Earning them: Stripe’s monster valuation

Hello and welcome to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. The governor of New York, Andrew Cuomo, has had a long career being uncompromising. But as allegations have piled up about his once lauded pandemic response and about his behavior, it seems something will have to give. And in Afghanistan's capital, Kabul, there's a service that's on the rise. Plastic surgery. Demand is up as more people spend time abroad and online. Problem is, being a cosmetic surgeon in the country is something of a dangerous profession. First up though, Patrick Collinson co founded the Irish American payment platform Stripe with his brother John in 2010 when he was just 22.

We started out building a payment platform for Internet businesses. As simple as that. And so you want to accept payments on your website, in your app, you want to charge people over the Internet. We built a system that makes that really easy to do.

By the time our sister Sho Babbage spoke with him in September 2019, private investors had poured money into Stripe, and It was worth 35 billion.

Stripe works with millions of the highest potential companies all around the world. And so we're sort of a platform for these new ventures, for these new undertakings, and for people doing things that weren't previously possible.

As of this weekend, it's now valued at $95 billion, making it the most valuable private company that Silicon Valley has ever produced. There's clearly plenty of investor interest in the small handful of firms that handle the back end of E Commerce. But as ever, with the eye watering valuations of the tech world, the question is whether all that enthusiasm is matched by real growth prospects.

You might never have heard of Stripe, but you're probably familiar with the kind of service it provides.

Mathieu Fauvas is a finance correspondent for the Economist.

It gives businesses an online payment system that they can quickly integrate into their websites and mobile apps so customers can pay for things they order like a meal, a flat screen tv, a taxi ride. Or to put it in another way, that pop up box at the end of an E Commerce transaction where you enter your card details and hit pay. Stripe are one of a handful of tech companies offering that.

I mean, that doesn't sound like the highest tech solution in the world. How can it be worth $95 billion?

Well, look, valuations are always a sketchy business, particularly for privately held companies because they don't disclose their financials. But Stripe did offer some metrics, so its co founder John Collison said its Systems handled almost 5,000 requests a second in 2020, and that 200,000 new companies in Europe have signed up to the platform since the start of the pandemic. Also, Stripe is moving into other services. So in December, Stripe announced it was teaming up with banks, including Goldman Sachs and Citigroup, to offer bank accounts and other business banking services to merchants. All that was enough to convince investors that the company has very own optimistic prospects for growth.

So is Stripe the only company that provides these services or simply the best one? I mean, what makes it such a notable example of that?

So the Collisons brothers, when they basically created the first company back in the early 2000s, they sold that company and with a few millions that they got, they started a new business in Silicon Valley. And the clever idea they got is that they started offering the payment services for startups based in Silicon Valley. At the time, the scene there was, of course, the tech scene was quite big, but the online e commerce scene was not as massive as it is today. So as these startups took off, then Stripe basically joined the ride and took off as well. But there are three other firms that provide this type of services. You have PayPal and Square, also based out of Silicon Valley, and Adyen, which is based in Amsterdam, all of which are publicly listed. And in fact, all of them have seen their share prices rise astronomically this year. PayPal's and Asian shares have close to triple and Squares have grown fivefold.

And so these four companies then that kind of dominate the market, do they all do the same thing?

Not quite. So if you think of the digital payments industry as rather like a transport system where money moves from point A to point B or from the buyer to the merchant. Gateways, as we call them, connect a shop's app or website to the e commerce infrastructure. And they check things like a buyer's identity and whether they have available funds before authorizing travel. The money then jumps onto the customer's type of rail. The means you choose to pay so that the credit card, bank to bank, or mobile wallet systems. And on top of this, you have the refreshment trolleys. So services providers like buy now, pay later, firms that purport to make the journey more pleasant. So PayPal is the biggest of the four, with a valuation of $280 billion. It combines a digital wallet used by 350 million consumers with a gateway accepted by 30 million merchants. So they have the ticket gates, the rails, and the refreshment trolley. Square is the second biggest, valued at $110 billion. And they have the gateways and the Rails. The one difference is that they tend to focus on independent merchants. So they have a bit of a niche. Stripe and Adyen are pure online gateways. They're just the ticket gates. They don't have a consumer brand, which is why many people have never heard of them.

But doesn't that put them in danger of being sort of pushed out by the bigger, let's say full service transport companies?

Yes and no. So PayPal provides a sort of turnkey solution. It's very simple. It works for less tech savvy clients. Stripe products offer more flexibility and the firm is seen as more innovative. There's more functionalities, so it's good for developers and for tech firms. The second thing is that Stripe and Agent are extremely good at what they do and they typically help cut rejection rates for payments by 4 to 5 percentage points. Few people know that, but actually 10 to 15% transactions online are rejected on a routine basis. So if you can cut that ratio by 4 to 5 percentage points, that's a lot more money in the pocket of merchants.

