The News: Visa’s acquisition of San Francisco-based fintech Plaid this week for a whopping $5.3 billion, about twice the company’s December 2018 valuation, was the big news in fintech. The financial consideration was $4.9 billion in cash and approximately $400 million of retention equity and deferred equity consideration in the form of Visa Restricted Stock units. Plaid CEO and co-founder Zach Perrett will continue to run the run the business, reporting to Visa Chief Product Officer, Jack Forestell. The deal is expected to close in three to six months, subject to regulatory and other approvals. Read Visa’s Acquisition of Plaid Statement for more info.
Visa’s Acquisition of Plaid — a $5.3Bn Bet on the Future of Finance (and a smart bet at that)
Analyst Take: Chances are good you’ve used Plaid without ever having any idea that the fintech startup was powering some of your financial transactions. Use Venmo? Square’s Cash App? Chime, Coinbase or Gemini, or Robinhood’s commission-free trading app? Those are just for starters, but chances are very, very good that if you’re using online payment systems or financial services systems of any kind, that you’re using Plaid.
It’s “The Plumbing” — How Plaid Works
Plaid describes itself as “the plumbing” that makes the tech-driven financials services world go ’round. Plaid’s interface, operating quietly behind the scenes, quickly, efficiently, and securely connects consumers to their financial services providers. Users download an app, fill in their bank account login and password, a snippet of Plaid’s code within the app, known as a widget, grabs that information. Plaid then packages that information so that it’s securely shareable, and then pings the bank’s server. The bank verifies that there’s a valid account and balance, and pings Plaid back. Plaid authenticates, and the transaction happens.
And by the way, it took me longer to explain that than it takes a transaction taking place by way of Plaid’s API to occur. Plaid seamlessly connects users’ bank accounts to financial apps and services — and it makes everything about the process quick and easy. Remember the days of the micropenny transactions required to verify bank accounts? You had to slog through verification methods with someone you wanted to do business with (and connect your bank account to). Like them having to make two tiny deposits into your bank account, then you, trying to remember (sometimes the hardest part) to check your account for it to show up, then go back to whatever platform you were trying to use to manage your money to verify the deposits? Thinking back on that now, it feels a little like what it was like to wait for dial-up internet service back in the day — archaic, right?
Back to Plaid. In the simplest terms, Plaid is a financial data network. As explained above, its API acts as an intermediary between the customer and the bank, making it easy for consumers to securely connect their financial accounts to the apps they like and use to manage their finances. Consumers don’t even know they’re using Plaid, which is fine, because every time every time a customer uses a Plaid-powered account to make a transaction — Plaid makes money. Digital payment systems haven’t (yet) exploded in the U.S. as they have in other markets, but it’s happening, right under our noses.
Digital Payments Are Hot and Getting Hotter — With Good Reason
Let’s talk digital payments for a minute. McKinsey’s US Digital Payments Survey shows that consumers are becoming more comfortable entrusting their financial transactions to nonbank-branded models, including banks that are not household names. They’re right. Here’s an example — I bought a piece of fitness equipment recently and financed it through Affirm, a loan company that allows users to buy goods or services from online merchants and pay them off in monthly payments.
Unlike my bank, Affirm doesn’t charge late fees, service fees, prepayment fees, or have any other hidden fees. I didn’t start out intending to finance the purchase, through Affirm or anywhere, but the company was offering the option of 12-or 18-month purchase plans with zero interest, and it seemed dumb not to use their money for a year—I decided to tried it out. Turns out, I don’t need “my” bank at all, and I sure didn’t need the headaches associated with applying for a loan, even from a bank you’ve done business with for decades. This financial services company, a brand I’ve never heard of before, is serving my financial services needs (and likely the needs of a whole lot of other consumers who like quick and easy) just fine.
Beyond disruptors like Affirm, the big technology companies like Amazon, Apple, and Alibaba see digital payments as either a new revenue stream, a way of protecting existing products, or improving margins on existing revenue streams (please sign up for an Amazon credit card, we’ll give you a hefty discount on your purchase today!). And it works.
I recently got the new Apple/Chase credit card because I wanted to see if it lived up to the hype. As a result, I’ve used Apple Pay more, and used my bank debit card less, than ever before. The Apple card pays me cash back on purchases on a regular basis (something my bank doesn’t do), so it’s “rewarding” for me, as a consumer, to get more deeply embedded into the Apple ecosystem. Like many consumers, I’m a fan of easy. The Apple card is easy (and rewards me for use), the Affirm loan is easy, and Venmo, my favorite thing on the planet, is also easy. See a theme there? Sounds like I’m on the road to breaking up with my bank, doesn’t it? I’m not alone on that front.
