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The New Power Player in Online Payments

November 21, 2013, 12:40 PM UTC
The brothers Collison: Patrick (left), 25, is Stripe's CEO; 23-year-old John is president.
Photograph by Gabriela Hasbun

A version of this article appears in the December 09, 2013 issue of Fortune Magazine.

Before he left Ireland for Harvard in 2009, John Collison had to promise his mother he would not drop out. His older brother, Patrick, had ditched MIT not long before, after just a few months in college. Promise and all, John never made it past freshman. He dropped out to join his brother to create Stripe, an online- and mobile-payments company that two years later is processing billions in transactions, counts PayPal’s three founders (Peter Thiel, Max Levchin, and Elon Musk) as investors, and is growing at a dizzying speed. With scores of hot startups like Lyft, Foursquare, and Squarespace using it to handle payments, Stripe has emerged as the buzziest new payments company since Jack Dorsey’s Square turned iPhones into credit card readers. Now John, 23, and Patrick, 25, are about to go head to head with online-payments giant PayPal, which in September agreed to spend $800 million to buy Stripe’s older and larger rival, a Chicago-based startup called Braintree. “John and Patrick are two of the sharpest characters that we’ve ever partnered with,” says Stripe investor Mike Moritz of Sequoia Capital, who is no stranger to sharp characters, having backed the founders of Google, Yahoo, PayPal, and countless other tech icons.

The Collison brothers didn’t set out to build a big company—at least not at first. The two are quintessential hacker types who seem to have been tailor-made for the startup boom that’s gripped a generation of techies. John, Stripe’s president, is quieter, and Patrick, its CEO, more intense, but both are cerebral, longtime app developers who became fascinated with the Internet and taught themselves to code at an early age. (When the Internet was down in their small town near Limerick, Patrick would go to the library to read books about the web.)

In 2007 the two, then 16 and 18, were accepted to the prestigious Y Combinator incubator in Silicon Valley to continue developing an auction management tool for eBay sellers that they had hatched in Ireland. Even after they’d sold the company, then named Auctomatic, for a few million dollars, something about the experience kept nagging at them. Charging for the service was a cumbersome process that required them to jump through multiple hoops to accept credit cards, so they kept putting it off by offering customers extended free trials. Scores of their fellow developers were in the same boat: While building apps was increasingly easy, getting paid for them, outside the confines of the Apple (AAPL) App Store, was not. So the Collison brothers set out to fix the problem for themselves and their peers. “We wanted this to exist for our own personal use,” says Patrick. Most people of any age would have looked at the payments industry—highly regulated and dominated by giants—and given up. The Collison brothers said, “How hard could it be?” Youthful naiveté, in this case, may well have been a blessing. “If you knew how hard it is to break into these industries, you wouldn’t even try,” says Thiel.

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Without U.S. work visas the brothers headed for Buenos Aires, which seemed as good a place as any to start their project. The two spent most of their waking hours coding in their hotel room, landing their first customer in January 2010. When they returned to the U.S., the brothers visited the Y Combinator offices in search of potential customers. Paul Graham, who runs the incubator, remembers them going to other developers who wanted to charge for their apps and showing them how to set up Stripe accounts on their machines. “No one regretted it,” says Graham. Indeed those developers told their friends, who in turn told their friends. By the summer of 2010, Stripe had enough test users to attract marquee investors. It officially launched to the public in the fall of 2011. The company has raised a total of $50 million from Sequoia, General Catalyst, Andreessen Horowitz, and others. It currently has 75 employees, most of them engineers. One in four has been a company founder before.

Roughly speaking, Stripe does for websites and mobile apps what Square does for food trucks: It sets them up with the capabilities to accept credit and debit cards within minutes. Stripe fees start at 2.9% plus 30¢ per transaction with no recurring or startup fees. Stripe pockets only a fraction of that, as most goes to payment processors and credit card networks. (For comparison, Square charges a 2.75% fee, and traditional card companies often have a thicket of pricing options and teaser fees that rise over time.) Stripe is private and won’t break out its revenue, though its early growth has mirrored that of Square—reaching a rate of $1 billion in annualized transactions in less than 18 months. Stripe says that it’s now processing as much in a day as it did in a month in the summer of 2012.

