Today’s marketplaces and finance industries are changing at a rapid pace. The rise of eCommerce and Fintech disrupts the way we buy and sell merchandise, car rides, banking, and groceries. With that rise comes new terms that help us determine how profitable these companies are, plus how to define their pricing power.
The take rate has been around for a while, but the term has risen in popularity more recently with the rise of companies such as Paypal, Airbnb, Shopify, and Etsy. But companies such as Visa, Mastercard, and American Express have used these terms to define their revenues for decades.
Defining the take rate and understanding its importance in Fintech and the online marketplaces helps investors translate how these businesses, such as Amazon, eBay, and Paypal generate revenues and grow their user bases.
For example, recognizing the strength of the online marketplaces, Paypal purchased Honey.com in 2019 to capture more take rates via the marketplaces and move beyond processing payments.
In today’s post, we will learn:
- What is a Take Rate?
- How is the Take Rate Calculated?
- The Importance of the Take Rate in eCommerce
- The Take Rate in Fintech
- Investor Takeaway
Okay, let’s dive in and learn more about the take rate.
What is a Take Rate?
A take rate is a fee charged by a processor or merchant on a transaction, either by a third-party ala Amazon or by a service provider ala Paypal. Those take rates are the primary source of revenues for companies such as Paypal, Shopify, Etsy, eBay, and many more.
A simple example of the formula to determine the take rate for a company is to divide the revenue generated from those fees by the total merchandise volume or transaction volume, more on this in a moment.
The take rate multiplied by the total volume transacted on the platform generates revenue for the company. For example, one of the strengths of Shopify is the ability to keep customers on their platforms by allowing a two-sided transaction. As a result, customers can shop and buy on Shopify’s platform, which generates revenue for the company from the fees to process the transaction. Also, the fees it generates from the merchants selling their wares on the platform.
The take rates differ across platforms; for example, Amazon and eBay charge anywhere between 5-20% on their marketplaces, which are fees they collect from their third-party sellers which generate revenues for Amazon and eBay.
Service providers such as Airbnb and Uber charge between 15-25% fees for their platforms, which they charge to the service provider, driver, or homeowner, to generate their revenues. These higher fees are a result of the lower transaction activities, compared to Shopify, for example.
The higher transaction frequencies such as online merchants, Shopify, Amazon, and Etsy can charge much lower take rates than Airbnb, which has far lower transaction frequencies.
More conventional businesses like Walmart don’t work with take rates; their revenues are more old-school. Instead, their income statements reflect the flow of buying inventory, stock shelves, paying employees, and customers depleting the store’s inventories.
A company like Shopify is a different model. They sell and process their payments through an online portal that allows the customer and merchant to transact virtually, and all the fees from buying and selling flow to Shopify as their revenue.
To consider evaluating a company like Shopify, Etsy, Airbnb, Uber, or Paypal, we need to consider the Gross Merchant Volume (GMV) or Gross Payment Volume (GPV) to understand the generation of revenues. Considering both the GMV and GPV helps us understand how much activity occurs on their platforms, and the take rate tells us how much revenue they can capture from that volume.
The higher the volume on the platform, the more ability to grow revenues, which is why we need to look for GMV or GPV when searching the financial statements. Considering both those metrics, take rates, and revenues will tell you how well the company performs.
How is the Take Rate Calculated?
The calculations to determine the take rate for both service providers and merchant providers is simple division. The bigger challenge is finding the information in the company’s financials to make the calculations.
First, let’s look at the take rate for Paypal. I will use the data from the latest 10-k, dated December 31, 2020. I found the information using the “ctrl-f” function to search for Total Payment Volume (TPV). I found both of these charts, which will help us calculate the take rate.
- 2020 = $21,454 million
- 2019 = $17,772 million
- 2018 = $15,451 million
Total payment volumes:
- $936,062 million
- $711,925 million
- $578,419 million
To determine the take rate for Paypal, we divide the net revenues by the total payment volume:
Take rate = net revenues / total payment volume
Let’s look at Paypal’s take rate over the last three years:
Okay, let’s look at one from the merchant side. We will try Shopify next, and using their latest 6-f, dated April 28, 2021, we can determine what Shopify’s take rate is for their merchant processing segment.
The company lists the Gross Merchandise Volume by using our friend “ctrl-f” about 29 times in the filing. We find that Shopify facilitated over $37.3 billion in transactions on the site in the quarter, which was an increase of 114.4% over the year-ago quarter.
To determine Shopify’s take rate, we find that the company’s merchant revenues for the quarter were:
- $668 million
Gross Merchandise Volume = $37,346 million
- Take rate = 668 / 37,346 = 1.79%
That was an increase from the 1.62% take rate in the first quarter of 2020, which was:
- $282.4 million in merchant revenues
- 17,415 million in GMV
- Take rate = 282.4 / 17,415 = 1.62%
Now, let’s look at the take rate for Uber, and we will use the numbers from the latest 10-k, dated March 1, 2021, and we will separate the main three drivers of revenue for the company by their take rates:
After all of that, I think we understand how to calculate the take rate for any merchant processor and service company. The biggest issue is determining the company’s metric to track the volume of transactions across their platform.
Keep in mind the metrics, ratios, and numbers we are talking about at this time are non-GAAP numbers, which means that no company is under any obligation to track these numbers to help investors determine the profitability or drivers of growth.
