All right. Welcome everyone to the 26th annual Credit Suisse Technology Conference. I'm very, very happy to be here with the team from Marqeta. On stage with us, we have Mike Milotich, who is the CFO, and also here at the conference we have Head of IR, Stacey Finerman. Thank you both for being here.
Thanks for having us.
All right, great. We have a good list of topics here, and we'll probably have a little bit of time at the end for maybe one or two questions from the audience. Let's get rolling with it. We want to hit it off with macro-related. BNPL, lots of headlines over the weekend in terms of how BNPL was doing. It's an area of exposure that you have as part of your volume. Maybe you could just recap that exposure and just maybe talk a little bit about how BNPL is looking into Q4 and what it means in terms of seasonality for your business.
Yeah, when we look at the seasonality, it really depends by vertical, so particularly when you look at Q4. On-demand delivery and expense management generally do not have seasonality to them, so you don't see the big lift in Q4 during the holiday season that you might see in some other spend categories. Within financial services, sort of our neobanking vertical, as well as you mentioned, Buy Now, Pay Later, we do see a pretty significant tick-up in spend all in discretionary categories, as you would imagine. It's mostly from about mid-November to mid-December. You see a noticeable lift in the amount of spending and volume and just general activity. We typically had not seen a lot of seasonality until last year.
If you went back to 2020 and before, because of BNPL was, one, not a big vertical for us then, as well as a lot of the neobanking players have been much better at getting consumers to use those platforms as their everyday sort of bank account and everyday spending, with a lot more deposits coming in. That's where we really started to see then the spending lift in the holiday season. Far, I guess what we're seeing is about as we had expected. We're, you know, it's a strong season so far, but, you know, not as good as last year, which is about as we expected.
Perfect. Mike, a quick just mechanical follow-up there for people. It's not that you're exposed to overall BNPL, it's specifically the virtual card component. Could you maybe just talk about the distinction there?
Yeah. The part we play in Buy Now, Pay Later is where the merchant hasn't directly integrated into the Buy Now, Pay Later platform, which is quite common because if you think about the scaling of the Buy Now, Pay Later business, one of the big challenges with it was getting all the merchants to do all the work to connect directly to their platform. Our virtual card solved that, where as a consumer, it feels like you're going through the checkout flow of the Buy Now, Pay Later company. Really behind the scenes, there's been very little technology work, and the money gets paid to the merchant via virtual card on our platform. We work with all the major Buy Now, Pay Later players to do this.
All right. Perfect. Thank you, Mike. Okay, great. The next one, we just wanna hit it on the head. This was a headline a few weeks ago, a lot of incoming questions from investors. Let's just tackle this one. There was a headline around Square launching their seller credit card. Amex is the network, and i2c was listed as powering it, meaning the issuer processor. This is a credit card. Could you just talk about Marqeta, if you had any involvement bidding for this, why you may or may not have, and just the general topic of the i2c headline?
Yeah, sure. this is not new news in the sense that this partnership was struck a couple years ago before we had credit capabilities. you know, if that, if that type of situation were to occur today, then, you know, we would feel very good about capturing that business, given the relationship that we have with Block and just the variety of areas that we help their business. At the time this decision was made, it was a couple years ago, we did not have credit processing capabilities and that's why you saw that headline. I think the key is, you know, how much is.
Are they really gonna push that product versus the sort of lending program they already have for their sellers? I think that's what, you know, still remains to be seen.
Excellent. All right, great. Thanks for clarifying that. It sounds like the ball was in motion before you even had the capability, so it was sort of not applicable or not addressable at the time.
Correct.
All right, great. All right. The next one we wanna tackle is competition from two competitors that have a little bit of a different angle. Stripe Issuing and Adyen Issuing, what they have as a unique aspect to their offering or business, I guess, from a competitive standpoint, is that they have lots of platform partners, specifically Stripe, who has literally thousands of them. Maybe just talk about the offerings and how you might be different from them and how you think about competition with those that have the, call it the pole position, with a large number of platforms.
Yeah. I mean, both Adyen and Stripe are great companies, you know, great platforms. They've had a lot of success, so we have a lot of respect for their capabilities. I think the key aspect, though, that I would highlight is that, in our view, issuing is not a part-time job, and it's a there's a lot more intricacies, there's a lot more detail required to do it really well on a broad basis, serving lots of different use cases. You know, although we, of course, respect our competitors, we feel like we have significant advantages. I think when it comes to serving larger players, they're gonna choose best-in-class technology.
