Fintech stocks can be tricky for investors. The global financial market is one of the largest investment opportunities, worth more than $20 trillion. There are hundreds of existing banks and payment companies fighting against a wave of new, innovative challengers. How do we take advantage as investors?

What if you could "play the field," owning stock in a company that was the connecting piece between new and old payment technologies? Marqeta (MQ -1.92%) serves this role, and if you are thinking of investing in fintech, you need to know about it. Here's why.

How do payments work?

When you swipe your payment card to buy something, a fundamental transaction process occurs:

  1. The merchant's bank sends a request for payment to your bank or credit card company.
  2. The bank or credit card company approves or declines the transaction.
  3. The transaction authorization travels back to the payment terminal (where you swiped).
  4. The payment is then "settled"; the funds eventually move from your bank to the merchant's bank.
Person using a digital payment card on their phone.

Image Source: Getty Images

The payment networks that operate between the banks are often referred to as "payment rails." Networks such as Visa or Mastercard work by running the data back and forth between the banks.

Think of payment networks as telephone lines between you and the merchant. Telephone lines carry the call data from one side to the other and collect a small fee in exchange for using the network. Because merchants are the party requesting the payment, the networks charge them user fees. We as consumers don't see them; merchants will bury them into their pricing, or offer a "cash discount" to customers.

Marqeta connects the new and old

Fintech companies have begun emerging over the past decade, many bringing new and exciting business models to the world. Companies such as Uber, DoorDash, and Square are all just hitting their stride.

How does Uber charge your bank account or credit card for the exact amount of your fare? How does DoorDash enable its drivers to pay for and pick up meals on behalf of someone else ordering it? Marqeta connects its customers, typically fintech and businesses that require payment solutions, with the existing payment infrastructure.

Marqeta has APIs (application programming interface software) that enable a company to issue digital and physical payment cards quickly and simply. These APIs are customizable, which gives companies the flexibility to create unique payment tools. For example, with Marqeta, a DoorDash driver can pay for their customer's restaurant order because Marqeta makes sure that the payment being processed matches back to the correct information on the DoorDash app, such as the order information, amount, and customer data. It funds the driver's card with the exact amount needed for the order.

Marqeta has relationships with banks and the existing payment networks such as Visa and Mastercard to connect new payment applications to the current payment infrastructure that still dominates the commerce landscape.

Growth through big customers

In the second quarter of this year, Marqeta's first as a public company, revenue rose 76% year from a year earlier to $122 million. Its customer list features several well-known companies, including Square, Uber, DoorDash, Affirm, Klarna, and Instacart. The company generates revenue by taking a small fee on payments processed using its APIs, so Marqeta grows in lockstep with its customers.

Let's look more closely at revenue. Square is Marqeta's largest customer, contributing 76% of Marqeta's revenue in the quarter. Some could argue that this is a risk because if something were to happen to its relationship with Square, it could be a disaster for Marqeta's business. On the other hand, Square itself is a rapidly growing business; Marqeta helps power Square's Cash App, which has seen its volume grow fourfold during the past two years. In Square's most recent quarter, Cash App revenue grew 87% year over year (excluding Bitcoin).

Marqeta also serves many companies in the buy now, pay later (BNPL) market. Management noted that its BNPL revenue increased 350% from a year earlier. Analysts are forecasting 35% revenue growth in 2022, but with its customers growing so much, I could see Marqeta surpassing expectations. 

The stock hasn't gotten the market's attention... yet

The stock has sold off since going public in June and now trades near all-time lows, roughly 33% lower than its close on the first day of trading. With a market cap of about $12.3 billion and estimated 2021 revenue of $478 million, Marqeta's price-to-sales ratio is 22.

Usually, investors might consider this a bargain for some tech companies. Still, because Marqeta's gross profit margin is just 38%, I think the current valuation is fair considering the company's revenue growth and future growth opportunities. Marqeta touches a majority of the innovation happening in fintech. Investors looking for a young company with growth ahead should give it some thought.