About a year ago, we chatted with with Tim Chiodo of UBS and Chris Kim of Capital Group about the investment side of payments. It’s been a pretty volatile 12-months in the equity market since then – well-timed for Bryan Derman to welcome Tim back to the podcast and catch up on the market factors playing into the payments space.

Listen in as they recap the performance of payments stocks, dive into the e-commerce market, provide perspective on the card networks, discuss merchant acquiring growth opportunities, and finish up with a lightning round on emerging technology.

For access to the following UBS charts and data shown during the episode, please contact Tim at [email protected].

• Visa Share of Visa ecommerce transactions by checkout type – Figure 10
• eCommerce Checkout button mix – Figure 16: eCommerce Payments & PayPal (Apple Pay, PayPal, Shop Pay, etc.): Global eCommerce Checkout Methods Benchmarking Analysis
• US Merchant Acquiring Swimlanes – Figure 29: “The Question 6.0” merchant acquiring deep dive: A framework for sizing and analyzing the various swimlanes of the IS merchant acquiring market
• Restaurant POS SMB & Mid-Market Share – Figure 2: “The Question” for Restaurant POS: A deeper look at the restaurant POS & merchant acquiring market
• Shopify Growth Algorithm – Figure 35: Shopify (SHOP): Demystifying Shopify’s Retail POS (In-store) Business
• Also referenced – Shopify (SHOP): Analyzing the Long-Term Growth Algorithm

 

Watch the full episode on YouTube: 

 

 

 

Episode Transcript

Welcome to Payments on Fire, a podcast from Glenbrook Partners about the payment industry, how it works, and trends in its evolution

Bryan Derman: Hello, everyone. This is Bryan Derman, a partner at Glenbrook, and your host for this episode of Payments on Fire. We had a great time this time last year, really for the first time talking about the investment side of payments with Tim Chiodo of UBS and Chris Kim of Capital Group. That was about a year ago, so we wanted to come back to the topic and see where things have gone.

Overall, it’s been a pretty volatile 12 months in the equity market since then, with the market reacting to a war in Iran, a resulting oil price spike, the announcement of the Liberation Day tariffs last spring, and a whole ton of financing, by companies building AI infrastructure.

We’ve had a new Fed chairman appointed since then, we had a historic IPO of SpaceX, and recently we’ve been dealing with increases in long-term interest rates to some of the highest levels seen in the past couple of decades. People claim that the stock market hates uncertainty, but through all of those exogenous factors as we record this episode in late August, the overall stock market is up about 19% in the past 12 months, fueled for sure by the AI boom, but with very strong earnings coming from a wide variety of corporate sectors and positive stock performance, having diversified such that all 11 sectors of the S&P 500 are showing positive gains over the last 12 months, about half of them in the double digit range.

Obviously, these factors also play into the payment space with the constant flow of news around consumer spending levels, the development of AI-enabled agentic commerce, and the growth of stablecoins. All of those things made it seem like a, a great time to catch up with Tim Chiodo.

Tim is the lead analyst for payments, processors, and fintech at the global investment bank UBS, and from his perch in San Francisco, he’s one of the most prolific analysts on Wall Street when it comes to our beat in payments. Tim watches the space closely and he and his team produce regular analysis on a coverage list of 35 companies in and around the payment space.

Tim, it’s great to have you back on Payments on Fire, and welcome to our new video edition of the podcast.

Tim Chiodo: Thank you, Bryan. Glad to be here. As I mentioned before, I’m a big fan of Glenbrook and Payments on Fire for well over a decade now. Been listening to the podcast for a long time, and I’m really honored to be back for a second time.

I have to say that the Glenbrook team has been just a tremendous resource to our team, whether it’s me or members of our team attending the boot camps over the years or live events that we’ve done together or our Napa conference. Really, the list goes on, and we just think so highly of the Glenbrook team, and we’re just glad to collaborate with you on things like this.

Bryan Derman: You’re really kind to say that. And we benefit equally from the incredible volume of research that you and the team pump out on topics that are very relevant. And we’re gonna get into a bunch of those today ’cause obviously I know you are all about individual company research and we want to talk about some specific pieces of that.

But I was hoping we could just start by level setting on the investment environment that we’re in, particularly for payments in fintech. I said in the open the overall market, despite everything going on in the world, has been really impressive this year. Another year of excellent gains for the S&P.

Now, there’s no particular index, I don’t think, or ETF that follows our space, but how are you feeling overall about the performance of stocks in your large coverage universe of 35 companies, as I said? Has that space kept up with the market?

Tim Chiodo: Absolutely. It’s been really a tale of many cities, and to mention a few, we’ve had some stocks that have been up a whole lot, like Block, XYZ, and Global Payments. We’ve had some that have been a little bit more pressured, whether it’s FIS or Fiserv, and then some that have been somewhat in the middle, like the card networks.

Specifically for the ones that have done really well, again, I’ll call out Block and Global Payments. Block has had accelerating trends in the Square business. They had the very notable headcount reduction earlier this year, and really a series of beats and raises on their results. For Global Payments, they’ve delivered relative stability in their results. They’ve got the genius point-of-sale system in market, there are sales hires coming on board, and the combined scale of Global Payments and Worldpay, it’s starting to really resonate with the market.

On the other side, I mentioned FIS and Fiserv. Those stocks are down more than twenty percent year to date. Part of that might be market concerns around core banking, whether it’s things like Pismo’s entry or pricing or bank M&A, or some other themes that might have impacted those stocks. But there’s also been some company-specific hurdles, whether it’s guidance reductions or management turnover, most notably at Fiserv.

Bryan Derman: We’ll talk some more about that one as we go.

Tim Chiodo: Surely. In the middle would be the card networks. Visa and Mastercard, they’ve been up sort of in that five to ten percent range, but at one point, maybe a few months back, they had just gotten way too cheap in our view. They were discounting in our reverse DCF analysis, something like four to five percent revenue growth from 2030 to 2040, and that’s just something that we don’t think is going to happen, and the stocks have gotten just way too cheap.