The whole idea of the bundle, if you will, because they're connected to other platforms, becomes less applicable with a larger company who's looking to do issuing because they're sophisticated, they're gonna choose best-in-class technology. It may be a little bit more effective on the longer tail business who may be more inclined to not have to do additional tech work. I think even there, a lot of those players require a level of support and service, right. We don't really do off-the-shelf issuing typically. It's gonna be highly customized, highly differentiated, generally disruptive, which means there's usually a lot of servicing involved, which is also not necessarily the strengths of some of these players. They will be limited in their offering in terms of only supporting commercial, for example, and not doing consumer. Why is that?
Well, because the regulatory and compliance lift and the level of support is just significantly greater for the consumer business, which we support, and several of these companies do not. We still feel like we have significant advantages, both in our capabilities as well as our service levels and our scale. You know, we continue to intend to continue to maintain that lead.
Excellent. Thank you, Mike. Point's well taken on the differences between the large platforms and some of the smaller ones. Point well taken. Let's talk about a topic that came up on the last earnings call. It was actually a question we asked on the earnings call as well, a few folks did, Marqeta for Banking. The good news is this does help with your relationships with some of the more neobank or digital bank type customers. It's higher gross margin. Maybe you could just expand upon this offering and what it means for your relationship with your customers.
Yeah, I think the idea is what we're seeing more and more from our customers is everybody has some neobank-like aspect to their strategy. You should think of Marqeta for Banking as not for neobanks. It's more for any vertical or any customer who wants to have some aspect of banking as part of their value proposition. What we've really done is make it in a very Marqeta way, highly configurable, highly flexible, so our customers can really pick and choose what they want. This is not a banking in a box. You get the whole thing as a bundled offering. It's always gonna be consumable on a per API basis, which allows them to put the mix of services that they want together in an offering.
For us, this trend towards everyone has an aspect of neobanking is really what embedded finance I think is really what the embedded finance trend is all about. We just think we're incredibly well positioned to offer modern processing, credit, and banking on one platform. If you look at the way, you know, sort of the embedded finance trend is happening, everybody, the economics related to card spending is generally how everyone is monetizing. That is where we are most differentiated. We have the best capabilities in that area, which then means if we build other services around it in terms of expanding our credit offering and our banking capabilities, then we think it's. You combine that with our scale, it just is gonna make us very difficult to compete with given the combination of all those assets.
That's really what the strategy is. As I mentioned on the call when we discussed it, you know, it's not as much about it being a business unto itself. Like, obviously, it'd be additional revenue for the customers that we have, and that's great, but we don't see it as a becoming a big business. We feel like it's much more important as a complementary capability to improve our win rate and capture the business that we're going for on the processing side, which is really where the economics are.
Perfect, Mike. Related to that, we've talked about this a little bit in the past. If there was a customer that had a neobank-like offering, there's maybe 20+ things that they might need to procure from a provider such as yourself. In the past, you said Marqeta had a good handful of them. It seems like you expanded that list a little bit. Can you just talk about how far down that list you are and maybe some of the others that could be added to the product roadmap longer term?
Yeah. I would say we're, I don't know, we're fairly far along, but there's still a lot more to do. Maybe I don't even know if I'd say we're halfway if you look at our product roadmap for the next couple of years. There's still a lot of areas that we would like to expand. One is there's a few different aspects to it. I would say first is money in and money out capabilities. Areas like how do we turn the point of sale into an ATM? How do you turn the point of sale into a place where you can make deposits, for example? You know, just different ways to get money in and out of an account. Another area would be rails, so multiple rails. FedNow is gonna be launching relatively soon.
You've got SWIFT. You've got, you know, push and pull from cards. There's a money, a number of different rails that we also wanna connect to that are on the roadmap. Then the third area, I would say major area is account types. You know, we support sort of a fairly typical deposit account. We wanna be doing small business accounts, different lending accounts, different account structures, so that, those are the kinds of things that are still on our roadmap. Many of those things we're building, this is also an area that we've mentioned, you know, we are quite active from an M&A perspective.
