Stripe: Not Just Your Friendly Neighbourhood PayFac, But A Powerful Platform For Platforms

14 min readApr 11, 2021

What the heck is Stripe?

In two words, a rocket ship 🚀. The company’s valuation has almost tripled in less than a year to a whopping USD$95 billion with its latest funding round, making it the most valuable U.S. startup, did I mention it is still private? The online payments processing company raised USD$600 million to fund European expansion, outlined in a Stripe statement.

Stripe was founded in 2010 by two Irish siblings: then 22-year-old Patrick Collison and younger brother John, 20, positioning itself as the builder of economic infrastructure for the internet — launching their payfac flagship product in 2011. Priding themselves on being the easiest payfac on the internet, famously starting out as the payfac only requiring seven-lines of code to implement. A tale which now speaks to Stripe’s strongest moats: products that are developer-centric and down-right simple.

Chances are you have bought something from one of your favourite shops or apps that was powered by a Stripe solution…

90% of US adults have bought from businesses powered by Stripe. (Source: Stripe)

So what does it mean to be a payfac? Once again Stripe does a pretty darn good job of simplifying (Demystifying payfacs by Stripe), but let me pull out the best parts…

Traditional payfac solutions require significant time and financial investment, and limit platforms’ revenue opportunities to online card payments.

The Stripe payfac solution is technology-driven and designed to help platforms fully embed payments and additional financial services into their software. It helps platforms quickly enter the market, keep setup costs low, and grow their monetization potential.

Platforms like Lightspeed and Shopify use Stripe to fully whitelabel and embed payments, and offer added value to customers like point-of-sale payments, card issuing programs, fraud solutions, subscriptions, and financing. Building on Stripe enables platforms to provide customized payments experiences for their customers and monetize a host of adjacent products and financial services.

Stripe’s solution is API-first and lets platforms design the best experience for their customers. Platforms get the ability to:

Fully customize the user experience or leverage prebuilt UI components
Set payout timing
Set pricing and fees
Manage complex money movement
Integrate and unify financial reporting
Scale the business globally without having to establish local bank accounts and company entities in each market
Offer new services to customers like point-of-sale payments, invoicing, issuing payment cards, subscriptions, and lending.

The Stripe Platform For Platforms

But Stripe is way more than just a product provider to platforms. They have since grown into a platform behemoth that secretly powers and facilitates more than you would guess.

For example, Mark Carney, former governor of both the Bank of England and Bank of Canada, joined Stripe’s board last month. Why the addition? Stripe is making a very sneaky push into BaaS or Banking-as-a-Service to provide embedded finance solutions, announcing Stripe Treasury last December, an API that lets users embed financial services into their marketplace or platform. With a single integration, enabling customers to hold funds, pay bills, earn interest, and manage cash flow (Stripe Treasury). Who is the beta, and initial user of this software? Shopify. Now Shopify merchants can create bank accounts with Shopify, wild.

It looks something like this …

Merchants → Shopify Balance→ Stripe API ←Partner Banks, Goldman Sachs

Or how about Stripe Capital? Starting out as a simple funding program for high-growth customers of Stripe, but quickly evolving into much more. Stripe Capital 2.0 if you will, provides platforms with an end-to-end lending API that enables them to offer access to fast and flexible financing to help their customers grow their businesses. Notice the subtle switch? Check out the different Stripe Capital hyperlinks above, or note the tweet below and the *your*.

Quick tangent: The below tweet is also an indication of Stripe’s GTM strategy. It is intentionally subtle. They want to be the invisible power behind major platforms, when they launch a new product or functionality its done so quietly, they don’t scream it from a mountain top. Rather, collect share-of-wallet from internal customers and then external customer capture. In this way, they are able to gobble-up more and more market share. Really sneaky, and really effective

Provider of Product → Platform Enabler

Here lies their vision, outside of increasing the GDP of the internet, to enable all companies to do business online — in true platform form. With that being said, we can turn our attention to the purpose of this article:

How can Stripe Protect and Expand their platform ambitions?