In Stripe’s offices in San Francisco’s Mission District on a recent afternoon, Patrick eagerly walks me through the setup routine. I open an account, cut and paste a few lines of code from the Stripe website, and minutes later I process my first transaction. “This thing used to take weeks to set up,” says Anthony Casalena, the CEO of Squarespace, a New York-based startup that makes it easy to create websites. Stripe has added a bevy of features, like the ability to do recurrent billing and to send money to individuals. Squarespace uses Stripe to bill its customers — and thousands of those Squarespace clients, who sell goods or services from their websites, use Stripe for their billing as well. Lyft, a car-sharing app, uses Stripe not only to charge riders, but also to distribute payments to its fleet of drivers.

“If you knew how hard it is to break into these industries, you wouldn’t even try.”
—Peter Thiel, PayPal co-founder

Stripe is not alone in the business of facilitating online payments. The company has spawned clones in Europe and Australia, and faces competition from the likes of Amazon (AMZN) and PayPal. After it completes the acquisition of Braintree, which counts powerhouses like Airbnb and Uber among its customers, PayPal will be Stripe’s biggest competitor. “All of the movers and shakers are on the Braintree platform,” says David Marcus, the president of PayPal. The Collison brothers are undaunted by the rivalry. They say many of Stripe’s early customers were small when they first signed up but are now growing at warp speed, and the company is adding new ones at a brisk clip. During one week this summer, 250 new businesses in the Bay Area counties of Santa Clara, San Mateo, and San Francisco alone joined Stripe. Big ones are joining too. Recently companies such as Salesforce and Rackspace began using Stripe for some transactions.

The Collison brothers often describe Stripe less as a financial services company than as fundamental plumbing for the Internet akin to Amazon’s cloud computing infrastructure. They want Stripe to enable new types of businesses and accelerate the shift to commerce online. Continued success, they say, will come not from snatching customers from rivals, but from simplifying payments so that more and more businesses experiment with them. Many of Stripe’s tens of thousands of customers “would not have even realized that their business could work if they had not been able to test it,” says John.

Patrick experienced this firsthand when he wrote one of the earliest iPhone apps and distributed it for free. When Apple opened the iOS store, Patrick decided to charge $5 for his app. It generated enough cash to pay for his MIT tuition. “If I had had to set up a merchant account, there’s 0% chance that I would have charged for the app,” he says. The Collisons are now counting on millions of fellow entrepreneurs to do the same math.

The Hit Factory

Stripe is among the top successes to come out of legendary incubator and investment fund Y Combinator. Here are some others.
Dropbox. The fast-growing cloud storage company was founded in 2007 by two MIT graduates, Drew Houston, who is CEO, and Arash Ferdowsi. Officially launched the following year, it has received more than $250 million in venture financing. The most recent round valued the firm at around $4 billion.
Airbnb. The service, which enables individuals to offer their unoccupied rooms or homes as short-term rentals to guests, has more than 500,000 listings in 33,000 cities around the world. Started in 2007, the company went through Y Combinator in 2009, and is now valued at more than $2.5 billion.
Reddit. One of Y Combinator’s earliest hits, Reddit is a social news website whose members vote articles up and down. Known for its Ask Me Anything sessions, with figures ranging from Madonna to Barack Obama, Reddit was bought by Condé Nast in 2006 — then became independent again in 2012.
Heroku. Founded in 2007, the company helps developers build and deploy apps on the cloud. Heroku went through the Y Combinator program in 2008 and was later bought by Salesforce for $212 million. It counts organizations like CareerBuilder and the YouTube network Fullscreen among its customers.