There are a lot of good companies out there who have these kind of capabilities, and if we could acquire them at a reasonable price as valuations come down, then, you know, that is something we're interested in as accelerating our product roadmap.
All right. Excellent. Thank you, Mike. Wrapping it up on Marqeta for Banking, sounds like a nice business to help with existing customer relationships, expand them. We shouldn't think about the business in and of itself as being too large, but the incremental revenue that you will see will be higher gross margin.
Correct.
Okay, great. Speaking of higher gross margin type products, maybe we should move on to the topic of Managed by versus Powered by. Powered by is now roughly low to mid-teens in terms of its mix of your volume. Maybe you just talk a little bit about the difference in those two business in terms of unit economics if we viewed it as gross profit divided by TPV.
Yeah. Just to, I guess, step back for a minute, just for people who may be newer to Marqeta, we have two offerings, what we call Powered by Marqeta and Managed by Marqeta. In a Powered by Marqeta relationship, we're really just providing issuer processing, similar to what other sort of legacy issuer processors would provide. In our Managed by Marqeta, we're bringing a lot more, managing the bank relationship, the network relationships, a lot of the compliance involved with running the issuing program, and that's the difference. The Powered by business will tend to have a lower take rate, so looking at revenue divided by volume. If you look at the gross profit take rate, as you mentioned, Tim, that is where it can be similar to many of our other verticals.
I would say on a in aggregate, it is a little bit lower than the managed by business, as we're obviously just providing a lot more services and capability. There's more economics for us to manage by. It's not nearly the drop off that I think many investors might think compared to some of our larger verticals when it comes to the gross profit take rate.
Okay, excellent. Thank you. The last two topics, we talked a little bit related to gross margins, take rates. Why don't we just directly get at gross margins? On the 3Q call, when you gave some of the splits between Block share of gross profit versus the rest of the customer base, it does imply that the Block gross margins are more sort of in the low 30s, low to mid-30s, versus sort of 65% or so for some of the other customers. Can you just talk about some of the mechanics that drive that gross profit margin difference and the gross profit mix difference relative to revenue?
Sure. There's a few components. I mean, one, the simple, the simple one is just, you know, the larger you are, the generally the better economics you're gonna get from us. Block obviously being a very large customer and by far our largest, you know, they have favorable economics from us. The second area that can be a big factor is the ticket size. When you look at how, particularly with a customer like Block, who is on a net interchange structure, and the way net interchange works is you put the interchange into a bucket, essentially with the bank fees and the network fees, and then we just decide how determine how we're gonna split that pie, if you will.
When you look at the way network fees on a per transaction versus bps on volume compares to the way interchange works, the networks take a large portion of the per transaction interchange economics. They leave a lot more on the bps on volume. What happens in a much smaller ticket size program is your margin gets squeezed a little bit, your network fees are higher. That is also a big factor with an everyday spend program like Block, which is gonna have much lower ticket sizes than BNPL or in particular expense management and even on-demand delivery. It has by far the lowest ticket size of any of our, of our verticals. That's another factor. The third is what's happening with network incentives.
The networks you know, try to be very careful about you know, who they pay incentives to and not having too much overlap. Block is an area where we don't really get meaningful network incentives. That's another area that compresses the gross margin compared to some of our other programs where they're much higher ticket size, they're smaller, and we may be getting network incentives.
Well said. Really like that summary at the end there. Thank you. I wanna hit a little bit again on the network fees part, though. When we look at that number, it's about 22 basis points or so of volume, which at face value seems pretty high. It would appear that there's room for leverage there longer term as you continue to scale. Could you talk a little bit about how the networks are viewing Marqeta's volume, the incentives that you're getting credit for, if you will, and how Block is not a part of that, and therefore you still have more scaling ahead in terms of essentially reducing the cogs and therefore increasing your gross margins?
Yeah. I think the role that or the value that we add to the networks is that a lot of innovative, disruptive companies are coming to Marqeta to do issuing, right? They haven't made a brand decision yet. They're coming to our platform because we're the ones who can innovate for them and drive their business and their business objectives. We very much influence the brand decision. That's ultimately what why the networks look to pay us incentives, is to help, I guess, align our interests with theirs in terms of which network is gonna get the business for any given customer that we sign up. That's really how the relationship is structured.
