Bo Jiang: Rebuilding the Issuing Side of Payments

I think you sit in a component of fintech that we haven't seen as much innovation in, which I think is pretty exciting. Before we dive into some of the specifics, in simplest terms, what is Lithic and what do you guys do?

Lithic is a payments infrastructure that helps fintech companies and software companies more broadly issue prepaid debit and credit cards. So Visa, Mastercard, primarily focused in the U.S., and we're largely a developer-focused API offering.

If you assume somebody knows fairly little about the modern financial ecosystem, walk me through how you think about the payment stack from acquiring to issuing. Where have most of the solutions been, and where does the opportunity exist in that stack?

If you take your card to a coffee shop and swipe it or tap it at a terminal, that oftentimes goes from an acquiring processor all the way to one of the card networks: Visa, Mastercard, Amex. And then they often route that over to an issuer processor to respond to the transaction, to check balances, fraud, run those rules, and then the message gets routed back all the way to the acquirer. And it all happens in a matter of seconds. So to you, it's an instant transaction, it seems like. But on the back end, it's going through all these pipes.

If you look at where we as an industry have focused over the past 10, 15 years, I would say that there's been a tremendous amount of innovation on the acquiring side. You've seen really great companies like Square, Stripe, Adyen, Checkout, as well as many smaller but equally exciting fast-growing companies being built on the acquiring side, making it basically easier for SMB merchants, websites, startups, SaaS companies to accept payments. That's been a much-needed area for innovation, but I'd say a lot of the low-hanging fruit in that segment has been pretty picked out.

We focus much more on the issuing side of things, actually exclusively on the issuing side. We provide the technology that actually powers the card and is responding to the transaction and helping companies decide on, "Should I approve, should I reject that transaction in real time?"

So when you look at the landscape on the issuing side, most of the companies that control payment flow were largely built multiple decades ago, some of them before the internet was a thing, and the vast majority of them before the iPhone was invented. And so when you look at the opportunity set, I'm personally biased, but I think there's a lot more room for growth, opportunity, TAM expansion on that issuing side, and replacing that infrastructure that was built 30-plus years ago.

Mastercard, Visa, everybody is familiar with those. It feels like they are the pillars of the payment stack that are basically untouchable. Why do they fill such a central role? And do you think there will ever be a point where it makes sense to innovate at that layer, or does it make the most sense to build up on either side of the transaction?

There's two parts to that answer. First of all, when you look at why these companies are so enduring and why they're such good businesses, that just comes down to the power of being a network. They're very enduring businesses. I think it's just by nature: the network is self-sustaining, it's expanding, they're constantly innovating.

When you look at if it ever makes sense to, if you're top-down, market landscape opportunity, it may feel like there's a massive opportunity there. But if you look at it from the perspective of what's the job to be done, what are you doing better, what's the customer pain that you're solving, it's not that clear to me that there's quite that level of opportunity.

In general, if you look at payments across the world today, it's pretty magical that I can take my credit card and spend it anywhere around the world. And money just, at least from a consumer perspective, moves magically out of my bank account into that of the seller, and it just happens, right? And I also get fantastic purchase protection, rewards, whatever it may be.

I think a lot of the opportunities actually exist outside of card rails. If you've ever tried to send an international wire, it is painful. You have to designate sometimes an intermediary bank, you sometimes have to call the end receiving bank to be like, "Hey, did you get the wire?" Which is kind of daunting if you're wiring or moving a reasonably large amount of money. It's like, "Hey, I feel like we should have solved this, right?" So in my mind, actually, a lot of the opportunity set is around how do we actually convert non-card transactions over to card rails, where the model actually works quite well from a customer perspective.

On the issuing side, you have the client that has a card, the processor, and then the sponsor bank. Where exactly do you guys fit in? Are there partners that you use to satisfy some of these components? And how much of that customer experience are you taking on?

That's spot on. In order to issue a card, basic components you need are obviously a card network partner, a sponsor bank and an issuer processor. Then there's this role of program manager, which can be a fintech company, or it can be the processor, oftentimes, or it can even be the bank. Typically, the role that we play the most is that processor role. So we're the technology that helps process the transactions, helps with the ledgering if needed, interfaces with the card manufacturer, spits out the reporting for the bank, helps with reconciliation. We provide that glue and plumbing layer.

