DEEP DIVE with Adyen: A Global Payments Giant
Payments remains the backbone of the financial services industry.
It’s a backbone built by industry pioneers (such as PayPal) and solidified by early fintech stars (such as Stripe) — both groups which have become household names across the world. In the mix are also smaller upstarts trying to carve a niche for themselves in one specific area of the sector (e.g. B2B payments, cross-border transfers, multi-currency).
Is there still room for another payments giant to emerge in this modern era full of competition?
Yes, there is! The newest juggernaut is Adyen: a Dutch paytech (publicly listed on the Euronext Amsterdam) with an acquiring bank that facilitates e-commerce, mobile, and point-of-sale (POS) payments for merchants and businesses globally.
Adyen made headlines earlier in the year due to missed performance targets, but there’s more to know in terms of the company and payments landscape.
In this deep dive, we’ll explore (TL; DR):
Brief on Adyen’s history (from its start in 2006);
What Adyen offers (as an end-to-end solution);
The decline in performance for H1 2023;
Where does Adyen go from here;
Outlook on staying the payments sector;
AdyeN’s ORIGIN & history
Adyen (headquartered in Amsterdam) was founded in 2006 by Pieter van der Does (CEO) and Arnout Schuijff (CTO). In a nod to the company being their second project together, Adyen means 'start again' in Sranan Tongo (a language from Suriname).
Within 5 years of inception (2011), the payments company was already showing robust growth and profitability. A year later, Adyen started its expansion outside of Amsterdam — opening offices in London, Paris, and San Francisco.
A $250M funding round came at the end of end 2015, which was led by General Atlantic and early investors (Index Ventures, Felicis Ventures, and Temasek Holdings). A $2.3B valuation came the following year for Adyen, ranking the paytech as a top 10 unicorn in Europe.
The company proceeded to add acquiring licenses as well in various geographies: Brazil (2016), European banking license to become an acquiring bank (2017), as well as acquiring in Australia, New Zealand, Hong Kong, and Singapore.
In May 2018, Adyen announced its intention to go public in Amsterdam. The initial public offering would take place on June 13, 2018.
More offices were added in 2019 (Tokyo & Mumbai) and product coverage now reached Africa. An office in Dubai and expansion to the Middle East would come a year later.
In terms of volume, Adyen reported $90B in transaction for 2016. The pandemic’s impact boosted growth even further as most purchases were taking place online (instead of in-person).
Over time, Adyen also built a reputation for winning growing clients (such as Tesla, Uber, LinkedIn, and Meta) in their early years. As these platforms started scaling massively, Adyen retained the relationship and grew alongside them. Other enterprises clients include Adidas, H&M, Subway, and Booking.com. eBay became a noteworthy addition as it transitioned its business off of PayPal between 2019 - 2021 to Adyen.
What adyen offers
Adyen provides merchants the ability to accept payments electronically via cards (credit or debit), wire transfers, and real-time bank transfers. Merchants with a physical presence can also choose different card types to accept as well (i.e. cash, mobile wallet payments).
Its platform offers an an end-to-end, plug & play solution that includes:
Payments gateway for merchants to initiate payments for a wide range of acceptance methods;
Acquirer processor to communicate the transaction between the merchant and customer banks;
Acquiring bank for payment settlement and ledgering;
This all-in-one platform also includes risk management to prevent fraudulent transactions.
With all major payment functions in one place, Adyen becomes a hub for data that moves across the entire payment lifecycle (from transaction request to settlement). Merchant clients are given insights & analytics to improve performance in each step.
Adyen’s key differentiator (that sets them apart from competitors) is that they are an acquiring bank with top quality technology. This combination allows them to provide one platform for managing 100+ types of payments in over 60 countries, which yields higher margins than those of competitors.
Having all core elements in one place reduces the need for 3rd party vendors and makes for a more efficient and secure platform, especially for fraud prevention. These key benefits reduce the per transaction cost for merchants.
Adyen also became strong in helping merchants become global brands by expanding to new geographies, especially companies from Europe entering US or Asia. As a company, over half of its revenue (56%) still comes from Europe, while 25% comes from North America and 11% from APAC.
