Business Breakdowns
· Parsa Kiai
[00:00:00] S1: Very fascinating story. Does not have the length of history of some other companies, but it was a family-started business, and there was a gentleman named John Herslow and his daughter Michele Herslow. They worked for their family's plastic business that the grandparents had started in the '50s. And through that business, they eventually founded CompoSecure in 2000. By happenstance, they worked with American Express in 2003 in introducing the first-ever metal credit card. And up until then, credit cards were always plastic, and they worked with American Express to make the first metal credit card. And I think there's a rich history of innovation and growth that we'll get through, and it's important that American Express today, 22 years later, is still a key partner and customer. And I think it just shows you a lot about the innovation and organic growth that the company has throughout the years. They pioneered a lot of what we see in a physical premium credit card today. After working with Amex, they helped Chase launch their first metal card, which was the predecessor to the Chase Sapphire card. It was called Chase Palladium in 2009, and again, Chase today, many, many years later, is still a premier customer. And you've seen that relationship has grown. Throughout the years, so much of the innovation that we see in a card today was helped and pioneered by them. They were the first ones to put an EMV chip in a credit card. And your listeners will know, those who listened to the Visa and Mastercard podcast will know EMV is Europay, Mastercard, and Visa, which is the security protocol for payment cards that puts a microprocessor embedded into a chip so that it works with an EMV-enabled payment terminal to authenticate transactions with much higher security. So they were the first ones to do that. They were also the first ones to put large-scale NFC, or near-field communications, integrated dual interface mailer cards. This is a protocol in a card that allows for radio frequency identification between the payment card and the terminal. So a lot of this innovation was done by them, and even up until now, including biometric security dynamics, CVV codes, and a lot of other things. Rich history. And then along the way, a private equity company called LLR invested in the company. They paid $100 million for a 60% stake in the business.
· Parsa Kiai
And one key aspect was they brought on board a senior payments executive named Jon Wilk. Jon Wilk has a deep history in the business at Bank of America first and then at Chase. Jon was in the room when they were making that first Chase Sapphire card, and he had the vision and the experience being on the issuer side, saying, "What does an issuer need? What do our premium clients want? Our cardholders?" And Jon has been instrumental in growing the business, strengthening and growing the American Express and Chase relationships, and expanding to all these new customers like Capital One and the Delta co-branded card, Amazon co-branded cards. And now with all these neobanks and fintechs, that business was growing. When COVID comes around, everything payments-related went crazy. I believe they were trying to shop the company in 2020. I think that sale didn't materialize. The company came public via a SPAC. They merged with a special purpose acquisition company called Roman DBDR, and it debuted in the market in 2021 at a $1 billion enterprise value. SPACs didn't have a great reputation at the time. We hit a little bit of a bear market, and it provided an opportunity for our involvement in Compo 1.0. But it's a really rich history of innovation and growth for an interesting niche little company.
· Matt Reustle
[00:00:00] S0: It's easy for me to look at the metal card and think about the vanity play of the noise it makes when it drops on the table. But there is obviously a lot of actual innovation going into the chip and what would attract them to the banks on the other side of this. I want to get into that SPAC era now because they had this premium metal card business, but I know they introduced another growth engine. Very much a sign of the times and we'll see where it goes. But can you talk a little bit about, beyond just being baby thrown out with the bathwater in terms of SPAC up and SPAC down, what was fueling some of the excitement over Compo? That was another piece of the business that we can introduce now.