We will, in a limited set of use cases, also play the program manager role. We take on compliance obligations, as well as other oversight obligations. Ultimately, that's the responsibility of the sponsor bank. But sometimes we will play a supporting role in that and be responsible for the operational pieces of that. But as a rule, we only operate at the API layer. So the user experience, the customer service, interfacing with customers, we leave that to the fintech companies. Where we really excel is as that direct-to-the-metal issuer processor for mid-market companies, at least.

On the banking side, when you have the fintech managing that client-facing relationship, do they have a banking partner that they like to use? How does that work?

On the banking side, we, at this point, work with close to a dozen banks. Our primary mode of operation is just as the processor. And so that's the vast majority of those relationships, where we're the processor and we have reporting set up. We have what the bank needs. And if you're a fintech company and you come to us, we can say, "Here are the banks that we work with. We're also happy to work with your bank if you want to bring your own bank. But here's what we have ready to go." One of the benefits of being a processor is it's relatively easy for us to stand up those new banking relationships, because it's oftentimes having reporting, having the third-party due diligence for the bank on hand and ready, and getting integrated is usually a relatively quick process for us.

Without having to cite names, are there new-age banks built to work closely with fintechs that you think highly of, and legacy banks that are harder to work with? What does the sponsor bank ecosystem look like?

It's on a spectrum, right? You have banks that have been in this space for a number of years and have actually really made these deep investments in process, in technology, and streamlining and scaling their offering as a sponsor bank to keep up with enormous scale. And that's really cool to see. These banks have essentially become technology companies. Now, one of the drawbacks is if you don't maintain the investment in the stack, you do run the risk of becoming more of a legacy player. You've got to upgrade your data story, your reporting, how you work with fintechs, right? We're now moving from batch files to real time, and you've got to be able to either ingest APIs or have APIs that ideally we can pipe data to in real time, right? And so I think there's a challenge there. But what's been really heartening for me is some bank partners have really invested over a decade in building good processes that may need an update, but are fundamentally sound.

I think you also see a new category of banks that were acquired for the specific purpose of sponsor banking or partner banking. Those are really, really cool opportunities. I think a number of folks have done that, and we think super highly of the teams there. They're really well positioned. They understand technology and product. And I think in some ways the TAM is big enough, but it is interesting to see: the incumbent folks that are in the space innovate quickly enough, or do the newer folks get distribution fast enough and scale fast enough, right? Personally bullish on both categories.

The third category is you have a lot of these new banks or smaller community banks that are getting into sponsor banking. And I think a lot of them are drawn by the opportunity for diversified revenue, increasing deposits, whatever it may be. I would say that category is more of a mixed bag in my mind. I think if you know what you're doing, you pick the right partners, it is a very lucrative business to be in. But I think the challenge you run into is if you scale up too quickly, you take on too much risk, you risk blowing up your book of business, getting in regulatory hot water, as well as damaging or setting back a bunch of fintech customers who may not be directly responsible even for some of the missteps.

So I think that's one where you just have to be super thoughtful as a fintech company around partner selection. And that's, I would say, the theme of the next couple of quarters or even years in my mind: the importance of that vendor selection or partner selection.

I imagine your customers value having a partner like you, where not only are they not having to build all of the really complicated infrastructure, but there's also a level of expertise. You're working with way more banks than they're ever going to have to evaluate. Is that fair to say?

We definitely play a role in guiding folks towards banks that are the right bank for their use case. Different banks really spike on different aspects. So even risk aside, we do try to matchmake a little bit and say, "This bank does a lot of credit, for example, or this bank does a lot of commercial, this one does a lot of ACH volume," or whatever it may be. We try to guide folks so that there's the right fit and there's expertise at the bank level.

You mentioned TAM expansion. When you act as that processor, are the competitors you're replacing the Fiservs and FISs of the world? How do you fit into that status quo ecosystem?

It's a mix of customers or a mix of other providers. But I would say the use cases that are most exciting for us tend to be these net new use cases. It's not the majority of our revenue, for sure. The majority of our revenue is mid-market, scaled, sophisticated fintech companies that want to have a lot more control over the stack. But what's exciting to us is the ability to lower the barrier to entry in a thoughtful, compliant way and enable net new use cases that couldn't have been built on, let's say, a Fiserv or a TSYS or someone super legacy.

