Marqeta is a CA-based card-issuing platform offering on-demand delivery, expense management, retail, and digital banking solutions to businesses and their clients. Founded in 2010, Marqeta has been publicly traded (NASDAQ: MQ) since 2021. Marqeta named Simon Khalaf its new CEO in January 2023; in the months thereafter, Marqeta announced BNPL-focused tie-ups to deepen market share in new geographies and diversify revenue streams.

In an interview with The Financial Revolutionist, Khalaf highlights Marqeta’s recent data on holiday BNPL spending, justifies expanded use of BNPL in the face of consumer debt and hardship, and outlines Marqeta’s growth and product strategies.

This interview has been edited for length and clarity.

The Financial Revolutionist: I know you had a number of tie-ups on the BNPL front in Europe recently, for instance—and your recent findings suggest that BNPL use is still on the up and up. Is that something that is expected to continue indefinitely, or is that something that is really tied to consumer well-being—or the lack thereof—at this current juncture?

Simon Khalaf: I’ll start with the broader picture. What buy now, pay later has done is kind of move into what I would call culturally accepted norms. In the United States, a credit card-heavy society that uses credit for credit and convenience, BNPL was there but only when you bought something like a mattress—the Searses and the Penneys have done it very successfully since the 50s and 60s. I think that what BNPL has done the last two to three years is make it into the mainstream. It works and it works at scale, so I might as well use it.

The second thing is to look at where the APRs are today on revolving credit, and the average is 21.5%. It's starting to become painful. And you have the BNPL, which is pretty, technically, from an interest perspective. Now is the consumer educated enough to be able to do the math on the fly? I think so, because of all the education that the BNPL players have done. So you've got that thing going up in addition to inflation.

The third thing is the increase in the debt stack. As a percentage of GDP it’s not alarming, but if you look at it those folks who have a limited income, and you take their GDP, they are now at their limit. They can barely afford the minimum on their credit cards, and they're using BNPL as a mechanism to amortize the cost, so that whatever their check gives them pays for that installment without incurring further debt. So yes, they have credit cards, but it's a debit card, like I'm maxed out and so the combination of all these have created the perfect storm for the pickup of BNPL.

And then the last thing I'd say is now we're seeing the migration of BNPL from being attached to the retailer to being attached to a payment card, which you can use everywhere—like Affirm Debit+ and Afterpay Plus. The convenience is there right now, and Google’s announcement of tying BNPL to a wallet is very interesting, too.

I do believe that we're at a point where we're gonna see the debt spectrum change between pay now, pay over four, or revolve, and that choice is going to happen instantaneously. That is going to be a very interesting change in American retail. We expected Cyber Monday volumes, but we’ve seen that extend through Christmas: a 28% increase over Cyber Monday. This is almost like compounding debt, but it's actually rolling, because, let's say you transacted something around Black Friday, you did the first installment, and as soon as you did the second installment, you went on and picked up new goods. That’s not something we thought was going to happen, so that tells us that this is a very interesting compounding trend.

You outlined this new debt spectrum between paying now, paying in four, and revolving. How do you anticipate something like BNPL affecting your credit card issuing vertical? Will this cannibalize that or does it complement it?

It's still very early in terms of the total processing volume. The co-brand market is a trillion-dollar market, and all of BNPL is effectively $100 billion, so it's still small, but I do believe that it is going to become a bigger practice. And I wouldn't say it will cannibalize revolving credit. I think it will allow consumers to build up more and better credit so that they don't get stuck in higher APRs when they move to revolving.

I hate to call it training wheels, but it is more of a bridge between immediate settlement and full revolving. So having that option will actually reduce the APRs on credit cards. Now, granted, banks will make less money, but they will expand purchasing power, and the volume increase would more than make up than what banks would lose from an APR perspective.

