It Took a $1 Billion IPO for People to See Why Adyen Matters

(Bloomberg) -- For Pieter van der Does and Arnout Schuijff, co-founders of Adyen BV, replacing PayPal Holdings Inc. as EBay Inc.’s payment processor was a major coup. But the Dutch firm’s June 13 share offering on the Euronext stock exchange, announced Tuesday, represents the fulfillment of a decades-long dream.

Van der Does and Schuijff helped establish one of the first online payment processors, Bibit, back in the 1990s dot-com boom. Royal Bank of Scotland acquired it in 2004. But in 2006, Bibit’s founders checked out to form a new venture -- Adyen -- and this time, Van der Does told Bloomberg in a 2016 interview, they had no intention of ever selling out.

By 2017, Adyen was processing in excess of $122 billion in payments for the year, an increase of 61 percent from the year before, and generated $1.2 billion in revenue, according to financial filings. Uber Technologies Inc., Netflix Inc., Spotify Technology SA, and Facebook Inc., are all customers.

On Tuesday, the company announced its intention to go public and generate as much as 947 million euros ($1.1 billion) for existing investors in one of the biggest European fintech IPOs in years, valuing the company at $8.3 billion. It hits as the battle to rule Europe’s payments infrastructure is intensifying to an unprecedented degree.

For years, the systems for processing payments in stores and online have been controlled by big banks, credit card issuers, and a few longstanding IT suppliers. Yet Adyen is part of a new breed of fintech firms challenging this hegemony, and the European Union has embraced this new order as a way to stoke more choices for consumers.

In January, Brussels implemented a law that requires banks across the bloc to open their systems and share customer data with qualified fintechs and other players. In April, the Bank of England granted TransferWise Ltd., a London-based money transfer startup, direct access to its payment system, which means it no longer has to depend on lenders to settle its customers’ transactions. It’s the first non-bank to join the the most exclusive club in British finance.

Adyen’s offering also punctuates a spate of dealmaking in the European fintech scene. In May, PayPal acquired Swedish payments processor iZettle for $2.2 billion. Later this year, Funding Circle Ltd. a London-based peer-to-peer lender, is expected to hold its own IPO that may value the firm at $2.6 billion. Chinese players are now starting to move into Europe’s fintech space: In March, Hong Kong-based Tencent Holdings Ltd. co-led a $160 million funding round in N26 GmbH, a German digital bank.

Entrepreneurs from Berlin to London are buzzing with speculation that more IPOs and deals are coming as the first generation of startups mature and their VC backers eye exits from their investments.

Despite its success so far, Adyen still has some ways to go to catch up with the largest payments firms -- Vantiv, Chase Paymentech and First Data each handle about $1 trillion annually -- but Adyen differs from many of its rivals in a number of ways: Its transaction processing fees are typically lower than those of other young e-commerce oriented payments firms such as Stripe or Square, and it can handle transfers in more currencies and payment types than Chase Paymentech or Vantiv.

Most traditional, large payment processors, such as First Data or Chase Paymentech, compete primarily on price, trying to ring profits from massive volumes, so Adyen took a different approach. It believed merchants would pay slightly more in processing fees if they could obtain higher conversion rates --- the percentage of transactions successfully completed after a customer makes it to a checkout screen.

Adyen gives merchants data that lets them drill down into individual transactions, or see whole swathes of their business in real time. This allows them to spot problems -- such as anti-fraud measures that are too strict -- and adjust them before they lose too much business. According to a report from Forrester Research in 2016, Adyen customers were able to boost overall conversion rates by 1.5 percent.

Brendan Miller, a payments industry analyst for Forrester, said that rivals have been catching up. Vantiv, which acquired Worldpay last year, First Data, PayPal and Stripe, now also offer customers tools similar to Adyen’s to boost successful sales.

But he said that because Adyen has been built on modern cloud-based technology, it’s been able to be more flexible than older rivals such as Chase Paymentech, which is owned by JPMorgan Chase & Co. It’s also been able to serve as a one-stop shop for retailers as they seek to integrate e-commerce and physical stores.

"Retailers and merchants don’t want to have to deal with multiple payments processors in different countries and different banks," Miller said. "Here they can just plug into Adyen and not have to deal with that."

In 2012, the company debuted a point-of-sale terminal that let it serve retail customers in brick-and-mortar stores. But Adyen’s growth in physical payments has not been as strong as in e-commerce, Phil Sealy, principal analyst at ABI research, said.

Olivier Bisserier, the chief financial officer at Booking.com, an Adyen customer, told Bloomberg in 2016 that he liked that Adyen was willing to "think like a tech company" rather than a bank. When Booking.com expanded into Argentina, Adyen helped build its payments processing gateway for that market at a time when larger payments processors were refusing to do so until the travel site could show significant sales volumes from the new geography.

Adyen has received more than $266 million in venture funding to date from significant investors that include Iconiq Capital -- which invests money for Facebook founder Mark Zuckerberg and Twitter founder Jack Dorsey, among others -- and General Atlantic. Index Ventures, the London-based venture capital firm, made an initial $16 million investment into Adyen in 2011, and still owns 16.86 percent of the payments firm. It stands to reap as much as a 1.2-billion-euro payday if Adyen prices at the top of the expected range.

Index declined to comment on Adyen’s IPO plans Tuesday.

In a 2016 interview with Bloomberg, Jan Hammer, a partner at Index, said of Adyen that he was "struck by their long-term vision."

"The size of the project and their level of ambition impressed me," he said. "They wanted to build the next generation payments processor in the cloud across all channels and they’ve stuck with that and done it."

©2018 Bloomberg L.P.