If you take a step back, these companies are built in a previous era where the job to be done was, "I'm XYZ big bank and I want to ship a million pieces of plastic at a really, really efficient, low cost to tons of people around the country," right? We're now in a time and age where a lot more of the innovation is around, "We know you can ship plastic, but what is the innovation on top of the plastic? What is the software and contextual component where you can actually control when this card gets approved, how much money gets loaded on the card in basically real time?"

I think we're just starting to see that unlock happen, where it's these spend management products out there more broadly. They're exciting, not because it's just another card with similar rewards as the status quo, but it's actually embedded in the software. And there's actually workflow innovations that save people time, make companies more efficient. That's the really exciting aspect of this to me, versus, "We're in a zero-sum game of taking volume from someone else and moving bits and bytes around."

Is that unlock a technical limitation, where fintech companies struggle to work with legacy processors, or is there a functional capability you've built that didn't exist before? What was the real unlock in those new use cases?

It's really about the customer type that you're building for, the archetype. There are definitely functionality gaps and costs. Those are probably the two biggest, I'd say. If you're building core processing for top 10 financial services companies or FIs, the time to market, the cost, it's just dramatically different, versus a Series A, B, C, whatever company that's trying to move quickly and build something innovative. You're talking weeks on the startup side, whereas you're talking probably at best multiple years on the FI side.

To speak to the specific product gaps, the biggest shift for us has been the ability to be in the authorization flow. So when you swipe that card at a Starbucks or whatever, a coffee shop, it gets routed to the network. And then we're able to put the fintech company or a software company in that flow to very quickly decide on, "Do we want to accept or reject that transaction?" And to make that really accessible and easy for people is a non-trivial effort. And that, I would say, is something that we've seen from the overwhelming vast majority of our customers is treated effectively as a first-class offering, where you have monitoring, 24/7 uptime, all that stuff. Whereas I think you're starting to see some incumbents try to do that, but it's hard when you're doing massive, massive scale. And most of your customers aren't demanding that.

I really think about it as who's the ideal customer for each company? And for us, it's companies that really are trying to push the boundaries from a technology perspective around what's possible.

I remember the first time I saw demos for things like Divvy or Ramp, where a business could set up a virtual card with a budget for an event or a conference, limit it and lock it. I remember wishing I could get one of those for my personal budget. And then I remember the first time I saw a Privacy.com demo, which was your original product. Walk us through the original vision of the company, how you went through that building journey, and how it's informed where you're focused today.

The story actually starts in 2014. Three co-founders, myself, Jason, David, had basically an idea for building Privacy.com, which we originally conceived as a broad suite of tools to help you stay safe online, hence the name Privacy.com. And we started with a cards product, and, being naive 25-year-olds at the time, we were like, "This is going to take us six months. We'll launch this, and then we'll move on to the next offering in the suite."

Basically, what we discovered in the process was we launched the offering. It took us longer than we expected. And also, as we scaled on a legacy infrastructure provider, even though the product technically worked, it was breaking in really weird ways we didn't anticipate at all. And it was really largely because it was built for this use case of plastic cards in the hands of consumers, relatively static spend controls. Maybe you could update them hourly, or you could cache cards. So fundamentally, that infrastructure just wasn't built for this digital-first use case that we had in mind with Privacy.com, which, to your point, is basically almost like Brex, Ramp or Divvy, except for your personal life.

We basically decided, "We have to rebuild our infrastructure or this company is going to die." Again, being naive 25-year-olds, we thought this would take maybe six or 12 months. Fast forward about five years, which is about how long it ended up taking us really to build our own processing in-house and get it to a reasonable scale. We looked around and realized that we actually have a pretty unique point of view on the market as well as a pretty unique asset opportunity to make a difference.

And so we decided to transform the business and basically pivoted from a roughly 20-person, really lean and mean team to scaling up, raising about $100 million in financing to go after this payments infrastructure opportunity. But this idea and notion that we're going to do things a little bit differently than the folks that had been just doing the same thing effectively for the past 20, 30 years.