And the data you collect from BNPL, if you apply it to underwriting, will help you dramatically. This is repayment, and if you do it and you're diligent at doing it, it most likely will reduce the use of reserves for debt on the revolving side, which is not insignificant if you look at it—it is approximately 10 to 20 basis points on purchases in aggregate for the banks. So if you cut that in half, banks win, consumers win, and retailers win.

How long do you anticipate this sort of dance to continue? As in, consumers have maxed out their credit cards, and the other purchases that they're making are forced to be divvied up into four. You talked about amortization, for instance: How long can you amortize your everyday purchases before you have to decide to default on one of those loans? With that, how are you anticipating gearing up for that being an outcome?

I saw the New York Times article saying that BNPL is sending more folks into debt. But if you actually look at it, at the end of the day, people are not dying out of hunger, which means that the money they're making is almost equivalent to the money they're spending, plus the debt stack they are incurring.

From a big-picture perspective as a percentage of GDP, that stack is actually going down. Yes, it's alarming, it's $1.3 trillion, but our GDP expanded more than the debt stack has expanded. So from a broader macroeconomic perspective, it's all fine, which means it will continue forever.

However, you do have a cohort in which the expansion in what they are spending serving the debt, which is the credit card debt, is more than the wage increase, which means they’re going more and more into debt. It's that cohort that I think will suffer and eventually lead into defaults if they do not get into a mode of getting their wages to be faster.

Now what can happen is wage expansion. We've seen the data that came out that wage expansion in the US beat inflation. I think this is the first time in 30 years that happened and prices on items like gas have dropped, so that will tremendously help, because, if you think about it, 21% APR and 8% inflation is 29%, which is far more than 4% inflation and 19% APR. This is to say I'm not that concerned from a macroeconomic perspective.

What about from a product perspective for Marqeta?

Big picture, Marqeta has one and a half percent of the total processing volume, so we have 98.5% to go. We're seeing greater demand for BNPL in the B2B space for SMBs, and at the same time, we see a lot of demand for traditional revolving credit for SMBs and consumers.

I was thinking more about something like accelerated wage access as perhaps a complement to wage concerns around BNPL, because I know that's something that's in your crosshairs to some extent.

Yes, it is. I mean, it is the fastest growing segment for Marqeta, but it's much smaller from a volume perspective. You're right, the Venn diagram that intersects the most is between BNPL and what I call “earn now, work later,” or accelerated wage access. But also the way we have implemented accelerated wage access actually does not require third party capital, which is really interesting. That's why we believe that Marqeta has done accelerated wage access really well.

Could you expand on that?

So let's say you are a large employer, and you have a lot of hourly or shift workers. To do accelerated wage access, each employee swipes at the moment they've done with their shift, and technically get paid, but we are not moving the money from the corporate bank account into your own bank account until you take the money that you earned and start spending. So we're not introducing a loan that has a certain wholesale rate price; we're moving the ledger but we’re not moving the money until it's spent. And then in return, the company’s getting about 100 basis points and interchange, which Marqeta gets back.

Instead of paying a payroll company to settle, now it's free, your employees get paid immediately, and on top of that, you get to earn interest on the capital that is still residing in your bank that has not been spent by all the employees in aggregate. You make 100 basis points on every purchase they make, which makes up for any lost interest on the capital of the people who's spending.

Now, where's the catch? If everybody goes and swipes the minute you settle with them, everybody loses, as we don't have enough money sitting in the company’s capital markets. But the probability of this happening is almost zero.

Given a 1.5% market penetration, what are your focus areas for the first half of the year?

Great question. All the traditional use cases for Marqeta are growing. So neobanking, expense management, on-demand delivery, BNPL. I expect this year to continue the growth of accelerated wage access in addition to all the other verticals, but also a lot of commercial credit and consumer co-brands. That's what we are seeing as the next generation of embedded finance: marketplaces or supply aggregators that are in a significantly better position to extend credits to suppliers, because they understand exactly what their earning potential is going to be. And the other one is the new co-brand that doesn't look like the Barclays or Synchrony fax machine, basically.