DEEP DIVE with Stripe: Giant Among FinTech Unicorns
INCREASE the gdp of the internet (through software and an Economic infrastructure for accepting payments for companies of any size).
Stripe is a financial technology (FinTech) company based in San Francisco, CA, whose software allows individuals and businesses to make and receive payments online. The Stripe e-commerce platform handles the technical implementation, fraud prevention, and banking infrastructure necessary to make quick and secure payment systems for businesses globally — making payment processing online as simple as possible.
As the largest of FinTech unicorns valued over $22.5 billion (Stripe valuation as of January 2019), Stripe has disrupted the payments sector of financial services, competing with established companies such as Visa, MasterCard, American Express, and even PayPal. But how did Stripe get its start? How does the company generate revenue with its platform and suite of products and services? What is the future outlook for Stripe online payments as other companies in this sector continue to push forward innovation in FinTech?
The History of paying with STRIPE
Stripe was founded by John and Patrick Collision (brothers from Limerick, Ireland), back in 2010 with seed funding from Y Combinator (a start-up accelerator). John and Patrick were both in college (Harvard and MIT, respectively) while they worked on several side projects. Patrick and John had actually founded a company before Stripe, named Auctomatic (a software company that built tools for the eBay platform), which was part of Y-Combinator’s Winter 2007 — that company was quickly bought out 10 months after incorporating for $5 MM by Live Current Media.
At the start of 2010, John and Patrick started working on what would become Stripe, as they sought to solve the enormous complexity with payments over the web, which came from an archaic infrastructure full of fees, compliance, regulations, and institutions. This fragmented approval process would take up to three weeks — the Collisons were looking to cut the process to minutes on a single, complete platform.
“We wanted it to be extremely simple to integrate. You should be able to start charging credit cards immediately. There shouldn’t be any latency. You shouldn’t have to talk to anybody. The information you have to give shouldn’t be pages long.”
- Patrick Collison, Fast Company
They focused on a simple solution, which they worked on for 6 months, testing with friends, and making changes along the way. After having a prototype working for two weeks, the first transactions were processed with 280 North, another Y-Combinator company, whose founder (Ross Boucher) also became one of the first employees at Stripe.
There was tremendous ambiguity from the start in considering market size, quality user experience, or how the Stripe founders would be able to solve complex issues such as fraud or international transfers. John and Patrick, tried a partnership with a payments company, but they realized that they wanted complete control over the customer experience and process — choosing to abandon the partnership and develop everything in-house. By Fall 2010, they felt certain that what they were working on could be huge and they gained confidence in being able to deliver the best user experience possible. This sentiment came to life as friends would invite other friends to use the product, growing a user base organically.
“Initially it very much spread through a word of mouth process. That was surprising to us because it’s a payment system and not a social network so it’s not something you’d think would have any virality whatsoever. But it became clear that everything else was so bad and so painful to work with that people actually were selling to their friends.”
- Patrick Collison, TechZing interview
The 2010 seed funding from Y Combinator for the Stripe payments company came easily as Paul Graham (previous investor in Auctomatic) already knew Patrick, and Auctomatic co-founder (Harj Taggar) was also a YC Partner. As such, Patrick did not have to go through the startup boot camp process like all other companies (since he had already done so in 2007) — YC invested about $30K. At a YC dinner the following summer, Peter Thiel (founder of PayPal) shared his insights on the payments sector with Stripe, and also offered to invest. A total of $2MM was raised, combined with investments from Sequoia Capital, Andreesen Horowitz, and SV Angel.
“Elon (Musk) and Peter (Thiel) have been very insightful. They have sharp opinions on what PayPal did right and wrong. They have deep appreciation for how difficult it is to get there. They fought this battle for many years and it’s really helpful to have someone who can talk about the future in 15 years, but also someone who can empathize and sympathize with the day-to-day considerations. I don’t think there are that many people who can straddle both sides of that.”
- Patrick Collison, TechZing Interview
In September 2011, the Stripe company launched publicly, and obtained a $20 MM Series B investment.
what makes STRIPE payment different
The true value of Stripe’s simplicity comes from the ability of developers to easily understand and use its API, which took multiple revisions, testing, and weeks of iterations to be PCI (Payment Card Industry) complaint.
stripe Payment Flow Process
The first stage in processing credit cards with a Stripe payment gateway is tokenization, where Stripe turns a credit card number, expiration date, and CVC into a single use encrypted token that the merchant’s application can use in transactions.
Stripe stores this token in its vault for a small amount of time, which helps for reference back to the server to finalize the transaction. The token process helps ensure PCI compliance, in which only the server-side process knows the real card information — Stripe simplifies this even more when all checkout pages are served over HTTPS and uses stripe.js or checkout.js.
