The Sunday Times of London published its annual Tech Track 100 list of the fastest-growing private technology companies in Britain (see here).  If you are into enterprise software, payments, and financing, in particular, it is a fun read.

Tech Track 100 Payments Companies

The Tech Track 100 is dominated by fintech companies, fully 24 of the 100 are fintech and many of these are in B2B Payments.  Companies involved in payments or the regtech surrounding them, include:

  • Onfido (#8)
  • ComplyAdvantage (#16)
  • GoCardless (#41)
  • Transferwise (#52)
  • Payen (#55)
  • Azimo (#62-remittances, not B2B)
  • Optal (#74)
  • CurrencyCloud (#78)
  • SmartSearch (#86)
  • Worldremit (#96-also remittances, not B2B)

In fact, all five of the companies with the largest operating profits on the list are either business or consumer payments related:

Tech Track 100 Small Business Financing Companies

The list also includes four small business lenders (not counting peer-to-peer lenders).  This makes sense as the UK is a leading financial center and UK payments terms are quite slow.  The companies include:

  • Capital on Tap (#29)
  • Iwoca (#34)
  • Fleximize (#39) and
  • Liberis (#87)

Tech Track 100 + Companies House = Nerd Heaven

If you combine the Tech Track 100 with the fact that private UK companies must post their financial statements to Companies House, you get an incredible treasure trove of information on SaaS enterprise companies.  Using both of these resources, I want to highlight two payments companies, GoCardless and Optal. These companies are interesting, in part, because they are executing the opposite strategies and yet both are succeeding.

GoCardless

Conceptually, GoCardless is a very simple business.  The company helps service providers, especially those who receive recurring payments (e.g., subscriptions), sign up customers to pay via ACH Debit–presumably rather than via credit card. (And in the US, perhaps instead of checks!)  The benefits to GoCardless customers are the reliability, flexibility, and attractive pricing of debit ACH relative to cards.  (Especially in markets where interchange is not capped.)  While a simple business conceptually, GoCardless is, of course, hard to execute on for several reasons:

  • banking and security regulations
  • competition (Stripe, Adyen, PayPal, etc.) and
  • it’s a two-sided sale–GoCardless needs to sell the biller (supplier) and then have the biller enroll all their payers (buyers) by agreeing to let the biller debit their bank account! That’s no easy task in a security conscious world.

GoCardless has yet to post their 2018 results to Companies House, but in 2017 the company processed about $4 Billion, double the prior year’s volume.  GoCardless’s take rate on that volume was about 37 basis points. The company’s reported gross margin is 81%, so if GoCardless can continue to grow rapidly, the company may be able to cover its administrative expense which also doubled in 2017.  This led to an EBITDA loss of more than 50%.  (Note: GoCardless is still close to a “Rule of 50” company given its high growth rate.)

If GoCardless can make it through the slog and keep their admin costs from scaling with volume, the company will have created a very profitable business.  Go Cardless will also have created a payments platform on the back of the international banking system, rather than on the back of the four-party credit card model. That’s an attractive prospect.

Optal

In many ways, Optal is executing the exact opposite strategy of GoCardless.  While GoCardless works with suppliers first (and then buyers) to take them off the credit card rails, Optal works with B2B buyers first (and then suppliers) to move their payments onto the credit card rails.  (Often via virtual cards.) I’ve written a lot about this very popular business model (see here and here for example).  Its popularity stems from commercial interchange, which is typically not regulated.  Commercial interchange offers generous rebates to the provider and the buyer, though it costs more for the supplier.  (Commercial interchange is often above 2%, whereas GoCardless, for instance, never charges suppliers more than 1% and averages 37 basis points as we saw above.)

Optal’s financials are quite different from GoCardless’s and reflect Optal’s reliance on the credit card network.

  • Optal processed about $11 Billion in 2017. It is growing at about 25% annually or about the same pace as the virtual card market overall (see here).) So Optal is larger, but growing more slowly than GoCardless.
  • In 2017, Optal reported revenues of almost exactly 2% of their processed volume ($200 million). So Optal’s take rate, as expected, is around the commercial interchange rate.
  • Optal’s gross margin,18%, is the mirror opposite of GoCardless’s.   Most of Optal’s revenue has to be paid out to the issuing bank and the buyer in the form of rebates, whereas GoCardless uses the ACH network in each country. (Interestingly, if you think about Optal’s gross margin as a net take rate, it is very similar to GoCardless’s–about 37 bps.)
  • Optal has much lower administrative costs than GoCardless on a proportional basis.  Optal has 75 employees and processes twice the volume of payments as GoCardless with 120 employees.  As a result, Optal has an EBITDA margin of 10%.

Combine this profitability with topline growth and Optal is nearly a “Rule of 40” company.

Financial MetricGoCardlessOptal
Payments Volume Processed$4 Billion$11 Billion
Growth Rate100%+25%
Gross Take Rate37 bps200 bps
Gross Margin81%18%
Operating Costs140% of revenue10% of revenue
Rule of 40YesYes (really close)

Summary

Everyone’s into B2B payments these days, but there are many ways to attack in this market.  You really cannot understand what a company’s payments strategy is until you understand:

  • Are they buyer- or supplier-centric?
  • Card rail or non-card rail?
  • Large ticket or small ticket?
  • High take rate and low volume or the opposite?

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