I think there is a broad swath of the world that has been built by naive young people, 25-year-olds, who think they can build something in six months but are willing to commit to the four or five years it actually takes to build something impressive. I also love examples where a product almost forced itself into existence. I think you've shared this story before, where one developer reverse-engineered Privacy.com's mobile application to figure out how the API worked. It speaks volumes to the need for something like what Lithic is today. Taking that one step further, how have you thought about your own business model, identifying the value you're creating and trying to capture some of that value?

One thing that really bugged us about legacy providers was, starting out, it was really, really hard to understand the pricing. There would be all sorts of random pricing and fees for things that we didn't have any idea why they were being charged or how to control our cost. So for us, one thing we decided to do differently starting out was, if we're the program manager and we're trying to help companies get started, we're going to go with a really simple pricing that's aligned with the customer.

And so we'll do a percentage share of the interchange. Interchange occurs when you swipe a card; the merchant pays that fee. We participate in a percentage of that transaction alongside the fintech company that's issuing the card. We wanted to just keep it really simple. So it's interchange share, as well as the SaaS fleet fee that's super easy to model.

Now, one learning we had was, as we started moving into the mid-market and into customers that wanted more control, they actually wanted more of that complexity. One thing we've had to do is evolve our pricing model to fit that mid-market customer, where they want the ability to toggle certain fees and decide, "Do I want to pay for this network usage fee or fraud fee or whatever it may be?" Those are the two models we have: one, which is just a straight interchange share, and another that's a more usage-based model. It's a little more complex, but we think hopefully it's still simpler and easier to understand than some of our incumbent competitors.

I think Marqeta has typically had not very many customers, and most of their customers are actually quite large. It sounds like you're enabling the mid-market. Is there a specific strategy around customers of a certain size or volume of spend? How do you think about your ideal customer profile?

We think of our ideal customer as a customer that is trying to build something new and innovative and has that pressure to work with a best-in-class provider that enables them to unlock new use cases. And so that's where our best customers tend to be and where we have the strongest fit. If you're looking for, "I just want someone to do it all for me out of the box in an easy-to-use package that abstracts away everything from me," we tend to not be the best fit for use cases like that.

The work we've done in recent quarters has been really aligning on, "Who are we for?" We're for that customer that cares about control, that cares about scalability, that cares about a long-term partner. That may mean that we work with certain customers later in their lifecycle, where it's totally understandable. You want to launch quickly. You want something that's totally out of the box and abstracts away the compliance, bank relations and all that stuff from you from day one. As you scale, you may find that, "That solution doesn't work for me perfectly." And so for those types of customers, we tend to enter a little bit later, mid-market in the lifecycle. That said, there are use cases where we're willing to help folks get started relatively quickly out of the box. But it's a pretty tightly defined scope of use cases, just given where we're strongest and where we see the market.

How does that translate into traction, whether it's the number of cards you've issued, customers or revenue, whatever you're willing to share?

Our North Star metric is really around transaction volume. And that's a metric that for us, year over year, has continued to grow by triple-digit percentage. You have to take a bit of a portfolio approach, and we've definitely seen consolidation or regretted churn due to the current funding environment. But net-net, year over year, we continue to see really, really robust triple-digit percentage year-over-year growth on the transaction volume side. In part, that's due to just strong growth from our core debit offering, but also new products that we've launched, for example, on the charge card side. And recently, we've launched ACH and accounts, new products just unlocking more and more of the TAM.

You have a really interesting seat in the fintech landscape. When you think about the fintechs that have made card issuing a part of their business, what are the takeaways from the ones that have been most successful? And what advice do you have for folks setting up a program?

I think there's a couple of things. And part of this is probably just selection bias with companies that we tend to work with. But the ones that tend to be the most successful that we've seen tend to have a couple of traits. They really do tend to care about the details, that fine-grained control. Maybe, "I want to have a direct relationship with the bank." Or, "I care about the card design because that's an extension of my brand." That's one thing that we've noticed. The best companies really tend to sweat the details, at the right level. There's a point in time where that just means you're going to be super, super slow to market. And so there's a balance there of balancing time to market plus long-term iteration and commitment to getting product quality right.

Another thing that we've seen is there's still a lot of opportunity in building products that are tightly focused on narrow niches that may on the surface seem a little bit too narrow. But in practice, you can go really deep on and be hyper-verticalized and just basically completely own a category by building the best end-to-end product for that category. I think in some ways, Chime was actually a pretty good example of this early on. They picked a really, really big segment and really built a bespoke offering for that segment. I think the days of, "We're just going to do what Chase does, except for the mass affluent segment," that's a tough proposition.