Bryan Derman: Yeah. So interesting diversity of outcomes there. So let me ask you an unfair question, Tim, like desert island DISC sort of question. If you could only own one stock, in this environment, where would you go? Where are we gonna make money?

Tim Chiodo: Surely. Well, our team covers about thirty-five stocks or so, and our favorites are Visa and Mastercard. So they are the durable compounders. They still look very cheap in that reverse DCF.

But to just change things up a little bit, another one that I would flag would be Block, so ticker XYZ. It’s got one of the best PEG ratios on the board. It’s got accelerating GPV trends. We mentioned earlier they’re starting to work more with ISOs. Field sales teams they’re building out are starting to scale. We still think there’s more runway for Cash App growth with some of the new BNPL products they’re adding, and again, just an overall company that has heading in the right direction.

Bryan Derman: And Tim, for our lay audience, just talk about a PEG ratio because we don’t always talk about that in payments. Just lay that out for folks.

Tim Chiodo: Sure. So it’s effectively a growth-adjusted multiple. So the price to earnings ratio compared to the forward growth. So if we’re looking at the 2027 earnings number, we’ll see what multiple the stock is trading on, that 2027 earnings number, and then we’ll look at the forward growth beyond there, the 2028 growth or the 2028 and ’29 combined or CAGR growth.

But the point is the multiple the stock is trading on relative to its forward growth rate.

Bryan Derman: Right. So you’re saying, given the growth you’re seeing in Block, it could probably sell for a higher multiple of its earnings than we are seeing in the market today, which translates into a higher stock price making more money for investors. So, got it.

Tim Chiodo: Correct. Another way to say it is it’s cheap relative to its growth.

Bryan Derman: Well said. That’s crisp. Okay, we’ll get into some more crystal ball issues toward the end of our chat, but we know stocks mostly trade on their near-term trends, their earning prospects, as you were just talking about.

So, let’s talk a little bit about some established companies with proven business models. And of course, the mega trend that’s still going on right beneath our feet is the growth of e-commerce. It’s still the growth channel and it’s, in many ways becoming almost the mainstream way we transact, depending on how you live your life.

A lot of it can be online, which means you’re buying in e-commerce mode. Let’s talk first about just how big that market is. Your team does a lot of deep-dive quantitative research on the size of the market. So tell us, at least at a high level, how you do that and what sort of results you’re getting.

Is e-commerce as huge a piece of the payments puzzle as we’re all sort of feeling it is?

Tim Chiodo: It is, Bryan. And before we talk about the size of the e-commerce market and what this means for e-commerce checkout buttons, I should preface this to say that we’re moving into a section of the discussion here where what we’re going to be doing is walking through a series of basically reports or analyses that our team did. One of them here that we’re about to look at is around global e-commerce checkout buttons.

So with that, the answer to the question, Bryan, is yes, it is massive, and often understated. When I say often understated, I think oftentimes what we’ll see is people citing the size of the retail e-commerce market and considering that to be all of e-commerce, when the reality is e-commerce goes well, well, well and far beyond the retail e-commerce market.

It starts to look at things like online travel, rideshare, gaming, donations, streaming subscriptions. Really, the list goes on. And the point is, what we do is we add retail e-commerce and non-retail e-commerce to come up with what we consider to be the true TAM for many of these companies that we cover within e-commerce.

When we get the numbers all together, it comes out to a global e-commerce true TAM on an ex-China basis, a little bit north of $8 trillion. Wow. For context, about three and a half of that is retail e-commerce. So you can see how much bigger it is when you add in all these other categories.

Bryan Derman: More than half is the other stuff, and that’s a great point. I mean, travel is almost 100% e-commerce in some ways. Maybe we still check out of a hotel in person from time to time, but try to find a travel agent these days where you can pay for a ticket. It’s all online.

Tim Chiodo: You’re right, Bryan. Online travel is definitely a big part of that non-retail component.

When we review those same numbers on the US business, it’s about three and a half trillion, and 1.25 trillion or so of that is retail e-commerce. Now, I would just note that these are all 2025 numbers, so clearly they’re all high single to low double-digit percentages higher in 2026 and continue to compound.

But to us, it’s not just about the size of the market, but what is in it and what are the various checkout buttons. So before we go too much further, I want to show one of the charts that really stood out to our team this year that we thought might have been one of the most slept-on charts in all of payments in 2026.

It’s not from UBS Research, it’s from Visa, from earlier this year from Visa. What we’ll see here is the share of Visa’s e-commerce transactions by checkout type. And the key point is the guest checkout, so the traditional type in your name, Bryan Derman, address, card number, manual entry guest checkout is now only 16% of the e-commerce transactions that Visa sees, and clearly a very, credible data source.

What also stands out here is this number was as high as 44% not too long ago, just before COVID in 2019. I bring this chart up only because it was really what inspired a lot of the analysis that we’re about to talk through.

Bryan Derman: Yeah. So, we’ve talked about this for a long time, particularly as e-commerce has migrated to tablets and phones. The old-fashioned, 16-digit PAN, four-digit expiration date, three-digit security code is kind of out the window, and the data you showed really reinforces that it’s not a good way to transact. So it is about checkout buttons and wallets and all of that, and, I know that’s another area where your team does the deep dive research. So tell us, who’s winning the button war out there?

Tim Chiodo: You got it. This answer is short and sweet. It is three different categories or buttons. It is, number one, Apple Pay, number two, Shop Pay, and number three, buy now, pay later as a category. All three of them have something happening that is TAM expansive to them.

Let’s start with the first one in Apple Pay. Apple Pay is expanding from a mobile-only button into a desktop button. We last checked, from our research, that the Apple Pay button was now on thirteen of the top fifty desktop websites in the US. So it’s already starting to get some traction, and you’re starting to see it pop up on desktop.

The next is Shop Pay, and simply stated, Shop Pay is moving from what was once more of an SMB product to now, with Shopify’s expansion into enterprise that’s being quite successful, they’re moving into enterprise. So SMB into enterprise, again, something that, similar to Apple Pay, it’s basically a doubling of the TAM.

