Payment fintechs persist despite economic upheaval

Toast is heating up competition in the restaurant payments market by adding more services and aiming to take business away from fintech rival Square and industry heavyweights Oracle and NCR.

Boston-based Toast has unveiled offerings in recent weeks for hotel restaurants and quick-service restaurants. It also announced improvements to its mobile ordering, payments, and digital menus. 

Toast has "a cloud-based point-of-sale that is very easy to use,” Mizuho Securities Senior Analyst Dan Dolev said in an interview, adding Toast provides “a one-stop-shop for everything.”

“It’s very modern, (and) feels like an iPad," he said. "It’s technologically more advanced than what the legacy" companies have to offer.

His views were echoed by Robert W. Baird Analyst David Koning, who also follows the payments sector, and like Dolev, recommends investors buy Toast shares.

“You could say that Toast is growing significantly faster than the market, and seemingly taking share from all key market participants,” Koning said. “The average merchant that Toast serves does over $1 million of volume per location now, and my guess is Square is significantly less.” Koning also follows Square parent Block.

In a 2021 report from research firm IDC, the market leaders in the arena were technology companies Oracle, NCR, PAR and Infor, and Toast was listed among the “major players” along with Zucchetti Switzerland (TCPOS), TouchBistro, Revel Systems, and Appetize, which has since merged with SpotOn. 

Toast benefited from its early move to cloud computing, though it isn’t such a differentiator now that its rivals have all moved their software to outside servers, too, IDC Analyst Dorothy Creamer said.

Still, it faced criticism from customers for lacking experience in growing with companies, she added. That may have been part of the reason that Toast decided to focus on small and mid-sized businesses, she said.

While the IDC chart made clear that Oracle dominates the market, the pecking order of other competitors was less clear and IDC didn’t provide a ranking. Square, a unit of Block and U.S. peer, wasn’t evaluated by IDC because it didn’t meet the study’s criterion of having two multi-unit QSR/fast-casual clients with a minimum revenue of $10 million, according to Creamer. She said she didn’t have an update to the report available.

“I haven’t set the criteria yet for the 2022/2023 report, but Square is on my list to consider should they meet the criteria,” Creamer said in an email.

Top competitors

Oracle’s Simphony POS platform is used by Starbucks, Dunkin' Brands, Sonic, and Pret A Manger, among others. NCR’s Aloha Systems is used at 100,000 restaurants, according to IDC’s report. The Aloha customers include Atlanta’s Mercedes-Benz Stadium, Starbucks locations in Europe, and Fifth Group Restaurants, which operates 10 fine dining restaurants in the Atlanta area.

Par Technologies is a multinational company that’s the corporate parent of the Brink POS, which the company says is used at more than 10,000 restaurants including the Five Guys burger chain and the Cava Mediterranean chain.

Informa is another major player in the POS market. That multi-national is part of Koch Industries and declined to provide the names of customers

Toast revenue rises

Toast, which was founded in 2011, estimates that its technology is used in 7% of the approximately 860,000 U.S. restaurant locations. During the company’s most recent quarter, revenue rose 90% to $535 million. Its net loss narrowed to $23 million. Gross payment volume (GPV) nearly doubled to $17.8 billion.  

Among Toast’s customers are Underbelly Hospitality, a Houston-based restaurant group, Richmond, Virginia-based HOUSEpitality Restaurant Group and the Melting Pot chain of fondue restaurants headquartered in Tampa.  

Toast went public in September 2021 through an initial public offering, which gave the company an initial valuation of $20 billion. Shares of the company along with the broader market have gotten pounded since then. The company's current valuation is less than $9 billion. When asked to comment for this story, Toast provided statements executives gave during the company’s earnings conference call in May. 

Rival San Francisco-based Square, which declined to discuss competitors, has also been busy adding services.

Its new point-of-sale feature allows restaurants to include order updates on a Square display system. The company also recently acquired GoParrot, a digital ordering and marketing platform for restaurants. In addition, the company announced partnerships with SoundHound, which can take voice orders automatically, along with Cartwheel and Vromo which can enable restaurants to power their own delivery services.

Fintech face-off

According to Toast, it was already offering services that Square added, an argument Square rejects.  

“Our product roadmap, feature updates and strategic partnerships are strongly influenced by feedback and requests we receive from our sellers directly,” a Square spokesperson said in a statement in response to a request for comment. “When we invest in our restaurant ecosystem, it is with the goal of empowering sellers of all sizes to face any challenges or opportunities that come their way.”

Square’s restaurant clients include the International Restaurant Management Group, which operates more than 200 restaurants in 29 states and 7 countries, according to its website.

While Toast has more singularly focused on restaurants, that category is only part of Square's broader merchant universe. Food and drink sellers represented 29% of Square’s GPV in 2021, according to Square’s most recent 10-K filing with the Securities and Exchange Commission. 

Block, which was founded in 2009 as Square, reported about $18 billion in revenue in 2021, so even a third of that dwarfs Toast’s $1.7 billion in sales for that year. Ditto for its workforce size relative to Toast. Block had 8,521 employees as of the end of last year. Toast’s workforce was 3,172. 

Square's quarterly revenue and GPV dropped during the period because of a decline in its bitcoin holdings, the company said.

