Okay, last but most certainly not least, to wrap up the conference, we have Eido Gal here, CEO of Riskified. So great to have you here. Thanks for coming. Appreciate it.
Thanks for inviting us.
Okay. Talk a little bit about, you know, it's a little, again, a little bit late for this, given that folks are probably quite familiar with the model, but nevertheless, give us a little overview of the company for those who are not familiar.
Sure. So for people who are not familiar, right, if I steal kind of Ramsey's credit card while we're speaking right now, order a bunch of stuff online, he sees it on his statement, asks around at home, "Did anyone, you know, order all these iPhones from Best Buy?" Everyone says, "No." He calls the bank, says, "Hey, it wasn't me." The bank refunds, right? You, as a consumer, are protected with a credit card purchase. But the money gets taken out of the merchant's account, right? So merchants are liable for accepting card-not-present transactions that have been from stolen financials, okay? And what that creates is the situation where every e-commerce merchant in the world, basically, also the significant enterprise ones, are screening incoming transactions to decide if they're fraudulent or not, okay? And that creates a lot of inefficiencies.
They accept a lot of bad transactions that result in loss. They turn away a lot of good customers, which is very frustrating and leads to, you know, missed bottom lines. And then they also have a large population of transactions that sit in manual review, and they can't offer, like, same-hour shipping and omni-channel flows because of the risk concerns. So that's the problem that we're solving. And when we started the company about a decade ago, we said, "Instead of all these individual merchants building and managing their own risk team and process and setup, we think we can do it better than they can," right? We have a better network effect, better machine learning, more resources towards solving that problem. And in order to really enable us to be an end-to-end solution, we need to offer them two things.
Number one is a Chargeback Guarantee, okay? So if we accept the transaction, approve a transaction, and it turns out that we were wrong, we need to pay the merchant back. And the second thing we need to offer is an Approval Rate Guarantee, right? So that the merchant knows that we'll approve more transactions than he has historically. And those two things enable the merchant to just kind of say, "Hey, I don't need to worry about this process anymore. Riskified is going to manage it for me.
I see. I see, and you know, you guys have a pretty differentiated view of the e-commerce environment. It's been really interesting to watch e-commerce, sort of macro e-commerce trends. I feel like there's this sort of normal cyclical cycle, but there's also a kind of an e-commerce cycle, which is a little bit out of sync just because of maybe the pandemic and tough growers, and this kind of odd goods versus services, you know, pendulum that's been swinging back and forth. What's your view right now of the e-commerce environment, just in terms of, you know, those types of forces and whether we're seeing some normalization, you know, coming?
You're right, 'cause the pandemic happened, and then, you know, home goods and stay-at-home categories took off. Anything related to tickets, travel, services went down. Reopening's are happening, right? And then you're seeing this normalization when tickets and travel just, you know, everyone wants to make up for all that lost time, lost experiences. And when we think about some of the other, you know, COVID beneficiaries, I think everyone's saying, "Hey, we're still-- they're still digesting the growth that they went through during COVID." So what we're seeing, and continue to see even in this Q1 that we just released, is that some of the categories, like home and general retail, while they're not declining as much, still seeing some year-over-year declines. Okay, tickets and travel continues to be very strong. And now we have the overlay of an overall weakening economy, and how is that influencing?
I think in there we saw that there was a general slowdown in luxury spend as well.
Hmm. And I guess as a follow-on to that, and you called out travel, I mean, what are you seeing in travel specifically? I mean, that's been, to your point, just this huge, you know, you know, you know, boost coming out of the pandemic, people saying, "You know, I want to get out of my home office and get back and get back on the road." And also obviously from a consumer perspective as well, you know, what are the trends like there? Are you still seeing some, you know, incremental lift, or are things kind of starting to crest?
We're still seeing a lot of sustained growth. So when we think about Q1, I think our growth was almost 100% within tickets and travel. Now, this isn't just organic same-store sales growth. We've also added a lot of merchants in the tickets and travel industry, so that's also helping us drive some of that demand. We do anticipate some normalization towards the end of the year, consistent with what these kind of public companies have been saying and disclosing themselves. But we still feel it's very, very strong. It's also important to mention, you know, the tickets is events. It's Taylor SWIFT, it's NBA, okay? So there's a lot of strength there, and I think that strength is going to continue. People have shifted more budget towards those areas long term.
Travel, I think people are making up for a lot of, like, lost travel opportunities. I don't know at what rate it would sustain into the future, but we're still seeing a lot of strength there.