And then last is buy now, pay later as a category, and what’s TAM expansive for them is really this move into the zero percent loans. So not just the interest-bearing product, but the zero percent loans, which meaningfully expands the user TAM for the product.

So those are the three, Apple Pay, Shop Pay, and buy now, pay later as a category. When we take those three combined, their share of checkout on an ex-Amazon basis is roughly in the mid-teens, let’s call it fourteen percent-ish or so. But their win share or their flow share, importantly, is about thirty-four, thirty-five percent.

In terms of some numbers that I’d like to share, let’s look at a time series that we prepared. This time series that we can see here is effectively three pie charts, one in 2019, one in 2025, or roughly today, and one in 2030, which is more of our forecast.

And what I would call out on this chart is you can see that the guest checkout, the equivalent of Visa’s number that was 44% in 2019, we have a little bit of a different denominator than them. We’re using 34%. You can see the large portion of the pie on the left. We have that getting down to roughly 7% by 2030. You’ll also notice the Apple Pay buttons going up and up, starting at 3% share, going to 8% share, and going in the far right to 12%.

And again, we’ll mention this later, but all of this data, all the backup, the reports, et cetera, of course, we’ll make available to the audience, and people can reach out, and we can gladly send you the full reports, the backup Excel, and take any questions that you might have.

Bryan Derman: So Tim, the data you’re showing reflects the decline in PayPal and there are a number of changes, challenges going on in that company at the moment.

There have been leadership changes. There has been a takeover bid from Stripe and Advent International, which, as you pick up the paper this morning, seems to be off the table again. But what did you make of that idea of combining, let’s call it combining Stripe with PayPal and what kind of strategic sense that might have made to you, or not?

Tim Chiodo: Sure. So what we call out about PayPal is that it is a super unique asset in the payments ecosystem. So that two-sided network, it’s really hard to recreate that. Challenging to recreate 400 or so million users on one side, millions of merchants on the other, and just generally all else equal, a two-sided network is going to be more valuable than a one-sided business. The accounts, the users, the identity aspect, data, the multiple payment methods per user, all of this is increasingly valuable.

What the company’s currently going through is they’re making some transaction margin dollar investments, and these are a part of their guidance this year, and that’s really a few things. Part of that is rewards programs, part of that is co-marketing, part of that is working with the merchant partners to improve the positioning of the button, not just the regular PayPal button, but also their pay later and, or buy now, pay later offerings that they have.

In terms of how things may or may not have gone with Stripe, just one thing we were mentioning is that some of this transaction margin dollar investment can be challenging to do in the spotlight as a public company when the branded checkout business makes up roughly 60% of their gross profit. And there was an argument to be made that possibly that is an easier investment to make as part of, call it, a subsidiary of a private company. Just one thought on the ease of that transition, again, with the transaction margin dollar investment.

Bryan Derman: Well, definitely is a unique asset, as you point out. Two-sided networks are few in number and, in the right hands, I think can do some really interesting things. Speaking of which, let’s get into the meat of the issue here, ’cause you said Visa and Mastercard are still your top picks, obviously some of the most investable names in the space that you and I inhabit.

And maybe for the first time, or one of the first times, I’ll say, in the, 20 or so years that they’ve been public companies, as we pointed out, they underperformed a little, sort of, mid-single digit performance in a market that’s up almost 20% in the last year. I think they’ve done a little better recently, but what would you say has been holding them back overall compared to the market at large?

Tim Chiodo: I would say it’s really three big buckets. The first being regulatory/legal, the second being alternative/competition, and the third, for lack of a better term, we would call other. On regulatory and legal, it’s been the interest rate cap headline that we all woke up to earlier this year. It’s been the Credit Card Competition Act, the Visa DOJ case, MDL 1720.

When we go to the alternatives and competition, it’s things like stablecoins. It’s account to account payment systems in the US and in other countries. It’s the discussion in Europe around the Wero and digital euro, and then, of course, the Capital One Discover deal.

When we go to the other bucket, it’s things like agentic commerce uncertainty, and I would say the market’s starting to come around on that. We’ll touch on that a little bit later in today’s talk. And then also, of course, the topic of cash to card.

Bryan Derman: So let’s pick off a couple of those so you can address them, ’cause if we just leave them there, we’ll all get scared and say, “Okay, no wonder they underperformed.” I’ve been a little bit obsessed with CCCA, the Card Competition Act, where it’s picking up some steam in Washington, and for those who don’t follow it that closely, it sort of says that all the issuers on the credit side would now need to have a secondary network and they couldn’t just go from Visa to Mastercard and Mastercard to Visa. There would have to be some third player who was not in the top share position or the second position.

How do you handicap that one and think about, I think it is getting more likely that something could happen there. If it did, what does it mean for these names?

Tim Chiodo: You got it. Thank you, Bryan. Well, first of all, we really appreciate the Glenbrook view and some of the insights that your team shares with us on this, so thank you for sharing that perspective. And I like the way that you phrased it. A part of what we do as analysts is we try to quantify what would it mean in that scenario, and we try to put some numbers around it.

And I’ll lead with the conclusion. For us, the revenue that we think would be even exposed to the topic, and I want to be really clear here, this is not us saying that we think this is how much revenue goes away or is it truly at risk, but it’s kind of size the revenue that is even addressable by the topic. And to us, that’s roughly 7 to 11% of Visa’s revenue and maybe 2 to 7% of Mastercard’s revenue. Again, that’s even the revenue pool that is, call it, at question.

How do we arrive at this? What we do is we start with the US net revenue that is disclosed by the companies, and we back out some of the inbound cross-border revenue. Remember, that is a card coming from another country into the US with a portion of those fees being paid by a US merchant. That is technically counted as US revenue, so we remove that. We take out debit, and we take out parts of value-added services that wouldn’t be impacted. And really what we’re doing is we’re trying to narrow it down to just the pure domestic credit business and a little bit of the associated value-added services that would attach to that.

Bryan Derman: It’s a good reminder that these are big global companies, right? And the US is important, but as soon as you screen out the rest of the world, it takes a lot of the revenue out of play right there.