Pandemic impact

Many restaurants were hit hard during the coronavirus pandemic when local officials ordered them to shut their doors to prevent the spread of COVID-19, which has taken the lives of 1 million Americans. More than 10% of U.S. restaurants closed permanently because of the heath crisis, according to a 2021 report from market research firm Datassential.

According to the National Restaurant Association, total restaurant and food service sales still lag behind their pre-pandemic levels. The trade group's recent State of the Restaurant Industry survey found 40% of operators believe businesses will need more than a year to recover from the worst public health crisis in history. Operators told the survey they were increasing technology spending as they cope with a staff shortage.

“We're seeing more and more of the medium and the smaller chains invest in kiosks and that kind of technology,” Alan Burt, an associate at the London market research and consulting firm RBR, said in an interview. “There's definitely an opportunity for (technology) companies to try and work with these chains.”

Billtrust CEO Flint Lane sees no shortage of acquisition options in the rapidly evolving business-to-business payments space, and he aims to continue the company's recent buyout streak.

Its $59.9 million acquisition of Amsterdam-based Order2Cash in February and its $58 million acquisition of Belgium company iController in October 2021 have established a European presence for Billtrust, Lane said. 

iController focuses on automating the collections process, while Order2Cash offers a variety of global solutions in the automated receivables area for mid-market and enterprise businesses.

With those acquisitions, Lawrenceville, New Jersey-based Billtrust now has about 2,400 customers. “We’ve added quite a bit of girth in Europe, and we’ve told the markets that we’re going to be acquisitive,” Lane said.

Those were Billtrust’s 9th and 10th acquisitions, Lane said. The company became a publicly-traded company in October 2020 through a special purpose acquisition company, or SPAC. That deal was partly to allow the company to be more acquisitive, Lane said.

Seeking to return to profitability

Founded in 2001 by Lane, Billtrust is focused on the accounts receivable side of B2B payments and enables its customers to automate that side of the ledger with an integrated, cloud-based platform.

Earlier, Lane founded another business in the industry, bill payment company Paytrust. The assets of that New Jersey company, formed in 1998, were sold to Metavante in 2002.

Billtrust has projected net revenue will be between $165 million and $171 million this year, Lane said. As far as past performance, he noted the company remained profitable during the start of the COVID-19 pandemic. That's not the case now, though he expects the company to return to profitably in late 2023 or early 2024.

The company "tapped the brakes a little bit on the spend” after the pandemic showed up, Lane said, but is not doing that now as it pursues growth, Lane said.

Billtrust plans to target one to two deals annually, he said, adding that there will be “years that we do no deals and years that we do three deals.” 

He wouldn’t comment further on future opportunities this year, other than to say there's plenty of potential targets. The company may make acquisitions that allow additions to its product suite, or consider "competitive roll-ups" that would allow geographic expansion into new territories, Lane said. The company may also seek to build on its business payments network, he said.

Expanding business payments network

Billtrust's business payments network, which Lane called “sort of a Venmo for B2B,” saw total payment volume grow by 86% in the first quarter, over the period last year, to $3 billion. That network “remains a highlight,” with triple-digit-growth expected this year, analysts with William Blair noted in a recent report. 

While the B2B area of payments has sped up efforts to digitize in recent years, there is still an abundance of paper checks in business payments in the U.S., “because there’s no easy way for a buyer to know how to pay a supplier electronically,” Lane said.

That prompted Billtrust’s creation of its business payments network in 2017. On the buyer side, Billtrust offers accounts payable companies the ability to pay suppliers electronically without asking for bank account details. On the supplier side, Billtrust has a digital lockbox, a similar concept to a check lockbox at a bank, that automatically opens envelopes and processes payments for businesses.

American Express recently announced a partnership with Billtrust, “so that we could help their merchants drive more digital acceptance with our digital lockbox,” Lane said.

Adding bank partners

Billtrust also is trying to convince banks they should offer a digital lockbox to their treasury clients; that’s a component of the company’s expanded relationship with KeyBank. Lane expects to announce more bank partners in the future, but couldn’t provide a more specific timeframe.

“If we are able to accelerate our growth by arming banks with the digital lockbox and they can offer it to hundreds if not thousands of treasury clients, that’s a win for us and a win for them,” Lane said. 

Billtrust – which mainly makes money through software subscription services – is typically competing against accounts receivable tools that are homegrown and “wildly inefficient” for businesses, the CEO said. 

Accounts receivable and accounts payable are “an enormous market that is ripe for innovation,” with a number of companies looking to do away with paper invoices and paper checks, Lane said.

Check volumes are still significant in the B2B space, but they are declining. Mail delays have slowed invoices and check delivery, and “there is a significant push to digitize because of the work-from-home dynamic,” he said. 

Automation in accounts payable and receivable that work together is the key to "driving checks out,” Lane said.

Dutch payments processor Adyen has set its sights on becoming a bigger player in the U.S. market, and it’s expanding its presence in the Midwest as part of that effort.

The company’s North America president, Brian Dammeir, was in Chicago this week to formally open a new tech hub in the city. It’s one of two that Adyen announced in February, with the other being in Madrid. 

