Every day, Americans spend about $1.2 billion online.
That figure has roughly doubled in the past five years, according to the Department of Commerce, and it’s likely to double again in the next five as the internet continues to devour traditional retail. So it might come as a surprise that the web’s financial infrastructure is old and slow.
For years, the explosive growth of e-commerce has outpaced the underlying technology; companies wanting to set up shop have had to go to a bank, a payment processor, and “gateways” that handle connections between the two. This takes weeks, lots of people, and fee after fee. Much of the software that processes the transactions is decades old, and the more modern bits are written by banks, credit card companies, and financial middlemen, none of whom are exactly winning hackathons for elegant coding.
In 2010, Patrick and John Collison, brothers from rural Ireland, began to debug this process. Their company, Stripe Inc., built software that businesses could plug into websites and apps to instantly connect with credit card and banking systems and receive payments.
The product was a hit with Silicon Valley startups. Businesses such as Lyft, Facebook, DoorDash, and thousands that aspired to be like them turned Stripe into the financial backbone of their operations.
The company now handles tens of billions of dollars in internet transactions annually, making money by charging a small fee on each one. Half of Americans who bought something online in the past year did so, probably unknowingly, via Stripe. This has given it a $9.2 billion valuation, several times larger than those of its nearest competitors, and made Patrick, 28, and John, 26, two of the world’s youngest billionaires.
But payments is a brutal battleground. Countless startups, big banks, and companies such as Google Inc. and Apple Inc. are trying to grab what pennies they can with their own systems. This competition, combined with the industry’s minuscule profit margins, has left pundits asking whether Stripe’s lofty appraisal makes sense. “We’re a ways out before they can satisfy that valuation,” says Brendan Miller, an analyst at Forrester Research Inc. “They’re valued higher than a lot of players who have been around for years with thousands of employees, tremendously more volume, and clients all over the world.”
One way to justify the number: Stripe’s new partnership with Amazon. com Inc., the largest and most sought-after customer on the internet. Over the past couple of weeks, Stripe began handling a large, though undisclosed, portion of Amazon’s transactions. Neither company will address the scope of the deal—which was only revealed by Stripe’s addition of Amazon’s logo to its website—but it could help Stripe greatly increase its transaction volume. (Amazon had no comment.)
Seven years in, however, Stripe’s mission is less to send more books, vacuums, and grooming kits into the world than to “increase the GDP of the internet,” Patrick says. To do this, the company is beginning to move beyond payments by writing software that helps companies retool the way they incorporate, pay workers, and detect fraud. It’s part of an ambitious bid to revamp how online business has been conducted for 20 years and to give anyone with a bright idea a chance to compete. “We think giving two people in a garage the same infrastructure as a 100,000-person corporation—the aggregate effects of that will be really good,” Patrick says.
The Collison brothers were born in Limerick and moved around as kids before settling in Dromineer, an idyllic village in central Ireland. Their parents had scientific backgrounds—father Denis in electrical engineering, mother Lily in microbiology—then became entrepreneurs. Denis ran a 24-bedroom hotel on the shore of Lough Derg, while Lily operated a corporate training company from the family’s home. “Entrepreneur is a long, fancy French word, but it didn’t seem like something you aspire to,” Patrick says. “It seemed normal, because whatever your parents do seems normal.”
The boys went to a school with fewer than 20 kids per grade. When bored in class, Patrick read books. “I would line up the angles so I was hidden from the teacher’s view,” he says, adding that he found out years later that an enlightened principal had instructed teachers to allow it.
Patrick spent his last year studying at home so he could take the required standardized tests early and graduate at 16. (“Surely the smartest redhead in Ireland,” read one headline about 16-year-old Patrick being named Young Scientist of the Year for developing a programming language and artificial intelligence system.) He condensed what’s normally a two-year test-taking process into a 20-day period in which he aced 30 exams. Then he ran a marathon to celebrate.
Patrick enrolled at MIT in 2006 based on an SAT he took at 13; John followed him to America, attending Harvard a couple of years later. In their spare time, they developed iPhone apps. One of their first hits was an $8 version of Wikipedia that people could search offline—the brothers stripped out superfluous coding so the whole thing could fit in a downloadable file. They also helped create a way to manage EBay auctions and sold that company, Auctomatic Inc., for $5 million in 2008.
The brothers dropped out of college and in late 2009 started noodling on the idea that would become Stripe. They set up an office in Palo Alto, which happened to be across the street from the old digs of transaction titan PayPal Inc. The Collisons would ride bikes to the office, sweating after trying to set personal bests. Part of this was competitiveness, and part of it was being too cheap to buy a car, says Mike Moritz, one of PayPal’s first investors. “They have the advantage of coming to California without being tainted and polluted by what’s in the water supply and air of Silicon Valley,” says Moritz, chairman of Sequoia Capital and a Stripe board member. “They’re more humble and well-rounded. There’s such an improbability to their story—that these brothers from a little village would come to build what could well be one of the most important companies on the internet.”
