Stripe Business Model: How Stripe Earns Money and Sustains Growth

Referred to as the “PayPal of the mobile era,” Stripe has garnered significant attention from business scholars due to its extensive reach across 130 countries and its impressive list of customers, including Google, Amazon, Microsoft, and National Geographic. The Stripe Business Model has revolutionized online payments by providing businesses with a fast, simple, and secure solution. By seamlessly integrating into any website or mobile application, Stripe helps prevent fraudulent activities and streamlines online transactions using credit or debit cards. Notably, Stripe ensures the utmost security as customers’ information remains solely accessible to the fintech company, which assumes full responsibility for processing payments. To gain a deeper understanding of Stripe’s innovative business model, continue reading.

The Evolution of Stripe

Stripe, founded in 2010 by prodigious Irish brothers Patrick and John Collison, has a fascinating history. At just 16, Patrick, already recognized for his Lisp programming language work, left high school to attend Computer Science classes at MIT. Meanwhile, John, with the highest score on the Irish Leaving Certificate, pursued Computer Science at Harvard University.

In 2007, during Patrick’s freshman year, they created Auctomatic, an auction management system, which was later acquired by Live Current Media for $5 million. At 19, Patrick became its Head of Product Engineering while John joined Harvard. The following year, the brothers founded Stripe, with their initial funding coming from Y Combinator, courtesy of its founder Paul Graham, who was familiar with Patrick.

A significant turning point occurred when the brothers connected with PayPal founders Peter Thiel and Elon Musk, who invested $2 million in Stripe and provided invaluable guidance. In September 2011, Stripe officially launched, securing an additional $18 million in funding from Sequoia Capital, Affirm, and PayPal just five months later.

Over the years, Stripe expanded its operations and product offerings, attracting major clients such as Lyft and Wish. In 2020, the COVID-19 pandemic accelerated the shift to online sales, further propelling Stripe’s growth. Its valuation skyrocketed from $20 billion in 2019 to a staggering $95 billion the following year. Today, Stripe serves over one million businesses worldwide and boasts a team of over 4,000 employees.

The Faces Behind Stripe: Who Holds the Ownership?

Stripe remains under the ownership of its founders, Patrick and John Collison, who are brothers. Patrick currently serves as the CEO of the company, while John holds the position of President.

How Does Stripe Work?

Stripe is a developer of diverse financial software products that enable online companies like Google or Uber to conduct and receive payments securely through the Internet.

According to Stripe, only a small fraction of global commerce, around three percent, currently occurs online. The company’s payment platform aims to simplify the process of conducting online transactions, thereby driving growth in the online marketplace.

Stripe identifies itself as a comprehensive provider of payments software, consisting of three key layers:

• A cloud-based payments infrastructure;
• A customizable payments platform that empowers companies to create tailor-made applications according to their specific needs;
• Ready-made applications designed for various purposes, including billing, reporting, and fraud prevention using machine learning technology.

To ensure the best possible experience for developers and customers, Stripe offers extensive documentation, providing valuable resources and information.

Stripe Business Model: How Stripe Makes Money

Stripe employs a transaction-based pricing model, where it levies fees for each payment processed on its platform. These transactions typically involve customer-to-vendor payments, but they can also encompass payments made to Stripe itself for its services or products. The fee structure consists of a percentage and a fixed fee, which vary depending on the chosen package.

Here is a detailed breakdown of the various revenue streams for Stripe:

Payment Processing Fees:

The primary source of revenue for Stripe is derived from payment processing fees. These fees are charged for every successful transaction processed through the Stripe platform. Stripe offers several payment processing products, including:

• Payments: The most widely used product, enabling businesses to accept and process online payments. Stripe charges a fee of 2.9% + $0.30 for each transaction processed through Payments. Additional fees of 1% apply for foreign currency transactions, currency conversions, and instant payout volume;
• Billing: Designed to automate recurring billing and invoicing, offering features like order acceptance, bill management, revenue optimization, analytics, and reporting. Stripe offers two plans for Billing: Starter (0.5% fee on recurring payments) and Scale (0.8% fee on recurring payments and one-time invoice payments);
• Invoicing: Helps businesses create and manage invoices, providing automated reminders, automatic payments, and online invoicing. Invoicing plans include Starter (0.4% fee per paid invoice) and Plus (0.5% fee per paid invoice);
• Terminal: Enables users to create their own checkout experience and process in-person payments. Stripe charges 2.7% + $0.05 for each successful card transaction, with additional fees for international cards and currency conversion. Pre-certified card readers are available for purchase;
• Connect: Specifically designed for marketplaces and platforms, offering three plans: Standard (no fees), Express ($2 per monthly active account and 0.25% + $0.25 per payout sent), and Custom.

Radar

Radar is Stripe’s fraud prevention tool, utilizing machine learning to automatically identify and prevent fraudulent activities. Stripe offers two plans for Radar: Machine Learning ($0.05 per screened transaction) and Fraud Teams ($0.07 per screened transaction).