At a coffee shop in Chicago's West Loop neighborhood for an interview this week, Dammeir pointed to Google’s building across the street as he explained why Chicago was the best place for the company to create the new hub. Other major tech players also have a significant presence in Chicago and have been expanding there in recent years, including social media company Facebook parent Meta, online retailer Amazon and payments player Braintree, which was acquired by PayPal in 2013.

In attracting a pack of big technology companies over the past decade, the city has accumulated a wealth of tech talent with help from a slew of state and private universities in the region, said Dammeir, who is based in the company's biggest North American office in San Francisco. In addition, Chicago offers extensive commercial real estate for a new office at reasonable rates and a major airport, he added.

For now, Amsterdam-based Adyen’s Chicago operations are located in temporary quarters at a WeWork building that has dedicated space to the processor. Eventually, the company will have its own space and Dammeir expects to populate it with hundreds of employees. He declined to say how many Adyen employees are working at the Chicago office now.

“We’re really a viable domestic player in this market,” Dammeir said in an interview regarding the “hyper-growth” strategy. “Chicago shows we’re serious about North America.”

Hiring at new tech hub

Adyen, which currently has about 2,500 employees worldwide, has posted online for hiring in 14 different roles in Chicago, from software engineer to project operations manager to senior technical recruiter. Adyen had about 200 employees in San Francisco as of the end of last year and about 70 in New York, according to its second-half financial report issued in February.

The company has relocated some existing employees to Chicago to fill the tech hub, including Bert Wolters, Adyen’s executive vice president of technology who was based at the Amsterdam headquarters until this month.

In making its bid to grow in North America, Adyen is taking on sizable competitors, including established processors such as Jacksonville, Florida-based Fidelity National Information Services (FIS) and Brookfield, Wisconsin-based Fiserv as well as new fintech peers like Stripe, with dual headquarters in San Francisco and Dublin.

Adyen increased its U.S. market share relative to merchant acquirer rivals last year and ranks No. 8, based on U.S. payments dollar volume, according to the industry consulting firm The Strawhecker Group. Adyen mainly trailed much older competitors such as FIS and Fiserv, but outranked younger fintechs like Stripe. 

Attracting U.S. clients

Adyen, founded in 2006, already has a sizable North American clientele, and being closer to those customers, including in the Midwest, is another benefit of building out its presence in Chicago. Among its Midwest clients is Chicago-based McDonald’s, which has its headquarters just down the street from Adyen’s new Chicago outpost. It also counts Beaverton, Oregon-based shoemaker Nike, the Coraopolis, Pennsylvania merchant Dick’s Sporting Goods, and Milford, Connecticut sandwich chain Subway as clients.

Adyen has won over tech-centric companies that have similar upstart cultures and appreciate its "fresh way" of approaching the business, especially with respect to e-commerce, said Trevor Forbes, who is director of market intelligence at TSG. "Adyen offers more of that unified, clean experience that seems to resonate" with merchants, Forbes said by email. He declined to say whether Adyen is a TSG client.

With respect to servicing other fintechs, customers include the Boston-based restaurant payments company Toast and Bellevue, Washington-based spa software provider Zenoti. 

The U.S. business has already helped make North America Adyen’s second-biggest market after Europe, Dammeir said, even though it also has operations in Asia and Latin America.

In addition, Adyen has been building its U.S. business with the help of the U.S. banking license it acquired, giving it "greater operational scale and services," Forbes said by email. The company received that bank branch charter last year with approvals from the Office of the Comptroller of the Currency and from the Federal Reserve. 

In the second half of last year, the company’s net revenue surged 47% over the same period in 2020 to 556.5 million euros ($597 million), according to the company’s financial statement. The company also said earnings before interest, taxes and depreciation rose 51% to 357.3 million euros.

The net revenue from its North America business grew at an even faster 70% clip to 131.3 million euros for the second half, relative to 2020, the company said. It now makes up about a quarter of Adyen’s net revenue, Dammeir said.

“Now, as we exit the reaction phase of COVID, we’re seeing a second wave of innovation as merchants across other verticals – e.g. hospitality, large-format retail, leisure – are increasingly aware of the impact of consumer preference shifts,” Dammeir said in a North America update included in the report for the second half of 2021. “Our newly acquired federal branch license should help us be able to fully meet these merchants' needs.”

Payments gateway firm NMI is working to carve out its niche by providing “the picks and the shovels” for banks to remain competitive with fintechs in the merchant space, the company’s CEO said. 

As payments fintechs like Stripe and Block-owned Square have bundled merchant services with payment processing to serve business owners, “that’s been very disruptive, obviously, to the incumbent banks and merchant acquirers and processors,” said Vijay Sondhi, CEO of Schaumburg, Illinois-based NMI.

Fintechs that came in with a point-of-sale terminal for a merchant have since started offering services like small-business lending, encroaching on banks’ territory. Banks “have started to realize some of those disruptors are kind of like Trojan horses,” Sondhi said. 

Financial institutions are watching these all-digital up-and-comers delve deeper into the processing business, said David Robertson, publisher of trade publication The Nilson Report. As these fintechs add services to make the relationship with merchants even stickier, they’re gaining share against legacy players, who are trying to fight back, Robertson said.

Banks know they need to offer modern digital merchant services to stay competitive, but it’s difficult for them to develop technology at the same speed as newer fintechs, Sondhi said.