Up until this point the transaction is still temporary, and needs to follow a few more steps to result in an actual charge:
The merchant application makes an API call to Stripe’s servers, which contains the token, amount to charge, and a secret key from Stripe.
Stripe’s servers contact the card network (e.g. Visa, Mastercard, Discover, AMEX) so that the transaction can be routed to the bank that issued the card. Previous forms of credit card processing (before Stripe) required a separate payment gateway.
The bank is contacted by the card network and asked to ‘authorize’ and ‘capture.’ The ‘authorize’ request asks the bank to verify and set aside the transaction amount from the card’s availability. The ‘capture’ request tells the bank to transfer the funds out of their account and into the merchant’s Stripe account. These two requests typically happen as one step, but certain merchants may authorize a larger amount depending on the type of transaction (i.e. purchase at a gas station).
After the bank has accepted or declined the charge request, it responds to Stripe to carry out an application server-side call so that the customer can complete the purchase transaction on the merchant’s page.
stripe MERCHANT SETUP AND APPROVAL
The actual registration process for new merchants involves only a few steps due to a streamlined user interface, and the newly opened account showcases a clear dashboard for merchants and developers to track every transaction detail easily.
Even though their merchant approval setup process goes through instantly for new businesses, Stripe has a mandatory 7-day waiting period for each transaction to be paid to the business. This was the company’s best option to do a fast and simple setup for new clients, and still deter fraud within this one week timeframe by getting a better picture of the business.
Having a payment system that can quickly go live without verification documents or upfront screening was a critical value proposition that Stripe insisted on offering.
Costs from paying with stripe
Stripe pricing is not the cheapest option for merchants at 2.9% plus $0.30 transaction fee. The true value comes from consideration of all the other fees that payment processors assess (but that Stripe fees do not) such as monthly, gateway, setup, PCI, and international credit card fees.
Educating customers clearly on what they pay for at other providers versus Stripe billing can be challenging, but overall the FinTech unicorn believes in focusing only on generating revenue when a client successfully processes a transaction.
What’s Next for STRIPE?
The FinTech giant will continue to enable businesses of all sizes the ability to receive payments, with a focus on smaller startups who have been a traditionally underserved segment in merchant services throughout the world. Continuing to build core functionality in Stripe online payments for a global user base, especially focused on Europe — has been a top priority.
“We’re not exercising the traditional enterprise playbook, which is ‘unless you pay us millions of dollars a year, we won’t talk to you.’ To the extent that we can, we’re arming the upstarts.”
- Patrick Collison, Quartz @ Work
Constantly working with early-stage, high-growth companies has helped Stripe stay at the forefront of innovation in payments, by delivering and responding to the expectations and features being requested on a consistent basis. As these start-ups grow and scale, they trust Stripe to provide world-class support along the way with tailored updates and enhancements.
The critical developer-first focus will grow further in the future, impacting both technical and user design. The feedback and success with Stripe’s APIs shows the deep understanding of its engineers when it comes to understanding the business needs of today, and being able to integrate for changes in the future.
Stripe’s user experience (UX) continues to be the most streamlined solution in the industry, having a higher degree of integration, and avoiding unnecessary rules and initial fees (from companies such as PayPal and Google Checkout), which get in the way of the product.
The company will continue to be designed for fast use, but allow the business to control the overall experience, the product, and customers.
beyond stripe hype: Future Outlook in PAYMENTS SECTOR of FINTECH
Overall, Stripe has accomplished tremendous growth and success in the last 8 years within the payments sector by executing on its value proposition of enabling businesses of all sizes to receive payments through a simple, seamless experience. As the company continues to mature and look for other opportunities to enhance its offerings and leadership among FinTech companies, the industry looks on in anticipation of what comes next for the biggest disruptor that the world has ever seen.
The battlefield between FinTechs and legacy payment processing institutions will only intensify as opposing sides both leverage the latest technology and innovation to gain new market share and remain relevant in an overcrowded sector. Ultimately the firm that provides THE best overall value to customers globally in a convenient and efficient platform, will emerge as the true industry leader and drive forward the future of FinTech payments for the next 10 years.
Startup Grind - The Collison Brothers and the Story Behind the Founding of Stripe
Fast Company - Inside Stripe, The PayPal Competitor Backed by PayPal Founders Peter Thiel, Elon Musk
Mastering Modern Payments - The Life of a Stripe Charge
Stripe - Switching Your Integration to Stripe
Silicon Republic - Stripe’s David Singleton: ‘We are building the future of commerce’