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Today’s Not Boring, the whole thing, is brought to you by... Lithic

Lithic is a modern, developer-first, card issuing and processing solution for innovative startups, fintech companies, and brands. They make issuing cards so much easier than you’d expect.

If you want to join an API-first, NYC-based 💳 🚀 with $100 billion ambitions, they’re hiring:

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Hi friends 👋 , 

Some companies that just feel like they have it. It’s not just growth, although that’s there too. It’s a combination of a bunch of good things happening all at once. 

Lithic is one of those companies. 

Lithic, which is really two fintech companies (one B2C, one B2B) under one roof, has announced $110 million in two rounds of venture funding since May. It passed $1 billion in annual processing volume and quadrupled growth on its API platform in the past eight months. It’s on pace to 2-3x again. That’s the growth-y stuff. 

Then there’s the less tangible stuff. 

Like people. I’ve followed the @regulatorynerd twitter account for a while for his smart takes on fintech from someone who’s been in it, first at Square, then at Stripe. In September, he changed his bio to Privacy.com (it says Lithic now). Or Charlie Kroll, who joined Lithic as CRO after co-founding two fintechs – Ellevest and Andera. And Nikil Konduru, whose measured piece on Banking-as-a-Service Euphoria impressed me last August, when he was a VC at Nyca. He’s at Lithic now, too.  

And customer pull. I’ve talked to two Not Boring Capital companies who are signing with Lithic in the past ten days, and my portfolio’s not that big. A third may sign up, too. 

Then there’s the je ne sais quoi of everyone just agreeing that the company has it. When Yoni Rechtman at Tusk Ventures reached out in June to ask if I wanted to meet a portfolio founder running a “very cool company with a ton of momentum and a really complex model/backstory,” it was a no-brainer yes. After I met with Lithic founder and CEO Bo Jiang, I got the hype, but I wanted to double-check with Mr. Fintech Today, Ian Kar, to confirm. Green light: 

After a few more glowing reviews, we decided to go ahead with a Sponsored Deep Dive, and I asked Bo if Not Boring Capital could invest. So this is my favorite kind of Thursday post: a Sponsored Deep Dive x Investment Memo. 

Since I invested, I’ve started bringing Lithic up in conversation with other founders and investors. Universally, the responses are positive, almost like, “Yeah, duh, that’s a great company.” It’s the same vibe I got when I talked about MainStreet or Ramp a year ago. 

Yoni was right: Lithic has a ton of momentum and just the right amount of complexity for a compelling Not Boring piece. 

Let’s get to it.

Lithic’s New Customer

I’ve been on a bit of a tech essay classics spree recently. There are fundamental concepts about which others have written beautifully that we should all understand if we want to grok what’s going on in the world.

Last week, I dove into two of Tim Urban’s on exponential growth. On Monday, I went deep on Eugene Wei’s Status-as-a-Service. And today, we’re turning to the King: Ben Thompson. 

Thompson has written so many of my favorite pieces in Stratechery. My very first piece when I started writing was about some of my favorites. And right there in my five favorite BT posts and podcasts is one called Amazon’s New Customer (and the follow-up podcast, Valuing Value Chains).

I remember when I first heard that Amazon was buying Whole Foods in 2017. I was on the golf course, and I don’t golf (it was for a friend’s wedding), so it was particularly memorable. I remember that grocery stocks tanked, and that none of us were really sure what Amazon was doing. Ben Thompson did though. 

A year earlier, Thompson had written The Amazon Tax, detailing Amazon’s overarching strategy across e-commerce (Amazon.com) and enterprise (AWS). When Amazon bought Whole Foods, he was ready. He called that they were running the same playbook that they’d run with e-commerce, enterprise, and even logistics. 

I loved that piece because it distilled so much complexity down into an easy-to-understand framework… which we will get to in a little bit. 

I bring that up because Lithic made an Amazonian move recently. If you haven’t heard about the company, that’s OK. It just became Lithic. Before that, it was Privacy.com. 

Privacy.com issues single-use virtual cards to people who want to keep their payment information safe as they buy things across the internet. If hackers breach a site you’ve bought something from and steal all of the credit card information, that’s fine. The Privacy.com card you used there already self-destructed after that one use and you’re on to the next. 

