CEO JP Chauvet
Photo: Lightspeed

Lightspeed thinks it can take on the big payment players

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: Lightspeed’s plan to catch Square and Shopify, the problem with .eth, and dark web deals on the government’s radar.

Off the chain

Are .eth domain names the Pet Rock of 2022? The short domain names, which point to an Ethereum wallet address, were trendy for a while: a Web3 virtue-signal. But writer Chad Loder noticed some VCs had been dropping “.eth” from their Twitter usernames, and data analyst Travis Brown put a number on it: Over 4,200 accounts have de-eth’d themselves. Is it the lure of rival blockchains? Maybe for Shaquille O’Neal, who switched from “SHAQ.ETH” to “SHAQ.SOL.” I have another theory, though: Maybe Twitter’s early adopters figured out that advertising your crypto wallet address to spammers and pranksters isn’t the best idea.

— Owen Thomas (email | twitter)

Growing into the payments opportunity

Offering payments has become table stakes for a wide range of companies, heightening the competition and blurring the lines between once-distinct sectors of fintech, ecommerce and business software. That means a broadening of the opportunity for companies selling both software and payments in a bundle, but also thorny problems to solve — including persuading investors the math will work.

That’s where Lightspeed Commerce finds itself. Its transaction revenue has grown faster than its subscription-software revenues for the past three quarters. (Before then, it didn’t break them out separately.) Software is more profitable than transactions, though, which has led to some unease among shareholders, who slashed $5 billion off its value on a single day in November. Now the Montréal company is hoping to expand into helping its retail customers manage their supply chains, an ambitious goal.

Taking control of its own payments was key. Founded in 2005, Lightspeed had found a niche offering point-of-sale software to restaurants and retailers, which sometimes already had their own payments processors.

  • Three years ago, Lightspeed decided to handle its own payments by becoming a payment facilitator — a process that requires a lot of work developing underwriting and risk capabilities. The company previously was signing up customers but then handing off the actual payments business, Lightspeed CEO JP Chauvet said. “The problem there is we would bear all the cost of sale,” he said. “But then when you look at the monetization, they would give us crumbs and keep the lion's share of the profits.”
  • After building it, Lightspeed decided it needed to switch off its payment processor, Worldpay, said Chauvet. The world was moving to omnichannel retail — think of how stores started fulfilling purchases through curbside pickup and restaurants had to switch to delivery during the pandemic. Worldpay required separate contracts for online and offline purchases, and had some outages, Chauvet added. Worldpay, a subsidiary of FIS, didn’t comment.
  • So Lightspeed dropped Worldpay for new partnerships with Stripe and Adyen. Those companies are doing the processing piece while Lightspeed handles most of the rest. Now about 12% of Lightspeed’s gross merchandise volume is on its own rails, where it handles the underwriting, Chauvet said.
  • Lightspeed customers with payments provide 10 times the revenue of those without, and the “vast majority” of new Lightspeed customers buy payments from Lightspeed, he said.

Lightspeed has bulked up to take on some of the bigger players in payments. The problem is that Wall Street can now compare it more easily to some of its darlings.

  • Lightspeed generated $20.4 billion of gross transaction volume in the quarter ending in December 2021, up 124% year-over-year. For comparison, Shopify generated $54.1 billion in gross merchandise volume, up 31% year-over-year. Block’s Square did $42.6 billion in the fourth quarter of 2021. Toast, which competes with Lightspeed for restaurants’ business, did $17 billion in gross payment volume in the fourth quarter.
  • But Lightspeed is still much smaller on a revenue basis, reflecting its heavier weighting toward software. Besides payments, Lightspeed provides a range of software for merchants such as inventory management, loyalty, analytics and restaurant ordering. Those are more profitable than payments, but yield less per dollar of customer revenue.
  • “Our view is that software and payments are going to be so intertwined, especially now with all these new services and with the world going back to physical, and that same consumer that goes from one channel to the next,” said Chauvet, who was promoted to the CEO job from president and chief revenue officer in February. “It's going to be almost impossible, we think, for the traditional payment companies to succeed.”
  • Average revenue per user doubles at a location when a Lightspeed customer adds payments, noted BTIG’s Mark Palmer, who views payments growth as part of his bullish call on the stock. Meanwhile, some analysts predict that roughly half of Lightspeed’s $500 million in revenue this year will be from payments.

The next big field of software to tackle is the supply chain. This is a big bet, but a tricky one for Lightspeed to pull off.

