$ADYEN | Adyen Deep Dive
$ADYEN | Adyen Deep Dive
Simplifying the payment system
The war on cash is well underway although it is still in its very early innings. There is one company that has managed to consolidate a leadership position in the Digital Payments industry while directly targeting the high-end of the market, quite an unusual strategy for a disruptor. This company is Adyen.
In this article we will take a deep dive into the Dutch unicorn, going over almost everything that investors need to know to get their due diligence process started.
Before we start, brief disclaimer: I’m not an analyst of any asset and this piece is not investment advice of any kind. The article’s goal is to be instructive in educational purposes and must never be interpreted as a call for a buy or sell of any stock. If you do your own due diligence, you’ll live happily ever after!
Before leaving The Global Investor, Invesquotes had already finished this deep dive and that is exactly why I (B&H) now publish it here as the first paid article ever.
This post is too long for email, if you want to read it in web format you can follow this link.
In this deep dive we’ll go over the following:
1. History
2. A brief explanation of the payments system
3. What the company does
4. Numbers and Financials
5. Management Quality and Culture
6. Competition
7. Valuation
8. Bull Case
9. Bear Case
10. Final thoughts
1. HISTORY
I always tend to start talking about the history of the company because it feels natural to do it this way. I do however understand that this section can be of little value add for those readers who have no context whatsoever about the company under discussion. If you are one of those readers, I think that you’d be better off reading the section on “What the company does” before and reading this one later. Without further a do, let’s get going!
The payments industry is huge, and as such, thousands of companies participate in it. These companies can be grouped in many different ways according to their role in the payment value chain but, at the end of the day, we can group them in the following two groups:
Those companies that are known by the everyday customer like Visa, Mastercard, Square or American Express for example
Those companies that fly under the radar for the everyday customer but nevertheless are of utmost importance to the correct functioning of the payments system. Go ahead an ask someone who has no idea about the industry if they know what company Fiserv is.
Company’s that belong to the first group have proven to be great investments over the last years and are probably still great investments today. However, this deep dive will discuss one company that belongs to the second group: Adyen.
This quote by Pieter van der Does (Adyen’s CEO) in a conference sums it up pretty well:
Probably all of you have used Adyen without even knowing it.
Adyen was founded in 2006 in Amsterdam by a group of entepreneurs from which Pieter van der Does, co-founder and current CEO, stands out. Pieter is in fact the only co-founder that still works for the company as Arnout Schuijff, co-founder and now former CTO, stepped down January 1st 2021.
The idea of starting Adyen did not come entirely from scratch as the group of 8 entrepreneurs already worked in the payments industry before starting this new venture. Most of them worked for Bibit, a payment service provider (PSP) which was acquired in 2004 by the Royal Bank of Scotland. After selling Bibit, the group of entrepeneurs were not planning on starting a new business but this is what happens when you have an entrepeneural spirit, things come without being planned:
When we sold BiBit to the Royal Bank of Scotland, we had so many lessons learned. And when we sold the company we didn't think we would go back into payments. But 2 years later, we regrouped and thought of starting a company again.
- Pieter van der Does - Adyen Co-Founder and CEO
The name “Adyen” has no particular meaning neither in Dutch or English, but it does have a very special meaning in a surinamese which seems to be perfectly tailored to the beginnings of the company:
To start over again.
Unlike other companies like Square, which were built by founders who did not have a payments industry background, Adyen was built as a new beginning. The group of entrepeneurs decided to start over again inside the payments industry as they had deep knowledge and still thought that the opportunity ahead was signficant. We are now living in the year 2021 and the optionality that payments offer is still significant so just imagine the youth of this opportunity back in 2006…digital payments were just getting started.
The Bibit experience was considered in every way a success for these young entrepreneurs as it also helped them in building Adyen. On one hand, this experience would help shape the Adyen Formula, which would later become the central pillar of Adyen’s culture and which I will go over in the “Management Quality and Culture” section of this article.
