How Does Melio Make Money? Dissecting Its Business Model

Executive Summary:

Melio is a financial technology company that offers software with which small businesses can accept payments and pay their expenses.

Melio makes money by charging various fixed and variable percentage fees to the businesses that use its solutions.

Founded in 2018, Melio has quickly risen to unicorn status. The company is now valued at more than $4 billion.

What Is Melio?

Melio is a financial technology company that develops accounts payable software for businesses to make payments to their vendors.  

Traditionally, small and medium-sized businesses (SMBs) have relied on checks to pay their vendors, suppliers, and contractors. Melio has since digitized that process to give businesses the necessary flexibility in how they pay for expenses.

At the core of its offering are the various payment options it provides. SMBs can pay vendors and the like via debit and credit cards, ACH bank transfers, and unironically paper checks.

Similarly, Melio’s customers can also receive payments via bank transfers and credit cards. Transactions can be conducted between accounts in the United States and in more than 70 other countries across the world.

Furthermore, Melio directly integrates with popular accounting software like Intuit’s Quickbooks to seamlessly sync all in and outgoing payments.

Other prominent features include the ability to combine payments, earn points and rewards for credit card payments, approve workflows, and split bills into multiple installments.

Thousands of small businesses in the United States are now entrusting Melio with handling their payments.

Detailing the Founding Story of Melio

Melio, which is formerly headquartered in New York City, was founded in 2018 by Matan Bar, Ilan Atias, and Ziv Paz.

The most accomplished of the bunch certainly is CEO Matan Bar who sold his first startup to eBay back in 2011.

Dubbed The Gifts Project, the platform enabled users to band together and purchase gifts for another person. The startup, after being bought for $20 million, became part of eBay’s development center in Israel.

Over the coming three years, Bar led eBay’s innovation center as its Head of Product and a General Manager. He then joined PayPal in a similar function, which he held until starting Melio in the summer of 2018.

At PayPal, Bar had a front-row seat to the digitization of consumer payments. The most notable example became Venmo, which PayPal acquired back in 2013 when it purchased Braintree.

Meanwhile, small businesses were still stuck in the stone age and largely reliant on paper-based payment processes. The year prior to launching Melio (2017), the Federal Reserve reported that $14 trillion worth of paper checks were transferred by businesses in the United States alone.

The sheer size of the U.S. market also became the reason why Melio, despite its founders and most of its employees being based in Israel, actually targeted North America instead of their home country.

Joined by Atias and Paz, the trio began to validate if their initial hunch was correct. To better understand the industry, they even opened up a small bookkeeping firm that managed payables for 10 small businesses for around four months.

Luckily, investors seemed to dig the founders’ ambition. From January 2019 to September 2020, Melio managed to raise a whopping $144 million in funding while largely remaining in the background.

The founders, in all likeliness, did not want to attract any additional competition. After all, FinTech juggernauts like Stripe have been known to enter new markets at a rapid pace, as seen, for example, by the launch of its Brex competitor.

Melio, by the time it unveiled its solution to the wider public (09/2020), already had over 100 employees and inked partnerships with the likes of Intuit (Quickbooks).

Another reason why the company went on the offensive was the Covid pandemic. Cashing physical checks became increasingly difficult due to social distancing measures, which meant that businesses would be even more reliant on digitized solutions.

From March to August 2020 alone, Melio grew by a whopping 700 percent. The firm’s rapid ascend enabled its founders to raise yet another round of funding in January 2021. Investors valued the firm at a whopping $1.3 billion while adding $110 million to its balance sheet.  

Melio used the money to make additional key hires, such as former JP Morgan director Prashant Gandhi, and ink additional partnerships with the likes of Capital One.

Capital allocators also continued to like what they saw and decided to pour even more cash into the business. In September 2021, Melio raised $250 million while being valued at $4+ billion – a feat its founders accomplished in just three years of starting the business.

Unfortunately, not everyone stayed on for the ride. Co-founder Ziv Paz, previously Melio’s COO, departed from the company for undisclosed reasons. Former Meta and PayPal executive Tomer Barel became his replacement in February 2022.

