Growing Payoneer in the Changing Landscape of Global Commerce

Growing Payoneer in the Changing Landscape of Global Commerce

Payoneer CEO Scott Galit in conversation with Daniel Webber on the company’s Q2 2021 results.

Q2 2021 provided Payoneer’s first full earnings call since it began trading as a public company in June following its SPAC merger. This has given investors the deepest insight into the company yet, with particular focus placed on Payoneer’s growth strategy, as well as its strong quarterly results.

But given the changing ecommerce landscape as a result of the global pandemic, how is Payoneer evolving its approach to its customers, growth and market position?

Daniel Webber spoke to CEO Scott Galit to build on the insights in the company’s earnings call and gain a stronger picture of what to expect from Payoneer in the future.

Topics covered:

  • Payoneer’s renewed proposition as a public company
  • Customer growth and network effects within the company’s ecosystem
  • Trends by geography and verticals
  • Take rate and unit economics of Payoneer’s business

Payoneer’s Q2 2021 Results: Key Highlights

Payoneer’s first earnings call as a public company saw it start on strong footing, with record revenue for Q2 2021 of $111m, up 42% year-on-year. This puts the company ahead of internal targets, with processed volume also increasing by 29% to $13.6bn. Between 2019 and 2021, the company’s volume saw a CAGR of 45%.

Take rate also increased in Q2 2021, at 82 basis points, compared to 75 in Q2 2020. Meanwhile, transaction costs were at 26% of revenues, compared to 30% in Q2 2020. 

These successes combined to see Payoneer produce positive EBITDA in Q2 2021 despite increased investment spend – something that the company attributes to strong revenue growth and improved transaction costs. It also reported record new customer additions in Q2, although volume was lighter than expected.

On the earnings call, CEO Scott Galit also outlined the four key areas of Payoneer’s growth strategy:

  1. Leveraging market momentum and scale to grow its marketplace ecosystems and B2B AP/AR.
  2. Expanding the Payoneer platform ecosystem, which currently allows it to engage with a wide range of integrated partners, including banks, mobile wallets and tax providers.
  3. Investing in new services, such as merchant services, working capital and its recently launched virtual commercial card. While these are not currently material contributors to growth, Payoneer believes they will be in the medium to long term.
  4. Continue its M&A strategy following the acquisition of Optile in order to expand Payoneer’s capabilities across different segments and regions.

For Payoneer, the challenges ahead include continued short-term impacts from Covid-19, with reopenings of several economies triggering a slowdown in ecommerce compared to the peak lockdown period in 2020. Travel, meanwhile, is unlikely to show significant recovery until 2022.

In the near-term, shortages in global logistics are likely to add headwinds, while new VAT requirements in Europe have prompted a lowering of volume guidance for 2021.

Nevertheless, Payoneer is positive about its prospects, and is projecting sustained revenue growth of 20% “well into the future” that is anticipates will ultimately produce an adjusted EBITDA margin of 20%+. This has prompted the company to raise its full-year revenue guidance to $442-448m and adjusted EBITDA to $1-3m.

Payoneer’s Proposition as a Public Company

Daniel Webber: Let’s start with people’s understanding of Payoneer as a public company. What are the pieces you really want people to understand about what Payoneer is and does, and how it adds value?

Scott Galit:

I always think it’s useful to start with the broader context and, and for us, that really is how commerce is changing. Commerce is changing in terms of the media through which it’s happening: digital, as opposed to physical and analog. It’s changing in terms of who’s able to participate now in commerce and how technology is really changing and transforming, where you have to be to engage with someone else, what kind of skillsets you need to have. 

Ultimately we see this mass democratization of participation in global commerce, and that has been happening because of technology and the internet over the last 20 years. Payoneer has been participating in the last 15 or 16, but actually the origins of Payoneer had nothing to do with ecommerce goods, which is when we talk ecommerce, we’re typically talking about goods.

If you go back to the mid-2000s, there really wasn’t a heck of a lot happening with goods, moving all over the world the same way they are today. There were in terms of big containers and things like that, but in terms of smaller parcels or in terms of smaller businesses being able to actually participate on a cross-border basis in actually getting goods moved around the world for consumers, that wasn’t really happening in any meaningful way. That took a lot longer to develop. 

In the early days, what we were seeing was something that could be delivered digitally. It could be a piece of code, it could be a translation of a document, it could be some marketing work that was getting done. There’s a whole variety of things that people have been able to do, but actually it’s interesting: things came back around.

The early foundation was more remote work; the ability for people to be in different places around the world, but actually interact, communicate and ultimately do business together now on a global basis. Marketplaces have, for us, always been one of the key facilitators of that.

Underlying that there were a few things that happened. One was that it was commerce-driven, not payments-driven. The payments was actually figuring out how to help commerce happen; it wasn’t fundamentally a payments-led approach. 

I think that’s going to be consistent for us in terms of it being about customers, being about the people and the businesses in the world that are changing the way business gets done and actually how their needs drive how we focus on supporting them again.

