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Flywire’s Growing Opportunity: CEO Mike Massaro on Q3 2021 earnings

In the latest report in our Post-Earnings Call Series, Flywire CEO Mike Massaro discusses the company’s strong Q3 2021 results and future plans.

Flywire’s Q3 2021 earnings, the second since its IPO, have seen the company continue its strong run of growth since its public debut. Its revenue has increased 61% year-on-year to $67.8m, while its adjusted EBITDA rose 73% to $17.6m. Total payment volume also increased 76% to $5.3bn. 

Given these strong results, and the growing opportunities in its four total addressable markets – education, healthcare, travel and B2B –  what opportunities lie ahead and how does Flywire plan to build on its success?

Daniel Webber spoke to CEO Mike Massaro to learn more about Flywire’s future plans. 

Topics covered:

  • Contributors to Flywire’s revenue growth
  • Travel’s return as a growth driver
  • The UK market opportunity
  • Why domestic payments is critical to Flywire
  • Flywire’s technology and market differentiation
  • Understanding true network quality and strength
  • Flywire’s approach to B2B payments
  • Future expansion plans

Contributors to Flywire’s growth

Daniel Webber: Let’s jump in. Great top line numbers, revenue, payment volume. What’s driving that?

Mike Massaro:

If you just think of where we were in the Q2 earnings call in August, you had people at the time asking about elective procedures in hospitals; Delta variant spikes; travel restrictions; student visa approvals; on-campus education – is it really going to happen in the fall or not? You had all those topics. 

Obviously, a whole bunch of those things have happened. The world has started to handle Delta and there have been some restrictions and some spikes here and there, but in general, it has done what we expected, which is the world is going to figure out how to live with the long lingering impacts of the pandemic. So you saw markets open, many geographies open: the UK, the US, Canada; you saw students go to campus; you saw hospitals continue to navigate elective procedures. You saw travel borders open up for more luxury trips and consumer trips, especially in Europe, in August.

Those were all positive signs. There’s other parts of the world that are not there yet, which is great for our business just because we have geographic distribution of clients in over 30 countries. We also have four industries. So as you looked at how we navigated the pandemic, having a geographic and industry-diverse business has been quite a positive. 

You do see markets, like Australia, New Zealand, Southeast Asia and Japan, not really open. There’s still a lot of travel restrictions for international travelers to go in or students. And so I think you’re going to see this rolling recovery even into 2022 in many parts of the world.

The role of the UK

Daniel Webber: On the earnings call you said that one thing that really helped drive reopening was the opening up of my old home country the UK. What’s notable about the UK market?

Mike Massaro:

It’s in the top four or five for sure. It jockeys around between Canada and China, which is making some head roads too. But if you look at the UK, the composition of students is slightly different, so you’ll see different populations of inbound students coming in from different geographies into the UK than elsewhere. 

For instance, Nigeria is a big student population going into the UK for higher education, obviously less so in the United States where Korea is in that third spot going into the US. That’s what varies in a lot of destination countries, whether you look at Southeast Asia, Australia, New Zealand, Canada, the US or the UK, you see different student populations. They’re all represented in all those places, but what position they are from the number of students that travel there is different.

That can govern different policies, different travel restrictions can go with that. But in general, the UK opened up, and now the US and UK now have opened flights together as well. Not every place, every geography was made easy to travel with the UK, but our belief is that more and more will continue to open up as you’re seeing with Australia, as you’re seeing with the UK, US and Canada, for instance.

That’s why we have that belief of a rolling recovery. One thing about the UK, and frankly much of Europe as well, is the summer programs and language programs. Those are likely to be the last thing inside education to come back, just because travel restrictions, when you had to quarantine for a two-week language program or a five-week or six-week summer program, it didn’t quite make sense, the risk/reward of traveling there for such a short program. 

A lot of those schools either went digital or paused enrollments or things like that. I think that’s something that will really come back more in 2022 than it really has been able to in 21, just due to the travel restrictions. And that’s a big thing for the UK and Europe.