It is important to first understand how platforms evolve using the below Platform Evolution Framework (Section4):

The first three phases are Inception, Scaling and Monetization — which at a high-level are about infant platform creation. In these stages platforms are still in infancy and are just learning to walk, if you will. Let’s step into each one.

Inception

A nice rule of thumb: If you observe inefficiencies, fragmentation, or a trust deficit between two markets, there may be an opportunity for a platform introduction. Leading platforms tackle big problems with total addressable markets (TAM) large enough to fuel external value creation.

Remember one of Stripe’s competitive moats? Simple and easy to implement. In the beginning, the brothers saw a need to provide complex solutions wrapped up in easy to implement APIs. And, Stripe was born.

In general, there are 4 key steps to follow when a platform is created:

Understand the issue you are solving, and identify the key pain points. Taking a look at any given market — are there inefficiencies, friction points in the customer journey, is it fragmented, or are there trust deficiencies between the two sides?
Identify & size the two sides that are being connected. Are there any under-appreciated assets or underutilized resources that can be deployed? What is the value of each transaction that your platform will facilitate (this will help prove out a TAM)?
Ensure the platform’s unique value proposition or UVP addresses validated pain points. Is is trust? optionality? convenience?
Design the interactions that make the platform successful. The buyer and the seller, buyer and platform, seller and platform. How can we make these interactions seamless, scaleable and safe?

Stripe’s initial creation was really a vertical or linear digital product play, providing a best-in class payfac to companies looking to accept payments online. If we take a look at their current product mix, aspirations and glance at the above 4 steps — we can start to see how they are rotating horizontally into a platform of platform.

Vertical Product Provider to Horizontal Platform

Scaling

At the roots, the value of a platform is that buyers and sellers create value for one another. Hence, the chicken-or-egg problem: how do you get one side on your new platform, without the other? It is critical to focus on activating one side of the market first. To kickstart scaling, most platforms need to artificially inject liquidity through seeding or subsidy strategies.

In general, there are 4 key steps to follow when scaling a platform:

Identify which side to focus on. Transactional platforms onboard sellers first; Technology platforms onboard the end-users (buyers).
Inject liquidity into the platform. Seeding is one-of-two ways, temporarily incentivizing one side to join (think ride bonuses for Lyft drivers). The second, Subsidizing, placing promotions or discounts to end-users, often the most price-sensitive (think ride discounts for Lyft riders).
Growing the other side. Once one side has been acquired or grown, or the supply or demand has been generated, it’s now time to bring on the other side to achieve that critical mass.
Avoiding pitfalls or growing pains. Failing to achieve defendable critical mass, over-subsidization, or logistical nightmares will crack your platform.

For Stripe, there was almost little need to inject liquidity, rather they already have access to platforms from their origin of being a product provider. Outside of traditional platform companies who are created for the sole purpose of being a platform — think Uber & Lyft, it is a lot easier when you start as a product company first, you already have access to a customer base!

Monetization

Winning platforms know when it’s time to hit the brakes on the infinite scaling loops (basically compounding network effects), and prioritize monetization. Platforms have a handful of viable options to monetize their customers: transaction fees, subscription fees, a freemium/premium model, advertising, or fees for complementary products and services. No matter which monetization strategy you choose, it needs to be simple, sustainable, and keep customer acquisition costs at bay. One thing to note is that you can mix-and-match with, or bundle monetization strategies. Uber, as you may guess, monetizes with transactions but they also introduced subscriptions like Uber Pass.

In general, there are 5 platform monetization strategies:

Transaction Fees — think DoorDash
Subscription Models — think Adobe
Freemium & Premium Access — think Spotify
Advertising — think Facebook
Complimentary Products & Services — think Salesforce Training

Stripe’s pricing is interesting. They are very much Transactional and have custom pricing strategies based on volume, size and ad-hoc needs but below is particularly compelling — Businesses on the Stripe platform get access to 100+ features that make doing business online easier and scaleable.

What’s in it for Stripe? A piece of each transaction. By enabling business to be more effective and well…sell more, they are essentially creating a transactional pricing growth loop.