Why are digital payment systems quickly becoming the new normal? The enhancement of APIs and software development kits (SDKs) have made integration easier than ever before, lowering the barrier to entry for startups, enabling scale and innovation to occur at a rapid pace by delivering access to the financial services system — allowing these disruptors to win customer hearts, minds, and trust by providing products that work, combined with exceptional customer service. Something banks are, historically, not great at. That Affirm loan? It took two minutes to apply, the in-app experience is fantastic, it’s everything I needed and more, and I don’t have to ever go to a bank, talk to a person at a bank, make a payment at a bank, etc. In fact, Affirm has so little brand awareness that when writing this article I had to dig through the apps on my phone in order to figure out the company name. That’s important to note if you’re in the banking business: Consumers don’t necessarily care who they do business with (and sometimes they don’t even remember the company’s name), as long as they make transactions easy and provide a great customer experience.
What the Plaid Acquisition Means for Visa
So, what does this Plaid acquisition mean for Visa? With some 11,000 bank and financial services company clients today, covering 200 million consumer accounts, Plaid is providing connections for 80 percent of the largest U.S. fintech apps — that’s 80 percent of the largesst apps, not all the apps — important distinction. That’s no small market share. In equally simple (and impressive) terms: Today, Plaid’s APIs are used by one in four people in the U.S. with a bank account.
For Visa, this acquisition provides multiple opportunities. It expands Visa’s network and provides much in the way of growth opportunities in fintech verticals, both in the U.S. and internationally. Note that there are approximately 15 times more fintech users in international markets than there are in the U.S. Take a gander at how Plaid expands Visa’s addressable market by providing high value services to high growth fintechs. It’s easy to get excited about that gigantic portion of the North American fintech verticals not yet penetrated — and I’m sure that was a significant driver here.
Image source: Visa
Fintechs are reshaping financial services. As more consumers discover the ease of finance apps, Visa is not sitting idly by while an innovator disrupts — the Plaid acquisition puts Visa right in the middle of the game.
Another benefit for Visa is that banks don’t generally have a lot of love for startups in the fintech space. With this acquisition, Plaid is no longer a dangerous disruptor fintech startup, but instead, a brand working alongside and as part of a much larger brand that is a household name — Visa — a known, trusted entity with whom banks have been doing business for decades. Better to do business with the devil you know that the devil you don’t.
Control of Plaid means control of infrastructure that’s critically important and destined to become more so moving forward. It also means access to data and insights from Plaid’s users, which will likely prove to be valuable to Visa.
The acquisition of Plaid puts Visa’s largest competitor, Mastercard, on notice. Interestingly, both Mastercard and Visa jointly participated in Plaid’s early financing rounds, but clearly Visa saw an opportunity worth taking. I am certain that Mastercard will be making its own moves in the fintech space in due time.
This move is about the future of finance. Fintechs are changing everything about the banking and financial services industry and, for Visa, this move is about staying relevant and continuing to evolve. This deal expands Visa’s offerings beyond credit cards and debit card solutions, into both non-card and real-time payments services. More importantly, this move allows Visa to be a significant player in the movement of money services, in the U.S. and around the world.
This is Only the Beginning
The Visa Plaid acquisition is a big deal, but I believe we’re only at the beginning stages of a lot of activity in the fintech space, with much transformation and evolution of traditional brands into more modern banking and financial services models — some by way of acquisition — is yet to come.
In late 2019 alone, Charles Schwab acquired TD Ameritrade for $26 billion, and PayPal bought Honey, the online coupon company for $4 billion, and it wouldn’t be any surprise to see a Stripe acquisition sometime this year. I’m positive we’ll see acquisitions of some of the payment plan and lending services, folding them into larger entities. Moreover, CB Insights reports that there are almost 60 financial technology startups today valued at more than $1 billion. The median deal size in the fintech space is trending up, with 70 plus $100M+ fintech mega-financing rounds. These include personal finance app SoFi ($500M Series G), payments startup Klarna ($460M VC round), Investing platform Robinhood ($323 Series E), and home & rental insurer Lemonade ($300M Series D).
It’s an exciting time in fintech, and a clear sign that financial services companies are betting big on the future of finance.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
Shelly Kramer is a Principal Analyst and Founding Partner at Futurum Research. A serial entrepreneur with a technology centric focus, she has worked alongside some of the world’s largest brands to embrace disruption and spur innovation, understand and address the realities of the connected customer, and help navigate the process of digital transformation. She brings 20 years' experience as a brand strategist to her work at Futurum, and has deep experience helping global companies with marketing challenges, GTM strategies, messaging develoment, and driving strategy and digital transformation for B2B brands across multiple verticals. Shelly's coverage areas include Collaboration/CX/SaaS, platforms, ESG, and Cybersecurity, as well as topics and trends related to the Future of Work, the transformation of the workplace and how people and technology are driving that transformation. A transplanted New Yorker, she has learned to love life in the Midwest, and has firsthand experience that some of the most innovative minds and most successful companies in the world also happen to live in “flyover country.”