Let’s pick up on that cash to card migration has been the great mega driver of these businesses for couple of decades now, I want to say. You did the work on this. How much room do you think there is left? How much cash is left in the world that needs to find its way onto a card or some other digital wallet or whatever it might be?

Tim Chiodo: Sure, Bryan. So when we think about the growth algorithms for the card networks, cash to card is certainly a component, but it’s a smaller component today than it was a few years ago and certainly 10 years ago.

That growth algorithm really is real PCE, plus inflation, plus cash to card, plus contributions from areas that are outside of PCE or sometimes called new flows. Our math suggests that there’s still some cash to card to go outside the US and a little bit in the US, but it’s depleted to the point that some of our analysis in the US suggests that there hasn’t been a sizable or meaningfully noticeable cash to card benefit in the US for really the better part of the last half decade.

The way we run this analysis is we try to do an apples to apples comparison. This is on the US market specific. What we do is we take PCE, or personal consumption expenditure, and we take what we believe are some of the most addressable categories for the card networks, and we look at their growth. And then what we do is we compare it to what we believe to be the most comparable portion of the Visa, Mastercard volumes, which is backing out estimates of the Visa Direct volumes, the Mastercard Move volumes, and of course, the commercial or B2B volumes.

Why do we remove those? Because they’re not associated with PCE. And just to give a sense of how meaningful that can be, our most recent estimates for Visa Direct suggest that it’s now roughly about a high single-digit percentage of Visa’s volumes, and with growth that’s been in sort of the 20-ish percent range, you can quickly get to a conclusion that Visa Direct is adding closer to 200 basis points or so to volume growth.

So of course, Visa’s volumes are growing faster than PCE. One of the contributors we’ve mentioned has been the very fast growth and lots of success that they’ve had with Visa Direct.

Bryan Derman: Yeah, and just a reminder for listeners who don’t traffic in this all the time, PCE, personal consumption expenditures, sort of roughly speaking, the government’s measure of retail payments volume. And we see Mastercard Move and Visa Direct sort of existing outside of that. They are not primarily used to buy things. They’re not really for retail payments or retail purchases. They satisfy other kind of payment scenarios.

So, Tim, can we pick up on the other point about alternatives to the card networks and expand on that a little bit? And then, in particular, we have seen a movement for some years now, toward domestic networks being stood up to compete with the big US-based global payment networks, and we hear people now calling this payment sovereignty.

Countries, in this sort of tenser global environment that we’re in, countries wanna have control of their own payment systems and make sure they’re not overly dependent on somebody else’s payments company that could be sanctioned. We saw that happen to Russia with respect to the US-based payment networks.

That sentiment has been present for a long time in Europe, where there’s been a desire to stand up a Pan-European system outside of Visa and Mastercard, and obviously that’s a big market for Visa and Mastercard. And the latest effort here is the Wero effort that’s beginning to spread around Europe. Give us some of your dimensioning on what sort of threat that could represent to the two big card networks.

Tim Chiodo: Sure. Thank you, Bryan. A recent report that we did as well, of course, that we can make available. I would agree with your comments. The European payment strategy does seem to be focused on exactly that, right? Resilience and sort of reducing the reliance on non-European payments infrastructure.

To be clear, we do not think it’s about replacing Visa, Mastercard. It’s more about having a viable alternative operating in parallel. And when that is the case, our view is that the card networks can compete. They always do, and quite frankly, they compete quite well. Another thing we’ve pointed out in our research is that the Wero currently does not extend credit, and of course, Visa, Mastercard issue credit cards do, by the issuing banks. But credit is one piece that is not a component, at least currently, of the Wero system/wallet.

It also doesn’t do cross-border, at least outside of Europe. Certainly, intra-Europe is the plan, but outside of Europe, there wouldn’t be the cross-border acceptance footprint. And credit and cross-border are extremely important to the card networks. Not to mention all of the other reasons why we think the networks can compete quite well, the laundry list of items around fraud and the investment behind fraud, tokenization, chargebacks and dispute resolution, the trusted brands. Of course, the list goes on. And again, the summary is we think the networks can compete quite well.

Bryan Derman: So Tim, what I think I hear you saying is that maybe these two systems could exist side by side, that Wero might find a place more so on the debit side, is the point you’re making because in its core it’s an account to account system, and there would still be room on the credit side for Visa and Mastercard, some debit as well, and then the cross-border piece, into or out of Europe. Is that sort of how you see it?

Tim Chiodo: Yes, that’s right. So not one or the other. Certainly both can exist side by side. So what we try to do is similar to what we were talking about earlier with CCA and talking about what portions of revenue are even exposed that might have, in a more bearish scenario, slightly slower growth, and that’s maybe a reasonable way to think about it.

It’s not that these revenue streams go away, it’s that they might see slightly pressured growth in the downside scenario. Similar kind of analysis here. What we did, we tried to basically put a box around what is the European exposure to this topic. And for Visa, we landed on roughly seven to 12% of revenue, and for Mastercard, 12 to 16% of revenue, clearly because Mastercard has a larger, as a percentage of its mix, European business.

And then we ran a scenario-

Bryan Derman: More European focus than Visa. Yeah.

Tim Chiodo: Yeah, that’s absolutely right. Then we just run a scenario where we say, “Hey, illustratively…” And again, we’re not trying to make a call that this is how much share they will gain. We’re just saying illustratively, if the Wero were to gain over some meaningfully long portion of time, call it 10% share, then you’d be talking about a point or maybe a little more than a point of revenue impact to the companies.

Again, depends on your scenario, depends on your timeline. But what we’re trying to do is just put a little bit of a box around it so that investors, our clients, et cetera, have a sense for what the exposure is.

Bryan Derman: You know, at some point here, it looks like we’re also gonna have a digital version of the euro to deal with in that market. Kinda takes us back to the cash discussion and we’ll have to see what becomes of that. Personally, I’m a little skeptical of the role of a retail CBDC in a market that already has very well-functioning instant payments, going across all those countries in a common currency. So we’ll have to see what’s additive there.