When they started in 2014, single-use virtual cards weren’t a thing. Virtual cards were barely a thing at all. To get the card product off the ground, they worked with i2c, a 20-year-old issuing company. But by 2018, CEO Bo Jiang and team realized that they needed to build their own infrastructure to support the unique needs of their own product. They rebuilt everything from the ground up as a set of issuing primitives.

Turns out, their unique needs weren’t that unique. Scores of modern fintech companies were also looking for a more flexible and modular card issuing API. 

Last year, after a year of beta testing, Privacy.com launched its own Card Issuing API, making the issuing infrastructure it built for itself available to anyone. In May this year, Privacy.com announced a $43 million Series B, led by Bessemer Venture Partners, and that it was rebranding the API-first business to Lithic and moving Privacy.com under the Lithic umbrella. Two weeks ago, the company announced a $60 million Series C led by Stripes (Not Boring Capital invested in this round). 

The Series C brings the company’s total funding to $110 million, with the vast majority announced within the past four months, and its valuation to $800 million. That’s rapid funding, and it matches Lithic’s rapid growth. 

While Privacy.com continues to grow, Lithic is exploding. In just over a year since announcing its Card Issuing API, Lithic is handling ~20x the total payments volume (TPV) that incumbent Marqeta did in its first year with an API (2015). It’s on pace to 2-3x TPV by the end of the year.

When a company pivots its strategy and finds enormous success out of the gate, it’s worth studying. This piece is about Lithic, but it’s also chock-full of lessons on primitives, first and best customers, APIs, market segmentation, growth, and how card payments work. 

Operators, investors, and the fintech-curious should all be able to learn a thing or two from Lithic. We’ll cover: 

• The Anatomy of a Payment

• Privacy.com

• The Amazon Playbook

• Lithic

• The Issuer Landscape

• The Size of the Prize

To understand Lithic’s opportunity, we need to start in the nitty gritty: by understanding how payments work. 

The Anatomy of a Payment

Moving money around is complex. 

We make payments all day, every day. It’s early on the east coast, so I haven’t made one yet this morning, but judging by my credit card statement, I’ll make between three to five payments by the time I go to sleep tonight. Most of us never think about what goes on behind the scenes; we just swipe our card or enter our card details online and trust that the balance will go down in our account and the balance will go up in the account of whoever we’re buying from. 

In between those two events, though, a bunch of stuff happens. In fact, there are at least five layers between the buyer and the merchant. I say “at least,” because many of these layers have multiple parties involved. Finix did a great job of breaking it down in Understanding the Payments Stack. 

Broadly, there are two sides of the transaction, with rails in between:

• Issuing is on the side of the person making the purchase 

• Acquiring is on the side of the seller. 

• Card networks like Visa, MasterCard, and American Express sit in between and connect the two sides. 

When a transaction occurs, each party in the stack talks to the party above and below it to decide in seconds whether to accept payment, and then move money around. 

Here’s how it works: when you swipe a card, it goes from the merchant acquirer to the card network to the issuer processor who decrypts and then approves or denies the transaction. Then the issuing bank pays the acquiring bank, who pays the merchant.

Let’s break it down. 

Card Networks. When you hear about card payments moving over Visa or MasterCard’s “rails,” this is what it’s referring to. It means that they move money from payer to payee, from buyer to merchant. Card networks sit in an important spot in the payments value chain and they have the market caps to prove it. Visa and MasterCard’s market caps are $506 and $363 billion, respectively. They also have all sorts of power; for example, the card networks set the interchange rates, which determine how much the issuing side of the stack makes on transactions.

Acquiring. When you think about the large fintech companies, chances are you’re thinking about the merchant acquiring side of the business. Historically, when you swiped your card at a store, the payment processor gave a thumbs up or thumbs down, then facilitated money moving from the issuing side through the card network and to the acquiring bank, which then sent the money to the merchant. 

Fintech giants like PayPal, Square, Adyen, and Stripe represent a recent addition to the stack called payment facilitators. They either sit on top of the payment processors, or replace the payment processors and work directly with the acquiring bank (see: Stripe + Wells Fargo) to let merchants accept online and digital payments. Stripe has a good overview of “payfacs” here. 