Atlas

Atlas is a product that assists companies in incorporating in the United States and opening a U.S. bank account. It includes services like incorporation in Delaware, a U.S. mailing address, tax filing assistance, licensing and compliance support, integration with Stripe’s payments infrastructure, and a business management dashboard. A one-time fee of $500 is required to use Atlas.

Sigma

Sigma allows users to create and run SQL queries on Stripe data, enabling analysis and data-driven decision-making. Pricing for Sigma is based on usage, with a fee of $0.02 per charge for 0 to 500 charges.

Data Pipeline

The data pipeline product allows businesses to export and query data in real time, with the option to export Stripe data to Amazon Redshift or Snowflake. Stripe charges $0.03 per transaction for the data pipeline service.

Issuing

Issuing is a financial service that enables companies to create and manage virtual and physical cards, including customization, spending limits, and expense tracking. Stripe charges $1 per month for each active card, along with fees of $0.10 per virtual card, $3 per physical card, $15 per lost dispute, and 1% + $0.30 for cross-border transactions.

Premium Support

Stripe provides round-the-clock email and phone support to its users, ensuring assistance whenever needed. For businesses requiring specialized aid in integration, account management, and reporting, premium support is available. This premium support plan offers 24/7 technical and operational assistance, catering to the unique needs of businesses. The pricing for the premium support plan starts at $1800 per month, varying based on the size of the company.

Funding, Revenue, and Valuation of Stripe

According to data from Crunchbase, Stripe has successfully raised more than $2.2 billion through 14 rounds of venture capital funding. Renowned institutions like Sequoia Capital, Andreessen Horowitz, General Catalyst, Tiger Global Management, and several others have invested in the company.

As of its Series H round in March 2021, Stripe holds a valuation of $95 billion. This valuation makes it the highest-valued private company in the United States and the second most valuable worldwide, trailing only behind ByteDance, which boasts a valuation of $140 billion.

While specific revenue figures are not publicly disclosed by Stripe, like many other venture capital-funded firms, the company has announced that it processes over $200 billion in transactions annually. With fees of approximately 2 percent for its SME and Enterprise accounts, Stripe’s estimated annual revenue stands at around $4 billion.

Competing in the Payment Processing Landscape

In the realm of payment processing, Stripe faces competition from several alternative providers, including Square, Elavon, and PayPal.

Analyzing Stripe: A SWOT Analysis

Conducting a SWOT analysis of Stripe allows us to identify the company’s strengths, weaknesses, opportunities, and threats:

Strengths:

• Strong engineering team that has developed a robust platform;
• Excellent reputation for security and reliability;
• User-friendly platform with transparent and straightforward pricing;
• Flexible payment options, including credit cards, debit cards, and bank transfers;
• Extensive client base, including renowned brands;
• Strong brand awareness in the industry.

Weaknesses:

• Dependency on major credit card companies and banks;
• Lack of physical brick-and-mortar locations;
• High costs per transaction, which may impact profitability.

Opportunities:

• Potential for a direct listing on stock exchanges, opening up new avenues for growth and investment;
• Expansion into untapped markets, particularly in Asia and Latin America;
• Continued growth of e-commerce, offering opportunities to capture a larger market share;
• Possibility to enhance and expand product offerings to meet evolving customer needs.

Threats:

• Increased regulatory scrutiny in the financial industry, which may impose stricter compliance requirements;
• Growing competition from industry rivals like Square and PayPal, posing a challenge to market share;
• The potential impact of a global economic downturn on consumer spending and business operations.

Powering Future Growth: Stripe’s Strategy for Success

Amidst the COVID-19 pandemic, the shift of businesses and consumers to online platforms proved beneficial for Stripe, leading to a significant revenue surge of $7.4 billion in 2020—a remarkable 70% increase compared to the previous year.

To drive further customer growth and enhance revenue streams, Stripe has adopted a comprehensive approach that involves both horizontal and vertical integration efforts. Throughout 2021, Stripe made strategic investments of approximately $1.1 billion in 14 different companies.

Stripe boasts an extensive portfolio of products and services meticulously designed to integrate seamlessly with their customers’ diverse requirements. This approach has yielded dual benefits for the company. Firstly, it has facilitated the expansion of Stripe’s customer base. Secondly, by strategically cross-selling and upselling services tailored to the specific needs of existing customers, Stripe has successfully increased its revenues.

The ability to offer a wide array of services in a single, unified platform has significantly amplified Stripe’s appeal among startups, small businesses, medium-sized enterprises, and large corporations alike.

Stripe’s successful strategy revolves around curating a portfolio of products that align with the needs of its target customers and presenting them in a unified platform. This approach has proven to be a winning formula, and we anticipate that Stripe will continue on this path to further fuel its future growth.

Conclusion

Stripe has achieved significant success in capturing a substantial market share. However, the company still holds immense potential for further growth and expansion. While an initial public offering (IPO) has been discussed as a potential opportunity, the timing for such a move remains uncertain according to the founders. Nevertheless, Stripe continues to explore various possibilities within the financial market, indicating a drive for future advancement.