Another thing that I think is not so well understood about us is actually a big part of what we pioneered was actually not about cross-border payments. It was actually about localizing B2B where the buyer is. Fundamentally, B2B historically has been very much about this cross-border payment because the two parties were in different places. And actually, the payment infrastructure was all payables driven. It was basically who is the payer going to go to, to initiate a payment.

What we started to reorient from the very beginning was let’s move the sellers to where the buyers or the payers are. Let’s actually localize where that buying is happening. 

We see this all the time in consumer ecommerce: the amount of work Adyen has done, the amount of work that other companies are doing, to localize the consumer buying experience. This has been a major trend over the last 5, 10 years, but we’ve been doing that essentially in B2B now for 15-plus years. It doesn’t matter where you are, if you’re in the Philippines; you’re in Australia or you’re in China or wherever, if you’re selling into the west, let’s make it so your buyers in the west can pay you locally in their home country and their home currency with local payments, as opposed to actually sending cross-border payments. 

So really what we’ve been doing is much less about cross-border payments and much more about globalizing the businesses that are doing businesses around the world. Making them local where their buyers are and giving them all the tools and support they need to really grow, build and manage their global business. So it’s more about global business and building, growing and managing a global business than it is about just the movement of money.

Incidental to that, we happen to have built a pretty awesome infrastructure around the world that allows us to localize payments the same way we localize commerce for our customers. Payments is just a piece of what we do. We very much focus on: what are our customers trying to do? How are we uniquely positioned to help them achieve their goals and overcome their challenges? 

So if it’s a big marketplace, that means connecting to us. And we give you the whole world from a payments perspective, but it might mean risk management. It might mean access to tax solutions. It might mean dealing with all the error handling, administration and support around payments. It might deal with compliance and risk management. 

There’s a whole bunch of different things that come along with that. And if you’re a small business that might mean I need working capital to grow my business. It might mean I actually have to pay suppliers. I need to source, I need to do a bunch of other things.

So we actually cover a very broad spectrum and a growing spectrum of the kind of core needs that our customers have. And in doing that, when they grow, we grow and we basically get paid when our customers get paid. 

That’s how we’ve focused, and that’s part of why we have this broad, more expansive description of who we are. Along with the logo, we’ve introduced some updated positioning, and our goal is to be the world’s go-to partner for digital commerce everywhere.

So again, nowhere in there does it say payments, not even financial services. The idea for us and the way we go about what we do every day is we want to help our customers grow and succeed. We view that as being in a digital world, which is transforming the opportunities and challenges, and we view it as everywhere, truly the four corners of the globe, really trying to be open, embracing and democratizing access for everybody.

Figure 1

Payoneer’s Growth Prospects

Payoneer Q2 2021 revenue volume growth prospects

Network Effects within Payoneer’s Ecosystem

Daniel Webber: How do the network effects work within that global ecosystem?

Scott Galit:

It’s actually one of the really unique aspects of our business, and also one of the underappreciated strengths and value drivers that we have. 

We get well over 300,000 applications a month that come to us and it’s not, you can now see from our sales and marketing line, what we’re spending to get it. 

We’re one of the top thousand most trafficked websites in the world, according to Alexa, because of the partners that we have, because of the customer base that we have, and because commerce is fundamentally a two-sided activity and trading fundamentally is two-sided. 

It’s also networked like in the real world. Before the internet and technology, there were networks of activity that existed in B2B. You had to pick whatever your vertical market is, but it doesn’t matter, there are certain manufacturers, certain distribution partners, certain end markets, and ultimately, it’s not a one-to-one, there’s multiple participants that are in these ecosystems. 

What happens is once you start to play in an ecosystem and you start to build some momentum on the buying side and the supplying side, they start to benefit now in a digital world with our platform and the ability to connect folks together. We have billions of dollars a year of volume that we don’t count in our volume reports that are Payoneer customers that are paying other Payoneer customers. 

Thousands of times a month, we have new small businesses that sign up to use Payoneer and get paid for the first time by an existing Payoneer customer. So they come to Payoneer and they sign up basically because there’s a trading partner of theirs that’s already part of our ecosystem.

Those network effects are really important and they also bring marketplaces, enterprises and other businesses to our platform as well – they’re now bringing banks to our platform. We have banks that have customers that are getting paid through Payoneer and we have banks and markets around the world that are saying, wait a minute, I have so many small business customers that are now settling to me from Payoneer. How can I integrate this into my platform? 

So we’re now seeing this broadening ecosystem of participants and partners that recognize that through Payoneer, they can connect efficiently to lots of other trading partners around the world.

Payoneer’s Geographic Split

Daniel Webber: Compared to Q2 2020, your revenue from China is going down, while the US share is growing quite quickly. How are you seeing your geographies and verticals changing, and what are your strategies there?

Scott Galit:

Part of what’s so exciting is from a geography perspective, the growth really is very global. We don’t break this out in detail, but basically it doesn’t matter whether it was Latin America, Eastern Europe, South Asia, Southeast Asia, the Middle East, the growth that we’ve been seeing has been very strong, really all over the world. Similarly, Western Europe and the U S, which as you’ve identified, are actually smaller for us than a lot of other folk would expect. Based on the numbers for China, you can tell that the rest of the world is actually growing faster than China, even though China’s done well. Now China will move up and down a little bit, you know, different markets have different weightings and different vertical segments.

