On January 13, financial services giant Visa announced it would acquire FinTech firm Plaid for $5.3 billion. Notably, the corporation is shelling out double the amount of the startup’s last valuation to make the purchase. Pending regulatory approval, the payment processor predicts it will close on Plaid in the next three to six months.
Nevertheless, the transaction represents a smart move on Visa’s part to future-proof its operations.
What Makes Plaid So Valuable
Founded in 2012, the San Francisco-based Plaid specializes in developing application programming interfaces (APIs) that allow banks to connect with FinTech companies. For example, the startup’s APIs give Venmo users the ability to add their bank accounts to the platform. The firm’s developer tools are also used by emerging brands such as Coinbase, Robinhood, and Acorns Grow.
Over the course of its history, Plaid has experienced remarkable growth. Thus far, the startup’s APIs connect more than 200 million users’ accounts to various FinTech services. Moreover, the company’s development tools are interoperable with more than 11,000 financial institutions.
Plaid’s ascent hasn’t gone unnoticed by the financial sector. In its last funding round, the startup received $250 million in investments from the likes of American Express, Spark Capital, and Visa. However, Visa didn’t pay double the startup’s $2.65 billion 2018 valuation because of its present performance. The payment processor made a substantial investment in the firm because it likes what it sees in the firm’s future.
Why Visa Bought Plaid
Like any smart acquisition, Visa’s purchase of Plaid involves both near and long-term advantages. The financial service corporation told Bloomberg its new subsidiary would increase its revenue generation by one percent in fiscal 2021. In the 2019 fiscal year, the brand brought in $23 billion in sales. But the payment company sees the startup’s real value further along in its roadmap.
TechCrunch reports Visa’s leadership told its stockholders FinTech adoption is growing at a compound rate of 43 percent annually. As a trusted provider of account interpolation APIs, Plaid will be at the forefront of that expansion.
Consequently, Visa has bought itself a measure of protection against further disruption of the banking sector. Even if consumers move away from traditional banking, it will still play a role in moving their money.
The corporation is also working to ensure the long-term viability of its new acquisition. Last March, Capital One and JPMorgan Chase began denying FinTech apps access to their servers due to security concerns. Now, Visa is teaming with JPMorgan to ensure Plaid’s APIs only harvest user data “appropriately.”
Effectively, the brand is using its legacy connections to make sure the FinTech revolution proceeds apace.
It’s also worth noting the payment processor is wise to buy Plaid right now. Recently, the financial services sector has undergone quite a bit of consolidation. FinTech company Global Payments and TSYS made a $21.5 billion merger agreement in May 2019. Last January, Fiserv bought banking tech services company First Data for $22 billion.
Therefore, Visa prevented two unpleasant outcomes with its acquisition of Plaid. It kept costs down by purchasing the startup before it became an institution, and it stopped another legacy brand from snapping it up. Instead, the legacy financial services giant made a shrewd but initially pricy investment in its longevity.