For a long time, I’ve argued that payments is one of the most mispriced sectors in the market.
This week brought an interesting development.
Stripe launched a $53 billion bid to acquire PayPal.
This is where being a public company would have served Stripe well. At a suggested valuation of 23x sales, it could have used its own over priced equity as currency for the acquisition. Instead it will finance the deal with approximately $50 billion of bank debt, although if successful, perhaps it will serve as a catalyst for a Stripe IPO followed by a debt for equity swap.
Either way, Stripe is clearly keen to exploit the low public market valuations of payment sector businesses. Perhaps this acquisition, in turn, will act as a catalyst for the re-rating of the entire sector. Time will tell.
The interesting question is why Stripe wants PayPal.
PayPal was arguably the original ecommerce payments platform.
Founded at the end of the 1990s by an exceptional group of entrepreneurs including Elon Musk and Peter Thiel, it became the dominant online payments network after its acquisition by eBay, which funnelled enormous payment volumes through the platform.
Over time, however, the founders departed. Innovation slowed. PayPal became less of a technology company and more of a dependable workhorse. That created an opening for a new generation of competitors.
Around 2010, Patrick and John Collison founded Stripe. In a neat twist of history, two of Stripe’s early investors were Elon Musk and Peter Thiel. Both had witnessed PayPal’s stagnation firsthand. They understood that internet commerce had evolved and that merchants needed a fundamentally better payments platform.
Meanwhile, eBay spun off PayPal before replacing it with Adyen as its own payment processor.
Since then, PayPal has increasingly been viewed by investors as an ‘also-ran’. A business with scale, but no longer considered one of the industry’s leaders.
Now the story has come full circle.
Stripe wants to buy it.
To understand the rationale, it helps to appreciate that “payments” is not a single business.
Stripe and Adyen are both infrastructure companies. They sell payment processing to businesses.
Every time a customer taps a credit card or makes an online purchase, these companies provide the technology that moves money from one financial institution to another. In many respects, they are selling highly sophisticated plumbing.
That is an excellent business, but it is also fiercely competitive.
Large merchants negotiate aggressively, forcing processors to compete on price. The result is that infrastructure providers process trillions of dollars while retaining only a tiny fraction of each transaction as revenue.
The economics differ between the two.
Adyen has deliberately focused on the world’s largest enterprises. Microsoft, McDonald’s, Uber and Hugo Boss are all customers. Margins are lower, but quality of customer is higher, as are their respective transaction volumes.
Stripe has largely built its franchise around small and medium-sized businesses. Think Shopify merchants and digital-first companies. These customers have less bargaining power and therefore accept higher take rates. The trade-off is that serving millions of smaller merchants requires significantly more operational effort.
PayPal sits somewhere completely different.
Unlike Stripe or Adyen, PayPal is fundamentally a consumer network.
More than 400 million active users already have payment credentials stored inside the platform.
When a merchant places the familiar PayPal button at checkout, they are buying access to a trusted consumer brand that consistently improves conversion rates.
That creates pricing power.
Merchants willingly pay materially higher transaction fees because more customers complete their purchases.
The economics become even more attractive when consumers pay using their PayPal balance or a linked bank account.
In those transactions, PayPal can often avoid the traditional card networks altogether.
Instead of routing payments through Visa, Mastercard and multiple banks, money moves directly within PayPal’s own ecosystem. Expensive interchange fees largely disappear, allowing PayPal to retain almost the entire transaction fee.
These closed-loop transactions are among the highest-margin activities anywhere in global payments.
The monetisation doesn’t stop there.
The ‘customer first’ ethos has never existed at PayPal. It has never been particularly shy about extracting value from its network. From a position of strength, it aggressively monetizes international shopping with hefty cross-border surcharges and currency conversion markups, while simultaneously earning interest on the billions of dollars sitting idle in user accounts.
It is a remarkably valuable consumer franchise.
Viewed through this lens, Stripe’s strategy starts to make sense.
The obvious path for Stripe would have been to move further upstream, competing more directly with Adyen for the world’s largest enterprise customers.
Instead, Stripe appears to be moving in the opposite direction.
It’s buying distribution.
Rather than simply becoming a larger payment processor, Stripe would acquire one of the world’s largest consumer payment networks, complete with hundreds of millions of trusted users, superior checkout conversion, closed-loop economics and multiple high-margin revenue streams.
Infrastructure businesses are valuable.
Consumer networks can be even more valuable.
That is why this deal is so interesting.
It may ultimately prove to be less about consolidating payment processing and more about owning both sides of the transaction.
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