Secondly, it helped management agree that they were not building Adyen to sell it:
With the first company - you build something, see it run successfully, you sell it, you celebrate it. After selling Bibit, I stayed in the company for another two years, and as a result I had to run it under the umbrella of a larger company that made all sorts of decisions that I wouldn't personally make. So when you start again with another company, you are very keen on not selling it.
- Pieter van der Does - Adyen Co-Founder and CEO
Adyen decided to follow a very ambitious (and unusual) strategy from day one as they directly targeted the high-end of the market. The team focused on building an integrated high quality system that would disrupt the legacy payment system:
We believed that if you could make this product of the highest quality possible, then you’d be able to sell it to the best companies in the market. So we had a very unusual market entry strategy and a very ambitious plan - we know this market, we're going to build something that outperforms and we directly target the high-end.
- Pieter van der Does - Adyen Co-Founder and CEO
Spoiler alert: the strategy worked. Since its foundation, the company has been able to “convince” some of the biggest and better-known enterprises in the world. Companies such as Booking, KLM and McDonalds can be counted amongst Adyen’s customers:
Adyen is also very prolific across Silicon Valley tech firms such as Facebook (now Meta) and Netflix.
How did the company manage to do this? The answer is high quality, low costs and transparency:
From the very beginning of Adyen, we were very different, because we wanted to accomplish one particular goal - have the highest product quality at the lowest cost, which is somewhat unusual. However, that means we had to build everything ourselves, because if you have it all in-house, if you have it all connected to all endpoints, you have the lowest cost.
We wanted to bring trust to the industry by making everything transparent. It still stays the same today.
- Pieter van der Does - Adyen Co-Founder and CEO
However, this path to success was a bumpy ride. Even though the company was founded in 2006, the first sizeable merchant win ocurred in 2009. Starting in the payments industry is never easy and it mirrors the experience of a newly graduated student looking for a job. Let me explain this.
Every employer requires students to have some experience but students can’t have experience if there is no employer who gives them the first opportunity. In the payments industry, any payment provider needs volume to attract merchants and to sign relevant partnerships with banks but this payment volume is not achievable without merchants.
In the case of Adyen, there was one merchant who “helped” the company get its impressive runway started. This company was…
Groupon was acquired as a customer in 2009 and helped Adyen massively. It was one of the first adopters who used the Adyen platform globally which gave the company significant payment volume to get its flywheel started. 12 years of flywheel have had the effect of converting the company into a top-tier payments company with more than $400 billion in annual processed volume serving enterprise and mid-market merchants all over the world.
Obviously, it wasn’t just Groupon who got the company to where is stands today. Management, through a series of strategic decisions, has been able to pivot Adyen’s offering to what the rapidly-changing environment has always demanded.
I know that the payment industry is complex, so I’ll try to describe everything in detail in the most simple way that I can.
2. A BRIEF EXPLANATION OF THE PAYMENT SYSTEM
Before going over Adyen’s value proposition, it’s important to understand how the payment system works overall. I will start first with a simple example to explain everything that occurs since you swipe your card to pay for something until this money is deposited in a merchant’s account.
What do you trigger when you swipe your card?
When we swipe our card in a store or through the internet, it just takes a matter of seconds until the transaction is approved which could lead any everyday customer to think that not much occurs between both events. The process that occurs between these events is highly complex but has been rapidly accelerated thanks to automation driven by improved technology.
When you swipe, introduce or tap your card at any Point of Sale (POS) device or when you pay through the internet, your information goes back and forth through the whole system until the transaction is finally approved. Before explaining the flow, it’s important to give a brief description of the parties involved:
Customers: the person who is actually swiping the card
Acquirer: financial institution who has signed an agreement with the merchant where the customer has made the payment. When you see the name of the bank in a POS device screen, this is normally the acquirer
Network: includes payment processors, payment card schemes (Visa, Mastercard, Amex, Discover…)
Issuer: financial institution who issues the card to the customer and most likely, where the customer has his/her funds deposited in case of debit
Merchants: business where the customer is trying to pay