Payments giant Adyen, whose systems handle transactions for companies ranging from eBay and Etsy to Booking.com and Amazon, is moving into providing banking services, the company said Thursday.
The white-labelled banking services—which will include multi-currency bank accounts, corporate credit cards, short-term cash advances based on pending payment transactions, and instant business loans—represent the first major strategic expansion for the Dutch payments company since it went public in 2018.
The move is indicative of the increasing competition facing traditional banks from new financial technology players, which are attacking their business from multiple directions. While many fintechs have focused primarily on drawing consumers away from traditional banks with easier to access, innovative, and cheaper services such as international money transfer, no-fee credit cards, buy-now-pay-later payments, Adyen is among a handful to target banking services aimed at businesses. Some of the others include Block, the payments terminal company, formerly called Square, founded by Twitter co-founder Jack Dorsey, as well as Stripe, and the upstart bank Tide.
Consultants McKinsey & Co. said in a report last year that small and medium-sized businesses represented a major opportunity for payments providers, especially if those companies could offer additional services, including banking, to those businesses. It forecast that by 2025 small and medium-sized businesses in the U.S. alone would spend more than $100 billion on payment services.
Adyen’s new banking products will initially be available to select customers in Europe and the U.S., where the company already holds banking licenses. The company says the banking services will be especially attractive to Adyen’s large “marketplace” customers, such as eBay, Etsy, or Airbnb, that have large numbers of small and medium-sized businesses selling on their platforms.
Many of these small businesses are currently either unbanked or underbanked—which means they can struggle to access capital they need in daily operations or for expansion, Thom Ruiter, Adyen’s vice president of banking and financial products, says.
Pieter van der Does, Adyen’s co-founder and chief executive, says the expansion into banking was “necessary to have sustained high growth that we see today.” But he also cautioned that revenues from the new banking products would likely be “insignificant” in the current calendar year, ramping up slowly after that.
Adyen processed transaction volumes of €516 billion ($575.5 billion) in 2021, a 70% leap from the year before. The company made more than $1 billion in revenue on this amount and its net income topped $523 million, a 79% increase over 2020.
The company has a current market capitalization of $57.4 billion. While Adyen has grown at phenomenal rates, its stock still trades at a lower valuation than competitors such as Block and Stripe that process significantly smaller transaction volumes.
The move into banking might help convince investors to value the company more highly. But it is not without risks. In recent years some new financial players, such as Germany’s Wirecard and the U.K.-based Greensill Capital, both of which who claimed their access to payments data gave them unique insights into extending credit, blew up spectacularly in financial scandals.
Van der Does said the move into banking made sense because many of Adyen’s large “platform” customers want to be able to offer merchants credit and other banking services, and Adyen, because it has so much data on the transaction history of these merchants and others like them, is well-placed to offer it. Adyen is also well-positioned to collect any money it loans to merchants because it can simply take a slice out of future payments that it processes for these vendors.
Van der Does also says that Adyen already offers its own customers instant payouts on pending card transactions. Now it will be able to let platforms offer the same service to its own merchants. In addition, Adyen already runs many of the same risk and creditworthiness calculations it will need to perform to be successful in banking. It just does so right now internally—as part of its processes to prevent payment fraud, for example. The company also runs know-your-customer and anti-money laundering checks on merchants.
The CEO said that for the moment, Adyen was not interested in offering banking services to individual consumers. It will not, for instance, be offering a buy-now-pay-later option that competes with similar offerings from Swedish fintech Klarna. “Our client is the merchant, the platform,” he says. “They own the consumer relationship, and we are not [interfering] with that. We don’t try to build a relationship with the consumers of the platforms.”
In a hypothetical example of how the new banking services would work, Ruiter described a small donut and coffee shop, Dean’s Donuts, that sold its products online through a food delivery app. Adyen currently handles the payments processing for all transactions on that app. But now, the food delivery app can offer its own branded banking services, powered by Adyen’s technology.
For instance, if Dean’s Donuts had to pay an invoice for $1,500 but did not have the money on hand, but had pending credit card transactions on the food delivery app of $2,000 that were due to be settled in two days, it could choose to receive the $2,000 instantly instead, in exchange for a 1% fee. Revenues from the fee would likely be split between Adyen and the food delivery app, Ruiter says. Dean’s Donuts could pay the invoice using a domestic or international transfer, again facilitated by Adyen.
In another example Ruiter provided, the espresso machine at Dean’s Donuts breaks, requiring an immediate $8,000 replacement. The business doesn’t have that cash available, but based on its payments history, it is pre-qualified to obtain an instant loan through the food delivery app’s financial portal, again with loan actually being provided by Adyen in the background. The donut shop would agree to let Adyen and food delivery app to automatically take a 15% cut of all future payments on the platform until the $8,000 loan, plus 10% interest, is repaid.
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