Okay. We’ve dealt with a long list of threats, Tim, but I’ll remind myself that you like these stocks. There’s an upside case here. You’ve seen them underperform and maybe you think that’s about to turn around. Without using too much higher math, can you lay out for us the case for why you think valuation could go higher in these two names?

Tim Chiodo: Yeah. Absolutely. You got it. And you’re right. We do like Visa and Mastercard a lot, and we get very comfortable with many of these topics. And what we try to do is we try to put it into a reverse DCF. So what we’ve built is an Excel framework where you can essentially pick the portions of revenue that you may or may not be concerned about and reduce the growth rate for that portion, and effectively the model will spit out a new revenue CAGR in a scenario from 2030 to 2040.

Now, I’d pause there and say, why are we using 2030 to 2040? I think it’s because there’s less consternation in the market around the sort of next two, three, four, five years of results. The card networks look like they’re in great shape. Some of these concerns that some investors might have are a little bit further out there, so we do the sensitivity around 2030 to 2040.

And really what the analysis is trying to get at is, what do you have to believe the growth slows to in order to justify the current stock price? And simply stated, what’s priced in the stocks right now, we do not think is going to happen. Visa and Mastercard are pricing in, depending on the assumption you use and this can always kind of jump around, something like a mid-single-digit revenue CAGR from 2030 to 2040, and quite frankly, our team thinks that it will be much faster than that, and therefore both stocks, in our view, are excellent buys.

Bryan Derman: Okay. So now I understand why you call it a reverse cash flow analysis. Now, tell me how bad it would have to be before these stocks are overvalued, and you’re saying quite bad. Exactly. I’ll give the qualitative answer. It would have to be really bad for these stocks to be overvalued. Okay. I think we’ve got that.

Why don’t we jump over to one of the other big areas of your coverage universe, which is the merchant acquiring market, and primarily here in the US, which is your beat. You’ve talked a lot about where the growth opportunities lie for the acquirers over the last few years, and you’ve defined a thing you call your swim lanes for US acquirers, describing the different areas of the market where certain competitors play.

Could you take us through your taxonomy there, maybe a little of the history of how you arrived at it, and then we’ll talk some about who’s playing where and what that means for the stocks?

Tim Chiodo: You got it. Happy to, Bryan. So yes, the question. So the question is a report series that we’ve done over the last half decade or so. We’re now on the question 6.0.

The history of the question is that it all kind of started in 2020, 2021. This was when e-commerce was just dominant, and the question at the time was, with Stripe and Adyen and Checkout growing so fast, would there be room for the scaled incumbents to continue to grow at what their current guidance was at that time, which was around low double-digit revenue growth?

We first did this analysis on global volumes. We later followed up and did the analysis on US net revenue. Personally, I think that’s a better way to do it. I think it’s cleaner. It eliminates some of the double counting. Just to give an example of that, if you’ve got Stripe working with Shopify, that’s double counting if you count both the volumes. Toast with Worldpay, and of course, there’s many other examples of this.

So US net revenue is the way that we think is the way to go. In later versions of the report, we started to add in the swim lanes that you mentioned, and we’ll get into those in a little bit later. And then we also started to add in a little bit more around SaaS platforms working with payments companies, the various operating models, whether it’s traditional referral, managed payfac, full payfac, and thinking about how the unit economics split across those, depending on how big the SaaS platform is, and depending on under what operating model is being utilized.

Bryan Derman: So Tim, with that as background, can you give us a sense of the sizing of the market that you’re coming to?

Tim Chiodo: Yes, gladly, Bryan. So I’d give three key numbers to put some sizing around the US market. Those three numbers are 14, 28 and 40. 14 is roughly 14 trillion of volume in 2026. Of course, that’s Visa, Mastercard, American Express, and more goes into alternative payment methods, other debit networks, et cetera.

The second is that 28. The 28 is 28 basis points as an industry-blended net take rate for merchant acquiring as a function, right? We’re talking about anything from the largest retailers paying a very small net take rate to the small business paying a higher net take rate. It all blends together on our math to about 28 basis points.

And then the product of those two gets us to the 40 billion, so 40 billion of net revenue. The definition of what’s in that, we do our best to attempt to remove some of the value-added services. We attempt to remove some of the hardware revenue. Inherently, some of that is less perfect, but we do our best to make it clean.

I would then also note that the 40 billion number is a little bit higher than some other industry estimates that are out there from very, very credible sources. And when I look at their analysis and I compare it to ours, I believe that some of the reasons that we’re a little bit higher is I believe we might be including more of the, the revenue from some of the SaaS platforms, whether it’s Amazon’s third-party marketplace, which inherently has a payments business, or eBay or even American Express when it serves as a merchant acquirer.

And some of these reasons, including PayPal’s net spread that they earn, could be making up some of the difference. Again, we’re not wildly off from these other sources, but we’re a little bit higher.

Bryan Derman: Interesting. Let’s come back to the swim lanes, ’cause not every acquirer is competing for every dollar. How do you sort of characterize where the major players are operating within segments of the market?

Tim Chiodo: Sure. I think it’s best to look at a couple of pie charts that describe the swim lanes.

There are four swim lanes, and three of them have something in common in that they’re all SMB related, whereas one of those is enterprise. Our most recent estimates suggest that enterprise, which is if we look at the 2025 pie chart, it’s about twenty percent or so of industry revenue. This is payments processing for large merchants. This is processing for Nike or Lululemon or Dick’s Sporting Goods. The list goes on. Payments processing for large customers.

The other three are SMB related revenue streams, and that’s defined by the ultimate underlying payer of the spread that is paid to the merchant acquiring function, if you will, is a small business. You’ll see the top right piece of the pie chart. That’s the software platform’s revenue share. This would be the portion of the net spread that accrues to the likes of Shopify and Clover and Square and Toast and thousands of other vertical and horizontal SaaS platforms. This is online marketplaces. Really, these are the aggregators, the operating systems, the marketplaces. We call this the software platform revenue piece of the pie chart or the swim lane.