There has been consolidation of merchant acquirers that also provide software to banks – with Fiserv acquiring First Data and FIS purchasing Worldpay – and that “has been a wake-up call for the mid-sized banks,” Sondhi said.

Those mid-market banks are a particular focus for NMI, said Sondhi, who pointed to Fresno First Bank in California as a new customer. The company's customers include about 3,300 independent sales organizations, independent software vendors and banks that use NMI’s white-label tech stack.

NMI provides the connectivity and tools to process payments with a digital-first approach, “in a bring-your-own [merchant account] type of environment,” Sondhi said. 

“We’re meant to be a behind-the-scenes player,” he said, catering to “those folks that want to have the ability to have a modern tech stack, but don’t have the means to develop it.”

NMI, founded in 2000, began as a white-label payments gateway. “We like to say sometimes we’re a [software-as-a-service] company that happens to be in the payments world," he said.

NMI focuses its services on e-commerce, unattended mobile and retail payments. It also has an omnichannel offering that allows all transactions to go into one single payment repository.

The company provides connectivity to about 200 processors, Sondhi said, and processes about $195 billion in payments volume annually for about 267,000 merchants. NMI has about 400 employees and is profitable.

New York-based private equity firm Insight Partners invested in NMI last year, alongside the earlier investor San Francisco-based private equity firm Francisco Partners. NMI also has a smaller investment from Boston-based private equity firm Great Hill Partners.

NMI acquired payments software firm IRIS in January to bolster its merchant services. As the company aims to double the size of the business in the next three to five years, “we’re definitely interested in doing more acquisitions,” Sondhi said. 

In particular, NMI is likely to pursue acquisitions of firms that offer settlement services, which it does not provide at this time, or that provide add-on services for merchants, like fraud management, Sondhi said.

NMI, which makes money through monthly access fees, transaction fees and fees for value-added services, is mainly focused on its North American business, but has a growing footprint in Europe and greater international ambitions, Sondhi said.

Looking ahead, the company wants to go beyond processing and offer “full commerce enablement,” Sondhi said. The signup process in the traditional acquirer world is “quite complex, when you compare it to that of the disruptors,  such as Stripe and Square and Adyen," he said.

NMI aims to replicate the digital onboarding experience those disruptors offer by allowing merchants to go through a digital workflow and instantly be issued a merchant account, which it’s doing through its acquisition of IRIS. 

SpotOn, a provider of payments services and software for the restaurant, hospitality and retail industries, announced Wednesday that it has raised $300 million dollars in new capital, resulting in a valuation for the San Francisco-based company of $3.6 billion.

The funding round was led by Dragoneer Investment Group along with participation from current investors, including the venture capital firms Andreessen Horowitz, DST Global, Franklin Templeton and Mubadala Investment Company. It also attracted a new investor, G Squared. 

The money raised will be used to develop "technology products that enable businesses to meet the evolving needs of today's consumer," the company said in the May 18 press release.

SpotOn provides restaurant payment and management software systems that integrate marketing, website development, online ordering and loyalty programs.  

Previously, SpotOn had raised a total of $628 million, according to Crunchbase. The company landed $300 million in funding last September, which gave it a valuation of $3.1 billion. It also lured $125 million last May.

SpotOn has used past funding to bolster its flagship SpotOn services with the acquisition of Dolce, a software company that streamlines payroll, scheduling, tip-pooling and compliance functions.

SpotOn also launched an omnichannel retail platform that it says allows independent retailers to compete with big-box stores and ecommerce giants.

Meanwhile, its executive team has expanded with the hiring of Lisa Banks as chief financial officer, JiNa Han as chief people officer and Mark Brodahl as chief revenue officer.

The company's customers include more than half of Major League Baseball stadiums. At Chase Field in Arizona, SpotOn added 383 point-of-sale stations, 51 handheld devices and three kiosks to help increase transaction speed for the 2022 season.

Dragoneer has invested in SpotOn six times over the past three years. This is the first time the San Francisco-based investor has led the funding round for SpotOn. With $25 billion in assets, Dragoneer has been an investor in such well-known startups as Atlassian, Chime, Doordash, Slack, Spotify and Uber, among others, the release said.

“Mom-and-pop restaurants and retail businesses are facing rapidly changing consumer expectations within today’s tech-driven landscape,” Marc Stad, Dragoneer’s founder and managing partner, said in the statement. “SpotOn has made it their mission to provide customized solutions to drive the growth and adaptation needed as businesses of all sizes evolve and grow.”

Payments company startups have been among the biggest recipients of venture capital money, reaping billions of dollars in recent years, including record sums last year. 

CB Insights estimates that venture capital funding globally dropped 19% in the first quarter to $143.9 billion, relative to a record-breaking fourth quarter, an April 7 report from the research firm said. It was the biggest quarterly decline since the third quarter of 2012.  

According to the National Restaurant Association’s 2022 State of the Restaurant Industry report, eight out of 10 operators say using technology provided a competitive edge. The survey released earlier this year by the trade group also indicated that operators plan to increase their investment in technology. 

