Plastiq, an SMB payments provider announced it is going public via SPAC. Because it’s a SPAC, not a traditional IPO, there is a lot to decipher. I’ll do my best.
Plastiq began as a consumer business and pivoted to SMB B2B. The company’s “champion” product helps SMBs put more of their spending with suppliers on credit cards–even when those suppliers do not accept credit card payments.
Increasing “B2B Cardability”
On the surface, “cardability” of supplier payments is a real pain point for B2B buyers. Buyers would love to increase card spending for at least two good reasons:
- Using cards, buyers can finance more purchases (up to their card limits) without additional paperwork or approvals, which is great for working capital, and
- Buyers typically get rewards or cash back on credit card purchases
Alas, cards represent well less than 10% of B2B payment volume, mainly because suppliers don’t want to pay the 3-4% fees associated with accepting cards on B2B payments. (B2B payments can be much larger than C2B payments.)
With the Plastiq business model, suppliers don’t pay credit card fees. As a result, issuing banks, card networks, and even suppliers win. Sounds like a lot of “winning” as you can see here:
Who’s paying the Freight (Interchange)?
By now you may be thinking, if the card is being used by buyers and suppliers are getting paid via checks and ACH, but are not paying fees, who is paying? It turns out the buyers are. Plastiq charges the buyer 2.85% to make credit card payments to suppliers who do not accept cards. In a way, it’s just reversing the way cards traditionally work from supplier-pay to buyer-pay.
Plastiq makes money primarily by offering this core bill pay capability. ACH and check payments are free, and so it seems, are “slow” wires. Plastiq does charge for accelerated wires and foreign exchange conversion. The company is also offering SaaS AP software as well as financing products, but these products are new. (The footnotes to the investor presentation indicate these products are not expected to materially contribute to revenue in 2022 or 2023.) The exact sources of revenue are not disclosed.
In 2021, Plastiq processed $2.3 billion in payments volume. The company expects to process $3.6 billion in 2022. Plastiq’s net revenue (or take rate) on this volume is about 2%, which makes sense if the bill pay product is 2.85% and everything else has a lower take rate.
Unfortunately, the numbers go south from there. The company’s gross margin is projected to be 16% in 2022. (Plastiq projects its gross margin will expand in 2023 to 20% due to unspecified mix shifts.) The company’s net loss is expected to be -$64 million in 2022. Adjusted EBITDA is projected to -$50 million, so the company’s cash burn is substantial. Right now, it’s a “Rule of less than zero” company.
I’m not going to opine on the valuation or whether this is a good investment. Legal disclaimer: this blog does not offer investment, legal, or tax advice (see below). I’d just make a few points:
- The company is providing free ACH and checks (which have real costs) and is counting on moving SMB spending to cards. Will buyers move enough spending to cards knowing they will pay 2.85% to do so? In addition, if a recession hits, how will SMBs fare? Will churn increase?
- Plastiq is trying to transition from this clever entry point into a full Bill.com-type offering. How long will the transition take and how much capital will Plastiq use in the meantime?
- I’m generally more interested in how to dramatically reduce the cost of B2B payments rather than shifting interchange-type fees from suppliers to buyers.
- Over the past year, the data on the performance of de-SPACs is as bad as the performance of VC-backed IPOs. Both are down 55%. Waiting has proved smart so far.
An interesting strategy for SMB business owners to use is one that AMEX salespeople used to pitch to their SMB clients (see here). The idea is to put the reward points (or even cash) associated with a company’s expenses onto the owner’s personal card, where they are not typically taxed, and to deduct Plastiq fees as a business expense. Plastiq does mention on its website: “Fee can be offset by credit card rewards, early pay discounts and may be tax deductible.” This little trick makes the 2.85% fee easier to swallow! It’s a win for everyone but Uncle Sam.
An alert reader has correctly pointed out that what Plastiq calls net revenue, others might call gross revenue and their gross margin might be considered a net take rate. This would be about 33 bps for 2022, which would fit with net take rates on some other interchange-based businesses.