In terms of looking at the network cost, though, I would say it goes far beyond just if we're getting incentives or not. There are many other factors that would drive our network costs. We talked a little bit about powered by versus managed by. In a powered by structure, you know, the network fees are not our costs. As you compare network costs to volume, you just need to make sure that, you know, you've accounted for that. You also have the ticket size dynamics that I described earlier. You would have things like, you know, how much is someone doing domestic versus cross-border. As cross-border has come back in a big way in the last six to nine months, as people start traveling again, that comes with higher network fees.
As cross-border has gained share of overall spending, that will generally increase our network fees. You also have PIN versus signature dynamics, right. As more people are going, doing in-store purchases, that's gonna generally lend itself to more PIN transactions, which also has different network costs. There's a lot of different variables in there that can drive that overall blended number that you might see in our disclosures.
Perfect. Thank you for going over those mechanics, Mike. Last point here on the network fees. Again, the number is roughly in the low 20s as a percent of volume. You talked about some of the things we should consider as we model in terms of Powered by, Managed by. What's a reasonable glide path for thinking about where that number could go longer term? Are we talking about it getting down to 10 basis points, 15 basis points? Any way you cut it seems like there's a reasonable amount of upside there.
We would like to think so. I think if you, certainly, the growth of the Powered by business will do that on an overall aggregate level, looking at our total business, because we do think the Powered by business has a lot of room for growth. If you look at the areas where, you know, we intend to where we see a lot of growth opportunity, a lot of it plays into a Powered by relationship with customers. Whether as we have more and more success processing for financial institutions, all that will be done on a Powered by structure. Our international business, we do very limited amounts of Managed, you know, Managed by outside of the U.S. If you think about our Powered by business, about 1/3 of the volume is outside the U.S.
You know, that is very different than the Managed by Marqeta business, which is very U.S.-centric. As we expand more internationally, as we have success with financial institutions, you know, we think that Powered by Marqeta business will grow, and that will make our network costs look a little lower.
Perfect. Thank you, Mike. All right. In the interest of time, I'm gonna try and combine these next two around operating expenses and profitability. We've talked a little bit about some of the mix shifts to a few higher gross margin revenue streams. We've talked about the network fees. In terms of hiring, you said this year that you're looking to see sort of a similar increase in the total number of employees that you added in 2021. Maybe you could combine these and just give us a few thoughts on hiring plans, early thoughts for 2023, and the overall path to profitability.
Yeah. I would say the first thing that's important is in late February, early March, we redid our plan. We originally looking to hire more people when we built the plan sort of in late 2021. By the time we got into the first couple of months of 2022, there were very clear warning signs that the macro environment was changing, both in terms of Russia had already invaded Ukraine, inflation was already quite high, and we started to scale back our hiring plans accordingly to make them more in line with what we did in 2021, which was adding about 280 people. I would say, as we've gone through the year, we have further calibrated back just given the way the environment is changing.
We now would expect to hire about 20%-25% fewer people than we did last year. You know, it'll be a little over 200 as opposed to something closer to 300. That's just really a recognition of how the environment is changing. Also, as we're getting a little bit more efficient and effective, I would say we've spent a lot of time this year really looking at where can we become more structured, more process-oriented, and do things just more effectively and efficiently than we have in the past where, you know, that wasn't as much of a consideration in previous years. In terms of as we go forward, we're definitely planning on being cautious in the early part of 2023 until we have a better sense for what kind of macro hand we've been dealt.
Right now, we're proceeding with caution, hiring critical roles because we're still running the business for the medium term, where there's still a lot of growth opportunities, and we need key people. I would say also, as the competitive dynamics in the marketplace for talent has changed, right? It was much harder to get talented people at a reasonable price, if you will, in the springtime compared to now. I think we also wanna take advantage of that. If there are a lot of good people out there who are looking for work and wanna work at an innovative payments company, then, you know, we're a great landing spot, and we're happy to have them.