The very best companies we see have just almost a painfully tight focus on ICP, and that may allow you to innovate on capital requirements or statementing. It may allow you to innovate at the software level to build workflows for that customer. It may allow you to invest in community. But in general, having that super tightly defined voice and who you're for tends to probably more than anything be an indicator of success, in our admittedly limited experience.

Over the next three, four, five years, if you got into the future and saw that Lithic had not been as successful as you would have liked, what do you think the obstacles would be? What keeps you up at night?

One of the toughest challenges is verticalizing the business at the right point in time. A lot of fintech infra companies, us included, started out relatively horizontally focused. We still internally at times think of ourselves as building Lego pieces and building blocks to allow entrepreneurs, operators, companies looking to build something new to put together these Lego pieces. Lends itself to a very horizontal go-to-market approach. And that's been a really good way to scale the business very, very quickly in the first, call it, three years or so.

So we're at a point in time in the company where we're starting to see different amounts of pull and really having to pick our spots in more specific verticals and segmentation, especially as we think about a lot of the folks coming in are more early adopters putting the puzzle pieces together themselves. And as we think about crossing that chasm and going more mainstream, especially in certain verticals, the need to be disciplined about which segments we lean into is becoming more and more apparent, I'd say.

And I think this is something that a lot of fintech infra companies struggle with: "I don't want to turn away business, but at the same time, if I'm not leaning into the right verticals, it feels hard to differentiate, or it feels hard to start that conversation with the customer around education, around use case and product, and how we fit into their business needs."

How does that translate into the key opportunities for you? Is it more of the same, doubling down on what's working? Or do you see step-function changes you have to take on as you get larger?

The short answer is in the near term, it's continuing to double down on the core processing capabilities that we have in the U.S., and continuing to expand the type of data that we offer customers, upping the reliability, and investing in more integrations with more bank partners.

One thing that we are starting to think about is, "What does a more comprehensive solution look like? What are the other pain points that our customers have?" And that can come in a bunch of different sizes and shapes. It could be international; businesses are increasingly global now, we're a largely U.S.-focused infrastructure play. It could be more segments in the U.S. So that is something that very much we're being thoughtful about sequencing. I do think that's one of the biggest risks for us, as we think about, "Focus is super important." At the same time, the industry that we play in, you have to lay some investments quite early on with the expectation that this should yield multi-hundred millions in net revenue in five years, so that you get that nice compounding as the business matures.

You did a lot of the hard work over the course of four or five years to build a product that can compound. As we've gone through this macroeconomic correction, it feels like a lot of fintech companies have been pretty punished in the public markets, and there are business model questions. From the vantage point that you have, what is the area of fintech that you think is really interesting or that you're keeping an eye on?

So many different ways to answer it. Definitely not a good public markets investor, so it's hard to say why fintech valuations are where they are now. I would say the thing that has me the most excited is we've been in this point in time or era where capital was relatively cheap. And because of that, us included, it was possible to build next-generation payments or fintech infra companies.

And I would argue that if that's the case, and we've done this and many other companies have also taken advantage of the environment and raised the capital to invest large amounts in R&D and building next-generation platforms, I think what would be really exciting is to just see what comes of it. The question mark maybe is proving out better product, more tailored distribution or more tailored offerings really do win out in the long term. From my point of view, logically, it just seems like if you have a product that's more bespoke for a certain segment, and it's a large enough offering, it feels like it should win out. But again, I'm also not a very good private investor, which is probably why I'm a founder here. So that's, to me, the most exciting thing. We've funded all these interesting next-generation infra companies that are doing things a little differently, and it's, what comes of it?

Your investment portfolio is the customers, right? You get to build a basket of companies offering this stuff. If I were to take one key theme away from our conversation, it really is that the more robust this new-age fintech infrastructure is, the more real TAM expansion there is. There are people who can build financial services and fintech products that you couldn't have built on the legacy stuff that was built in the 60s and 70s. So I think it's going to be pretty compelling to watch.

Ultimately, the best thing is, at the end of the day, the consumer wins, right? More competition and better products, driving down the cost of providing these services. It's consumers, businesses and customers that ultimately win out, however the world shakes out.