As you called out when you were describing your business, you know, the Chargeback Guarantee is an essential part of your value proposition. How do you sort of manage risk around that product? How do you underwrite risk at the right kind of equilibrium of increasing approvals while still, you know, preventing the fraudulent transactions? What is that process like internally?
I mean, the way to think about it is, look, we believe that we've created the most accurate decisioning platform to understand if a transaction would result in a chargeback or not. And we're not really underwriting this unknown probability that something like a hurricane would happen, right? We're saying we've identified if this is, like, a fraudster that's stolen this card or not. And we just have, through our network effect, through our, you know, better resources and our amount, we just have more accuracy on that. Now, the Chargeback Guarantee, it's more of a method so that the merchant can trust us, right? To give us ownership and control over that part of the business. Now, what we're actually doing, we're doing millions, hundreds of millions of smaller transactions on an ongoing basis, right?
We're not guaranteeing, you know, a $90 million SWIFT transfer between geographies or anything like that. And we continuously have an internal expectation of how many chargebacks we should be receiving within what time frame, right? And you can know that as soon as a few days. And what we always see is, you know, are things tracking to what we anticipate or maybe for a specific merchant, for a specific model, in a specific use case, we see that maybe we're a bit off, and then we need to course correct. But the time frame where chargebacks happen, okay, and chargebacks come back in within a few days. They fully mature within a few months, but they start coming back in within a few days.
The fact that most transactions are for lower average dollar amounts, usually a few hundred dollars, gives us a lot of safety in large numbers and the ability and timing to understand if anything is off and course correct based on that.
Interesting. So you really do have quite a bit of visibility. It's not something that emerges really abruptly. It's something where you see the signals, you know, pretty early and a lot. It gives you time to basically, you know-
Yeah, I think that's a great way to think about it.
Interesting. Here's something I've always been meaning to ask you. Is there any kind of correlation between chargeback levels and economic stress? Is it more difficult, you know, to, you know, predict chargebacks as in different parts of the economic cycle, or is it, is that not the case?
I think fraud is pretty consistent in good times and bad times, right? So there's always been online fraud, and, you know, it's increasing in, in sophistication. I've never been able to really pinpoint and say, "Hey, in a tougher macro, we're seeing an increase of fraud," and we've looked into that in various points. This isn't like defaults, right? You would expect, like defaults and interest rates, they have an unbelievably clear impact, right? But when you think about just like the ability to create fraud, it's somewhat consistent.
Mm. That makes a lot of sense. Talk to us about the competitive environment. You know, you know, who are you competing with? And maybe don't just limit the thinking to other companies who might be offering something similar, the fintechs kind of offering something similar. Like, what is the broader view of competition, in-house solutions, you know, that type of a lens?
So the vast majority of merchants, they have an in-house team. That in-house team uses a number of third-party providers, and they could be providers from like a data enrichment provider to a provider that gives them the tools to do rule building, machine learning building, case management. But these are tools used by the internal team, right? And usually, Riskified says, "Hey, instead of having a team using these various tools, right, we think we can perform better and replace that entire construct." Now, these tools that the teams are using, 90%+ of the time, they're legacy tools, older tools. Sometimes they could be some of the newer generation players, right? There's kind of probably two or three of those out today. I think that altogether, the market share for the newer players is still sub-10%, if I had to size it.
And outside of dedicated risk solutions, and we're a dedicated risk solution, right, that's what we do, you also have payment gateway solutions. In the enterprise space, where we play, they're much less prominent, right? And there's a few reasons for that. One of them being that enterprises tend to run multiple payment gateways and route transactions and have fail-safe, and, you know, wherever they have better margins and unit economics there. Second being that most of the payment gateways have much limited data integration points because they want everyone to get up and running in no time, and they don't want to create a very complex integration cycle, whereas we tend to go a bit deeper, which helps our modeling and performance overall.
And, when you do sign a new customer, how does that typically, how does the sort of life cycle of that relationship work? Do they say to you, "Hey, you know, we want you to take our full book?" Do they give you parts of the flow that are more problematic, where they need some help? Or, you know, how does it start versus where you kind of get to with that customer? What's that journey look like?
Start with us, you know, hey, we're talking to you, Ramsey, you're managing the payments and risk team for a $20 billion OTA, right? And we start to map out the different flows and segments. You have a few different product lines, you have accommodations, you have flights, you have ride-sharing, you're operating in APAC, in the US. You have some declines, you have some transactions that are out at the manual review. You have a bunch of stuff, right? And we take a CSV from you with all that data, and we run a different analysis, and we come to you and say, "Hey, you know what? We think that your APAC traffic, actually, you're paying, you know, 50 basis points for a 90% approval rate. We could do that for 35 basis points, okay?
