June 09, 2021 at 04:30PM

Marqeta, which is focused on helping client firms issue debit cards, went public on Wednesday (June 9).  At this writing, the shares were at $27 on the NASDAQ, above the price range coming into the IPO of $20 to $24 a share.

Fast-growing, digital-first/digital-only companies, especially in the payments space, sometimes are dependent on a few key levers to drive that growth. Revenue streams may hinge on a few key products or services, or a few outsized customers, or reliance on trends within a particular geography.

Marqeta’s own filings with the Securities and Exchange Commission (SEC) detail the dual-edged nature of its growth engines – where risk and reward are intertwined, pinned to interchange fees and one (very large) key customer.

To get a sense of how the great digital shift is spurring companies to issue cards and consumers to use them, consider the fact that, per the financials, Marqeta’s revenues surged to $108 million in the first quarter, compared to $48 million in the year-ago period. For the full year 2020, sales more than doubled to $290.3 million, up from $143.3 million.

As has been seen with other fast-growing firms in the midst of scaling, red ink marks the operating income line, as Marqeta posted an operating loss of almost $48 million in the latest year, narrowing from $58.2 million a year ago. The company noted in the filing that just about 80 percent of its $290 million in 2020 revenues came from interchange fees.

Digging Into the Interchange Fees 

Interchange fees are transaction-based and volume-based, Marqeta noted in the filing, set by a card network and paid by an acquiring bank to the issuing bank that issued the payment card.

Marqeta wrote that “we expect interchange fees to continue to represent a significant percentage of our total net revenue in the near term. The amount of interchange fees we earn is highly dependent on the interchange rates that the card networks set and adjust.”

Marqeta details in the filing that the fees are subject to change – especially in the wake of the Durbin Act, which limits those fees, and may have an impact on the company’s revenues. According to the filing, Marqeta only contracts with  Durbin-exempt issuing banks when it provides program management services – and those banks are able to access higher interchange fees. Those higher fees, in turn, allow Marqeta to maximize its own revenues. Interchange rate changes from Visa and Mastercard have been postponed through April 2022 as a result of COVID-19, the company said.

Any shifts in interchange rates, or in U.S. regulations, would be significant for Marqeta, as the U.S. remains its largest market by far. Less than 2 percent of the company’s net revenues in 2020 came from customers located outside the United States, the company said in its filing.

Dependence on Square 

As of now, there is also an outsized dependence on Square (and, specifically, processing volume). Square represented 70 percent of Marqeta’s net revenues in 2020 and 73 percent of net revenues in the latest reported quarter. Any material shift in Square’s own activities would have a ripple effect on Marqeta’s business.  In 2020, there was a 170 percent increase in processing volume generated from Square.

Marqeta’s agreement with Square, for the latter firm’s Cash App, expires in March 2024; the agreement for Square Card expires in 2024. “Each agreement automatically renews thereafter for successive one-year periods, unless terminated earlier by either party,” according to the filing. That gives the firm runway through the next few years to, for lack of a better term, diversify its revenue streams.

Marqeta IPO Casts Spotlight On Interchange Fees, Reliance On Square …

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