So as ecommerce grows or shrinks as a percentage of the business, China will index more closely to ecommerce. When ecommerce sees big growth as a percentage of our business, China will grow a bit faster than maybe some other markets will. 

Eastern Europe interestingly, is actually a mix; lots of digital services, lots of social platforms, lots of B2B, lots of other things, but also a decent amount of, of ecommerce as well. So you’ll see a different mix in different parts of the world. 

But really it’s extraordinary: we’ve seen acceleration everywhere. We had a record number of new customers in the second quarter, and the volume per customer is just a bit lower than what we’d expected given some of the changes in the market around ecommerce.

Figure 2

Payoneer’s revenue by geography

Payoneer Q2 2021 geographic split versus Q2 2020

Payoneer’s Take Rate and Unit Economics

Daniel Webber: Let’s talk about the economics of the business. Take rate was improved a little, but I think you have a mix of things that now contribute to take rate: direct transaction costs, as well as some of the value adds for some of the other services. How should we think about that, and how should we think about the unit economics of the business?

Scott Galit:

I’ll start with the transaction costs, and what we’re continuing to show there is the leverage in the business model. We’re able to drive increasing value and while our revenues are up 42%, if you take revenues less transaction costs, that was up 51% in the quarter. 

So we’re continuing to show improvement there and that’s really execution, efficiency, and scale. Some of the benefits there in terms of the take rate, there’s quite a bit of integrity and take rate within bands. 

Part of what’s complicated about our business is that we have a number of different types of customer segments. We’re not a Netflix business model; we’re not a take the number of customers times £10 a month or whatever it is and there’s your revenues. We have small customers that do small amounts of volume with us, and we have very large customers who do large amounts of volume with us and a lot in between. 

It makes it somewhat complicated as a result. Within those bands of customer segments, there’s pricing stability. Last year our take rate from 2019 to 2020 changed dramatically. Ecommerce surged. We have a couple of relationships with some ecommerce platforms that have cross-border and domestic, but quite a bit of domestic-related activity that surged last year. It’s a profitable business for us – not in gross dollar terms, not a huge contributor – the margin profile and everything’s fine, but the take rate is really low.

It’s not like we had pricing pressure from that. It just meant that the mix shifted more quickly towards this low take rate US ACH kind of volume that became a larger percentage almost overnight from Q1 to Q2 as Covid surged and habits changed. As a result, the take rate starts to go down a fair amount. 

So there’s two kind of buckets of activity with take rate for us. For some companies, take rate equals pricing, but for us, most of it is a bit more of an output.  So one is the mix, and ecommerce is a lower average take rate than our business overall.

Daniel Webber: What is the mix driven by?

Scott Galit:

Customer sizes and vertical markets.

Daniel Webber: What about geography too? It there a third dimension there?

Scott Galit:

A bit, but less. You will see more in common with large ecommerce merchants that are in the UK and in Japan and in Korea than you will between a service provider that is small, that might be in Latin America, Eastern Europe, or in Korea or whatever. So it will tend to be more size and vertical market. 

Probably the number one would be size. There can be variance based on geography and obviously different geographies have different levels of competitors that are there that will have some impact. 

But the vast majority of what goes on is not competition. It’s not pricing changes. We’ve been growing over time, the kind of corporates customers that are larger with larger volumes and lower take rates has been growing faster as part of our business, it’s been intentional.

We’ve been investing in more sales teams in more places, working with larger customers with more complex needs, higher volumes, lower price per volume for those customer segments. That’s been growing as a share of our business overall. 

Lastly, another example of that is B2B, which for us is off marketplace, just buyers and suppliers. We have buyers from over 150 countries buying from suppliers in over 190 countries, 7,000 corridors, and that’s growing as a share of our platform. It’s a higher take rate part of the business. 

As that grows, it also blends our take rate up, which ties into this kind of intentional and purposeful part of the take rate change. 

We’re investing in commercial cards. So just as an illustration, if we have a large customer that – and I’ll just use, for the sake of discussion, the blended average take rate –  let’s just say the pricing would be in the mid seventies for a customer to take funds out. So they get paid through us and they withdraw it at their bank and they would’ve paid us when they took it off our platform. 

Again, for the sake of discussion, 70 basis points. If now they use a commercial card to actually buy it, pay for certain expenses that they have, they don’t pay us to withdraw anymore. So they see the 70 basis points – that’s a win for them. 

When they use the commercial card, we generate a multiple of that in revenues for ourselves because of the economics of the commercial part. It’s a great win-win: we can give them cost savings where literally they can save money. 

We have just started a pilot rewards program with a cash back reward that we’re piloting around the commercial cards. So not only can they save money, they actually can benefit.

Daniel Webber: Scott, a pleasure, thank you.

Scott Galit:

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 Inc. 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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