From our Obsession
New technology is upending everything in finance.
Visaâ€™s $5.3 billion acquisition of Plaid, one of Silicon Valleyâ€™s hottest startups, came after conversations between the companiesâ€™ executives intensified in late 2019. But the idea had been planted long before, with discussions at the highest ranks of the largest US card network that go back more than a year.
The rationale is clear: In a world where billions of credit and debit cards have already been issued, the Visa and Mastercard duopoly need to prepare for a time when consumers move beyond pieces of plastic (and metal) to pay for things. Last summer, the card giants jockeyed for Nets, a Danish company that handles things like bank-to-bank payments; Mastercard ultimately acquired the company for $3.2 billion.
As more transactions flow through financial apps, like Venmo for payments and Robinhood for trading, these upstarts are increasingly important partners for the card networks. Visa CEO Al Kelly has acknowledged that the company, whose roots go back 62 years, was â€œslow out of the chuteâ€ when it comes to fintech, and it has been bolstering its efforts there. Visa execs hammered out an agreement in September with Revolut, a fast-growing app that offers foreign exchange and peer-to-peer payments, as the fintech expands internationally.
But the acquisition of San Francisco-based Plaid, founded by a pair of former Bain consultants in their early 30s, represents a different prospect. Visa and Mastercard have tight partnerships with banks (Visa springs from Bank of America). Plaid has been an interloper, providing the electronic plumbing that connects financial upstarts to consumer bank accounts.
For bank executives, fintech apps sometimes push their institutions into the background. The banks risk becoming invisible, interchangeable utilities, while startups get all the interaction, providing savings advice or spending information.
Banks also worry about security. To access account records, financial apps often ask users for their bank usernames and passwords. Then, they log on and pull in information through a process known as screen scraping, which is one of the services Plaid provides. Banks have complained that it can be a major burden for their systems.
In 2016, the CEO of JPMorgan, among the biggest card issuers (pdf), criticized password-sharing. Capital One clashed with Plaid in 2018 over a security upgrade that cut off the startupâ€™s access to its bank accounts.
A growing number of banks, however, have decided the risks are worth it. They may lose customers if their users canâ€™t access their favorite apps. Plaid, meanwhile, has struck agreements with banks to use their application program interfaces (APIs) to access data using encrypted token-based credentials. These specialized gateways are seen as safer and more stable than screen scraping.
In 2018, JPMorgan signed a data-sharing agreement with Plaid that uses APIs, and Wells Fargo announced one in September. â€œWe want to be where our customers are,â€ a Well Fargo executive said. More than 11,000 financial services companies are now linked to Plaid, and one in four people with a US bank account are connected to it, according to a presentation by Visa (pdf).
Payment company stocks have been red hot, as they benefit from a shift from cash to digital transactions. Visa is valued at around $430 billion, among the highest of any financial company, edging out even JPMorgan. The US card giantsâ€™ share prices have each risen by more than 200% over the past five years, outpacing even Facebook, Google, and Apple during that span.
Unusually for companies of their size and age, the US card giants are still growing at a rapid clip. Visa reported some $23 billion in revenue for its last fiscal year, an 11% jump from the previous year.
Still, at $5.3 billion, Plaid is a pricey purchase by most any valuation metric, and Visa wasnâ€™t the only party interested in buying the company. Talks heated up late last year, with Plaid getting advice from Goldman Sachs and Visa relying on Lazard. The final acquisition valuation is roughly twice what it was in December 2018 when Mastercard, Visa, Goldman Sachs, and others invested in the startup. (American Express invested in 2016.)
Plaid is only projected to boost Visaâ€™s revenue growth by about 1% in 2021, but Visa is counting on Plaidâ€™s network becoming more powerful in the coming years.
The startup has reached a â€œcritical massâ€ of users in the US, according to Bernstein research. Using the companyâ€™s tech, financial upstarts can verify their customersâ€™ ID, and handle payments and interbank transfers from a single API. â€œIn the absence of a platform such as Plaidâ€™s, these fintechs would have to overcome a rather monumental task of doing custom integrations with thousands of financial institutions,â€ Bernstein analyst Harshita Rawat wrote in a report.
Plaid may still face battles ahead. Users of Pittsburg-based bank PNC complained last year on Twitter that theyâ€™re having trouble connecting to Venmo, the payment app owned by PayPal; Venmo and PNC are connected to each other by Plaidâ€™s network. In October, PNC blamed the problem on a security upgrade and suggested that users switch to Zelle, a payment app backed by banks.
A spokesperson for PNC said the company has no dispute with Venmo and that the issue has been misreported. The bank says its additional security measures are to protect customersâ€™ information, and that their users can connect to apps like Venmo by supplying their account and routing numbers directly to Venmo.
Either way, to the extent that some banks are still wary of Plaid, placing the upstart inside the Visa mothership could offer reassurance, as the card giants are trusted networks, with expertise in handling hundreds of billions of transactions per year. â€œWe know there are financial institutions who would prefer Plaid operate differently in some places,â€ Visaâ€™s CEO said this week, without naming any particular companies. â€œWe intend to address those concerns,â€ he said.