The brown piece we see here at the bottom right, this is what we call the partners revenue. The partners revenue is for the payments companies that are working hand-in-hand with the software companies. This could be Stripe Connect, Adyen for platforms, Global Payments for Worldpay for platforms. There’s Finix, Rainforest, Fortis, Forward, Infinicept, and many other payments companies that can help software companies to monetize payment. Again, that’s the brown portion of the pie chart.

And then last but not least is the SMB direct, call it non-integrated, not attached to an operating system. We have that at roughly twenty percent of revenue, and sometimes this number comes off, and even to us, as maybe a little bit high because what we see with our eyes when we’re out in the real world, I wouldn’t say two out of ten times you would encounter, something like this. But the reality is it’s a much smaller portion of volume. It’s more that it’s SMB-focused, therefore the net take rate is higher, and we have that at about twenty-one percent.

The last thing I’d wanna call out here with the pie charts and the swim lanes is to show the forecast out to 2030, and the key point to make here is that the software platform revenue is the one that is gaining the most share. That is the most attractive swim lane, and we have the software platforms taking on roughly half or approaching half of the revenue of the entire industry by 2030.

Also, an attractive swim lane, of course, is the partner channel. We have it gaining share. Enterprise is kind of holding steady, and then we have the SMB direct or non-integrated SMB portion decreasing in share to only 12%. You’ll see in the backup data, which again, I’m happy to make available, we have this portion of the revenue stream kind of CAGR-ing at a, call it, negative mid-single digit rate.

Bryan Derman: Yeah. very interesting. Tim, obviously one of the big names in this space is Fiserv, and there’s been a lot of turmoil around that name, sort of similar to what we said a while ago about PayPal.

Earnings guidance has come way down there, leadership changes, activist investors coming into the company. What’s your read on that situation? Is that clearing up, getting murkier? How do you feel about that one as an investment?

Tim Chiodo: We think Fiserv is a good company. They’ve got good assets. They’ve got good people. The numbers, though, are digesting some lapping items from some initiatives over the past few years, things like some data sales, some hardware sales. The company talked about rolling back some of their pricing, and that just makes it very challenging from a year-over-year growth perspective.

There’s also been some guidance revisions and some management turnover, and this has made it a little bit more challenging for investors to get too much confidence in the company at the moment. But you start to get a couple of quarters of stabilization showing that re-acceleration, proving out the model, and you could start to see some investor interest come back to the stock.

And really what that’ll likely take is getting that revenue growth back into positive territory or more meaningfully into, call it, the mid-single-digit revenue growth range.

Bryan Derman: Interesting. Hey, Tim, let’s pivot over to another corner of the payment space that you put a lot of focus on, and that’s the restaurant POS systems.

I’ve always been interested in the restaurant space ’cause it’s kind of, in the card present world, it’s really kind of the crucible of innovation. And that even accelerated further during the pandemic. We see people doing and trying different stuff in that space. And for a business that’s populated by a lot of SMBs, it was pretty early to digitize, even going back to systems like Micros, which is now part of Oracle.

The NCR systems in that space kind of created a digital operating system for the restaurant space. And, years ago, the payment processors would integrate into those systems. But then along came people like Square working their way up from the food trucks and cafes, and began to build these integrated systems that did everything up to and including payments.

And now all of that stuff is working its way up, and you’ve got robust competitors like Toast. We mentioned Square. Fiserv has the Clover system that’s prevalent in that space, and Shift4 has its SkyTab system. How do you go about sizing that market and looking at those competitors?

Tim Chiodo: You got it, Bryan. So sizing it is not easy. And when we went about this analysis, which we call, by the way, the question for restaurant point of sale, as I mentioned earlier, it’s another report certainly available to anyone in the audience.

So the restaurant point of sale market, we looked at all the data sources, and they were so different. I mean, they had a different definition of what the market was, including this subsegment or not including this subsegment. So what we did was we tried to put our heads together and come up with our best estimate of what was most representative of the TAM for the companies that we cover. We did dozens of calls and emails and conversations with the companies and people in the industry.

And what we landed on was a number of, call it roughly just north of one trillion in TAM across roughly nine hundred thousand or maybe slightly more in locations. Now, within that TAM, I would note that we do remove two items that we think are appropriate to be taken out because they’re not overly addressable by the companies that we cover.

The first is cash paid at some of the restaurants, and the second is volumes coming through the third-party delivery providers, the Ubers, Uber Eats and the DoorDashes of the world. That is not volume that gets processed by, for example, Toast.

Another thing I’d call out on this estimate is that it might even be larger than some others. And again, that’s because we’re trying to include all the various segments of the industry, some of the secondary locations. And with the number of smaller locations out there, whether it’s online only or some of the pop-ups, our estimate could even be underestimating the TAM.

Bryan Derman: Got it. And how about the segmentation in terms of where the volume is? Is there enough for all these good companies to make money? Is there enough volume out there?

Tim Chiodo: There is. So when we talk about the segmentation, I would first start by splitting up SMB mid-market and enterprise. And when we take that one trillion number that we just talked about a moment ago, we split it roughly 650 and 350, again, using round numbers. 650 of that is the SMB and mid-market portion of the restaurant market, 350 billion is more the enterprise market. That’s by volume.

When we split it by locations, we get to enterprise locations at about 240,000 or so of that 900K, and it’s leaving, call it, 660 SMB and mid-market locations. So those are two ways to split it, right? We’ve got the volume and we’ve got the locations.

The other way we like to look at it is by gross profit, and it’s almost like the 80/20 rule in life here. What we have is, on our estimates officially, roughly 85%, but it’s in that ballpark, 80 to 85% of the industry’s gross profit pool coming from the SMB and mid-market restaurants. What we see is more or less that the enterprise locations on a per location basis, they’re paying much less for software. And obviously, they also get lower payments net spreads.

So a lot of the industry’s profit opportunity sits with that core SMB and mid-market portion of the restaurant industry. In terms of how much runway is left, I would point to, we can go to figure two from the report. The two key numbers here really are the 28 and the 12, and they are very indicative of how much runway remains. And really what they’re saying is the market’s just still more fragmented than maybe some might appreciate.