Most of the innovation in payments over the past couple of decades has happened on the acquiring side. For the internet to live up to its promise, online merchants needed to be able to easily accept payment, and PayPal, Square, Adyen, Stripe, and others have built large businesses making that possible. In doing so, they have dramatically expanded the market. It’s no coincidence that Stripe’s mission is to “increase the GDP of the internet.” 

Issuing. On the issuing side, there are two main parties: issuing banks and issuing processors. Issuing banks are banks that issue cards on behalf of the card networks. Issuer processors work with the card network and issuing bank to approve transactions in real-time at the point of sale. Issuer processors -- including incumbents like i2c and TSYS, newer players like Galileo and Marqeta, and Lithic -- don’t issue cards themselves. They work with issuing banks who do.  

Legacy issuer processor giants like TSYS work with big banks who are both issuing banks and own the customer relationship. In this case, the bank has the power. Newer players work with sponsor banks, issuing banks who provide the Bank Identification Number required but don’t own the customer relationship. Marqeta, for example, uses Sutton Bank to issue most of its cards, whereas Lithic can work with any issuing bank its clients use. 

Adding one layer to the stack, issuer processors like Lithic allow neobanks and other non-bank companies to embed financial products into their offering -- “embedded finance” -- adding another player on the issuing side: the client. Together, the client, Lithic, and a sponsor bank perform the function of a card issuer. In this model, the clients have the power and the banks are modularized.

To date, there has been a ton of innovation on the acquiring side. Stripe, Square, PayPal, and Lightspeed are worth over half a trillion dollars combined. They made it possible to enter a traditional credit card, or connect a bank account and pay via ACH, on nearly any website to purchase items. 

There has been less innovation and value creation on the issuing side. But the issuing side is actually where more of the value is captured in the transaction. Check out this chart from Finix:

Whereas the acquiring side takes a 50-100 bps “markup,” and card networks grab ~15 bps on pretty much everything, ~175 bps in each transaction go to the issuing bank and processor in the form of interchange—the lifeblood of fintech. As I wrote in Ramp’s Double-Unicorn Rounds:

Ramp makes money on interchange. Like a normal credit card company, it takes a 1.5%-2.5% fee on transactions (paid by merchants/card networks) when customers spend using the card. Unlike a normal credit card company, it doesn’t reward users with points; it rewards them with better software. Better software drives more usage, which drives more revenue, which drives better software, and so on.

The challenge was: banks like Chase and Bank of America have historically owned the customer relationship and therefore captured most of the value from interchange, leaving little room for issuing-side fintechs. No financial opportunity, no innovation. 

But embedded finance changed that. On the internet, whoever owns the customer holds the power. When tech companies with millions of customers started offering financial products directly to those customers, without needing to go through Chase or Bank of America, they shook loose a ton of interchange to split among the client and the issuer processor. 

Thanks to Marqeta’s recent IPO and corresponding S-1, we have some visibility into how that ~175 bps of interchange is split up in this emerging world order (it’s a little lower than 175 here because debit and prepaid card transactions have lower interchange):

James Ho @jamesjho_

One of the (many) great things from the Marqeta S-1, is the visibility into transaction economics 🥰 80bp for the issuer (e.g. Square, DoorDash) 25bp for the card network 20bp for Marqeta 3bp for the partner bank 😂 Tells you all you need to know :)

May 15th 2021

66 Retweets490 Likes

Lithic exists to help its clients capture their bps and to capture some bps itself for making it easy for any company to issue physical and virtual cards and process transactions. 

Where does the money come from? The merchant ultimately pays the fees for both sides of the transaction, with the ~3% of revenue coming out of gross margins. That 3% on everything funds an entire industry full of unicorns, decacorns, and centacorns.

OK, so now that we understand how a payment works, we can turn our attention to Privacy.com and begin to understand why they needed to build their own infrastructure.

To learn about Privacy.com, The Amazon Playbook, Lithic, Embedded Finance, the Issuing Market, API-First Companies, and the Size of the Payments Prize…

Continue Reading Online

Thanks to Yoni for the introduction, and to Bo and Nikil for demystifying payments!

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Thanks for reading and see you on Monday!

Packy