with the consumer, when the consumer is in workflows. So if you need retail, you're buying something, imagine that the credit card comes alive and talks to you and says, Look, if you do this purchase, your rewards are going to jump to x, so on and so forth. They want to alter consumer behavior more than intercept consumer behavior with the most adopted technical product that has ever existed, which is a credit card.
That set us looking at companies like Power, who were great program managers, but at the same time, built a very strong tech stack that allowed for flexibility in the integration with any workflow. And the good thing about Power is that they're effectively the exact opposite of us so the duplication is almost non existent. So we were just a processor, and they were a program manager. So putting those together, you’ve got the complete solution that allows our customers to do all these great things they want to do.
Looking ahead with Power
The biggest thing is serving the embedded finance market. So I'll give you three simple examples that can illustrate that. The first one is a retail marketplace. Think of whatever marketplace you love, and you go in, and you get a co-brand from them. And then that credit card actually looks at what you are doing and guides you. There are many things that a card can actually do in order to encourage or discourage a purchase: rewards and loyalty are huge. So you can bring those up and down in near real time in order to change consumer behavior. I hate to say gamification, because that word means a lot of things, but it has worked. And also shopping and retail is fun. It is like games, so bringing gamification to that can change the equation in retail.
That would be an example of what we can do. And then also increasing the loyalty of consumers. I mean, if you look at today, which in a downturn, the cost of user acquisition matters as much as the LTV with inflation going up. The lifetime value of a consumer is going up, but your cost of goods are actually going up with it. So it's very important to focus on retention. And there is nothing like the airline industry that is phenomenal with loyalty points. Loyalty drives retention, retention increases the LTV. So everybody who wants to increase consumer engagement with a brand sees that as an opportunity to drive it.
The other example, which is huge, is if you look at working capital at 8% and 9%. It's complicated. If you are a small business, and want to borrow $100k in a working capital loan to bridge receivables and payables, then you have to basically provide a P&L, balance sheet sometimes the owners of that small business have to put their own credit on the line. And then you have initiation fees and you have early early payment penalties and these six or seven pages that you actually have to sign your life over.
Imagine you get an invoice, and you've got to pay it. So why not swipe to pay, and you're only underwriting that transaction, you're not giving an SMB carte blanche with working capital to go spend more money on Google and Facebook – you're just giving to meet the payables. By focusing on underwriting a transaction versus underwriting, effectively a blank check, you have changed the risk equation. You have served the SMB, and you made the issuance of credit, let's call it working capital, you've made that embedded into the flow like swipe to pay. And behind the scenes, your virtual credit card is created. We underwrite this transaction. Payment is done and everybody's happy. Net 30. Deal’s done. Card evaporates.
Market impact on clients
Whenever you look at a downturn, or what we're calling a downturn, I think we have been spoiled as an industry in general. Literally, right? You look at 15 or 16 years of prosperity, it encourages bad behavior. So once you look at where we are today, and the focus that every company, not only fintech, is being focused on what I call ‘back to basics’, you have to deliver sustainable, profitable growth. That's how companies survive. You don't survive by borrowing, selling that, or increasing your valuation. You thrive when you start delivering value to customers and growing your EBITDA. I hate to call it the flight to quality – it's the flight to basic principles, and that will happen, and that will create much stronger companies, much more durable use cases, and much better leadership to be perfectly honest with you.
I think the generation of leadership that will graduate from this downturn is going to be a much stronger leadership to take us into the future. So I'm extremely bullish about our industry. Now, as far as Marqeta is concerned, I have to say our demand is growing. And I think there's a lot of folks coming to Marqeta. They're coming to us because we have scale, because we're we've demonstrated that we can scale. But the most important thing we've demonstrated, while we have scaled, we can still innovate. It's a combination of innovation at scale that folks are intrigued by.
Different times, changing clients
We're seeing a lot of the more established companies that are not your traditional venture funded fintechs come to us with many use cases, and not just one. Most of our sales before, it used to be I'd say, look, I've got a use case: I'm a BNPL player and I need you to help me in BNPL. Great, no problem – that will continue to grow.
Now we're seeing companies come to us, saying first thing I want you to do is labor disbursement. Check. Great. But I also want you to think of point of sale lending for my consumers. I also want you to think about a covenant with my consumers. Guess what? I also want you to think about earned wage access for my consumers. I also want you to think about expense management for my employees. So all of a sudden, an engagement leads to four or five or six use cases.
So yes, we’re absolutely seeing the expansion of the demand more, not just the change in who's buying. So there's a change in who's buying and a change in what they are buying. I think it plays a little bit to the strength of Marqeta because we went very deep in the stack, which is debit, prepaid, banking, and money movement, and now with credit – but all at the same time. We didn't go wide. We're not doing acquiring. We're not doing, Hey, start a company and we would do all the five things behind the scenes.
We went very deep and I think it’s paying off.