The Importance of the Take Rate in eCommerce
Online merchants like Amazon and eBay collect their fees and commissions from their third-party sellers, tracking their take rates. For example, eBay collects fees for listing products and services on their website, plus the final fees they collect from a successful sale.
The key issue with the take rate in online marketplaces is the yin and yang between maximizing profits and keeping customers on the network. If a company tries to increase its take rate, as eBay has done by increasing its take rates and final fees to gain a bigger piece of the pie, but in doing so opened the door for companies such as Etsy to move in and offer lower fees and lure away the more cost-conscious customers.
When we look at the financial health of some of these online marketplaces, such as Amazon, Shopify, eBay, and Etsy, it is useful to look at the gross merchandise volume and the profitability of each segment.
Volume growth is important because the more users are on the platform, the greater the chances of revenue growth. And if the company can create more user value adds, they can keep users on the platform.
One of Shopify and Etsy’s strengths is keeping users on the platform and deepening the customer relationship by offering more products and functionality.
Focusing on the volume growth helps keep track of each company’s health, and tracking that volume growth will help you see if a platform is healthy.
But also tracking the ratio of profits to the transaction volume is directly proportionate to the take rate. By tracking the profit ratio, we can see that the company is finding the right balance between income and revenue.
Keep in mind that there is a difference between types of online marketplaces. For example, Amazon, eBay, Shopify, and Etsy offer third-party transactions on their platforms, which allows all of these companies to generate revenues from both the buyers and sellers of products. These are two-sided marketplaces and allow the platforms to grow their revenues quickly as the marketplace volumes grow.
That makes companies like Amazon and Shopify such strong business models and allows them to grow rapidly. Shopify also generates revenues from its subscription services or recurring revenues from its merchants; it’s a brilliant business model.
Take Rate and Fintech
The take rate idea is the same for Fintech. Companies such as Paypal, Square, Global Payments Network, Stripe, and Visa all take a percentage of each transaction in exchange for easing the transfer of money from a buyer to the seller.
Generally, the fee is taken from the merchant, who pays the merchant acquirer, who handles the transaction and pays the take rate fee. As a buyer of a product for $100, we don’t see the fee in our transaction, but the seller of the product only receives $97 for the product as the fees are paid to Paypal, Visa, and any other company processing the transaction.
That take rate for the transaction is 3%, but it doesn’t all go to Paypal. Others are enabling the transaction that takes a cut of that percentage.
Below is a great example of how the whole process works via Paypal.
Because of competition, the take rate payment processors such as Paypal can charge vary on the type of transaction. For example, depending on the source of funding, Paypal’s net take rate will differ. If the customer uses a debit card or credit card, then Paypal has to use the card network, Visa or Mastercard, and bear the costs of using that network, which reduces Paypal’s take rate. Paypal takes that into account when transacting other payments; the company won’t charge anything if they use their Paypal account or a bank account to transact. But if they use a debit card or credit card, they charge the customer 2.9% plus a $0.30 transaction fee. On the seller side, they pay 2.9%, plus the $0.30 transaction fee regardless of the funding source, which is extra profit for Paypal.
Visa and Mastercard are the two most dominant players in the fintech payment processing world. They operate the payment rails for all card processors; in other words, they are the gateway for all processors.
Neither company has actual credit cards or bank accounts; instead, they created a network that allows all payments to flow across that network between buyers, merchant processors, banks, and sellers.
Of course, they do charge a fee for this gateway, depending on the type of transaction. But by and large, these take rates are stable across the network and allow for stable processing across the networks. As of 2021, the average take rates for credit card processing are between 1.3% to 3.5%, depending on the type of transaction and network.
For merchants to accept credit card payments, they must agree to interchange fees (Visa and Mastercard), assessment fees, and processing fees. These fees get split up between the card’s issuing bank, payment network, and payment processor.
Those fees, although small on an individual basis, make up large amounts as the network grows. That is why payment processors such as Square and Paypal get so much attention, plus processors such as Square have started banks to help grow the unbanked revenues and allow for easier payment options.
For example, Paypal recently announced they would raise their take rates for merchant payments to 3.49% plus $0.49 per transaction. That was a raise from 2.9%, plus $0.30 per transaction. The next move is up to competitors, Square and Stripe, to follow suit or go lower.
As we discovered, diving into the take rates for online marketplaces, service providers, and payment processors tells us a lot about the profitability and growth of the companies.
The competition and demand for these products and services grew exponentially during the pandemic, and many think that demand will continue long after, as habits and patterns become the norm.
The take rate calculation itself is quite simple. The biggest issue is determining what to compare that revenue to. It is important to analyze the company’s profit margin because those ideas are correlated.
Keep in mind that take rate, the gross payment volume, gross merchandise volume are non-GAAP numbers, so there is little standardization across the board. It might take a little hunting to find what you are looking for, but it is there if you look deep enough.
The take rate is also a great metric to track the strength of both the company’s website volume and pricing power. Paypal is a great example of a strong company with a growing base reliant on its platform to move money. As someone who worked in banking for a while, I know how sticky banking or money platforms can become, as it is painful to move.
As Paypal via Venmo becomes more relevant, it will grow the ability to continue to raise prices incrementally, which will grow its revenues.
These are all ideas and metrics to consider when analyzing online merchants, payment processors, service providers, or any company using online networks to conduct business.
And with that, we will wrap up our discussion on take rates.
As always, thank you for taking the time to read today’s post, and I hope you find some value in your investing journey. If I can be of any further assistance, please don’t hesitate to reach out.
Until next time, take care and be safe out there,