Growing At 400%, Rapyd Takes On PayPal In $160 Trillion B2B Payments Market
Unlike credit cards, checks, and other physical means of making payments, online payments can’t transmit the virus that causes Covid-19. So it comes as no surprise that the pandemic has boosted demand for services like PayPal.
Of course, the entry barriers into the online payments market are significant — but not enough to deter new rivals. And one of those rivals — London-based Rapyd, has raised $180 million and is growing much faster than PayPal as it targets the $160 trillion market for business-to-business payments.
Rapyd’s fast growth does not threaten PayPal — but it would not surprise me if PayPal or another payments service seeking to sustain its growth could acquire the company.
(I have no financial interest in the securities mentioned in this post).
PayPal’s Record Earnings
PayPal — whose stock has jumped 78% in 2020 as of October 26 (while the S&P was up 4.4%) — is poised to report third quarter earnings on November 2. Based on its record second quarter results and boosted guidance for the third quarter, investor expectations are high.
How so? In the second quarter, PayPal reported a 25% rise in revenue to $5.26 billion — 5.4% more than analysts expected, according to Barron’s. PayPal’s adjusted earnings per share of $1.07 were 23% higher than the consensus forecast and free cash flow of $2.19 billion was 112% more than the year before.
Total payment volume increased 29% to $220 billion ($10 billion higher than analysts expected) and PayPal “added 1.7 million new merchant users in the quarter, gaining momentum from the shift to online commerce through the lockdown period,” noted Barron’s.
PayPal expects the adoption of contactless payment to outlive the pandemic. As CEO Dan Schulman said in the July investor conference call, “PayPal now just had its strongest quarter since becoming an independent public company five years ago. Simply put, our business has never been more relevant and important in the midst of the Covid pandemic. We have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business.”
PayPal raised its guidance for the soon-to-be-reported September ending quarter. Specifically, PayPal projects revenue of $5.48 billion — 8% above the previous Wall Street consensus while it raised its non-GAAP earnings forecast to 95 cents a share — 10.5% above the consensus.
Rapyd Growing Fast In B2B Payments
PayPal does not have the B2B payments space all to itself.
A case in point is Rapyd, a London-based “fintech as a service” provider founded in 2016. Rapyd expects to hit $100 million in revenue in 2020 and was valued at $1.2 billion in December 2019, the last time it raised capital, according to TechCrunch.
Rapyd’s fintech platform addresses the problem of fragmentation in the global payments market. Payment methods and regulatory requirements vary by region — some regions do not accept credit or debit cards, noted TechCrunch.
Rapyd copes with this complexity so its clients can focus on what they do best.
How so? Rapyd’s Application Programming Interface (API) enables companies to
- Collect payments using thousands of methods around the world;
- Disburse funds to bank accounts,
- Operate an eWallet that gives consumers and workers access to digital payments, financial services and cash withdrawals that is white-labeled like PayPal,
- Issue cards on Visa, Mastercard, and
- Conduct foreign exchange transactions.
Rapyd makes money by charging a percentage of each transaction and a fee on foreign exchange.
Rapyd has grown rapidly and expects that to continue. As CEO Arik Shtilman told me in an October 8 interview, “It took two years to build the platform. In 2018 we had 25 or 30 employees and now we have over 250 people in the U.S. and U.K, Australia, Sao Paolo, and Iceland. We have about 3,500 customers. Revenue will hit $100 million in 2020 and over $100 million in 2021. We are growing at 350% to 400%.”
The idea for Rapyd emerged several years after a previous company was acquired. As Shtilman said “I sold ITNAvigator — [an Israeli communications integrator and social media solutions provider for several tens of millions of dollars, according to the Times of Israel] — to Avaya in October 2013.”
His original idea was to offer a consumer payments service. “At the end of 2015 I was starting the next thing with technology for the consumer payments space on top of PayPal. The original idea of Rapyd was actually to create a consumer eWallet product that is built on alternative payment rails. The product name was CashDash. We started to work on this product in around January 2016,” Shtilman said.
After eight months, the frustration he experienced trying to build CashDash convinced him to change focus. As he said, “I spent eight months working on developing an app in a disconnected fashion because there was no fintech platform available. We needed a platform that did more than collect payments. We built from scratch a platform that also did compliance, know your customer, and moving money in and out of bank accounts. We were building something like AWS for fintech.”
PayPal’s B2B Payments Business
PayPal is aiming to boost its B2B payments market presence by expanding how businesses can transact with consumers using its Venmo peer-to-peer payments service and through a contactless payment service for businesses.
PayPal CFO John Rainey told investors in July that Venmo users began this spring “to evolve an entirely new set of use cases on the platform, which has really ‘immigrated its relevance and importance’ to the user base,” according to PYMNTS.
Rainey expects Venmo to enable more eCommerce. This includes adding direct deposit, an increase in businesses taking payments through the platform, the recent launch of a Venmo card, and continuing efforts “around expanding the Pay with Venmo in an eCommerce setting,” reported PYMNTS.
PayPal also began rolling out a QR code-based touchless payment solution for businesses. This service is being marketed to small and micro merchants in 28 countries. PayPal is “also seeing considerable penetration of the [QR code-based service] among more than 100 large U.S. and European enterprise merchants,” Schulman told investors in July.
Why Rapyd Wins And Where It’s Headed
Rapyd is winning business from incumbents because of the breadth of its services and its global presence.
As Shtilman told me, “There are so many companies trying to do what we do — Worldpay WP , Ingenico. We win against competitors because of our global reach, single API, payment, collection, disburse for hundreds of companies around the world — Brazil, Indonesia, the UK and US. We cover the regulatory umbrella in all markets. We have a high success rate of payment settlement and a compliance platform that is fully digitized — which removes an impediment to completing a transaction.”
Rapyd is in no hurry to sell out. “Will we IPO? We want to go the public route though we have been approached to sell the company. We don’t need to sell and we want to scale the business,” he said.
If PayPal reports faster than expected growth and raises guidance next week, its shares will likely rise. If not, maybe Rapyd could boost its growth.