What does Marqeta do?

Marqeta allows companies to offer Visa or Mastercard payment products to customers without having to deal directly with a traditional bank. (Marqeta itself handles the work with banks; its bank partners include Sutton Bank of Ohio, which accounts for nearly all of Marqeta's business, and MetaBank of South Dakota.)

As of March 31, 2021, Marqeta had issued some 320 million cards. In all of 2020, Marqeta processed approximately 1.6 billion transactions.

The open API system has a few advantages over dealing directly with an issuing bank:

• It becomes faster and cheaper to launch a new payment product since Marqeta has already developed the back-end systems and makes them available to developers through well-documented APIs. Marqeta CEO Jason Gardner told Protocol in February that APIs helped define the company's strategy to focus on developers. Marqeta CPO Kevin Doerr added: "Developers are a unique cohort of the population at a technical level and if you can win [their] hearts and minds because you're doing the things that appeal to them, then ultimately you can win the business."
• APIs also make it easier to build more complicated and customizable financial products. For instance, Klarna partnered with Marqeta because it needed a way to safely pay online retailers on behalf of its "buy now, pay later" customers. The Marqeta API allows Klarna to instantly create virtual cards that pay for goods from online sellers and distribute those payments over time. Developers at crypto exchanges such as Coinbase and Shakepay have also taken to Marqeta's APIs, which allow customers to convert value stored in cryptocurrencies into fiat at the point-of-sale.
• Finally, Marqeta's systems offer enhanced security features. Payment tokenization, for instance, allows consumers to pay for goods without actually exposing their card information. Many of the world's largest financial institutions use Marqeta's safety protocols. Last July, for instance, JP Morgan announced that it would rely on Marqeta's technology to instantly tokenize its consumer credit cards for use in digital wallets.

Marqeta makes money by charging a small fee on all of these payment transactions, based on the interchange fee system that payment processors like Visa and Mastercard use. It's therefore in Marqeta's interest to make its APIs as open and accessible as possible, thereby enticing companies to build new products around them and boost transaction volume.

Marqeta's financials

When Marqeta's partners do well, Marqeta does well. Square, by far Marqeta's most important partner, is growing fast, so it isn't all that surprising that Marqeta posted 103% revenue growth in 2020 relative to 2019. The company generated $290 million in revenue in 2020 compared to $143 the previous year. 2021 is shaping up to be even better, as Marqeta made just under $108 million in the first three months of the year, up 123% from the same period in 2020.

Despite the impressive revenue growth, Marqeta has yet to turn a profit. The company actually reported impressive gross margins of over 40% in 2019 and 2020. But significant operating expenses — most notably compensation and other benefits — ended up putting the company in the red. Marqeta lost $47.7 million in 2020, a slight improvement over the $58.2 million loss in 2019. The first three months are pretty much par for the course in terms of profitability, as Marqeta lost $12.8 million.

What could go wrong?

Three risk factors stand out from Marqeta's S-1: overreliance on a limited set of customers and partners, competition and cybersecurity threats.

One of the biggest surprises in the S-1 was the extent to which Marqeta relies on just a handful of key partners.

• Square accounted for an astounding 70% of Marqeta's net revenue in 2020. For the first three months in 2021, that figure rose even higher to 73%.
• No company wants to be that reliant on any one client. In this case, it gives Square more leverage in negotiations and creates significant operational risk in the event that Square leaves.
• Sutton Bank, which is the underlying issuer for the Square Business Card and the Cash App Card, accounts for even more of Marqeta's business — 94% as of the first quarter of 2021.
• The good news for Marqeta — at least for now — is that they have existing contracts with Square that expire in 2024. The Sutton deal runs through 2027.
• Until then, Marqeta will definitely want to diversify its client portfolio to reduce the associated risk. The company writes: "Our net revenue and results of operations could suffer if, among other things, Square does not continue to use our products, uses fewer of our products, reduces its processing volume, or renegotiates, terminates or fails to renew, or to renew on similar or favorable terms, its agreement with us." Termination of the Sutton deal also poses risks, Marqeta said.

Marqeta is going after a highly lucrative market (we're talking trillions, not billions, in terms of the total payment value processed). Though it has strong relationships with powerful institutional partners for now, there's always a possibility that those companies decide to go it alone instead of relying on an intermediary.

• Consider the companies that exist in the payments processing space and work in some capacity with Marqeta — JPMorgan Chase, Goldman Sachs, Visa and Mastercard. All of these companies operate at such a scale that it could eventually make sense for them to make their own version of Marqeta's API and cut out the middleman.
• This isn't that far-fetched of a possibility. We've already seen bigger players in the payments market attempt to buy up fintech companies to reap those efficiencies: SoFi agreed to acquire Galileo in April 2020, Mastercard agreed to purchase Finicity in June 2020 and Visa tried but ultimately failed to buy Plaid.
• The company writes: "Such competitors with greater financial and operating resources may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, customer requirements, or regulatory developments."
• And though Marqeta doesn't explicitly address the disruptive potential of cryptocurrencies in the payment processing space, it's probably worth mentioning: Part of the promise of cryptocurrencies comes from their ability to enable secure direct payments and cut out intermediaries. If cryptocurrencies become a more widely accepted form of direct payment — and this is still a big "if," just ask Elon — they could eat away at Marqueta's business.
• For now, though, crypto is driving up the popularity of Square's Cash App, which is good for Marqeta.

Payment processors are always high on the list of targets for cybersecurity attacks, whether orchestrated by state-backed actors or individual fraudsters.

• The company writes a lengthy catch-all in this department. To spare you the legalese: Marqeta works hard to secure its data but if something did go wrong it could be very, very bad.

What people are saying

• "There's a trade-off in the supplier space of speed to market vs. economics vs. long-term flexibility and capability. Marqeta is right in the middle of all of that, and that makes them interesting to watch. Marqeta is big enough for large banks but flexible enough for big tech." — Simon Taylor, on the Fintech Brain Food Substack newsletter in February.
• "I read a statistic a long time ago that less than 10% of financial services is digitized today. If you're a challenger bank, you're attacking that space head on. For large banks, you're seeing this and you're saying, 'I gotta move.'" — Salman Syed, Marqeta's U.S. general manager, to Protocol's Benjamin Pimentel in April.
• "[Marqeta's valuation] makes the Galileo price tag look cheap in comparison — SoFi bought Galileo for $1.2 billion in April." — Cokie Hasiotis, on the Fintech Today Substack newsletter in July 2020, reacting to reports that Marqeta could fetch a $8 billion valuation.