Marqeta IPO puts spotlight on fintech fees

Marqeta, a debit card company that gets most of its business through Jack Dorsey’s payments processor Square, is aiming to complete one of the largest listings for a fintech company this year, testing a business model that has boomed because of curbs on traditional banks imposed after the 2008 financial crisis.

At the top of the company’s marketed price range, Marqeta would have a market capitalisation of almost $13bn and raise as much as $1.1bn in an initial public offering due to be priced on Tuesday.

The IPO adds to a string of recent and planned fintech listings from companies including the online lender SoFi and the no-fee brokerage Robinhood.

Based in Oakland, California, Marqeta creates branded debit cards and prepaid cards for corporate customers that include the delivery group DoorDash and Swedish fintech Klarna as well as Square.

Marqeta’s listing plan has drawn attention to the relationships between fintech start-ups and small community banks in the US, which have become increasingly tight partners since the financial crisis.

Most of Marqeta’s revenue comes from interchange fees, the costs that merchants pay when their customers use debit cards to make a purchase. 

Because of the Durbin Amendment in the 2010 Dodd Frank Act, banks with under $10bn in assets receive higher interchange fees than larger lenders from the transactions. 

You can call it arbitrage, you can call it a loophole, whatever you want to call it. [However,] we’re very likely years away from that being something that would change, if at all

Fintech start-ups such as Marqeta and Chime, a fast-growing personal finance app in the US, have taken advantage of this discrepancy by partnering with small community banks and taking a cut of the fees. 

Marqeta’s largest partner is Sutton Bank, which receives a payment from Marqeta in exchange for the interchange fee. The company also passes on a part of its revenue from interchange fees to Square and other customers.

Some analysts and investors have questioned the long-term viability of the set-up, with the growth of fintech start-ups drawing attention from regulators and large banks.

In a prospectus, Marqeta warned that interchange fees were subject to “intense legal and regulatory scrutiny” and said it consciously partnered with exempt banks under the Durbin amendment.

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“You can call it arbitrage, you can call it a loophole, whatever you want to call it,” said Callum Godwin, chief economist at global payments consultancy firm CMSPI. However, “we’re very likely years away from that being something that would change, if at all,” he said.

Marqeta’s business has boomed during the pandemic as locked-down Americans turned to digital financial services such as Square’s Cash App and ecommerce companies such as DoorDash.

Marqeta more than doubled net revenues to $290m last year while narrowing losses to $48m. Business from Square made up 73 per cent of Marqeta’s net revenue in the first quarter, a concentration that increased from the previous year. Marqeta’s agreements with Square last until 2024, according to the company.

If Marqeta reaches the top end of its price range, its market capitalisation would be roughly triple the valuation it received during a financing in May last year. Granite Ventures and Iconiq Capital stood as the company’s largest outside investors before the IPO.

Marqeta chief executive Jason Gardner would own a stake in the company worth $1.7bn at the top of the range, through a special class of shares carrying 10 votes a piece.

Goldman Sachs and JPMorgan are serving as the lead underwriters of the offering.