Anyone who thinks that the astronomical assessments of tech companies will return to Earth in 2020 will have this assumption disobeyed by a big deal overnight.
Payment giant Visa has just agreed to pay $ 5.3 billion (£ 4.1 billion) for Plaid, a company founded only in 2013.
The deal comes only seven months after Visa paid $ 250 million (£ 192 million) for Earthport, a payment service company, which was also interested in Visa’s rival Mastercard.
The same Mastercard has also been active in the fintech space in recent years, shelling out £ 700m in 2017 for Vocalink, a payment technology company previously owned by a consortium of banks including Lloyds Banking Group, Barclays, HSBC and Royal Bank of Scotland.
So what is Visa getting for its money?
Plaid is a developer of so-called APIs – application programming interfaces.
These are boundaries through which different parts of an information system exchange information.
In Plaid’s case, its software allows financial technology vendors to connect to their customers’ bank accounts.
The company, valued at $ 2.65 billion (£ 2.04 billion) during the last fundraising round in 2018, claims that between one in four and one in five Americans with a bank account used the service.
Other major customers include Venmo, a mobile service owned by PayPal, the payment provider.
Plaid’s technology allows Venmo to instantly connect its customers ‘accounts to those customers’ bank accounts.
There have been questions about agreements like these.
Banks have been wary because they care about the security of their customers’ accounts and also because they fear it will dilute the strength of their relationship with their customers.
Capital One, for example, recently updated its systems to eliminate these third party agreements.
In response, the API developers claimed to be a safe way to allow sharing of financial data.
They claim that APIs such as Plaid allow banks to transmit data from their customers ‘accounts without having to disclose those customers’ passwords.
It is therefore significant that, in the press release issued by Visa to announce the agreement, a quote of approval was included by an executive of JP Morgan Chase, the largest American bank, in which he stressed the importance of giving consumers “other security and control over the use of their financial data”.
Al Kelly, CEO and president of Visa, added: “We are extremely excited about our acquisition of Plaid and how it improves the growth path of our business.
“Plaid is a leader in the rapidly growing fintech world with the best skills and abilities.
“The acquisition, combined with our many ongoing fintech efforts, will allow Visa to offer even more value to developers, financial institutions and consumers.”
And that’s the main reason why Visa concluded this deal.
While the world is growing moving to a cashless companyVisa and Mastercard are obsessed with the idea that consumers can also, over time, abandon the use of credit and debit cards to make payments directly from their bank accounts, for example using their mobile phones.
As a result, they are looking to make their businesses future-proof by gaining access to technologies that allow them to take part in that sector of the payment market, moving from simple card payments to broader funds transfer activities.
To this end, Visa has invested in other services, such as Visa Direct, which allows companies operating in the so-called “gig economy” to pay their employees faster and which allows customers of peer-to-peer services to transfer money to and from their bank accounts more quickly.
APIs such as Plaid potentially offer another way of expansion for card companies as they open the door to greater participation in the business-to-business payments market.
The main attraction for Visa, however, could be that Plaid has relationships with almost all of America’s fastest growing fintech companies, including Venmo and Robinhood, the commission-free stock trading service.
This potentially allows Visa to access millions of additional potential customers, as well as provide a better insight into fintech trends and access to other fintech startups.
The plaid potentially offers Visa the ability to influence those companies and, in theory, prevent them from developing products and services that could compete with Visa’s.
For Plaid, meanwhile, being purchased by Visa should mean that financial services companies and banks in particular have more confidence in it because they have worked longer with Visa.
While banks may be resistant to sharing their customers’ financial data with third parties, they are likely to have few of these problems with Visa, as they already work closely with it.
Meanwhile, Plaid owners – which include investment bank Goldman Sachs, renowned technology investor Mary Meeker and venture capital firms Index Ventures, Kleiner Perkins and Andreessen Horowitz – can enjoy a spectacular return on their investment.
Ironically, another investor in Plaid is thought to be Mastercard, who should try to compensate for any unhappiness in losing the company itself.