Stripe’s Path to Become Infrastructure

It’s a good place to be an infrastructure provider. It’s even better to have the potential to become a generally relied-upon infrastructure provider. Particularly if investors accredit that potential to you.

That’s the case for Stripe Inc. which just raised a new funding round at almost twice the valuation of its last round, according to the New York Times:

Stripe Inc., a start-up that offers software and services that process payments for businesses, has raised another round of private funding that values the company at just under $9.2 billion, according the company’s investors.

That valuation is nearly double what Stripe was worth nearly a year and a half ago.

To me, the key quote in the article is from Hemant Taneja, a managing director at General Catalyst Partners:

“Stripe’s momentum as the underlying platform for online commerce is just accelerating when you think about the fact that less than 10 percent or so of commerce is online today,” Mr. Taneja said. “Stripe has been widely misunderstood as a low-margin payments company.”

That’s certainly looks like upside. Then again: Will the other 90 percent follow?

It’s the internet’s tendency to create winner-takes-all markets. Every vendor who isn’t online today (and who isn’t bound to physical retail; e.g. hot beverages) has essentially the following choices:

  1. Lose his/her business to online vendors (Amazon)
  2. Start selling on an established platform (Amazon)
  3. Start his/her own online business

Of course the Amazon brackets are an oversimplification for two reasons: a) there are other alternatives and b) commerce isn’t only retail/the selling of physical goods in b2c environments. While the former is basically irrelevant, the second might be rather important for Stripe. I’ll get to that in a second.

Looking at the three scenarios, the majority of Taneja’s 90 percent should likely pick options 1. or 2., particularly when selling goods. It’s simply not even worth trying to compete with Amazon except when you can offer a way-superior customer experience (some markets like fashion might provide that opportunity). In most cases Amazon and its gigantic advantage in both users and infrastructure simply renders option 3. Mu. Instead, a sound heuristic for 2016/17 is: If you have something to sell, do so on Amazon.

So much for the retail/physical goods share of the 90%. It isn’t Stripe’s playing field. But as I said earlier, there’s more than b2c physical goods commerce, namely:

  • b2b goods (raw materials, components)
  • services (b2b, b2c)

The former is certainly not Amazon’s turf (except maybe office supplies). But it’s a rather specialized business and I’m not positive that Stripe is going to play an important role there, at least short-term. Thus remains the service business.

And that’s where Stripe needs to win. But it’s also a varied and volatile environment.

Services can roughly be segmented into traditional, physical b2c services (e.g. barbers, tailors etc.), professional services and online services (b2b and b2c). Let’s quickly go through them from Stripe’s perspective:

In theory, oldschool traditional b2c suppliers could use Stripe for in-store payments (not explicitly in Stripes portfolio as of today). Otherwise, they are not all that interesting for Stripe. What is really interesting is the new breed of suppliers that increasingly rely on aggregators à la Taskrabbit to reach clients. For stripe, those aggregators are both opportunity and risk. The winner in this market (or rather: those markets. Geography and profession play a much bigger role in traditional services than in shopping) isn’t known yet. So the winner(s) might likely be among Stripe’s (future) clients. On the other hand: Once there is a winner, there is no guarantee that Stripe will remain the payment provider of choice beyond a certain scale. Stripe’s major selling argument is cost-effectiveness because it takes away the pain of building and maintaining a secure payment processing service. This benefit might be inversely proportional to size.

A similar logic applies to professional services. Except that some of them face the additional thread of automation (e.g. low level legal services). Since traditional providers are probably less likely to use Stripe and because client’s today pay via bills anyway, I think the opportunity here is marginal.

This leads to online services. They are at the core of Stripe’s business anyway. Both, b2b and b2c services (including media), which do not yet exist are where Stripe’s real potential lies. New companies in need of a solution for payments should take a look at Stripe. And once a solution is implemented, it likely remains in place. But the same scale-related issue from above applies. In an ideal world for Stripe there is a healthy SME sector of online services. Yet: The internet’s tendency to create winner-takes-all markets.

Of course, reality is more nuanced than a general statement like this. As long as new solutions emerge, there will be a market for Stripe. Some of those solutions will be better than what incumbents offer and find their user base. Also, my objection that native solutions might be more cost effective for big companies can be circumvented by offering better deals to them.

Be that as it may: Stripe’s biggest potential aren’t the 90% of today’s commerce which happen offline. It’s becoming the infrastructure for future online services¹. That’s not to take away from its upside; it’s still huge. But the path to realize it is certainly not straight-forward and highly dependent on the broader market structure.

¹ Again: Which will aggregate many of today’s offline services. But that’s an important distinction from today’s offline services will turn into online services. The latter scenario would be perfect for stripe; the former not necessarily so.

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