  • In retail, Lightspeed’s strength is helping merchants manage vast inventory across multiple stores, Chauvet said. A new product coming this spring called Lightspeed Retail includes technology from recent acquisitions Vend and Ecwid.
  • Lightspeed works with suppliers and automates the ingestion of catalogs so that merchants’ inventories are automatically up to date, then helps automate reordering when items run out of stock. “In retail, you can’t manage your inventory by looking at your Excel sheet,” he said.
  • Lightspeed is building a new “integrated supply chain,” which connects purchases between brands, suppliers and stores while eliminating middlemen. For example, if Ralph Lauren is selling through Lightspeed’s network to merchants, it would know how much to manufacture. Or Rolex could discover from Lightspeed which merchants can sell more luxury watches — and merchants could potentially buy through Lightspeed at discounted rates.

Lightspeed may just have to grow past its challenges. Some short-sellers have targeted Lightspeed, criticizing its organic revenue growth excluding acquisitions, but Palmer disagreed, citing its 74% year-over-year increase in software and transaction-based revenue and 53% year-over-year increase in gross transaction volume, both excluding acquisitions. It’s not clear how strongly Chauvet’s vision of integrated supply chains will contribute to that growth — but it does promise a new field of opportunity that’s not bristling with rivals.

— Tomio Geron (email | twitter)


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On the money

On Protocol: One-click-checkout software maker Fast announced that it’s shutting down after failing to raise enough funds for operation. The upside for at least some Fast employees? Affirm plans to hire a lot of them.

The FBI seized $34 million worth of crypto tied to dark web activity. In a joint investigation by the IRS, FBI, DEA, Homeland Security and the Postal Service, $34 million worth of crypto was seized from a South Florida resident. The resident reportedly obtained the crypto via selling hacked online account information.

Also on Protocol: Block reported to the SEC that one of its former employees gained access to its Cash App Investing customer data, including names and brokerage account numbers. Sensitive data, such as Social Security numbers, was not breached.

Worldcoin’s big crypto project is in trouble. BuzzFeed News found its ambitious plan to scan irises around the world in exchange for an as-yet-unlaunched cryptocurrency is experiencing deployment problems, hardware failures and legal scrapes.

German authorities shut down darknet marketplace Hydra. Hydra was the top Russian darknet marketplace, with 17 million customers registered at the time of its closure. Officials seized about $25 million worth of bitcoin.

Singapore passed a law regulating crypto providers overseas. The Financial Services and Markets Bill will regulate Singaporean crypto businesses that only operate outside of the country, subjecting them to licensing requirements.

Neutrino lost its peg to the dollar. The algorithmic stablecoin, USDN, lost its peg after the value of its underlying token, Waves, dropped drastically by more than 26% in a day.

MicroStrategy bought about $191 million worth of bitcoin. The software company had recently taken out a $205 million loan from Silvergate Bank. CEO Michael Saylor said the company has no plans to sell the bitcoin stash, holding onto it for the long term instead.

Making crypto pay

For crypto to become a truly viable payment method, companies need to be able to settle transactions in crypto, ideally stablecoins. There’s a new product from card-processing giant Worldpay and stablecoin issuer Circle out today that does just that.

Using this product, merchants will be able to accept fiat payments from Visa or Mastercard cards and settle in Circle’s USDC stablecoins. In other words, merchants can choose to receive crypto without touching fiat. This is especially useful for crypto-focused companies as well as those with a crypto treasury strategy who want to avoid the expense of fiat-to-crypto conversion. Crypto exchange is the pilot merchant for the new product.

The companies say this is the first global merchant acquirer to offer direct USDC settlement. Worldpay has more than 1 million merchants worldwide, and Circle offers a well-accepted dollar-linked stablecoin in USDC.

The move is part of a broader push by Worldpay to enable crypto payments. It’s also working on another pay-by-crypto product that would let merchants accept crypto directly from wallets without using cards.

— Tomio Geron

Just one question with Lance Morginn, co-founder and president of Blockchain Intelligence Group

Before starting his blockchain analytics firm, Morginn was president of a healthy-snacks vending machine company.

How did the Blockchain Intelligence Group get started?

We started in 2015. In 2016, we put out an announcement letting the industry know that we had the ability to track cryptocurrency transactions. Law enforcement was our biggest respondent. We’re finally starting to see regulation over the last two years, and different countries making a demand for the risk-scoring of addresses and transactions so that the frontline defense can at least know if further investigation needs to take place or not.

Back in the mining days, who made the money was the guy selling the picks and shovels. I've always liked business models that do that. We actually don't hold crypto. We don't build anything in blockchain. But we do index all the blockchains. Being able to take a piece out of every transaction by providing confidence and transparency seemed like a great business model to me.


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Thanks for reading — see you tomorrow!

Correction: This story has been updated to reflect the correct time period in which Toast recorded $17 billion in gross payment volume.

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