Figure 1

Flywire’s Revenue and EBITDA margin by quarter

Adding domestic to cross-border

Daniel Webber: Flywire started as a cross-border payments company, but if we understand how you are evolving, adding the domestic payments piece is becoming one of the critical components. How are you thinking about domestic?

Mike Massaro:

Six, seven years into our journey, we only had the cross-border product. So for us, we were frankly quite surprised to see such poor systems deployed domestically. 

There’s really two different ways to think about it. In the United States, you had a set of legacy software vendors competing for that domestic business. And remember, the old model is buy software, then connect in acquirers, connect in your banks, deal with the manual wires coming in from overseas. That was the old way of doing it. 

So when we had this software and payments already integrated from a cross-border perspective, it was relatively easy for us to say, “Oh, you just need us to add domestic payments” and then add some more software capability to do things like payment plans or other types of payments on a campus that we weren’t really having to do for the international flows. That software build-out ended up really helping our clients say, “I’ve been telling my other vendors to do this for years and they haven’t innovated.” 

We’re also just taking away all that complexity around domestic payment negotiation. Remember universities, hospitals, travel companies, businesses, they have to negotiate interchange; they have to sign up with Amex. If they want to accept China Union Pay, they have to go do that. If they want to accept PayPal and Venmo, they’re going to be able to do that. 

All of those business negotiations also disappear when Flywire gets inserted. Because with the old way they used to have to manage all of that complexity and manage the software vendor and manage the integration between the two. 

The big lightbulb moment for us was just this belief that our clients shouldn’t have to be experts in payments. They don’t even see the difference between a cross-border payment and a domestic payment. And if we build the right software and have this network already prebuilt that can be leveraged, it’s a huge lift for them in the back office. It makes them have one solution that everyone uses, domestic and international, and it’s much more modern software. 

So we went there because clients kept pushing us there, seeing the success we had in fixing their international payments problem. We just never really realized the domestic stuff had been neglected so much by the incumbents. 

Part of the opportunity, and you see this in our net revenue retention number that we’ve talked about quite a bit, is by doing that, those six, seven years of clients that just knew us for cross-border, you’re seeing us add more to those cross-border clients, but you’re now seeing us add more software, getting more payment flows, whether domestic or cross-border flows. That just increases that NRR that gives you this amazing growth baseline with the customer base that we have.

That’s really what has helped grow the business, the geography expansion, the product expansion and the industry expansion.

Daniel Webber: On the business side, is B2B payments to the university the key use case for domestic payments, or like with cross-border, is it students paying for their tuition?

Mike Massaro:

It starts with tuition. In general, on campus tuition is probably 80% of the payment volume, but only 20 to 30% of the transactional volume. A huge part of the volume is getting to the cross-border and the domestic tuition, and also, it’s things like deposits, application fees, all those things are part of that tuition, but room and board can be part of that, all that fees. 

Then in addition to that, we have capabilities now that help us identify other use cases. So we’ve talked about taking our payment plan capability, which is like a buy now, pay later without the financing. Giving the client the opportunity to extend different payment terms over different milestones, to provide more flexibility to the payer.

Taking that capability, we found a lot of universities had a lot of overdue payments. Payments that were overdue 60, 90, 120 days. And what they were doing in the US and elsewhere is they were sending that over to collection agencies, oftentimes paying 20, 30, 40% on the dollar to get that money back. 

What an awful payment experience. Here you are trying to complete your education and they’re sending you to a collection agent. Sometimes, a lot of this lost payment revenue for the university was because of the poor systems that were in place. 

Imagine a student: I’ve got a 16 year old boy, if he’s responsible for telling me when the tuition bill is due, we’re going to have a problem, right?

So how do you make sure the parent’s being properly communicated to, or whoever’s making that tuition payment has the proper communication? By just deploying more software using the same payment capabilities, we started solving a whole different problem around overdue payments at the university. 

Another good example is what we just did and talked about on the call with MMU [Manchester Metropolitan University] in the UK. An example where we’re digitizing all the payments on campus. So things like parking passes, certain types of fees. There’s even a therapy dog that can be booked through our product to show up for a student. 