2022, in general, was a pretty uneventful year. In August, Melio laid off 10 percent of its workforce, most of whom were people in the North American sales team. However, the company quickly expanded its workforce in other key areas such as product development and software engineering.

How Does Melio Make Money?

Melio makes money by charging various fixed and variable percentage fees to the businesses that use its solutions.

An overview of its pricing structure can be accessed here. The fee that a business customer is charged is dependent on the type of payment.

For example, ACH bank transfers are completely free, either when receiving or accepting payments. The same applies when a business accepts a credit card payment.

Meanwhile, if a business wants to pay someone via debit or credit card, then they are charged a 2.90 percent fee. Same-day bank transfers incur fees of 1 percent.

Those that prefer to use checks can still do so as well. Compensating someone with paper checks costs $1.50 per check. Delivering a check via postage will incur fees of $20.

Why would businesses pay Melio for those services, though? First, it takes a lot of time to write and cash checks as well as track them for accounting purposes. Melio essentially automates that whole process.

Second, Melio’s solution significantly speeds up access to cash flow, which is particularly essential for small businesses that are traditionally strapped for it.

And thirdly, accepting payments via debit and credit cards costs around what Melio charges anyways. Stripe, for example, charges 2.90 percent plus fixed fees of $0.30 per transaction as well.

The business model strategy that Melio pursues is likely modeled after the likes of Brex and Stripe. Both of them started out solving one pain point for businesses, namely accepting online payments (Stripe) or tracking expenses (Brex).

Once they amassed a large enough customer and revenue base, they began expanding vertically into all kinds of associated services. Stripe, for instance, now offers company incorporation, customizable payment interfaces, subscription billing, and so much more.

Melio is still in the process of creating customer lock-in effects. It does so by digitizing more and more of their payment services, ranging from tracking and accounting for payments all the way to managing a whole team.

Features such as team management or workflow control, in particular, are crucial as they enable Melio to sell into an even larger organization, which by virtue of being big also boast greater payment volumes.

Going forward, it can be expected that Melio will continue to expand its ecosystem by adding even more features and integrations with partners such as Xero.

Melio Funding, Revenue & Valuation

Melio, according to Crunchbase, has raised a total of $504 million across five rounds of venture capital funding.

Notable investors include the who-is-who of venture capital, including General Catalyst, Thrive Capital, Coatue, Accel, and more.

Melio is currently valued at $4.05 billion (post-money) after having raised $250 million in Series D funding back in September 2021.

Unfortunately, Melio does currently not disclose revenue figures to the public. It may do so during a future funding announcement or when it files to go public.

Who Owns Melio?

There is currently no public record showing who owns what of Melio given that the company remains in private ownership.

However, we do have a few data points that would help us in dissecting who owns what. Here’s an overview of the firm’s funding rounds for that matter:

  • Series A (01/2019): $16 million raised at an undisclosed valuation
  • Series B (03/2020): $48 million raised, valuation undisclosed
  • Series C (09/2020): $80 million raised, no valuation disclosed
  • Series C (01/2021): $110 million raised at $1.2 billion pre-money valuation
  • Series D (09/2021): $250 million raised at $3.8 billion pre-money valuation

We can assume that the first Series C round was likely raised at the same valuation figure given the short timespan those funding rounds were apart from each other.

With that being said, Melio’s founders gave up 6.17 percent during the Series D round (= $250 million / $4.05 billion) and 8.40 percent during the January Series C round.

Assuming the valuation during the September 2020 round was somewhat similar, then the founders gave away another 8.40 percent more or less.

But it’s not unlikely that some of those funding rounds also had secondary transactions, meaning previous investors sold (some of) their existing shares.

Additionally, the founders likely gave up another 15 percent to 20 percent in the first two rounds (Series A and Series B), which is a common level of dilution at this stage of a startup’s life.

With that being said, even adding up all those percentages means that Ilan Atias, Matan Bar, and Ziv Paz still retain a majority of their equity holdings in Melio.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.