The payment processing industry has become far more crowded than it was just a few years ago. However, recent fintech IPO Flywire (NASDAQ:FLYW) is doing things a little differently. In this Fool Live video clip, recorded on June 7, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why Flywire could be worth watching.
Jason Moser: We got another fintech IPO. I'm of two minds here, Matt, because on the one hand, well listen, we love this space, we love to talk about it. Fintech is a fascinating opportunity for investors it seems like. It's also one that it's been around for a little while now. We've been using that word Fintech for some time and now we have another fintech IPO that's just come public here: Flywire, which just came public here recently. Flywire is another fintech IPO. That's good. But then it also begs the question, what do they do differently? We're going to get to all of that. Really we wanted to take a big-picture look at this business, understand what they do, come up with some things we like about it. Maybe some of the things we're not so sure about, give listeners a general idea of what this business is all about. What's first and foremost? Let's talk a little bit about what Flywire actually does. What is Flywire in the business of?
Matt Frankel: Flywire is a payment network. Think of them like Square. They're the intermediary between a merchant and its customers. This is a crowded space. Not only do you have giants like Square, but there are a lot of other little payment networks that we've talked about on the show even. Like you said, you really need to look for what differentiates these. In the case of Flywire, it's what they process payments for. They're very specialized in terms of the industries they focus on. Specifically they focus on the education industry, such as processing payments for universities, the healthcare industry. Four out of the 10 largest healthcare systems in the U.S. use Flywire to process their payments. Business-to-business payments, which is a really broad market, that's probably the biggest one they focus on and probably the biggest opportunity, but the one that's most crowded.
Moser: That's that B2B that you would always say. We even see B2B with companies like MasterCard, Visa talking about that B2B opportunity as well.
Frankel: That's the biggest market I'm talking about, but it's also probably the least likely for them to really develop a big share of. But you have education, healthcare, and travel is the other big one they focus on. These are pretty big markets and Flywire knows that Square is still going to be Square. They are the big player in this space for the moment, PayPal is still going to be PayPal. Education payments is a $660 billion market opportunity by itself, travel is $530 billion a year, changes hands every year for travel, healthcare is $500 billion in size. These are some pretty big niche markets. If Flywire can really take share of, I mentioned four out of the 10 leading healthcare systems in the U.S. use Flywire, there's a lot of potential here. On one hand, the whole payment processing space is getting crowded. All the big players in it are growing very fast. At some point, there's going to be a lot of competitive pressure here, but I do like that they specialize. I can't really think of many other of the big payment processors that really specialize. There's Shift4 Payments is another one. They specialize in the hospitality industry like a lot of restaurants and stuff like that. They're pretty specialized, but I don't know if anyone who specializes in education payments or travel payments or healthcare payments, especially to the extent that fly wire does. So unique company.
Moser: I'm glad that you said it because when I was looking through the S-1 trying to get a grip on what they do and what makes them different, that seems like to me that was at the top of the list. To your point, it is a small business. They generate $150 million in trailing-12-month revenue. It is a tiny little company and it's a small-cap stock, $3.2 billion market capitalization. But the thing that stood out to me was that specialization. They call that out, they say it is a vertical-specific software and that is backed by what they call deep industry expertise. I mean, on the one hand, I appreciate that but you mentioned the "S" word earlier, Square and that is a company we talked about it a lot on the show. I think you and I both own shares still of Square. Very happily going to let those shares just keep on doing their thing, too, because one of the things that attracted me to Square among other things, was that, I get that idea of vertical-specific software. I mean, whether you're a retailer or a restaurant or something else, it does seem like Square is really providing the products and services for those specific verticals. The thing with Flywire, and you touched on this. It seems like Flywire is focused on some different market opportunities that maybe Square isn't necessarily focusing on. Maybe that's the opportunity. I don't know.
Frankel: The way the company puts it, these are some sectors that have been left behind by the evolution of the payment industry. As you mentioned, it's a pretty small company, $150 million in trailing-12-month revenue roughly. In 2020, they did about 132 million in revenue but they're growing fast. That's 39% growth over 2019, which given the pandemic, that's pretty impressive.
Frankel: I have to imagine as a whole, education payments were down in 2020.
Moser: I would imagine.
Frankel: A lot of their travel, especially they focus on travel payments. Some of their core markets got pretty hard hit in 2020 and for them to still grow revenue at 39% is pretty impressive. Just to give you an idea, you say it's a small company, which is compared to some of these big fintech. They processed $7.5 billion of volume in 2020. It's crazy how big the fintech industry has got that we consider that to be a small company. PayPal's over $1 trillion in annual volume. Their client retention rate is 97% which is pretty impressive. Over the past three years, their dollar-based net revenue retention rate, which is pretty much, that just means how much they are existing customers are spending, has been 118%. Meaning that the average customer that spends $100 with them a year ago, is now spending $118 with them.
Frankel: That's the thing with these payment companies. One thing that all investors should know in the Fintech space, there's no real reason for a company to be loyal to one payment processor or another. A lot of companies use several different payment processors for their needs. There's no reason a company couldn't use PayPal for its online payment, Square for some of its payments, Flywire for some of its payments, it's really tough for them to compete on price. Pretty much all of the fee is passed through from the payment networks like these are Mastercard and things like that. Each of these FinTech companies gets 10 cents out of every transaction. The real differentiation is the software, as you mentioned the vertical-specific software. As companies see value in Flywire's, vertical-specific software, they might be gradually shifting some of their payment needs over from PayPal to Flywire or things like that. Which is where you're seeing this dollar-based net revenue retention rate over 100% coming from. Customers are seeing more value in the product so they are shifting more of their needs over to Flywire over time, which if that trend continues, things could get very interesting for this business.
Moser: Yeah. I mean, it is very early days. I mean, this is a business certainly that we're just starting to learn more about. I'm more than happy to give it a few quarters to better understand the business. See how management behaves as a publicly traded management team. I don't feel like there is any rush to buy shares in a business like this but by the same token, it is something that absolutely compels me. I think this vertical-specific software, I think there's something to that end. What's something that you feel like you're going to need to keep an eye on what the business like this? This is going to be a business we're going to be talking about I think fairly regularly on the show. It's one that seems like it has a lot of potential in the space. What's something you're going to be keeping an eye on with a company like this to try to judge whether it's something that's worthy of taking that next step as a possible investment?
Frankel: I mean, a few more quarters of that 100% plus revenue retention, that will definitely be a positive if they can keep this growth rate going. I want to see what they're doing in 2021 now that the big part of COVID is behind us, the big effect on the business. As education ramps up again and travel ramps up again and things like that, I want to see how their business does. I will say with the vast amount of FinTech IPOs recently, a company is really got to knock my socks off for me get in on the IPO level these days. I mean, I don't know about you, but it really has to wow me from the get-go for me to get in on the IPO. There have been a few that I've been really interested in, but Flywire is one I might have to keep on my radar. It's an interesting company. Like I said, the specialization is really at a different level for most other fintechs.