Dive Brief:

• Eyeing debit cards as a growth tool, card issuer Marqeta has partnered with Swedish buy now-pay later provider Klarna to create a new physical Klarna card that lets shoppers pay in four bi-weekly, interest-free installments for their online and in-store transactions, according to a Wednesday press release.
• Marqeta currently lets Klarna customers generate one-time digital cards within the BNPL provider's app. The new Klarna card is available to consumers in the U.S., which is Klarna’s fastest-growing market, according to the release. It is a debit card, a Marqeta spokesperson said.
• Marqeta’s card issuing platform lets Klarna onboard new accounts, issue physical and virtual cards and add them to digital wallets so that shoppers can make purchases immediately after their credit approval, per the announcement.

Dive Insight:

Klarna’s relationship with Marqeta began in 2018 when the two teamed up to start issuing virtual cards in the U.S. In December 2021, they announced plans to issue virtual cards across 13 European countries. The buy now-pay later giant is relying on Marqeta’s payments tools to grow its U.S. presence.

Klarna continues to release physical cards for shoppers in the U.S. after doing so in Europe. In February, Klarna partnered with WebBank to issue physical Visa cards in the U.S. after piloting the cards in the U.K., Germany and Sweden. The cards issued by WebBank also offered a “Pay in 4” payment option for online and physical store purchases. 

“By working with Marqeta, we were able to quickly launch a brand new card program with seamless flexibility and controls,” David Sykes, chief commercial officer at Klarna, said in a statement. This expansion with Marqeta "will ultimately help our business grow,” he added.

Meanwhile, the broader payment industry has eyed the expanding BNPL installment market. In July 2021, Visa introduced buy now, pay later options for cardholders transacting with Canadian merchants. Visa CEO Al Kelly noted last year that installment payment providers need Visa’s global network to reach more consumers. 

Klarna competitor Affirm has been planning to issue debit cards since last year as part of its growth strategy. Affirm announced on Tuesday that it is partnering with Stripe to offer its checkout tool and installment payment services to Stripe merchants.

The timing is critical, because a report from Juniper Research estimates that the BNPL market will grow to $995 billion internationally by 2026.

But after raising $639 million last June to support its international expansion and offer more payment options, Klarna is cutting back amid increasing costs and regulatory scrutiny. Last month, the company laid off 10% of its workforce, a decision which Klarna CEO Sebastian Siemiatkowski attributed to the Russian invasion of Ukraine, a change in consumer sentiment, stock market fluctuations and a possible recession.

Klarna and its BNPL competitors have also faced rapid growth in their operating costs as they rush to capture the market. Other BNPL competitors have seen an uptick in late payments, The Wall Street Journal reported. 

In addition to rising operating costs and challenging market conditions, the industry also is under scrutiny by researchers and regulators seeking to understand its risks to consumers. Klarna and Affirm said they complied with the Consumer Financial Protection Bureau’s request for information regarding their business practices.

In the U.K., researchers warned that BNPL services could result in consumers getting trapped in a “debt spiral."

 

Payments cards are getting increasingly expensive as banks and other card issuers face shortages of computer chips, industry analysts say.

An analysis published by industry research firm The Nilson Report forecasts prices for finished, first-use plastic cards will increase between 5% and 20% this year and next year. Prices also rose in 2021.

“These increases follow multiple years of price declines for finished cards preceding the Covid-19 pandemic,” Nilson said in its April edition.

The U.S. companies JPMorgan Chase, Citibank and American Express are among the biggest credit card issuers in the world. A spokesperson for JPMorgan Chase said: "We have no expected impacts." 

The American Bankers Association declined comment other than to reference a November letter on the topic that it submitted last year to the U.S. Department of Commerce. "This is a fluid situation and exact predictions are difficult to make," the Nov. 8 letter said. "However, without an adequate chip supply, some payment card issuers could potentially face challenges in consistently delivering the timely replacement of chip cards or issuing new chip cards to meet consumer and business demand in the U.S."

Nilson’s views were echoed by Phil Sealy, a research director for digital security at New York-based ABI Research, a global technology research and consulting firm.

“There have been several increases in prices over the course of the last 12 to 24 months,” said Sealy in an interview. “There likely will be another increase coming shortly.”

Average selling prices for chips are between 10% and 20% this year and an additional increase is expected by the end of the year, Sealy said.

An August 2021 ABI report said as many as 1 billion payments cards were at risk of not being made over an 18-month period because of a chip shortage. ABI is in the process of updating its forecast and declined to discuss its research before publication.

Ukraine companies shutter

The conflict between Russia and Ukraine is affecting chip prices because Ukraine is home to two companies that produce half the world’s supply of neon, a key ingredient in making chips, Sealy said. 

According to Reuters, the Ukrainian companies, Ingas, based in Mariupol, and Cryoin, based in Odessa, shut their doors when the war started earlier this year.

Chipmakers use neon to control the specialized lasers they use to make semiconductors. Prices for Neon have skyrocketed since the invasion of Ukraine. According to the South China Morning Post, the average wholesale price of industrial-grade neon in China has jumped nearly nine-fold since the invasion began.

About 80% of the card market is related to the re-issuance of expiring cards, Sealy said, adding that manufacturers have to appease their client base by prioritizing old accounts over new ones.

"Higher prices paid by card issuers present the dilemma of whether to pass along their increased cost to consumers,” according to The Nilson Report. “Charging more for the same plastic is not a good position to be in. If consumers are going to be asked to pay more, the opportunity exists to migrate them to a card perceived to be of greater value such as one made of metal.”