· Parsa Kiai
[00:00:00] S1: The SPAC era was interesting because there was just some real unrealistic expectations about everything—digital assets and a lot of other things. But they actually do have a business called Arculus which focuses on two things. One is a digital cold wallet for storing, transacting, and trading digital assets. But its larger use case, in my view, is really on the security and authentication side. And it's here where I think there's potentially a lot of value, and it really shows the next step in the innovation and growth of the company. When they came public via the SPAC, you had this very good core payments business, and it was almost overlooked as an afterthought because they're like, all right, well we have this business, it's profitable and it's growing. But really look at this Arculus business. And the expectations there initially were too high. If you think about what Arculus does from security and authentication, it has a lot of incredible use cases that we have not yet seen monetized. So their services can be combined between the payments and the authentication. It makes your premium metal card into a security token, into an authentication token, and it can be combined to have a lot of different use cases for different banks, fintechs, and all sorts of payment transactions. For example, you can use this for passwordless login on a variety of different financial apps or banking apps. So you can combine it with your biometric, fingerprint, or face recognition. You can tap your Arculus-enabled metal card on your phone, and this reduces the need for passwords, reduces fraud risk, and it simplifies your access while maintaining a lot of high security. I think it also can be used in certain high-value false declines in online purchases. So if you make a potential transaction that needs verification from your bank without having to call in or text to confirm, you can tap your Arculus card and it minimizes friction, it boosts the approval rate, cuts down on fraud. So it's really a win for the cardholder and the issuer. There are a lot of other use cases, including high-value transactions in gaming, in-store approvals, in more unusual locations, call center efficiency, customer verification. Beyond just saying it's a crypto cold wallet, it has a lot of applications, and it was a big portion of the excitement of the company.
· Parsa Kiai, Matt Reustle
A couple years after the SPAC, it almost became a bit of a liability because its revenues had not materialized. It was generating about a $20 million operating loss, and it went from being the shiny toy to a liability. And that was our involvement in the company, saying we've got this incredible niche core payments business that is growing organically, has a long runway for growth, is valued at a fraction of what it's worth, and we have this incredible nascent technology that is not yet generating a lot of revenues, but it has incredible use cases, an incredible team, and is the next leg of innovation and growth for this company. [00:00:00] S0: As a consumer, I've heard of your credit card with a Bloomberg B-unit for those that use Bloomberg attached in it being a one-stop shop to reduce a lot of the frictions. But then you can obviously understand from the opposite side of the equation, whether it's banks or whoever who have to deal with all of the costs associated with the challenges of security. And it's only getting more and more intense. So that's an interesting one where the expectations were so high and at times you could see these dislocations, but it will be interesting to see how that evolves. I wanted to tap into a little bit about those relationships they have. They seem so core. Can you just talk about what drives that beyond some of what you just mentioned and what the competitive set looks like in terms of others that might be trying to do the same thing and where Compo really ranks against the rest of the peer group?
· Parsa Kiai
[00:00:00] S1: When you think about the relationships that they have with their issuers, the two biggest customers are American Express and Chase. And if you're in the premium metal card business, it's only natural that those are going to be your two biggest clients given their size and scale. But in the industry, if you focus on those two first, you see how long and valuable that partnership has been. And even though it's a contractual business—one, two, three year contracts—the number of times that those contracts have been renewed and have been increased in tenure really speaks to how important that relationship is. Initially when we looked at the business, we had some concerns about customer concentration. But the more we learned about how symbiotic this relationship is, we became a lot more comfortable with that. So if you think about what they provide, this is really all about the pursuit of the high-end credit card customer. Research shows that 10% of cardholders are responsible for nearly 50% of all consumer spending. So if you are a Chase, American Express, now Citibank, Capital One, you really want to go after that high-end customer because they spend on average—cardholders with credit cards that have an annual fee greater than $500—they spend something like $3,000 per month on their credit cards. Those with cards with below that as an annual fee spend only $1,000. The difference between that $2,000 a month is $24,000 in annual spending. And that is a huge prize for credit card issuers, not only because of the interchange revenue that it brings, but all the ancillary service fees and cross-selling opportunities to this high-end cohort. These are also a much more loyal customer base with lower churn. And given their higher income stature, they generally don't carry balances. So you have lower credit loss provisions. And you're seeing this now with the increase in annual fees and the increase in rewards for the new American Express Platinum cards, the new Chase Sapphire cards. It really is a battle to win the top-of-wallet status. When you open your wallet, you want to be that heavy metal card that you throw on the dinner table at a restaurant and it clanks. It really is trying to find those. What CompoSecure does is it really helps facilitate that.