Stripe made its debut in 2011 with Patrick as chief executive officer and John as president. The Collisons had spent two years testing their service and forming relationships with banks, credit card companies, and regulators so customers wouldn’t have to. With Stripe, all a startup had to do was add seven lines of code to its site to handle payments: What once took weeks was now a cut-and-paste job. Silicon Valley coders spread word of this elegant new architecture.
The genius of Stripe’s approach was twofold. Typically, finance managers decided what payment system to use. But Stripe appealed to developers, helping to solidify its importance in a startup’s early days. And its technology was crafted for the modern internet’s newfangled business models: Marketplace builders such as Shopify needed to divvy up payments between vendors and consumers, and sharing-economy upstarts such as Lyft had contractors and riders to move money between.
Setting up an accounting platform to pay Lyft drivers and charge millions of customers would have taken six months to build. “You have to keep track of who’s earning what, and the schedule they should be paid out on, and then you get into weird regulatory stuff,” John says. “The work that all these businesses had to do to manage payments was a shared toil.
We could take on much more of that and leave running the business to them.”
Although startups appreciated what Stripe was doing, most potential investors did not. How was a small group of young engineers going to alter the internet’s financial structure? Hadn’t they heard of PayPal? Ironically, it was Moritz and PayPal co-founders Peter Thiel and Elon Musk who wanted in. They got that its technology hadn’t kept pace. “The propeller of the good ship PayPal was pretty encrusted, and a lot of barnacles had formed on the hull since we invested in the company more than a decade earlier,” Moritz says. “The observation that accepting payments was still too difficult rang very true.”
Today, Stripe is the financial engine for more than 100,000 businesses. It stores key financial information such as credit card numbers, deals with fraud, and adds support for new services such as Apple Pay as they arise. Stripe charges a 2.9 percent fee on credit card payments in exchange for its services, though the fee can be lowered with higher volumes. Stripe won’t disclose the number of transactions it processes, but analysts estimate it’s getting close to handling $50 billion in commerce annually, which would translate to about $1.5 billion in revenue. Stripe’s profit is what’s left over after banks charge it fees for their services. Generally, banks can take as much as 2.5 percent, but Patrick insists that Stripe has better margins than people assume, without providing further clarity.
The low margins point to an industry adage: There’s no money in payments. Stripe is in a vicious universe dominated by banks and credit card companies and larded with regulations. Still, it’s in competition to own nothing less than the flow of global trade, which is why there’s no shortage of participants.
Stripe competes most directly with Braintree Payment Solutions LLC, a subsidiary of PayPal (Moritz, Musk, and Thiel sold PayPal to EBay in 2002), and the Dutch company Adyen B.V.—older rivals that teamed up with name brands Netflix, Airbnb, and Uber Technologies, which provide massive transaction volumes. Meanwhile, Square Inc. has focused on processing in-person sales at retailers, Google and Apple have concentrated on smartphones, and companies such as Alibaba Group Holding Inc. have bespoke platforms. Old-guard payment processors—Chase Paymentech Solutions LLC, First Data Corp.—which contract with large, traditional retailers, have been trying to modernize their technology.
Stripe continues to attract startups. It intends to be behind the next Uber or Airbnb, to cash in on its meteoric growth. “If you think about the broad trajectory of the internet, most of the breakout successes are still to come,” Patrick says. But Stripe is also trying to make deals with Target Corp., Under Armour Inc., and other merchants to snag money available outside the startup scene, partnerships made more possible by the trust Amazon is showing.
In 2016, Stripe moved into offices next door to AT&T Park in San Francisco’s startup-heavy SoMa district. The previous tenant, file-sharing company Dropbox Inc., had tricked out the space with a bar, a music recording studio, a Lego room, and sofa swings. The Collisons got rid of all that. The kitchen, where Dropbox employees dined on individually plated meals, is now a standard cafeteria chow line. “It’s slow and indulgent to wait for food,” Patrick says.
On a spring day, pop music plays in the white-orchid-lined lobby. Coffee tables are layered with eclectic reading material including the Paris Review and the Twelve Tomorrows sci-fi anthology. There’s an open floor plan—of course—and workers change desks every few months to meet new people. An algorithm will select a lunch buddy for you to dine with at communal benches. A placard on the bathroom door reads: “We believe that gender is non-binary. Please use the restroom that feels most comfortable to you.”