WHAT HAPPENED IN H1 2023 for ADYEN
While multiple top fintechs (such as Affirm, Robinhood) took a hit last year in the market, Adyen was shining brightly with its growth and profit performance in the payments space.
This lasted until the first half of this year when revenue came in at 21% growth instead of 25%, and profit dropped by 10% (year-over-year from 2022). The concern is that the combination of slower growth and reduced margins is a red flag for further declines in performance.
Here’s a mix of factors contributing to Adyen missing its recent forecast:
Product investments not delivering growth — Adyen is committed to the long-game in its approach towards investing in new products. The company has a history of building and developing in-house in order to earn better unit economics and stay differentiated over time. Unfortunately, the revenue from these new products isn’t (yet) matching to core programs, which has analysts worried. It’s more expensive (in the short term) to ‘build’ instead of ‘buy’ or ‘partner.’
Expanding to the US — The same point can be made for its US expansion. Adyen is hiring and staffing now in the US in preparation for expected demand to follow in the next years. A solid sales force and more marketing dollars are needed to earn market share. As a new geography, US is among the most expensive in comparison to most other regions (especially with employees).
Price slashing by competitors — Established, incumbent payment brands have operated in the space longer than Adyen. These competitors (such as Braintree) are now looking to avoid losing market share by reducing the cost of their programs. Once pricing wars have started it’s difficult to avoid a race to the bottom. As a result, revenue performance starts to take a hit in the near-term.
These three factors combined with the current macroeconomic climate have made for a perfect storm of reduced activity as customers monitor spending closely and businesses retract on new initiatives (such as opening in new markets or locations).
Where does adyen go from here?
The next 6-9 months will be THE defining period for Adyen to validate its growth & expansion efforts from the last year+.
By Q2 2024, there should be some indicators available about progress in the US. As an established public company, Adyen knows how to manage costs and maneuver in complex environments. Unit economics may show positive growth as US staffing will have a year of market operations under its belt.
Emerging enterprises & brands (which have made Adyen successful in the past) will continue to work with the payments giant due to its modern tech infrastructure and ease in scaling. These types of companies prefer an all-in-one solution that can handle massive volume without breaking down. Add to this mix, Adyen’s ability to expand into new geographies and there’s plenty of reasons for growing enterprises to continue as clients.
Some of these enterprises (especially ones with massive scale) are looking to improve unit economics and take on some of the obligations in-house. This requires a partner that can flexibly break out components of its program, while still maintaining a core relationship. We’ve seen this happen in the Banking-as-a-Service sector with multiple vendor companies being available for user onboarding, compliance checkpoints, and fraud management.
Adyen won’t be the best ‘specialist’ in all categories and may need to concede some of its program coverage in order to meet the demand of these high-scaling growth companies. Ultimately, it comes down to balancing its value proposition of being the default payments platform with a client’s ambitions to own more of the operations. This can lead to creating a new business model with commercials that differ from standard product offerings.
The drop in performance may have been a surprise earlier this year, but Adyen is still operating by the book in terms of strategy and roadmap. As soon as the company gathers traction with its new products and expansion efforts, expect revenue and profit targets to be back where they should be.
OUTLOOK FOR THE PAYMENTS SECTOR
There’s still much work to be done with payments from a macro-level view.
Instant, real-time payments. Cross-border & multi-currency payments. Business-to-business (B2B) payments. Emerging regions shifting from offline to online transacting.
There’s no clear leader in these categories and there’s no unified platform that offers all these products as a best-in-class solution.
Looking back about 15 years ago, we can all appreciate how far this sector has come in terms of capabilities, ease of use, and time to market. The juggernauts we see today (PayPal, Stripe, Adyen) were still growth companies back then. With this perspective, we can look to growth companies of today (such as Toast, Checkout.com, Nuvei) as being the next-generation of giants.
The future remains bright for paytech as merchants & businesses (of all sizes) look to increase acceptance of payment types, while keeping fees down (to preserve profit from sales). As new forms of payments gain adoption (cryptocurrency could be next), processors & platforms will look to stay up-to-date with their solutions and competitive with products.
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