The 28% number, that is the other bucket. Those are sort of the not named players within our analysis. What you’ll see, we’re effectively taking the market size, and then we’re forecasting out some of the known or named players where we have slightly more concrete estimates, and then we’re putting the rest into other.

And what we’re trying to see is if the other bucket turns out to be a sensical number or not, and it does in this case. So what is in “other” is often what we’re asked, and other includes lots of good companies. It’s not to say that other is this easy bucket to go after. It’s just to say that there remains some fragmentation. Global Payments and Genius and Heartland would be in there. Lightspeed, SpotOn, TouchBistro, Tabit, Lavu, Epos Now, the list goes on. There are many players that would be here, including some of the, call it, non-modern point-of-sale restaurant volumes. A portion of that comes from the non-Clover SMB business.

Bryan Derman: Yeah. So it’s just an enormous market. Like you said, a trillion dollars, getting on a million locations. I mean, this is just a lot of cheeseburgers, out there. People, you need to do some of your own cooking because there’s an awful lot of money going to restaurants, but it’s been a gift to the payments business. So we, like that.

The other element, and in some ways, Tim, I think what makes these integrated systems different is all the value-added services that they bring, especially to these SMBs. It’s payroll processing and tax filing services and, probably the big one is lending against the cash flow they provide.

How important a piece of the picture are those ancillary businesses when you look at these integrated players, Toast and Clover and Square and so forth?

Tim Chiodo: You got it, Bryan. This is a great topic. I’m glad you brought it up. So the main thing that I think about with these additional embedded financial services is that they really do a couple of things.

Number one, they reduce the churn, right? So if you are lending to the underlying business, you’re gonna have multiple benefits, both direct and indirect. The second thing, you’re increasing your ARPU, right? And when you combine those two things, reduced churn and increased ARPU, that allows you to be more aggressive and play offense on CAC. You can spend more to go out and get the customer.

In other words, you know what the paybacks are going to be or they’re going to be, the LTV to CAC might be more attractive because, again, a better churn assumption and a better ARPU assumption.

Bryan Derman: And the ARPU, average revenue per user, so you’re saying each restaurant location is generating that much more revenue for the provider of the payments and the related services so that they can spend more to acquire them ’cause they’re gonna get more out of that relationship once they kind of land and expand.

Tim Chiodo: Well said. No, yeah, you’re right. You’ve got a software revenue stream, a payments revenue stream, and now maybe a lending revenue stream. Right. And it goes beyond that. Card programs, debit and credit, there’s instant transfer, there’s payroll, and really the list goes on.

But you’re right, Bryan, you mentioned earlier, the main one where we’ve seen the most success is the working capital programs. And you asked for a few examples. Let’s put some numbers behind it. One of the most successful has been the Square Capital program or Square Loans. That’s roughly, and I should preface this by saying one of the measures we use to look at penetration of the programs is we take the loan origination volumes and we divide them by the payments volumes. It’s just a sense of how penetrated.

Square is number one on that. They have about 3% penetration, if you will, of their payments volume, and it makes up about 10% of the segment’s gross profit. For Toast, it’s relative to Square, a relatively more nascent program, but it’s been around for a few years now. They’re at just under roughly 1% or so of their payments volume, but it’s 12% of their gross profit, and part of that is because who’s taking more risk. Square tends to sell off a larger portion of the loans. Toast has a few different operating models that they use, which, which take on a little bit more of the risk in certain models.

The Shopify capital business, it’s just under 2%, and it makes up on our most recent estimates about a high single-digit, percentage of the gross profit.

Bryan Derman: So, I think the big point there is that there’s still a lot of runway there for everybody. It’s a nice business, but penetration is not probably reaching a ceiling anytime soon.

Tim Chiodo: Correct. Yeah, there’s definitely some more runway there. Square is sort of the one that people point to say, “Hey, if we could get to 3%.” But there’s also your different business mix, and you have some larger customers that might be less applicable to the working capital loan. So Square is definitely the shining star there, but also their business mix is maybe more relevant to the product relative to at least some of the others.

Bryan Derman: Hey, Tim, you, brought up Shopify there, who’s not really a restaurant POS. But, if the Toasts and Clovers and SkyTabs are the operating system of restaurants, I think in a lot of ways Shopify is becoming the operating system of e-commerce. And I just notice in my own shopping behavior, if I’m not on Amazon or maybe not on walmart.com, I usually end up finding out that I’ve been shopping at a store that is essentially powered under the hood by Shopify, and maybe I find that out at checkout because I see the Shop Pay button, or after I’ve closed a sale, it’s telling me to go to the Shop app to track the shipping or whatever it is.

Have you looked at the TAM of that market and sort of broken down the components of what’s going on in the e-commerce delivery system?

Tim Chiodo: Yeah, absolutely. So our team covers Shopify, and the TAM is very large. For e-commerce alone, it’s starting to approach roughly 3.5 trillion or so, and that’s on 2025 numbers.

We also have an alternative view where we reduce the TAM to account for some of the largest enterprise customers and platforms that might not be as overly addressable to Shopify, but we still get to a very large number that’s north of 1.5 trillion and growing. In terms of the TAM, it also expands into point of sale or in-store, and also to B2B.

So I do think that’s a good segue to look at what we consider to be, call it the five pillars of Shopify.

All right. So let’s look at the five pillars of Shopify. So the first is the North American SMB market. Next is enterprise, then we have international SMB, as I mentioned, the in-store or point-of-sale business, and then of course the B2B business.

If I was gonna call out something here in the point-of-sale market, I would just note that the size of this business is already getting up there. It’s already approaching 60 billion in volume. And just for context, this is just one vertical, right? It is retail, it is in-store only. It’s not including any of the online volumes.

And that compares to Toast, which did in 2025, just under 200 billion. So it gives you the sense of this growing part of Shopify that is maybe less appreciated by the market. It makes up about 12% or so, a low double-digit portion of their total volume. And in our forecast, we have that getting into the high teens by 2035.

Bryan Derman: Really interesting. We talked about this a bit before under the buttons, but we at Glenbrook are very intrigued by the Shop Pay system. In some respect it almost seems to us to be the slickest checkout experience that’s out there. But, as an investment analyst, does it sort of hit your radar? Does it move the numbers? how do you think about it?

