Business Breakdowns
· Parsa Kiai
Because when you think about the unit economics of this business, you can think about it on a per card basis and then you could think about it in aggregate. If we take an American Express cardholder or a Chase Sapphire cardholder, these cardholders will spend anywhere between 30 to 60 thousand dollars per year on some of that spend. That interchange is as high as 2.5%. So the card issuer can get $750 or $1,500 annually in interchange revenue. On top of that, they provide these rewards to the customers. So they have to give something about half of the interchange back to these customers. And they're happy to do that because it makes and retains, it grows these customer relationships. So you spend about $375 or $750 on your rewards costs. These cards typically have very, very low credit losses. And then you add on top your annual fee for this and you're looking at something like a $1,200 or $1,600 annual profit. And the cost to the issuers for this CompoSecure card is $12 per card. So you're looking at something like 100 times return on your investment. This is really the only physical COGS that an American Express or Chase has. There's a lot of other things that are variable costs. And if that metal card, that premium feel is that important, we think it's very important to have that quality card so that you're not going to switch to go to a new upstart competitor to save a dollar per card when you're making something like $1,000 or $1,500 in annual profit. And now you compare that to your generic plastic card, even that one that has no fee. It costs less than a tenth of a premium metal card. It costs $1.25 per card. But given how much less a customer spends and generally the higher cost for credit provisions and churn, we estimate that the return on investment on a generic plastic card is less than a fifth of what it is on a premium metal card. That is why we think that this symbiotic relationship exists. And that is why even as the company has become public and its high gross margins, its high EBITDA margins, and its average selling price has become public disclosure, you have not seen customer attrition, you've not seen market share losses because it is such an incredibly valuable tool for their issuers to go after those high-end credit cards.
· Parsa Kiai, Matt Reustle
If you look at a business like American Express, American Express does something like $75 billion of annual revenues. And the largest component of that, about $40 billion, is interchange fees. Another $18 billion is net interest income. About $10 billion is your card fees and $8 billion is service fees. So on the $75 billion, American Express makes about $20 billion of pre-tax and pre-provision profits. The biggest cost structure is about $18, $19 billion in card member rewards. This $20 billion of pre-tax, pre-provision profit is really facilitated by providing that valuable customer experience and a $10 card. That cost of goods sold is 0.2% of their cost base. And we think this is a really interesting business that you provide such an experience to such a big company, facilitating such a large scale, and you are such a small part of that cost. And that's really why we think these relationships exist and grow, and why other people want to get into the game. [00:00:00] S0: You mentioned they have this market share. Do you have any sense in terms of numbers of what that market share looks like in this segment?
· Parsa Kiai
[00:00:00] S1: There's about 18 billion payment cards in circulation. And that number, despite all the movements towards mobile wallets and Apple Pay and everything, that number is still growing at about 4% per year. The fascinating thing about cards is it's actually a rather stable recurring revenue business because the number of new cards issued, most of them actually come because of card expiration or lost and stolen cards. And these happen with regular frequency. About 4 billion new cards are issued annually. If you look at net new accounts, it's actually a fraction of the cards issued. So there's a solid core of recurring card issuance per year and then an interesting, nice little amount of new accounts. When you look at the premium metal card business that CompoSecure operates, it's a very, very small share, but a very fast growing share. Of the 4 billion cards issued annually, less than 1% of that are premium metal credit cards. But those premium metal cards are growing three or four times faster than the aggregate cards in circulation. One thing that we think is really fascinating is CompoSecure has something like an 80% market share in these premium metal cards. So that market share, that penetration of premium metal cards goes from 1% to 2% or 3%. If you, even if you lose a little bit of market share, you're still getting so much growth in terms of units and dollars that there's a long runway for organic growth, even as your market share goes from basically being virtually the only player at a 90% market share to 80 and 75 or something. So we think that if you look to where the puck is going on the issuer side and the focus on premium metal cards, CompoSecure is in the pole position to maintain a very large market share and to have outsized organic growth.
· Matt Reustle
[00:00:00] S0: I can speak to having a card expire recently and then getting my new card, and it was upgraded to a metal. That's just a perfect example of mix shift moving in their direction and how that can continue to happen over time. But you did mention Apple Pay. There's this natural question of once that was released, will we ever need wallets ever again? Will we ever need to carry credit cards? How do you frame that risk of Apple Pay?
· Parsa Kiai
[00:00:00] S1: This is probably the most important question in breaking down this business and thinking about it long term. And it really was the biggest concern we had when we first invested in CompoSecure before Dave Cote's involvement. As I mentioned, it is a real important and interesting topic. And it's worth thinking about the disintermediation risk by mobile wallets and Apple Pay. But I'll address it in two ways. The first is back when we first invested in the company, the company was valued as if no one was going to use a credit card in three or four years. The company was trading at five times normalized free cash flow. When we did our work then, we came away with the conclusion that cards were going to be around for at least five years, and we were going to make good money on this investment because it was priced as if you were disintermediated in the near term, while cards were still growing double digits. Of these new fintechs and neobanks were all looking to get into the premium card business. That was a different story then. Fast forward a few years to now, it's still an important question. But the data shows that the premium metal card has become increasingly important, not the other way around. Even as Apple Pay, mobile wallets, and other things have taken off, you're seeing that that customer response is getting stronger, not weaker. Take a look at American Express. When they did one of their first big product refreshes back in 2016 and they introduced a brand new shiny American Express card with a higher annual fee, net new accounts acquired went up by 50% over the pre-refresh period. When American Express just introduced the new product refresh earlier this year, you saw that net new account acquisition went up by 2x. So the customer response was double in 2025 what it was in 2016, even though mobile wallets, Apple Pay, and everything is more prevalent today. So customers are still showing that they want a top of wallet physical card and the status and prestige that that brings among your friends. The second point is when you look at even digitally native companies that have some aversion to physical assets like Coinbase, Robinhood, Gemini, all of them are coming out with brand new premium cards that are physical metal cards as a customer acquisition tool, and they are all CompoSecure customers.
· Parsa Kiai
So even these companies that are at the leading edge of everything digital, they are manufacturing and distributing cards to their customers, and instead of giving you 4% cash back, they'll give you 4% in Bitcoin back. It shows that this tool is still incredibly important. Third, when you look at Apple itself, Apple was one of the first ones to try a card that did not have a physical card and it was only digital. And the Apple card program did not take off the way people anticipated that it would. It really did not resonate with the high end consumer. And the reports have been that Goldman Sachs has lost quite a bit of money on it and now trying to transfer that over to maybe J.P. Morgan. So the experiment that you've had with a purely digital card has not taken off yet. And then lastly, while I do think that in 20 years or some long time period this does become a bit of a risk, you have to also consider that the third most frequently used form of payment even today is cash, not mobile wallets or anything. So credit cards are number one at 35%, debit cards are at 30%, and 17% of transactions are still done with cash. And it's incredible to people who live in New York or San Francisco, but there's plenty of places that forget about accepting metal or plastic. They don't accept anything but cash. So the tail for physical credit cards is going to be longer than expected rather than shorter. This is a risk, and you've got Dave Cote and his team here to address that and to put the company, whether it's with the security and authentication at Arculus, whether it's with M&A, whether it's with other things, really get ahead of this risk in the long term.