Or if you want, for 50 basis points, we can provide you a 95% approval rate," right? So we find segments where we can overperform the most on an existing merchant setup. And in that sense, we're not asking you to replace everything you have. We're augmenting you in one area where we think we can do better. So we do an integration, okay? We start to build this trusted relationship. You start to see that we can perform. Now, we're only, you know, in this example, we're only doing APAC for you, but we see and capture all of the rest of the volume, okay? So we can also analyze what's going on in the rest of your business by now, and then maybe a few months down the line, we're going to come, we're going to say, "Hey, you know what?
The rest of the business or these other parts that you're not giving to us today, we can actually do a much better job, and here's the economics, and here's the business case." And it's very, very ROI driven. And that's the standard land and expand process that we have.
... how does kind of new products and cross-sell sort of fit into that, that kind of schema? Maybe talk about, you know, describe for us some of the ancillary products that you have and, you know, how that kind of cross-sell process works, you know, how does that fit into that, that roadmap?
Sure. So I'll talk about the one that I'm most excited about. We call it Policy, and Policy Protect has a few different use cases. Maybe the one to highlight is around refund requests, right? Refund requests and return requests. So what we found is that we can use the same ML platform network effects, the data that we have, not just to predict if a transaction would result in a chargeback, but also to predict if when a consumer is coming and saying to the merchant, "Hey, I never received my package. I received the wrong size. I received the wrong whatever. It was damaged. I want a refund." Is this a legitimate claim, a legitimate consumer? Or is it just someone who says, "You know what?
Even easier than to steal Ramsey's credit card is just to call the merchant and say, "I never received my package." Right? It's hard to prove, disprove anything. Nine times out of 10, a merchant would honor that refund request, that return request. And when we run the analysis, we find that there's a ton of fraudulent activity and behavior there. So two recent examples with merchants that went live, we were able to increase their reject rate from, you know, less than 2%- 15% while not increasing the insult rate. And the insult rate is, you know, the amount of good customers that you're turning away, and that's measured by either callbacks or actual chargebacks after they decline them. So I think there's massive value in those areas as well.
And that's the one that I'm kind of more excited about. The way we go to market with it is a combination of talking to... You know, when we talk to newer clients, we talk to them about the platform more so than just the fraudulent chargebacks. And when we think about our existing clients, it's definitely a cross-sell opportunity.
What's the economic model on a product like that? Is it just very simply, does it function somewhat similarly to the, you know, to your core product, or how does it?
It's slightly different. So the core product is more, you know, it's usage based, based on the GMV flowing through, and there's the guarantee component. Here, it's just a much simpler SaaS monthly subscription, obviously based on volume and size of merchant. And the margins themselves are also, they don't have the guarantee component, so they're more traditional SaaS-like margins. I see.
Okay. And you know, if you fast-forward a few years in terms of the product, you know, overlaying a product roadmap to your kind of growth algorithm or your revenue mix, I guess I should say, you know, how important do you think some of these ancillary products are going to become? Is this always going to be the case where your core is the chargeback kind of protection services, and then you're sort of hanging some stuff off the side? Or do any of these have the potential to really open up a big, you know, aperture in terms of being a really primary growth driver over time?
Like I say, it depends on how many years forward and how successful we are in selling it, right? But I think that when I think about the business, I don't think about chargebacks, right? I think about we have a very deep integration into the online system, into the offline system, the shipping system, the customer support system, because we need all that to make, you know, smart fraud decisions. And internally, we have, you know, great machine learning platform capabilities that are really focused and dedicated towards e-commerce, which is unique. And at any point where an enterprise e-commerce needs to make a decision, right, do I honor this request? Will this result in a chargeback? What's the LTV of this customer? What's the option?
There's a lot of decisions that they need to make that I think we're incredibly well situated to answer and solve for them, right? So when I think about the fact that, you know, we've had kind of a 99% gross retention rate for a few years now, okay? Our customers love us. They stay with us for a long time. We're always thinking, what other problems or questions can we help solve for them using our existing technology and stack? So I think this approach will lead us, you know, over time, to a situation where the revenue that is associated with these other products outside of core Chargeback Guarantee is significant. What is that timeframe? How long does that scale? That's, you know, we need to work on that.
Fair enough. I meant to ask you this a little bit earlier. What do merchant acquirers think of you?
I think most of them like us.
Yeah.
I don't think they view us very competitive. I think that they understand that our value offering is distinct enough from their real core value offering, not just like what they maybe talk about doing. I think a lot of them like to bring us in when they need someone to help their merchants that are having issues.