Okay, excellent. All right. We have about seven minutes left. I wanna make sure we tackle an important topic on Block. Then we'll leave room for maybe one question at the end. On Block, I think this is an important one for investors to understand, which is that if you look in our model and you look at the take rate that we model on a revenue basis for Block, it's a healthy take rate, right? It's partially due to the fact that you're doing a lot more for this customer. It is a consumer program. There are additional services. There's direct deposit. There's chargeback and disputes. Maybe you could expand upon that to just give a better sense of the breadth of services that you're providing for Block, maybe relative to some of your other customers.
Sure. I would say first, our relationship with Cash App goes back to 2016. We were there from the beginning, and it started as they wanted to do instant issuance. They didn't want consumers, when they sign up, they wanted them to be able to spend right away. You know, it's funny to think, but six years ago, that was, that was very unique and cutting edge. In 2017, that extended into the physical card. I think in 2018 or 2019, we started doing, the seller card for them. We also started, we enabled all the direct deposit capabilities. In 2021, we started doing the teen card. At the beginning of 2022, acquired Afterpay, who was already a customer of ours.
We really are touching almost every aspect of their business when it comes to card payment and facilitating issuing. We do provide direct deposit. We do help with a lot of risk and other services like that. It's a significant relationship in terms of the amount that they rely on our platform to facilitate their business, particularly with Cash App. There are many things that they don't like us to talk about, that's pretty much the extent that I can share.
I will skip my follow-up question then. On that, I think we can go to the audience for a question if anyone would like to grab the microphone. If someone would like to jump in, please just raise your hand. If not, we'll keep rolling. I wanna take it back and just wrap on the credit offering. We touched about this a little bit when we kicked off, when we talked about i2c. You did not have a credit offering then, but you do now. Maybe just talk a little bit about your partners there, your role in this versus the partner's role, and some of the marquee clients that you've already signed, including Greenlight.
Yeah. At this point, we are really Our credit platform is ready to do Powered by Marqeta, but not do managed services as part of credit issuing. We do have partners like FNBO and Deserve who we use for the program management aspects of our credit offering. You know, that's one key difference. I think the differentiation that we see from our platform, again, comes down to the configurability that we always bring to processing, the ability to do very detailed rewards, kind of value propositions. Also to have the bank in the background is also a very important differentiator. If you look at, you know, pretty much all the major co-brand programs out there, you know, the consumer goes to the bank app to manage that card program. That's not necessary on our platform.
The customer can come directly to your app to manage their card preferences and their card needs. That's really where we're differentiated. We see, you know, huge opportunities for growth in this area because the economics also tend to be better for the issuer. There's more people both with disruptors as well as financial institutions who wanna innovate in this space and want that flexibility and configurability that our platform provides. We do intend to have program management capabilities over time, that will be something that we'll be looking to add both organically or maybe inorganically as well. That's an area that we're also interested from an M&A perspective.
Once we do that, then it allows us to just take a bigger share of the economics because there is a lot more work to do on the program management side and credit. That's why we haven't done it yet. It's more complicated than debit. You have a lot more, you know, reward structures and things that have to be managed. You have, you know, different APRs and different, you know, balances that have to be managed. There's a lot more ledger work involved as well. We intend to get there, and that will make our value proposition even more powerful.
Perfect. Thank you, Mike. All right. I do wanna squeeze one more in if we can. The One card. This was a big customer that was announced in the last earnings call. When this first hit, it struck me as, okay, I'm sure that anything associated with Walmart, it's probably a pretty rigorous vendor evaluation type of process. Maybe just talk about how you won that business and what it means for Marqeta's positioning for other RFPs.
Yeah. You're right. It's, you know, they are very thorough in their vendor decisions or their partner decisions. I guess we would rather think of it that way as a partnership. I think there's really two unique things that come together when we're talking about a partner like One and Walmart, which is the innovation and flexibility that our platform provides combined with scale. There really is not another option. We think we're highly differentiated when it comes to cutting-edge capabilities and the experience operating very large programs at a very large scale. That's really what, you know, we think differentiates us for someone like Walmart and other embedded finance players to come who already have scale in their business overall and are looking to add more financial services to that business.
Just that combination of our platform capabilities and the scale with which we operate is just unmatched, and that's what gives us a unique advantage and we think played a big role in our win with One.
Well, congratulations on that win. On behalf of everyone at Credit Suisse, I wanna say thank you to both Mike and Stacey for making the trip here to be at our conference. It's a pleasure having you both here.
Thanks so much, Tim.