I tried to highlight the loop with the diagram above, hope it helps. Let’s call the top diagram, pre-Stripe. Pre-Stripe, Platforms were limited in their scalability and access to customers. Now, post-Stripe, Platforms are incentivized to add to their rolodex of Stripe products on their Stripe Platform, it increases their Total Platform Income by unlocking more customer transactions. And, as they continue to add to their products and their transaction volume subsequently increases, as does Stripe’s Total Transactional Income.

What’s Next?

Now that we have stepped-into each of the three infancy or creation phases: Inception, Scaling and Monetization. The end product or realization should be the creation of a Platform that functions like below — The Platform Model (Section4).

Platforms generate enormous economic value. Without owning fixed assets, platforms are more efficient, resilient and their network effects make them tough to disrupt. Technology platforms in particular, like Stripe, facilitate bits (digital interactions, transactions) over atoms (physical, regionalized interactions, think DoorDash), and can be extremely powerful.

After the creation phases, we can now finally move onto Protection and Expansion — the two go hand-in-hand. And, how Stripe can protect itself going forward.

Protection

Platform companies are the ultimate disruptors. Increasing multihoming costs, preventing disintermediation, adapting your rules of engagement to promote trust, and other defensive strategies fortify your platform against new entrants. Platforms are most vulnerable to multihoming, or when users participate in multiple platforms with the same service (think Uber and Lyft). A lack of rules of engagement to promote trust and transparency can also be particularly costly.

Let’s see if there are any issues with Stripe:

Switching Costs

How costly is it for Stripe customers to switch to another platform? An example in social costs, think about leaving Apple’s ecosystem.. no more shiny blue iMessage, hello ugly green bubble.

Issue: Going back to the monetization and pricing strategy of Stripe, a transactional pricing strategy is fantastic when large volumes are involved but they lack stickiness. Subscription pricing models have swept SaaS’s — major reason? It is really a zero-sum game. As a customer, I now have to pay multiple months of use and really don’t have any other choices. As an aside, I wonder if subscription pricing increase usage — I bought a year-long subscription so I better use it consistently for a year? As a user of Stripe I stop paying for the service when I want to. This is a risk.

Multihoming Costs

Multihoming is when customers use more than one similar platform, think DoorDash and Uber Eats, Uber and Lyft. How do we make this more difficult? One way could be exclusive offers, Cactus Club only delivers on DoorDash, Spiderman is only on the Playstation network.

No Issue: Stripe’s most effective protective strategy is multihoming. We know that Stripe was successful from the very beginning by being the simplest payfac out there — with just seven lines of code companies were able to implement a payment solution. It was so ridiculously intuitive and easy that companies really didn’t need to look else where. It is this exclusivity by simplicity that Stripe needs to continue as they expand their operations. If they can repeatedly execute their vision with this, their strongest competitive moat & core competency in mind, then there is no need to worry.

This speaks to the importance of multihoming. Platforms are valuable because of these great network effects — network effects are made from volume on both sides. But, when either end continue switching to a new “home” or provider these effects are eroded and thus the platform’s growth is halted. And, to tie in the past phases, if Stripe can fortify multihoming, they won’t need to continue subsidies or seeding programs, and can finally reallocate this budget to growth.

Prevent Disintermediation

Don’t allow both sides to interact and create your value outside of your platform. Ever wonder why AirBnB hides certain text? It has an extensive AI network that hides any type of indicative text between host and guest that would lead to outside deal-making.

Issue: This isn’t really an issue more an observation. The risk of being a platform for platforms is that Stripe is servicing well capitalized business. Businesses that may one day wake-up and use their vast resources to create the platform’s value on their own, in house or in partnership with the “other side.”

Platform Innovation

This one is simple, make sure the offering is innovative enough to appeal to the current and future needs of users.

No Issue: Stripe continues to be a market-leader in solutions and innovative offerings that enable their customers and platforms to grow.

Avoid Platform Envelopment

Also known as, being gobbled up, don’t allow an end of your platform to be gobbled up by competitions.

Issue: Again, not really an issue more an observation. With their recent funding round, there is little chance or scenario that they would be gobbled-up or SPAC’d (might have made that word up). However, with the rise of Tech SPAC deals in today’s age, you never know. There may also be reputational risk if they merge or if they gobble-up a competitor.

