Insights

“When you have a business and you want to keep the business, not exit it, your decisions start to drastically change. I think that’s how you build longevity and sustainability at as a business.” – Adyen CEO Pieter van der Does (emphasis ours)

The payments industry, over the years, has ended up with a bulked-up structure – too many parties and actions involved. It is estimated that approximately 10% of all payment transactions fail for e-commerce and m-commerce transactions. Interestingly, nearly 25% of the declined transactions lack valid reasons[1]. Further, dealing with a multitude of counterparties results in significant operational complexity for the vendor’s systems.

For an Enterprise customer, such frictional costs can add up very quickly. Adyen, which is Surinamese means “start over again”, was started by Pieter van der Does, CEO and Arnout Schuijff in 2006 to simplify the global payment process. As against a multitude of counterparties, the Adyen way results in a unified commerce system across channels – online, mobile, and in-store. Merchants end up with centralized customer data and reports. Transaction fail rates are materially lower. Further, Adyen does all this at much lower direct cost with its take rate being lower than its competition. Importantly, it maintains fully transparent pricing.

At the center of Adyen’s truly disruptive business model is its differentiated culture, one that is reflected in the statement above by Pieter van der Does. It’s a business that they built to keep as against with a view to exit it to the next willing buyer looking to pay an even higher price.

As we discussed in our previous article, corporate culture is driven by the company’s mission and vision statement which lays the foundation for the business. In case of Adyen, the key elements of its culture are laid out in the ‘Adyen Formula’ and the ‘Adyen Way of Being in Control’. Some of these key elements are building its business to benefit all merchants (not just one) and launching new products/releases faster with continuous iteration. Other elements revolve around employee and work practices. An important point about these key elements is that they have remained constant since the company’s founding. Further, the culture has been maintained even while the company continues to add new employees. Indeed, it limits it growth pace to its ability to hire the kind of people the company desires.

As we noted previously, there is no uniform culture that works for all companies and organizational behavior will differ based on the business model and competitive advantage that the business possesses. When looking at Network Effect businesses, innovation is crucial to drive network expansion and continued value improvement. Adyen’s key elements of culture such as broad merchant focused approach, launching new products/releases faster etc. provides Adyen the ability to drive innovation faster in a rapidly changing industry.

Its close collaboration with merchants results in product development to solve merchant’s problems and reduce the growing complexity in the business. One such notable innovation from merchant collaboration is the solution for unified commerce which enables retailers/merchants to seamlessly process their in-store, in-app, and online volumes with a single provider. Pandemic increased the complexity mainly in unified commerce and Adyen had the right solution at the right time to cater to merchant’s evolving needs.

Adyen’s employee and work practices also ensures that it maintains its culture and consistently drives innovation in its business. Some of these practices are promoting from within before considering external hires, board/senior management members meeting every new hire before joining the company, etc.

We look for our businesses to be managed with an owner-manager mindset. In the table below, we present a comparison of CEO compensations for Adyen and Workday. In case of both these companies, the founding managers have similar stakes. While Adyen is highly profitable, Workday was still losing money. What’s interesting is that while the Adyen CEO hasn’t received any stock-based compensation (SBC), the Workday CEO continues to be showered with SBCs. This is so even though the cash compensation levels of the WDAY CEO is 3-4 x to that of the Adyen CEO.

As we look at these numbers, we wonder what can an additional $15 million in SBCs do to align the interest of the CEO with us mere shareholders that an existing $1.5 billion in ownership cannot!

On that interest alignment idea, even though Adyen does not offer significant SBCs while its peers continue to shower their employees with them, Adyen witnesses one of the lowest employee turnover rates. Further, as we stated in our March 2022 letter, excessive reliance on ESOs add an additional risk to the business. As Adyen’s peers like PayPal have seen their stock prices take a tumble, they have had to contend with an increasing employee attrition rate as ESOPs go deeply underwater.

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[1] https://www.adyen.com/knowledge-hub/guides/payments-training-guide/get-the-best-from-your-card-processing