Chip supplies were already tight before the pandemic began in March 2020 due to increased demand from the automobile industry and telecommunications companies deploying high-speed 5G service, among other reasons, said Barb Else, Fiserv’s vice president of output solutions. 

“Disruptions caused by the COVID-19 pandemic and global labor supply challenges have exacerbated the shortage, which is projected to possibly continue until 2024,” Else said in an emailed statement. “Financial institutions can mitigate the impact of chip shortages by developing and maintaining a rolling 12-month forecast of chip and card needs and sharing those forecasts with their card manufacturers.”

Some slower delivery times

For the moment, at least one chip manufacturer, Infineon Technologies, is still meeting demand for chips from its payment card customers. The trick is staying in closer touch with customers about their needs and being realistic about the supply that will be available, said Oliver Manahan, a senior director for business development at Infineon.

The biggest change now, in the tighter supply market, is that if customers decide they want to increase an order, that typically isn't possible, Manahan said.

While the company is meeting the demands of its existing customers on a normal timetable because it had forecasts for them, new customers that weren't part of its forecast will have to wait longer for deliveries, at least 52 weeks, as opposed to less than 18 months in the past, he said.

Fiserv has told customers to place card orders four to five months sooner than usual because of the longer lead times for chip shipments, and to expect price hikes. Being flexible about any design changes or major promotions until the supply chain issues are resolved would also be helpful, according to Else.

Fiserv conducts weekly status meetings with its vendors to assess current chip availability and determine future delivery schedules. With input from vendors, Fiserv has identified new chips that could be used in cards.

Buy now-pay later company Affirm is counting on a new debit card to aid the company's growth, even as it's getting a later start on that new product than expected.

When Affirm Chief Executive Max Levchin first unveiled plans for an Affirm debit card in 2021, to give customers access to the buy now-pay later service, he said it would be available later that year. However, during a company conference call May 12 to discuss fiscal third quarter results, Levchin said the debit card will be offered by the end of this year. Affirm declined to explain the reasons for the delay.

In a statement, the San Francisco-based company noted the card is being “rolled out to tens of thousands of consumers through our beta program," which began last year. The company also said it has a waitlist for the new card and that it's inviting "tens of thousands of consumers" on a daily basis to get the new card.

The new debit card will let Affirm customers pay upfront, via a link to their bank account, or access the company's BNPL financing.

Levchin, a billionaire cofounder of PayPal, told Wall Street analysts that he had high expectations for the card, which will be available to customers in good standing with the company. When consumers apply for Affirm's services, the company will review their recent credit usage and reject anyone who the company decides won't be able to pay off purchases, according to Levchin.

He noted that in the beta program for the new card, called Debit+, users averaged more than two transactions per week compared with non-users. The most visited physical retail location during the beta has been Walmart grocery. Levchin said that indicates consumers are finding the service useful.

“We want it to be top of wallet," Levchin said. "We want it to be the thing that people take to go shopping for their family.”

The company plans to keep improving the card with regular updates, Levchin said during the conference call.

It's a physical card as opposed to a digital card to create a "more ubiquitous payment option because Debit+ opens up basically an unlimited amount of merchants to consumers for Affirm to be able to capture a little bit of share," Mizuho Americas Analyst Nicholas Lucas said in an interview.

Critics of the industry, however, have argued the ease with which consumers can access credit through BNPL services like Affirm encourages people to overextend themselves, taking on too much debt by purchasing household goods through installments.

Marshall Lux, a consultant with Boston Consulting Group and a research fellow at Harvard Kennedy’s Mossavar-Rahmani Center for Business and Government, believes the Consumer Financial Protection Bureau should move faster on BNPL regulation because most borrowers are subprime. “This should rise higher in terms of the CFPB agenda,” he said in a recent interview.

The CFPB opened an inquiry last year into the business practices of the BNPL industry. Affirm, Block's Afterpay, Klarna, PayPal and Zip have been asked to provide information about their business practices, including how they safeguard confidential information from consumers.

None of the BNPL companies targeted by the CFPB is profitable when measured by Generally Accepted Accounting Principals (GAAP).

Affirm posted a GAAP operating loss of $227 million in the most recent quarter which included $217 million of equity-related costs. Levchin expects to achieve a sustained profitability run rate on an "adjusted basis" by the end of next year. Lucas, however, expects the GAAP losses to continue for the foreseeable future.

The company's earnings report was better than Wall Street analysts expected as the number of active merchants surged 12,000 to 207,000 year over year, and active consumers more than doubled to 12.7 million people and total transactions spiked 162% to 10.5 million.

Payments players PayPal, Klarna and Bolt all recently moved to restructure their businesses in the face of new economic pressures, and another peer, Fast, shuttered altogether, highlighting the emerging macro-economic perils for fintechs.

San Jose, California-based PayPal has pared jobs worldwide, with cuts in San Francisco, Chicago and Ireland while Stockholm-based Klarna said it plans to eliminate about 700 employees, or about 10% of its workforce, and California checkout upstart Bolt shaved about 185 workers, a third of its headcount, according to reports in recent weeks.  