So talk about that a little bit. So you have a kind of a partnership type of relationship with some of these acquirers who you know who will effectively you know pull you into the conversation when there's an issue.
When they know that there's an issue, for sure.
Interesting.
Those account managers.
Okay. On profitability, you know, I guess the first question is, you know, on that. You know, talk a little bit about that longer-term path to normalized profitability. Is this just a question of kind of throwing more volume onto the expense base and gaining some operating leverage and kind of getting there? Are there certain places where you, you know, you'll need to kind of pull back a little bit in spending? What are those levers that you might think about working? Or is the game plan really more just manage costs kind of tightly and let the volume kind of get to the point where profitability kind of gets to where it needs to get to?
Look, I think, you know, previous Q4, we were kind of basically profitable. Upcoming Q4 definitely will be profitable and for all of 2024, right? I think we kind of clearly laid that out. Exact levels of profitability in 2024, you know, TBD. Macro, we'll get to that closer when we get to the guide. I think what we mentioned when we were talking, probably one to maybe even two years ago, is, hey, we decided to accelerate investments and go-to-market so that we can build local field sales in international regions across LATAM, APAC. We think there's great opportunity there. We wanted to go after that. We incrementally increased R&D spend to build out our product platform... I think about a year ago is when we said, "Hey, we've made those investments.
We have those strategic teams in place to go after that opportunity." And at this point, we think we're gonna try and stop spend completely, keep OpEx where it is, and march forward, you know, for the foreseeable future like that as we get towards profitability and probably a bit beyond as well. Right now, I think what you've seen from us over the past three quarters is basically flat operating expense, down on a year-over-year basis, just showing some of the inherent leverage in the business, and I think we'll continue to show that.
Mm-hmm. Okay. You also just touched on some different regions that you had been investing in. What is the broader, you know, kind of geographic opportunity? I guess right now, remind us what the geographic mix of the business is, and then talk about what that opportunity looks like, how and, you know, how do you get there?
I think still most of the business is in the U.S., right?
Yep.
60 %+, but the faster growth is on a lower base. It's coming from APAC, EMEA. We're anticipating to see something from LATAM.
Yeah.
So I think that's where the faster growth areas are coming from right now for us. Chargebacks are a global issue that impacts the different geographies in a way like it does in the US. There's no difference in that sense. So we definitely think there's a global opportunity. And for some of the brands that we work with that are selling globally, having a centralized company that's able to work with them across all these different regions and sometimes all these different products that they sell as well, because when you think about it, some of the more complex merchants, they're selling, you know, groceries, electronics, digital gift cards, fashion, and they're selling it across geographies. So someone who's able to really optimize all those different segments and flows, that's a very unique value proposition that they need.
So entering a new market in this context really means that you might have a US retailer, but you entering a new market effectively means that you're able to analyze and help with those flows that are potentially coming from an international market. It's not like you need to go to that region and form a partnership and enter a market in a more traditional sense. Is that a correct way to characterize it, or?
It's one of them. So for example, when I enter a new market, it's true to say that I've already reviewed a lot of transactions from that market and region. It's not brand new to me.
Mm.
If there are local sellers, right, that's my first opportunity going after the local sellers. But as part of, like, larger multinationals that are not domiciled there, I probably already have experience.
Interesting. Okay. And what is that process like? That's one thing that I'm curious about in terms of how you train your models. You know, you know, is it enough to get the data. I guess the question is this: Is the data that you have from these geographies relevant in these geographies, or do you need a new set of data, a new, you know, data science sort of, you know, not process, but a data science sort of effort in order to get that region's models up to snuff to hit your targets?
We do believe that that localized modeling is beneficial, so we do try to do to deploy that where we can, right? For example, if I have a general retail model, it might be good, but if I have a general retail Japan model, it's probably gonna perform better. So when we talk about having a machine learning factory that's able to deploy multiple models fairly quickly based on segments and geographies, that's what we mean, right? So even when, for a given retailer, we might have, you know, a bunch of different models running on their population based on that segmentation. So it's definitely a value add to have that localization.
You know, there's a lot of chatter about generative AI. You guys are already, you know, employing, you know, very sophisticated, you know, data science. Is there any kind of newer generations of AI technology that can be helpful to your business, or are you sort of feeling like the data sets you have, you're already analyzing or, you know?
Look, AI and ML is like, it's a, it's a massive world, right, and it's always moving forward. It's moved forward a year ago before everyone was talking about generative, and it's moving forward a year from now in areas outside exactly of generative. I think that generative AI is not the most helpful for predictive model decisioning on e-commerce, on fraud, and I think a lot of people in the industry-wide would share that opinion. I'm sure that there are areas where it can augment and help, so for example, when a merchant wants to chat with us and say, "Hey, why was this transaction declined?" That's a great use of, you know, potential use case for generative AI to help reduce OpEx on our end and to help, you know, provide a smart answer to the merchant. But on the core decisioning, we think it's slightly less relevant.