Tim Chiodo: It sure does. So Shop Pay, we can see it both directly in the numbers and also indirectly in some of the market share gains and client wins. So on a direct basis, it’s already greater than 50% of their payments volume or their GPV. That’s a super high penetration rate. It also is somewhat associated with, of course, the Shop app, and we’ve done some analysis around some of the advertising opportunity associated with that. Separate topic on Shop campaigns. If anyone in the audience is interested, we can tackle that separately.

In terms of the indirect benefits, I would call it out again as one of the reasons that they’ve been winning some of the larger and enterprise customers. The Shop Pay button converts really well, and working with Shopify is a way to somewhat future-proof this portion or many portions of your e-commerce operation.

So what the company has said is that oftentimes enterprise customers might not want to start with the full set of capabilities from Shopify, and they might go sort of module by module, and one of the common starting points, not always, but one of the common starting points is to work with Shop Pay. And it’s somewhat of a Trojan horse for Shopify to get in with the customer, start to build a relationship, build credibility, and Shop Pay is, again, a common starting point.

Bryan Derman: So Tim, just back on Square, who you were mentioning a minute ago. They’re also experimenting with some new strategies. Take us through some unique things that they’re doing in the space.

Tim Chiodo: You got it, Bryan. They’re really doing two things that are very different than how the company approached things for many years.

The first is they’ve added direct field sales. So back in November of 2024, there were zero field salespeople with Square, and the goal is to get to roughly 300 or so by the end of 2027. That’s tracking really well, and it will be contributing, and already is contributing to some of the volume acceleration that they’re seeing.

The second is working with the ISO channel, and the most recent update was that they’re tracking at about 1,500 merchants per month. That’s an impressive number given not too long ago, we think that number was in sort of the 500-ish range. So it’s starting to ramp. They’re gaining traction, and again, this is a lot of distribution that is out there in the field speaking with merchants, and that wasn’t the case just a few years ago, where the company was much more heavily reliant on self on board.

And I should also say that the self on board business is doing quite well. It’s not that self on board is being set aside. It’s that these two components, the ISOs and the field sales, are being added on incrementally. So it’s additional distribution, and all of this adds up to what we forecast to be continued acceleration in their GPB growth.

Bryan Derman: I think the thing like that we’ve seen that should also be additive is a willingness on their part to plug in their payment processing into other people’s POS systems, which historically was something they didn’t do, and we’ve seen some movement on that, and we’ve seen them get some traction with that in some situations we’ve been involved in. So it’s an interesting sort of a few branches of diversification there that I think can round out the company.

Well, Tim, we have just a couple of minutes left. Can we run a couple of quick lightning round questions past you? We’ll hit some of the emerging tech in just a sentence or two. So tell me about the current investment significance of number one, agentic commerce.

Tim Chiodo: Let’s do it. Agentic commerce, good for Visa, Mastercard. We think they’re the best positioned with the agentic network tokenization, and of course, all the other reasons that we like the networks, ubiquity of acceptance, the chargeback and dispute processes.

A lot of that is extremely applicable in an agentic commerce world.

Bryan Derman: Yeah. No, we’ve been saying, payments isn’t the hardest part of agentic commerce. we can envision how that will work.

Ok, hot topic number two, stablecoins, of course.

Tim Chiodo: All right. So great use cases, many of them, global treasury, large dollar transactions, settlement, which I would note Visa, Mastercard are already doing, but maybe less necessary for a typical consumer business transaction, at least in developed markets that have really established, card programs and card penetration.

Bryan Derman: Yeah. Good point. Okay, Tim, next topic. Acquirers getting bank licenses.

Tim Chiodo: Yes. This one, we think it’s a good thing, and we’ve seen a bunch of companies in our coverage either already go there or start to go there, make applications, et cetera, and even beyond our coverage. So Fiserv, Square, PayPal, Affirm, Klarna, Stripe, the list goes on.

Many are heading in that direction, various types of licenses. But generally we think about them reducing costs, removing a dependence on a third party, more flexibility, more speed, and overall a good thing.

Bryan Derman: Yeah. It’s been a real change in terms of the ability to get those licenses. The change of administration has really changed the outlook there.

Okay. Let’s wrap up the lightning round. Give me one public company that’s flying under the radar and not getting the attention it deserves. And don’t say Visa or Mastercard.

Tim Chiodo: Sure. One that’s somewhat under the radar is Flywire. So Flywire thrives in the complexity of cross-border. So it’s not just the many local payment methods that they enable, but there’s a lot of compliance and regulatory and tax, and the list goes on in terms of the complexity that they deal with.

The issue on the stock, though, has been that they have dealt with some student visa restrictions, and their core market is education, but they do much more than education. They’re also in travel, they’re in healthcare, they’re in B2B. So Flywire, I would say, fits that description of a payments company that’s maybe flying a little bit under the radar.

Bryan Derman: Yeah. A little bit underappreciated. I can see that.

Okay. Well, Tim, what a lively hour that was. We really appreciate the time and the preparation that you put into this. We will include in all our show notes references to the several reports that you quoted. But if people want to get ahold of you, tell us how investors or other interested people can reach you.

Tim Chiodo: Great. Thank you, Bryan. Yeah, absolutely. I would echo what you’re saying there. In terms of the research reports referenced or any of the backup Excel, please just do reach out to me. I’m at [email protected].

Bryan Derman: Great, and we’ll include that in the notes as well for people who didn’t pick it up. Not everybody in our audience pays a ton of attention to the investment side of the business, but I love checking in with our Wall Street colleagues, people like Tim, who are in the business of quickly trying to make sense of all the news flow that comes out of their business.

They have jobs that force them to make quick and tough judgments about what matters, what doesn’t, who’s gonna win, who’s gonna lose, as the system evolves, and the system just keeps evolving. So great respect for the work you do.

So thanks as always to our audience for joining us. Keep doing the great work that you do. Keep the world safe for payments, and we will see you next time. Bye for now.