The workforce reductions and related restructurings come as the digital payments companies grapple with rising interest rates, significant inflation and less plentiful capital. With their operating results under duress from those economic conditions, strategic flaws are coming to light and investors have become wary. 

This is the type of cyclical economic hardship that some fintechs, also including buy now-pay later player Affirm and a multitude of other venture-backed firms, have never encountered in their short lifespans and it will test their business models in a way that separates the strong from the weak, industry professionals say.

“We haven't seen how this specific industry, particularly some of the newer firms, like a Klarna or an Affirm, will perform,” said Fitch Ratings analyst Mike Taiano. 

Inflation is the latest specter overshadowing the businesses, with the consumer price index rising to a 40-year high. With many paytech companies pitching their services as more cost-effective alternatives to traditional tools, demand from commercial clients with pinched budgets could increase, but it could prove harder to boost prices. For those payments companies offering credit services, inflation also means the possibility of customers taking on too much debt and defaulting on commitments.

Digital payments pioneer PayPal and Swedish BNPL provider Klarna are both in the business of extending credit to consumers so they face a double-edged sword. For now, delinquencies and defaults aren’t an issue, but analysts say that could change, given the current economic environment.

BNPL headwinds

For BNPL in particular, the questions are: what will their business models look like in a higher interest rate environment and what do they look like in an environment where credit is not as easy to come by, Taiano said.

On the positive side for the companies, the inflationary environment may make consumers, particularly the subprime group that they target, more eager to tap their BNPL financing option, he noted. “Those folks will struggle a bit more with an inflationary environment and thus need products like buy now-pay later in order to finance some of their transactions," Taiano said.

The trouble with that, though, is that those same consumers may be less well-situated to take on and pay off the debt they’re accumulating, increasing the risk for the companies longer-term. “The financing costs as well as the credit losses, I think, will become a bigger issue as we move forward,” Taiano said.

All of that could leave the BNPL companies particularly exposed, though the risk is mitigated by the short duration of their loans and the underwriting of each transaction separately, he said. "The jury's out on how well they’re going to perform,” Taiano said.

Venture investor concerns

For its part, Klarna’s CEO Sebastian Siemiatkowski said last month: “We have re-evaluated our organizational setup to make sure we can continue to deliver on our ambitious targets.”

That’s actually a good thing in the view of Krista Morgan, whose Denver venture capital firm Stage Fund has invested in fintechs and is considering a payment firm investment now.

“If I’m an investor right now I want to see my CEOs making tough decisions fast because if you're burning $1 million, $2 million or $5 million a month, the sooner you cut, the better off you are,” said Morgan, who is a general partner at Stage. “I just think there are no guarantees of funding right now.”

While the Federal Reserve’s move last month to increase interest rates is aimed at holding down inflation, it presents its own set of challenges for businesses, namely increasing the cost of capital after a long period in which companies, particularly startups, benefited from easy money. 

Investors will be sitting on the sidelines until they see whether the Fed is getting inflation under control and whether a recession arrives in the second quarter, Morgan said.

“We’re no longer in a growth-at-all-costs environment,” she said. “Growth does not trump everything anymore.” 

If a U.S. recession materializes, as some economists have predicted, that could create a double-whammy scenario for companies that lose investor support at the same time that revenue declines. That can be especially devastating for startups that are still posting losses.

That scenario is a big reversal for fledgling companies that have been showered with investment dollars in recent years. Payments startups raised record amounts of capital last year, with Klarna as one of the biggest beneficiaries. Now, Klarna and Bolt have reportedly had difficulty raising new rounds of funding.

“Given the change in environment and the fact that the Fed is tightening monetary conditions, I think (that) has created more demand from investors to see that profitability sooner rather than later,” Taiano said. 

The BNPL companies are likely to be forced to expand their portfolio of products and services, or consider consolidation, as has unfolded already with Square parent Block buying Afterpay last year and Zip purchasing Sezzle this year, he said.

Bolt CEO Maju Kuruvilla last week blamed “macro challenges” for the employee cuts and restructuring, saying “the leadership team and I have made the decision to secure our financial position, extend our runway, and reach profitability with the money we have already raised.”

Is there a silver lining?

Another payments startup, the smaller New York-based virtual commercial card company Extend, sees the new environment delivering a mixed bag. There is more available talent, thanks to tech companies shedding workers, and salary requests aren’t as exorbitant as they were just a few months ago, when prospective employees with little experience could command sky-high salaries, said Extend CEO and co-founder Andrew Jamison. “That sort of ridiculousness has now calmed down,” he said.

Still, venture capital investors consider recruiting “a luxury” at this point because they’re more focused on efficiency and profitability, Jamison said. There’s a “sobering message” for venture-backed companies that have to raise money and may be forced into the "painful" position of rethinking valuations, he said. 

Larger companies, like PayPal, will most likely have the financial wherewithal to power through the economic turbulence. “Fitch views PayPal's modest amount of debt/leverage and significant amounts of cash on its balance sheet as a clear differentiator versus other issuers in the payments and technology sectors,” the ratings company said in a May 16 report. It noted PayPal’s $11.9 billion in cash and investments, plus $5.5 billion in credit capacity.

Smaller companies won’t have that kind of cushion to fall back on. However, if they outlast the economic headwinds, “it will make them so much more valuable,” Morgan predicts.