Patrick’s desk is covered in books. There’s a copy of The Dream Machine, about J.C.R. Licklider, the technologist who conceptualized and funded the early internet. The volume was out of print, but Patrick loves it so much he bought the rights and paid to publish hundreds of copies for employees and guests.
The wallpaper on his computer displays a countdown clock for his life: He has 52 years and a few days left. “This is a very coarse estimate, but it’s a reminder that you get old quickly,” he says, a touch of gray now in his red hair. “When you talk to people who are old, some wish they had enjoyed themselves more, but not many wish they had wasted more time.”
The brothers share a love for books and an apartment. They describe things in computing lingo. Patrick explains their lack of pop culture knowledge, saying: “It’s not that I don’t enjoy TV. If I had infinite time, I would watch it. This might be the entirely wrong optimization.” On weekends, John pays for a Stanford student to tutor him in law, and Patrick has a physics tutor. Conversations with them tend to move from Turkish politics to San Francisco’s water supply to the joys of aviation (they’re pilots).
When they’re not flying, they’re running and posting their times on Strava, a social network for people who like to brag about exercising. During company runs, Patrick lags behind to hang with the slowest person. Sometimes, John hands out pancake bundles at the end of early-morning jogs.
Three years ago, Stripe had 80 employees. Now it has 750. The company continues to try to cultivate its enlightened reputation among developers. Recently it hired Susan Fowler, whose blog alleging a corporate culture of sexual harassment at Uber set off an internal investigation. (Ultimately, CEO Travis Kalanick resigned.) At Stripe, Fowler oversees a quarterly publication, Increment, that collects stories on how engineers at other companies solved problems. Stripe also acquired Indie Hackers, a site that specializes in case studies about apps and software tools.
The Collisons’ plan is to bundle new tools into the core product to make that 2.9 percent fee seem ever-more reasonable. One feature, Radar, is a fraud-detection system. Stripe uses AI software to analyze payments on its network and identify suspect activity. By looking at such a large data set, Stripe says it can spot patterns better than a single company reviewing its own transactions. Radar comes free, but Stripe wants to find ways to charge monthly fees for add-ons, such as customer support for larger clients. The goal is for this side of the business to look more like a traditional software company, with services helping high-profit payments roll in month after month.
In May, Patrick went on a five-day tour of Israel to meet with investors and young entrepreneurs and tout these products. Much of the trip felt like he was still in Silicon Valley: At Google’s Tel Aviv office, he talked to startup founders amid “Tech It Easy” posters and potted plants with stickers reading “You are outstanding!”
Midway through the trip, he went to Ramallah, in the West Bank. About 50 people were at the offices of Leaders, a Palestinian organization that runs the region’s only technology park. The midafternoon call to prayer had just gone out, and a few men smoked on the balcony of the third-floor conference room that overlooked tan buildings, fields strewn with garbage and rocks, and a shepherd goading sheep. Patrick hopped up on a stool to address the crowd, saying, “I unfortunately don’t speak Arabic,” and apologizing for his rapid-fire brogue.
Much of the talk centered on Atlas, Stripe’s year-old service. For $500, a business can incorporate in Delaware, get a taxpayer number and U.S. bank account, and receive legal and tax advice on forming a company. Typically, this would require months of work, visits to the U.S., and lawyers. As it did with payments, Stripe simplified the process to a few clicks. A large number of Atlas customers are U.S. companies that want a quicker way to get up and running. But the majority of its clients are overseas, where the service helps with credibility, lower fees, and access to American customers and venture capital.
In Ramallah, entrepreneurs trying to build tech companies have had to contend with travel restrictions, a 2G cellular network, and poor access to investors. Odeh Quraan, 30, one of the Leaders attendees, runs Mostawda Inc., a Middle Eastern version of Etsy Inc. that links artisans and consumers from Morocco to Oman. Quraan uses Stripe to manage cross-border payments and help online merchants fill stores with hijabs, labneh, and mosaics. He turned to Atlas to incorporate and is trying to attract foreign venture capital. “When I found Stripe, it seemed unbelievable,” Quraan says.
During his talk, Patrick explained to Quraan and the others that he could identify with feelings of isolation because of his upbringing in rural Ireland. “There is that sense of comparative inferiority,” he says. “You are clearly much less significant than the bigger forces around you.” Audience members told him they were set to deliver a petition with more than 100,000 signatures to PayPal chiding the company for allowing Israeli settlers to use the service but not Palestinians. Patrick countered that Stripe wants to expand its business in Palestine and anywhere else entrepreneurs need help, adding, “We are drawn by places that the rest of the world tends to underestimate.”
Bloomberg - Ashlee Vance
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