Okay. You announced some partnerships recently, SAP, Deloitte. What is that strategy, that potential opportunity about? You know, do you see partnerships as a compelling way to kind of go to market?
Yeah, I mean, look, we always think about, we target the strategic decision makers at enterprise e-commerce companies, right? And who do they consult with? Who do they view as a trusted source? Maybe SAP, but Deloitte definitely is right up there at the top of the list, right? And when Deloitte comes and presents the CFO and says, "Hey, you should have a look at this. This is the type of value and ROI that they provided, you know, these other clients. Okay, maybe do something meaningful for your P&L right now," that's exactly the type of referral or input that would be the most helpful for us into the organization. So that's what we're hoping to achieve through some of those.
Is there an overlay with the international strategy? Could you accelerate that strategy via partnerships?
Yeah.
Yeah.
Yep.
Yeah. What about M&A? How are you feeling about that right now? And I, I guess in terms of not only, you know, are there some, again, some ways to accelerate your strategy via M&A, but also the environment and, you know, it's, you know, there's a lot of interesting cross currents right now with private companies who are, you know, maybe not budging off of their valuation perceptions. Maybe that's changing. I'm not sure, but how are you thinking about M&A?
So a few parts. We are interested in M&A. We have people actively kind of looking at deals and trying to identify the right opportunities for us. And our overall thesis is the same as what I laid out initially. We have these strategic relationships with merchants, and what other decisioning points or services can we cross-sell into them, and that's what we're looking for. Specifically within today's market, it does feel like mostly there still is some disconnect. There still is a disconnect between, you know, private company expectations, public market valuations, and we haven't seen a full convergence yet, but hopefully over time, and we're continuing to look.
What kind of categories of acquisitions might be interesting for you guys? Is it about the geographic expansion? Is it product expansion? Is it-
I think product expansion more so than anything else.
Product more so than anything else. And then, also, do you see an opportunity? I mean, right now, if I understand correctly, you know, there's a pretty rigorous kind of integration that occurs, pretty involved integration that occurs with your customers, and many of your customers are quite large businesses. Is there any opportunity to kind of move down market? Can you kind of? Or is that something that's attractive, sort of productize the offering a little bit more to make it more standardized for a smaller customer, or do you think there would be an unmet need there? On the other hand, I don't know if the model kind of hangs together. What do you think about that?
I think it's interesting.
Yeah.
I think that what we would need to solve is how can we provide the maximum amount of value like we do today with the deeper integration and some of the customized as we go to, through channel partners towards that mid-market. I think it's important to remember that what we consider enterprise, which is over 100 million in annual GMV, 70% of e-com spend is in that category, right? So we think we're going after the largest and most important category to date, and there's a lot, a lot of growth opportunities in that area. So I do think that the company and the team needs to be laser-focused on that.
Now, when we get to that lower 30%, okay, and it's probably not a 2023 thing, definitely channels and partnerships is the right opportunity because we would not want to own the go-to-market and the relationship with such a large basket of merchants, right? And it would need to be an integrated offering through some other vendors.
Okay. And then, you know, regionally speaking, some time ago, there were some regulatory changes in Europe, et cetera. You know, how is Europe looking relative to the U.S. right now?
It's seeing a ton of growth. I mean, over 40% on the most recent, and the reason being is that a lot of merchants that are headquartered in Europe just have a ton of business outside of Europe.
Oh, interesting.
Even within Europe, we're no longer selling the Chargeback Guarantee, but we do sell some of the additional services of our non-guaranteed decisions as well. So we still have a lot of opportunity there.
I'll close on this. What's the sort of multi-year vision for Riskified? I mean, do you see just a very slow and gradual build-up of volume? Do you consider sort of strategic alternatives as you move forward, or, you know, through M&A, any potentially transformative M&A, or is it just basically, you know, the game plan as you have it now is sort of what the business is going to look like in a few years?
We need to increase our GMV through increasing clients and through capturing more wallet share from the clients we already have, and we need to increase the overall take rate through selling additional services to those clients. Those additional services we can either develop in-house or partner or acquire, right? But that's what we need to do. We need to capture more GMV. We need to get more services into the hands of the commerce merchants that we serve, and that's the game plan.
Fantastic. Just about out of time. Really appreciate you being here, and thanks so much.
Great.
Great conversation. Thanks.