Adapt Rules of Engagement

Ensure proper safety, trust, regulatory requirements are being met as your platform grows and evolves.

No Issue: From the get-go Stripe is very transparent with their fee structure and boast great reviews of safety and usability from some of the world’s top business.

Protection Recommendations Based on Issues

I’m not saying Reddit is r/reputable but after doing some quick research below really does sum up my main point of concern and recommendation.

Let’s go over what we know: We know that their pricing strategy isn’t entirely sticky and is transactional; they have multihoming moats based on their exclusivity by simplicity; their core business and cash cow is their payfac which could be commoditized and thus subject to cost-competition, and lastly many SMB’s can’t afford Stripe.

If customers start to churn now, Stripe won’t be able to realize their full platform for platform vision. Right now, they are in the fortunate position of…

unsticky pricing model (low switching cost) < sticky value proposition of exclusivity by simplicity (high multihoming moat)

My recommendation is to conduct a pricing stress test. Understand how sensitive Stripe customers are to price changes, how much customer attrition is based on their fee structure, what segment has the highest attrition, and ultimately is the pricing structure worth changing? Understanding how sensitive their customers are to the above average fee structure will help them plan out their future growth.

Tactically, this isn’t even hard to do — churn rate and customer retention exercises using languages like SQL are common among tech firms. This is a really fantastic Medium article on how to do just that, click here.

Or, shameless plug alert, check out below:

|Free SQL Trello Resource I created and maintain|

Going Forward

Now that we have some understanding of Stripe’s creation phases, and Protection strategy, we can turn to the fun stuff, Expansion. Of course to be fully exhaustive we would need to do proper analysis, competitive benchmarking etc. if only they had a S-1.

There are 5 ways Stripe can expand:

Geographical. This one is straightforward, can Stripe expand to areas outside of home court? Remember bits vs. atoms: bits can be scaled globally, atoms require regionalized strategies. Stripe will naturally expand to new geographies.
Product. How does Stripe build off of their ecosystem to enhance their offering to existing customers? An example, check that Apple Watch on your wrist. A new product for an existing customer (you).
Customer. How does Stripe broaden their segmentation to target a net-new client base? A new customer, with an existing product.
Capability. Different than Product & Customer. How does Stripe create a new product for a new customer?
Increase Share of Wallet. How does Stripe more efficiently monetize their customers. Think Adobe, once a pay-per-download software, now a rolling-subscription.

The expansionary phase of any platform is really shaped by the previous evolutionary stages. For example, Stripe is successful at protecting their position by a fantastic multihoming strategy of exclusivity by ease-of-use. So a fortified multihoming strategy = an extremely sticky, high customer lifetime value customer base. And, in the near-term it may be a multi-pronged expansionary strategy that looks inward in which Stripe deploys the Product & Share-of-wallet strategies, focusing on existing customers. It is easier to monetize evangelists than net-new customers. Long-term Stripe can deploy outward strategies like Customer or Capability, and due to the nature of the platform, Geographical expansion will almost be a byproduct of the said outward looking expansionary strategies (remember, they are transferring bits not atoms).

Stripe’s aspirational positioning:

So where does Stripe want to go? Well according to the public this is the company now:

“Invisible Tax on Half the Internet” — that is a fair argument. Stripe needs to be careful as they grow so that their costs < perceived value they provide. If we use the headline as an example, Stripe want’s to two things to happen:

They want to touch the entirety of the internet — not just half;
They want to shift away from being known as an overpriced payfac → the provider of internet infrastructure for all (a true democratization)

The diagram below concludes the article well, and highlights their mission:

The interesting thing to note here is that the “Customer Base” is open-ended. For example, let’s look back to Stripe Treasury, Stripe connecting Shopify Merchants to SMB Bank Accounts at Goldman Sachs. In this scenario, we can interchange “customer” for “platform.”

Thanks for reading!

P.S. This article is my capstone project for Section4’s Platform Strategy Sprint.

- Lucas