Stripe Emerges from Global E-Commerce and Mobile Boom
Stripe, a fintech startup, is using digital technology to transform the e-commerce and mobile payment processing industry, but will it be able to outcompete industry behemoths like PayPal?
In 2010, two brothers John and Patrick began to ponder – in a world of digital transformation where internet companies were leading the way, why was it so difficult to accept payments on the web? While companies like PayPal existed, these payment options were often clunky and did not integrate into the merchant’s website directly. Even more problematic, PayPal “owned” the customer experience, by taking customers off the merchant’s website to PayPal’s own website where users were forced to use PayPal-specific log-in details to pay. If companies did not want to relinquish their customer purchasing experience to a payment gateway like PayPal, the company had to go through the arduous and time-consuming task of setting up a merchant account with a bank, which came with high fees, long delays, and clunky online interfaces [1].
With this context, John and Patrick saw an opportunity that digitization posed – they created a software company, Stripe, that allows businesses to cut through bureaucracy and instantly accept payments online from countries across the globe.
Stripe’s Business Model
At its core, Stripe’s business model is fueled by using digital technology to capitalize on the wave of e-commerce and marketplace platforms emerging – Stripe differentiates itself from other digital payment processors by building the most beautiful, high-converting payment flows for internet and mobile commerce. Whether the business is a subscription service (i.e., Blue Apron), an on-demand marketplace (i.e., Uber), an e-commerce storefront (i.e., Saks), or a crowdfunding platform (i.e., Kickstarter), Stripe designs APIs that creates the best possible experience for users [2]. The companies listed here are a sample of Stripe’s 100,000+ customers, where, unlike PayPal, users like you and I don’t know we are using Stripe when we pay, and businesses still own the customer experience that is integrated seamlessly onto their websites and mobile apps!
Stripe’s Operating Model
As Stripe is not the only fin-tech start-up disrupting payment processing (its biggest competitor is Braintree, which was acquired by PayPal in September 2013), Stripe has had to have a relentless focus on innovating new products to stay ahead of competition [3]:
- In September 2016, for marketplace models (i.e., Lyft, InstaCart), Stripe made it possible to send instant payouts to service providers (i.e., drivers, shoppers) on their platform. Unlike traditional bank transfers, payouts are deposited in drivers’ bank accounts within minutes after a ride is completed, allowing Stripe’s customers to be even more nimble in attracting service providers onto their platform who value receiving earnings faster [4].
- A few months ago, Stripe announced its latest product, Stripe Atlas, that gives entrepreneurs the building blocks to start a global internet business within a couple of days. Atlas helps an entrepreneur incorporate his/her company in the U.S., open a U.S. bank account with Silicon Valley Bank, and start a Stripe account to accept payments from countries around the world [5]. Stripe is working with 100+ accelerators and VC firms to get Atlas in the hands of promising start-ups.
- In October 2016, Stripe released Radar, which uses advanced machine learning algorithms to learn from Stripe’s global network of businesses to automatically detect and block fraudulent charges in real-time [6].
Beyond product innovations, in my opinion, one of the most remarkable operating practices that Stripe has followed is partnering with its own competitors to ensure its long-term success. For example, Stripe partnered with ApplePay (to enable any business with Stripe’s mobile application to instantly accept ApplePay when charging for physical goods) and Alibaba’s Alipay (to allow all Chinese customers to pay using Alipay during checkout) [7]. Most recently, in July 2015, Stripe announced that it raised a new round of funding from Visa and American Express, valuing the company at $5 billion and signaling to the marketplace that Visa and AmEx, who both have their own branded competing solutions Visa Checkout and Amex Express Checkout, have incredible confidence in Stripe and Stripe’s ability to win in this market [8].
Looking Forward
The digital payments business has relatively low barriers to entry and thus has seen a number of entrants. For Stripe to maintain its sustainable competitive differentiation, it must continue to innovate its business model and execute on its operating model. Specifically, Stripe will face margin pressure in the future as competitors try to sell their products for cheaper. Instead of competing on price, Stripe should continue to differentiate itself from competitors by innovating on products that deepen the value proposition for existing and new users. Stripe should also focus its resources on speed-to-market in new emerging countries (Stripe currently operates in 25 countries) to capture market share as these economies open to ecommerce and consumers begin trusting online payment processing [9]. To achieve this success, it will all come down to one thing: as Stripe scales, can it hire and retain the best talent to win in this market?
Word Count: 800 (excluding footnotes)
Sources:
[1] Scott Carey, “Which is the right online payments solution for your startup? Stripe vs Braintree vs Worldpay vs Adyen,” Tech World (blog), July 28, 2016, http://www.techworld.com/startups/which-is-best-online-payments-solution-for-your-startup-stripe-vs-braintree-3644141/, accessed November 2016.
[2] Stripe. “Customers.” https://stripe.com/customers, accessed November 2016.
[3] Bill Ready, “Two Years After Acquisition, Braintree’s Authorized Payment Volume to Cross $50B this Year,” Braintree (blog), September 17, 2015, https://www.braintreepayments.com/blog/two-years-after-acquisition-braintrees-authorized-payment-volume-to-cross-50-billion-this-year/, accessed November 2016.