But is that to say that they're completely immune from competition? I mean, why wouldn't a big online e commerce firm basically bring this in house? If all that stripe is bringing them is the ticket gates in your analogy, then why wouldn't big sellers of the world build their own technology to do the same and not have to pay the fees?

Yeah, that's right. So you see competition potentially coming from different corners of the industry. One is the big tech firm. So Apple Cash, for example, allows users to pay each other via text messages. So you know, you could imagine that in time, perhaps replicating what Stripe and others do or perhaps bypassing it altogether. The second threat could come from large retailers. You're right, like Walmart or Target. And they are building their own gateways and wallets. They're working on that. Where competition is not really coming from is from the banks actually. Because at present you still have 50 to 60% of all digital transactions still processed by the banks. But they are pretty inefficient typically. And E commerce being cross border, it's also very complex to manage. So you can imagine that over time the digital specialists are better placed and that they'll continue to steal market share away from the banks.

And what about that enormous valuation though? I never know what to make of them. There's almost always talk of a bubble when these numbers get batted around. Is there any hint of that this time around?

The direction of travel for these firms is perhaps clearer. Than for a lot of other tech firms. One reason is that E Commerce is here to stay and also that even in physical shops cash is declining today. But the other is that also payment firms are no longer just payment firms. PayPal for example offers Buy Now, Pay later services, credit cards. Crypto Trading Square's consumer app, which is called Cash App, allows you to receive paychecks. You can also trade stocks and also Crypto Stripe is offering short term loans to its merchants and bank accounts as well to its clients by a partner with the banks. And all that gives these firms much more room to move and vastly bigger revenue pool they can target than just payments. So in three to four years time in fact they probably will have become financial super apps or software supermarkets. So multi headed beasts that are alike the current self that they are today.

Mathieu, thank you very much for your time.

Pleasure Justin.

For a lot more about the trends shaping the shopping experience online, in person and behind the scenes, listen to this week's episode of Money Talks, our sister show on business and finance. It's out later today wherever fine podcasts are sold and traded. A year ago, New York Governor Andrew Cuomo's nightly news conferences became must watch tv.

I see it as a wave that will break at one point and the question is, when the wave breaks, does it crash over the health care system?

He addressed his constituents and beyond with science based facts, empathy and clear information.

And to the President I say today, if you want to help stop COVID 19, then they should start telling the people of this country the truth.

But now, following a range of allegations, Mr. Cuomo faces calls for his resignation from across the political spectrum, it's clear.

That Governor Cuomo has lost the confidence of his governing partners as well as the people of New York. That's why I believe that the governor has to resign publicly. It started to go wrong in January when Letitia James, the state's attorney general and a close pal of Cuomo, released a very scathing report saying his administration had understated the number of COVID 19 related deaths in state nursing homes by as much as 50%.

Rosemary Ward is the Economist's New York correspondent.

That made out to be about a few thousand extra deaths that people didn't really know about. The administration did not handle this well. A top aide, Du Cuomo, admitted to state lawmakers that they froze because they didn't want the then president Donald Trump to turn this into, as she put it, a giant political football. But that didn't satisfy state lawmakers and soon after, several sexual Misconduct allegations emerged.

And what's the nature of those allegations?

There's at least seven from current as well as former aides, which range from inappropriate touching to kissing, and then from a current staffer groping at the Executive Mansion where Cuomo lives. That case has been put to the police, and they're looking into it now. And at the end of last week, a journalist who used to cover Albany and Mr. Cuomo wrote an essay talking about the toxic culture that the governor cultivated for women.

And how has Mr. Cuomo responded to all this?

Well, in typical fashion, he held a press briefing.

I want New Yorkers to hear from me directly on this.

And denied all sexual misconduct allegations. He said that he was a hugger.

I now understand that I acted in a way that made people feel uncomfortable. It was unintentional, and I truly and deeply apologized for it.

But he said he didn't do anything inappropriate, and he's sorry that these women feel that way. But he denies that he did anything wrong.

I asked the people of this state to wait for the facts before forming an opinion.

And in fact, he started to say that politicians who've now calling on him to resign are reckless and dangerous. And then he started to accuse some of the women as having questionable motivations. He says he won't resign, that he was voted to do his job, and he's gonna continue to do it.

And so what recourse is left then if he won't stand down?

Well, the New York State assembly have launched an impeachment investigation which has the power to interview witnesses, subpoena documents. An independent investigation by State Attorney General Letitia James office is underway. That's the one that Cuomo says he is fully cooperating with, and he wants people to wait until the results of that report come out before passing any judgment. There's actually a third investigation underway by the feds looking into the nursing home numbers, too. That actually could be the most dangerous for Cuomo. If he's found to have lied to the federal government, that brings this whole mess into a whole different plane.

Well, this sounds like a tale of two governors, then, one who is a pandemic hero, and one who is under the cloud of these allegations. You've been following him for some years. Which one matches your experience best?