There’s all these types of other transactions that were happening on campus, and the finance department never really had control over it, because different departments would sign up with different payment processors.

The reality is the finance departments have always wanted to control how money comes into the university, but empower the departments to do what they need to do. Maybe they’re hosting an event and need to sell tickets. Maybe they’re a science department and they have samples of some scientific research that they’re doing or they get patent payments from somewhere else. 

All of those are different ways in which a university has to collect payments, but have all been bespoke one-off solutions. So those are some of the other use cases that by having the software and the payments together, we’ve been able to identify and help digitize.

Figure 2

Flywire’s total payment volume by quarter – a seasonal business

Network quality and strength

Daniel Webber: Let’s dig into the network piece. A lot of people claim to have great networks, then you dig a bit deeper and it turns out they’re just integrated with one group or bank that has a phenomenal network. How do you define the strength and quality of your payments and banking network?

Mike Massaro:

We always say we’ve got a global and local proprietary network. What we mean by that is truly Flywire owned and controlled entities, connected to the local clearing infrastructure from a bank perspective in the countries in which we’re processing payments from. 

Always opportunities to keep enhancing that, but in general, one of the best receivables networks in the world. And local clearing, so not multicurrency accounts, not virtual IBAN accounts, these are local accounts.

Also a level of redundancy. We don’t consider it success to just connect to your point with one bank that’s got great coverage and to get our own account; we want to have multiple accounts within those major markets for us, because that gives us leverage. It also gives us redundancy. It de-risks the flow of money or currencies, gives us more choice when it comes to service levels with our providers. And we do the same for card processing.

The providers we use, we’ve publicly stated FIS, Worldpay, Fiserv, First Data, Adyen. We don’t have any contractual obligations at a client level to use any given party. So we can route transactions differently, we can pursue better economics, better settlement times, additional capabilities when it comes to card verification with different providers, depending on the market’s need and dynamic. 

And because our software controls what methods are shown to the payer, it really is controlling. We don’t care which way a payer picks to pay us. If you think about it, Flywire wins no matter what method, domestic or international gets picked. It is a huge value add to our client, but it puts us in a fascinating partner ecosystem. 

When we say network, we mean something we own and control. Oftentimes, the card processors will say, “Oh yeah, they support third-party wallets”. Well, if you go sign the paperwork and you go at it and you do some type of integration into the software, they do, but with Flywire, it just comes. 

PayPal, Venmo, Alipay, they just come as embedded options already preconfigured, already active. You’re not having to do anything as an end client of Flywire just to have those activated.

Flywire’s approach to B2B payments

Daniel Webber: Let’s look at your B2B segment. B2B payments is a giant total addressable market but an incredibly fragmented space. What are you focusing on there?

Mike Massaro:

We’re going to market across all industries going after all the payment volume. Even though the legacy is cross-border only, we’re now not going in just talking about cross border, whether that’s in B2B or travel or wherever else. 

When you look at B2B, it is shocking how underserved it continues to be. Part of that is because I think of this AP/AR dynamic, where you’ve had different companies and different solutions trying to digitize the payments as they leave a business going to another business. Then others trying to come in from the new voice perspective and trying to improve that payment experience that’s driven off of an invoice or an amount owed. 

Those are definitely completely different approaches. One is forcing payment methods down on a receiver and the other is really trying to improve the experience of the payer, from a preexisting relationship of the invoice. 

Obviously we’re on the AR side, we help our clients get paid. So we think there’s more value-add in delivering better payment experiences, no matter how someone wants to pay you, but from that existing relationship, as opposed to just trying to force a relationship into businesses. 

That’s where we’re focused. We’ve got a number of great partnerships in this space, [including] banks who identified this problem within their customers. We announced a Bank of America deal last year, which has been great for us. We’ve mentioned our Billtrust as well as our YayPay relationship, which recently was announced.

Those are great examples of where our network and our capabilities at a global and local scale can really help. Remember, those businesses don’t just have US clients. They have clients in Europe who invoice other companies in Europe and companies abroad. 

