It seems clear that Plaid’s revenue potential is only a (minimal) part of the reasons behind the acquisition: the 2x price/valuation is probably more justified by the desire to either protect the core business or keep competitors away from the new business.
Plaid in numbers:
💵 investments to date: $353.3M
💰 revenues: $150–250M
🤓 valuation prior to acquisition: $2.65B
🥳 acquired for: $5.3B (2x the previous valuation)
🤝 provides connection for 80% of the largest US FinTech apps
👨👨👦👦 200M accounts linked (115% CAGR since 2015)
👩💻 2,600 developers
#1: Plaid is facing risks (that Visa can solve)
A crucial component of Plaid’s business is the ability to get access to users’ bank accounts and scrape the data on behalf of 3rd-party apps. Thanks to this capability, users are offered an enhanced experience that materializes in transparency, easiness, financial advice, etc.
Two problems arise: 1) banks are complaining about the poor security of this practice and 2) users lose control of their data without realizing it.
Visa can leverage more solid relationships with bank partners, which can lead to the development of a safer authentication system / data acquisition system than what Plaid has built so far.
Despite some limitations, payment networks such as Visa and Mastercard are huge data aggregators as they store data of millions of transactions per day. The biggest limitation is that they only see (parts of) the transactions that happen within their network. Plaid acquisition would potentially enable Visa to see the rest of the picture in which Plaid is currently used by all those apps that reduce the need of Visa such as Venmo or Square Cash, as well as non-Visa transactions of a bank account.
Despite this is very tempting, Visa will have to be really careful because Plaid’s clients won’t be keen to let Visa see/use their data, hence creating the case for switching to Plaid’s competitors.
In the US, Plaid’s penetration in key FinTech verticals is between 2 and 7%. This represents a win-win situation for Visa: on one hand, Visa’s relationships will help Plaid sign more clients; on the other hand, Visa will expand its product offering and its addressable market.
Visa will also push Plaid’s expansion outside the US: in fact, there are ~15x more fintech users in International markets than in the US…and Plaid’s penetration in these markets is really low.
But the most interesting use case is the potential development of online payments. Visa is a middle-man, and its value lies on the ability of creating a standard for merchants and buyers to exchange digital money. While the card is a very practical tool in the offline world, especially with the advent of faster technologies such as contactless, it’s generally a strong friction point in the online commerce. That’s why companies such as PayPal, Venmo, Amazon, Visa itself are trying to simplify the process pre-saving the card and letting users pay through a simple authentication. A PISP (Payment Initiation Service Providers) is a 3rd party which enables a payment to be authenticated and paid directly out of a persons or businesses bank account rather than a debit or credit card. A company like Plaid strongly simplifies this process as it helps the user pay through her bank simply with username and password — an easier process than PayPal as there would be no need to create another account on top of the one the user already has with her main bank. The rise of a ‘Pay with your bank account’ system would allow merchants to save on credit card fees without creating any friction for the user, while also reducing the risks of credit card frauds. Plaid’s acquisition would give Visa enough visibility of the new trends, allowing the company to anticipate competitors’ moves while protecting the business model.