Yeah, there hasn't been a halo on Cuomo ever. I will give him this. When he first became governor, it followed four years of inept governing by Elliot Spitzer, who was in trouble for cavorting with a prostitute. His successor, an affable man, David Patterson was completely not up to the job of governing the state during a recession. It did seem like he was a good manager, however, he spent his whole time in office, which is now 10 years, he's in his third term, creating and managing the narrative on every level. He was very image conscious. He knows everything about what everyone has said about him. Most everyone I have interviewed going back years, not just in recent weeks, have called Governor Cuomo a bully. This is his M.O. that's how most people describe him who have to deal with him. And for the first time, he doesn't have control of the narrative, which is why this is all spinning out and he can't stop it. But until now, he had so much power. The state constitution gives him almost all the say over budgets. He has unilateral power to withhold state funding from programs, agencies, authorities, which he uses to leverage and push people to do what he wants. And there's not a lot of transparency with that. And then with COVID for the past year, he's been a source of comfort, not just for New Yorkers, but everyone from Dublin to Dubai who turned in to hear this person talking, seemingly straight, but hubris got involved.

But as it stands, things are kind of at an impasse. How do you see this playing out?

I don't see him going willingly. I think something really bad has to come out for him to resign or for President Biden to push him, and he hasn't done that. But most of New York's congressional delegation have called on him to resign, including Chuck Schumer, who's the Senate majority leader. But he still has powerful allies in the unions, the teachers union, the civil workers union, and he still has support, especially among middle aged women. Ironically, given some of the allegations put against him, he's not going to go willingly. He's not going to resign.

Rosemarie, thanks very much for joining us.

Thank you, Jason.

On the outskirts of Kabul, Afghanistan's capital, Taliban insurgents launch nightly attacks on army and police outposts. Yesterday, a resident recounted seeing a minibus explode. Fifteen people were injured. But for many Kabulis, the war on their doorstep is no reason to neglect their appearance.

Kabul is a place where there's a surprising growth in people looking to find ways of looking good.

Daniel Knowles is an international correspondent for the Economist.

There's a growing business providing cosmetic surgery. There's perhaps 10 clinics, and they say their business is expanding a lot. I went to one of them, the Arvin Hospital, which is in a suburb south of the city, and talked to the lead surgeon, a Guy called Mohammed Arif Abdi, and he told me that more and more people in Afghanistan are looking to get plastic surgery.

It's quite good.

There are a lot of people that want to be beauty and they do some procedure.

And so why this surge in demand for cosmetic procedures?

Kabul is a kind of surprisingly fairly cosmopolitan place, and a lot of demand comes from Afghans who have spent time abroad. You know, there's very close links with Iran. And in Iran, various sorts of plastic surgery, particularly nose jobs, have been popular for quite a long time, and that's now sort of being brought back to Afghanistan. But you also have a lot of people who are using social media. The Internet's really taken off in the last few years, and people want to look like Bollywood actors or Hollywood actors or actresses. And so all of a sudden, I think people who perhaps even a few years ago wouldn't have sort of thought of going for plastic surgery now increasingly want it.

Well, then it must be good business for those who do have the expertise, like Mr. Abdi.

So you can make money as a plastic surgeon in Afghanistan, but it's not the easiest business to be getting into. There's a lot of growing insecurity in Afghanistan in general. And one of the big risks is that doctors are seen as prime kidnapping targets. As Mr. Abdi pointed out to me when I was talking to him, saw.

A lot of doctors who get kidnapped by kidnappers and they request money to release. So the main problem is security.

Even in our hospital, we don't feel ourselves safe.

So it's partly that people get a good nap for money, but there's also objections to what they're doing. Cosmetic surgery is seen by some people in Afghanistan as against Islam. At the Arvind Hospital, they report that people kind of leave threatening comments on their Facebook pages. Mr. Abdi himself had once been attacked. He was shot in the leg.

I was attacked by someone just four yard backs.

They fired at me and hit my legs.

Gosh, you're in shots in the leg? Yeah.

This is the scale.

I see.

Gosh, that's awful.

It could have been a kidnapping attempt. It could have been an attempt to stop him working. But he's got this scar on his leg from the bullet wound, and he'll always have that scar. Despite having access to a lot of plastic surgeons.

Well, I suppose that's another question for a lot of people caught up in the violence in Afghanistan. People might want to clean up their war wounds.

Well, quite. Afghanistan really needs plastic surgeons because it's not just nose jobs that might be where the money comes from, but you have an awful lot of people with injuries from warfare. You have people with severe burns, with bullet wounds, disfigured faces, all sorts of things that need specialists, medical help, and they generally don't charge the same amount of money. They charge nothing at all or a sort of token fee for patching up injuries from war. And I think even the sort of zealots who leave all the comments on their Facebook pages have to sort of recognize that that's good.

Daniel, thanks very much for joining us.

Thank you for having me. J.

That's all for this episode of the Intelligence. If you like us, leave us a rating and a review and you can subscribe to the economist@examiner.com intelligenceoffer. The link is in the show Notes. See you back here tomorrow.