[4] Stripe. “Connect Overview.” https://stripe.com/docs/connect, accessed November 2016.
[5] Stripe. “Stripe Atlas Frequently Asked Questions.” https://stripe.com/atlas/faq, accessed November 2016.
[6] Stripe. “Radar.” https://stripe.com/radar, accessed November 2016.
[7] Olga Kharif and Serena Saitto, “Stripe Lands Apple in Quest for $720 Billion in Payments,” Bloomberg Technology, September 17, 2014, https://www.bloomberg.com/news/articles/2014-09-17/stripe-lands-apple-in-quest-for-720-billion-in-payments, accessed November 2016.
[8] Rebecca Borison, “PayPal Faces New Threat as Visa Partners With Payments Startup Stripe,” TheStreet, July 29, 2015, https://www.thestreet.com/story/13234280/1/paypal-faces-new-threat-as-visa-partners-with-payments-startup-stripe.html, accessed November 2016.
[9] Stripe. “Global.” https://stripe.com/global, accessed November 2016.
PThatai, thanks for this post! I really enjoyed it and found the business analysis to be spot-on!
It does seem like a very low barrier to entry industry / product. You point out correctly that—to the chagrin of some of its customers—PayPal owns the customer experience. While this in part creates the market opportunity for Stripe, it is also a challenge for the business. The fact that PayPal owns the customer experience makes it a more valuable business. Speaking personally, I trust the PayPal brand, and it gives me confidence when I’m making a payment on some website I’ve never been visited before that I’m getting taken to PayPal’s secure portal. I worry that competing purely on the basis of being a private label technology provider is a less differentiated / sustainable business with significantly lower switching costs. That said, you make a great point that Visa and American Express (who obviously know much more about this than I do!) gave Stripe a huge vote of confidence by investing in it at a $5bn valuation.
One thing I can say for certain is that these FinTech innovations are driving great value for customers as well as businesses. Paying online and on mobile devices is so much easier now than it was 5 years ago!
Digital technologies are changing the way people exchange money with friends and with merchants. Technology is making payments so customizable that payment gateways and processors need to adapt faster than ever before. If I want to pay a merchant using my digital bank, I have PayPal. If I want to pay a merchant using my phone, I have Apple Pay. If a merchant wants to instantly receive a payment and instantly pass some of that along to a provider, there’s Stripe.
It’s amazing how digital payments are catching up to how we ideally want to move money: instantly, conveniently, and securely.
I agree that Stripe has been able to build tremendous success on ecommerce brands looking to own the digital payment experience within their own brand. I also agree that Stripe should “differentiate itself from competitors by innovating on products that deepen the value proposition for existing and new users.” Others in the field are already doing this: Shopify and Square have built out robust payment systems alongside their own ecommerce platforms [1] [2]. Klarna has built a payment system that makes it easier for customers who use Klarna to shop with merchants who process payments using Klarna by pre-filling out their shipping and payment details [3].
[1] http://thenextweb.com/insider/2013/06/26/square-branches-out-into-ecommerce-with-new-square-market-virtual-stores-for-us-businesses/
[2] https://techcrunch.com/2013/08/12/shopify-debuts-fully-integrated-credit-card-payment-processing-for-its-e-commerce-platform/
[3] https://techcrunch.com/2015/10/28/klarna-a-unicorn-is-coming-to-the-u-s-and-going-after-u-s-credit-card-companies/
Awesome analysis here! Totally agree with your conclusions about product innovation and talent.
One thing that I find really interesting about Stripe and Braintree is in the nature of their customer bases. Stripe’s revenue is directly tied to the success of its customer base, which is predominantly comprised of other tech startups–some of these will ultimately fail, and some will scale and drive a lot of value for Stripe. It’s unclear if Braintree would have done as well as it did without signing up Uber and AirBNB early on, for instance. As a result, I wonder if Stripe is spending any time optimizing its outreach to focus on the most high-potential companies – almost a “venture capital” approach to customer acquisition…?
To your point about product innovation, I think Stripe is actually leaving a lot of money on the table in providing additional software services. One of our portfolio companies, Recurly, has built a pretty nice business by providing recurring billing services on top of payment gateways like Stripe and Braintree – business that Stripe could be doing just as well.
I’ve been interested in how Stripe operates differently – thanks for your thoughtful analysis!
I find it really interesting that American Express and Visa would invest in Stripe considering that they’ve been pushing their own payment processing pretty hard. Similarly, it is curious that Stripe would accept funding from these two sources. What is the benefit to Stripe? It feels to me that AmEx and Visa are really trying to push their own payment processing which, considering their scale, could make Stripe obsolete. Does Stripe feel that the benefits they’re providing to their customers extend beyond payment processing? How do these partnerships help ensure Stripe’s long-term success?
Great write up on Stripe, Pallavi! They definitely provide a great payment gateway service that would compliment the SMEs we had read about in the Li and Fung Internet Issues case. The main problem I see in their model is underwriting debt for SMEs business. By facilitating payments and payments they incur a risk that most banks have the capital to take on. With offices in the US and a few in Europe, they need to grow their team to be able to service the large undeserved e-commerce websites in the Middle East and Africa and Asia. Overall Stripe is great disruptive digital technology.