What’s going on here?

Visa is buying fintech Plaid for $5.3 billion and expects the deal to close in the next three to six months (Mar-Jun, 2020).

Plaid offers technology that allows consumers to link their bank accounts to its 2,600 fintech clients (including Venmo) and 11,000 financial institutions – making it one of several players developing back-end infrastructure to enable fintechs to operate.

Plaid’s scale is such that it’s now used by an estimated 1 in 4 consumers in the US.

Context

Plaid’s high price tag comes amid an uptick in dollars flowing into payments and fintech M&A. This deal size comes in the context of rapid industry consolidation: Deal value in the space more than tripled from $31.8 billion in H1 2018 to $116.6 billion in H1 2019 as providers look to M&A to heed off competition from upstarts

• to better prepare for major shifts in the space, and
• to combat low margins.

The Payments and Fintech M&A story

This deal is no exception from the context: Visa sees Plaid as a tool that will help it in the next decade by improving fintech relationships and expanding Visa’s addressable market, per CNBC.

While Visa’s price has been viewed as a “significant premium” by doubling Plaid’s last valuation of $2.65 billion, it isn’t entirely surprising.

• Existing industry momentum of being swallowed like several of Plaid’s peers:
  • In 2015, wealth management technology developer Envestnet bought Plaid-like startup Yodlee for $660 million, and
  • Plaid itself acquired peer Quovo for a reported $200 million last January.
• Combined with Plaid’s stature and major reach that gives it an advantage over peers, could help explain Visa’s willingness to pay.

Meaning for Plaid

The move could help it scale Plaid’s business rapidly, especially outside the US.

• Plaid has already achieved significant traction in the US with 2,600 partners and 11,000 banks — but Visa’s backing could boost that further with its existing brand reputation and tight relationships with FIs, making banks more willing to allow Plaid’s data-sharing with fintechs amid security and privacy concerns. In turn, that allows Plaid to continue to grow its network and bolster its offerings.
• Following in the footsteps of regulators in Europe and the UK, authorities across the world have pushed for an increase in consumer-permitted data-sharing between fintechs and incumbent FIs to boost competition. Yet, data implementation has been slow to occur amid a slew of technical issues that Plaid’s experience in data-sharing could help smooth. With the startup still in the early days of European expansion (since May 2019), Visa’s dominance on the continent could help Plaid proliferate in the region and become a larger player in the open banking space.

Meaning for Visa

The acquisition represents a more aggressive move to diversify its own business. Visa highlighted three key opportunities in acquiring Plaid:

• new market opportunities for Visa,
• better services for developer partners, and
• tighter relationships with fintechs.

Combating threats to the overall card ecosystem could help Visa stay competitive with peers. Plaid represents another major step on Visa’s part to build out its noncard offerings.

• 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, calling alternative payment types, including real-time payments (RTP), which are quickly gaining traction and could begin to chip away at network revenues (e.g: third-party mobile wallet rails in China).
• As a result, providers are investing in their noncard businesses:
  • Mastercard acquired Vocalink in 2017 and Transfast in 2019, and
  • Visa purchased Earthport in 2018 and Rambus’ tokenization assets in 2019.

Plaid’s reach could also help Visa introduce new products.

• The brand could help Visa build its own P2P product (where cards have lacked visibility) – or push into B2B payments (representing another target, per The WSJ).
• A new avenue into these fast-growing areas could help Visa bring in new revenue:
  • The brand thinks Plaid could add 100 basis points to Visa’s net revenue growth by 2021, per CNBC, and
  • the reach Plaid provides could accelerate Visa’s fairly consistent volume gains.

Some concerns

The buy also raises considerable questions about the long-term fate of Plaid’s other partnerships.

Plaid’s relationships with high-profile fintechs are one of the firm’s main assets and likely a contributor to its immense value. Right now, those partners are largely excited about the purchase, but if Visa opts to leverage Plaid’s infrastructure to launch products of its own down the line,

• it could create competitive tension, in turn disrupting the way fintech users fund their services by limiting a key option used to connect to banks.
• it might also force top providers to build or seek out new tools to enmesh financial information into their services in order to remain operable.

Content source: Toplin. J. and Tesfaye. M. (2020) Our take on Visa's $5.3 billion surprise acquisition of Plaid. Business Insider. Available from: https://www.businessinsider.com/visa-to-acquire-fintech-plaid-2020-1 [Accessed 19 January, 2020]