So when you talk about local payments and global, you have to really be within the currency of your client as well as helping them when the invoice goes across the border. So I think this industry is going to take literally decades to digitize. 

No one has a major percentage. And I think to really win, the closer you are to that invoice, I think the better off you are. Our bet is that that invoice is a cornerstone of the relationship. That’s where a lot of the discussion comes in of what’s owed, if there’s any disputes in that payment amount owed. 

That’s where you can really make that process much more streamlined. Just doing mass payouts and grabbing as much payout volume as possible and more cost effectively delivering those funds, there’s value in that, but I don’t think there’s the value that we’re seeing on the other side.

Daniel Webber: What’s the core customer?

Mike Massaro:

It is more mid and high mid-market, so companies that have tens of millions of revenue up to a billion dollars in revenue. Those customers in the tech sector, professional services, manufacturing, those are all great sub-sectors for us. 

It’s someone that’s dealing with the automation of invoicing, and for many businesses, there’s usually a flavor of international in there that adds to the complexity – or a desire to grow internationally. Even divisions of much larger businesses tell us, “Yeah, we can’t invoice in euros, even though our customers want us to invoice them in euros. We have to invoice in dollars.” 

Price in dollars, that’s fine, but give them a nice, easy way to pay in euros. That’s really where that software component can actually come in to provide different ways in which people can pay you through that invoicing flow.

Future expansion plans

Daniel Webber: What’s on the horizon for capabilities, product or M&A? Anything that you can share that you’re focusing on?

Mike Massaro:

Our 2022 planning is is going really, really well. We’re super excited. Expect new geographies, expect new capabilities, new products within certain industries, both at the platform level and use cases at the industry level, super excited about that. 

When it comes to inorganic things, our 2022 planning is really around all the great organic levers that we’ve seen in the last two quarters. But obviously we have a large balance sheet, we’ll continue to look for good inorganic moves, but they’ll fit into those three pillars:

How can we accelerate an industry or a geography? Can we add a new capability at the software level that could drive that net revenue retention? And then the third, potentially enter a new industry or sector that we’re not in today. 

Because we have that network and that platform, if there is another high-value, high-stakes payment industry we want to get it into, we could always do that through inorganic moves. Those are really the three pillars of any inorganic strategy we choose to undertake. But right now, the focus is heavily on the great organic levers we have to just keep growing the business. And we’ll keep looking for potential deals, but for us, there’s no real sense of urgency there.

Daniel Webber: The last word has to be yours. Anything else you want to add?

Mike Massaro:

The only thing I’d highlight is that I feel really good about how we’re competing in the talent war that exists. We looked for industry experts, sometimes 10 or 20 year veterans in their industry. The companies they worked for historically, typically they were geography-based, typically they were office-based. 

For someone like us to have nearly no geographic limitations in this hybrid environment gives us the potential to go after some great talent, and that’s what we’re doing. So the 200 Flymates we announced on the call that we’ve added this year, 100 plus positions we’re looking to add actively. 

It’s a great time for us, with a high-growth business, a great culture, lots of a growth opportunity to just bring in more and more great Flymates. So I think that’s another thing that’s going to fuel us for years to come.

Daniel Webber: Mike, thank you, a pleasure.

Mike Massaro:

Thank you.

The information provided in this report is for informational purposes only, and does not constitute an offer or solicitation to sell shares or securities. None of the information presented is intended to form the basis for any investment decision, and no specific recommendations are intended. Accordingly, this work and its contents do not constitute investment advice or counsel or solicitation for investment in any security. This report and its contents should not form the basis of, or be relied on in any connection with, any contract or commitment whatsoever. FXC Group Ltd and subsidiaries including FXC Intelligence Ltd expressly disclaims any and all responsibility for any direct or consequential loss or damage of any kind whatsoever arising directly or indirectly from: (i) reliance on any information contained in this report, (ii) any error, omission or inaccuracy in any such information or (iii) any action resulting there from. This report and the data included in this report may not be used for any commercial purpose, used for comparisons by any business in the money transfer or payments space or distributed or sold to any other third parties without the expressed written permission or license granted directly by FXC Intelligence Ltd.

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