Checkout startup Fast is shutting down, the company’s CEO said in statements posted on the company's website Tuesday, abruptly shuttering a business that had lured $124 million in investments since its founding three years ago.

“After making great strides on our mission of making buying and selling frictionless for everyone, we have made the difficult decision to close our doors,” Fast CEO Domm Holland said in the statements. “While you’ll no longer see the Fast button at checkout, we are incredibly proud of the team we assembled and our work to democratize commerce through Fast’s one-click checkout experience.” 

A spokesperson for San Francisco-based Fast did not respond to requests for comment beyond sharing a statement from Holland (there were two nearly identical statements posted on the company's web site for different audiences). 

In a message to sellers on Fast’s website, Holland wrote the company "will permanently discontinue service of Fast Checkout on April 15" and will try to “make this uninstalling/offboarding process as seamless as possible.”

The company’s downfall was swift, following a report last week from the trade publication The Information that Fast was exploring a sale after attempts to raise more capital were unsuccessful. The publication also reported last week that Holland had told prospective investors the company planned to lay off hundreds of staffers. 

In an interview with Payments Dive in January, Holland said that the company had nearly 400 employees. It had grown quickly since its founding in 2019, thanks partly to the capital infusion from investors. Holland also said at that time that the company might seek another round of funding this year as he spearheaded growth.

Not even three months later, those plans have evaporated. Holland said in the Tuesday statement that he’d be “forever grateful to the Fast team, our investors and the sellers who shared our vision for improving the system of buying online.”

Stripe, Index Ventures were Fast investors

The startup had been backed by digital payments darling Stripe and Index Ventures; neither responded to requests for comment Tuesday. Stripe led a $20 million round of investing in Fast in March 2020, and a $102 million investment round in January 2021. 

Stripe itself has landed capital investments quickly. Founded by two Irish brothers, with dual headquarters in Dublin and San Francisco, Stripe raised $600 million last year, giving a $95 billion valuation. An earlier notable investor in Fast was Index Ventures, which also invested in the fintechs Revolut, Adyen and Plaid, among others.  

The speed of Fast's fundraising stands out even among Silicon Valley's successes, said Jeff Fortney,  a senior associate at payments consulting firm The Strawhecker Group. "The guy’s a great salesman," Fortney said of Holland. "He sold Fast fast.” 

That can create an aura that attracts other investors, Fortney said. “Sometimes investors will say 'Look Stripe’s invested in it—it must be good,'” Fortney said in an interview. Now, he's wondering, "Where was Stripe in all this?"

Plenty of competition

Fast faced rivals that similarly soaked big investments. One of them was San Francisco-based competitor Bolt, whose CEO blasted Fast in a Twitter tirade in January. Bolt CEO Ryan Breslow unleashed a Twitter thread calling out global payments fintech Stripe and startup accelerator Y Combinator for making his company's start difficult and singling out Fast for criticism.

They're not the only startups in the checkout arena going at each other. Checkout.com and Rapyd are also vying for merchant customers in the rush to sell digital payment tools that ensued with an e-commerce surge spurred by the COVID-19 pandemic.

Still, Holland asserted that his company was rising above the fray. In the January interview, he said investors "are really pleased" with the company's progress. Fast had grown "over 650% as a company, and this year we’ll grow even more, as a percentage," he said at that time.

He also said Fast's checkout services were available on about 1,000 e-commerce sites and contended Fast was outpacing checkout rival Bolt "in virtually every way."

Some Fast employees headed to Affirm

The “vast majority” of Fast’s engineers are being offered the chance to work at buy now-pay later provider Affirm, according to Affirm Spokesperson Matt Gross. He declined to comment on how the arrangement came to be and wouldn’t specify how many of the workers were being absorbed. 

“We look forward to welcoming many of Fast’s talented engineers to Affirm,” Gross said. 

A Fast employee in a non-engineering role who requested anonymity said employees would be paid through Friday. Still, he noted they had already lost access to Fast's work systems.

The employee, who joined Fast in February along with more than a dozen other new hires, said it appeared any employees not within the engineering department were on their own to find new jobs. “That’s just absolutely crazy, that they were continuing to hire when they were sub-two months away from being acquired-slash-running out of money,” the employee said.

Within the last week, “we all kind of knew,” the employee said. Staffers shared their concerns in Slack channels regarding rumors circulating, and compensation adjustments kept being pushed back, the employee said. On Friday, a senior vice president hinted to staffers they should update resumes, the employee said. 

“I hold no ill will towards any person in the company besides basically the CEO," the employee said.

 Fast CEO turns to Twitter

Holland took to Twitter to expand on his company statement, saying “Start-ups fail for many reasons, of which Fast obviously was not immune." He added: "But decisions made that lead (sic) to this outcome which I take responsibility for…” 

He also praised Fast employees and encouraged others to hire the startup’s staffers. 

As recently as March 28, Fast announced it had partnered with The Honest Company to place its one-click checkout option on that marketplace's website, referring to itself as "the world's fastest online checkout experience."

In his letter to sellers Tuesday, Holland suggested those looking for a replacement turn to Shopify. "If you're looking to continue improving conversion rates with one-click checkout, we encourage you to explore Shopify's platform at Shopify.com," the company website post said.