Visa’s $5.3 Billion Acquisition of Plaid Is Fundamentally Anti-Competition

Jan 20, 2020 by Barry Shisgal

By Barry Shisgal

Visa, the global payments technology company, announced earlier this week its agreement to acquire FinTech infrastructure provider, Plaid, for $5.3 billion. By acquiring the San Francisco-based Plaid, Visa stands to gain control over the application program interface (API) platform that, according to Plaid, “empowers innovators by delivering access to the financial system.”

Plaid’s business model, that of providing an independent API platform for connecting FinTech developers with banks, evolved from its own difficulties in connecting bank accounts, a capability that was essential for Plaid’s original plan to build a personal financial management and tracking tool.

Plaid focuses on enabling consumers and businesses to interact with their bank accounts, allowing for balance checks and the ability to make payments through financial technology applications. Plaid says it integrates with more than 10,000 banks and connects to roughly 20 million consumer accounts.

Its functionality is at the core of open banking and other initiatives that tie banks to third-party FinTechs such as payment apps.

Fundamental Key

As stated in Plaid’s June 2016 public relations announcement, the ability to connect bank accounts through an independent API platform, or Plaid’s data infrastructure layer, is a fundamental key to driving further financial progress.

“Plaid’s suite of APIs provides the tools that developers need to build great financial services applications, from high-quality transaction data to bank accounts authentication tools and comprehensive analytics to reduce fraud,” said Zach Perret, CEO and co-founder of Plaid.

Plaid’s other co-founder and Chief Technology Officer, William Hockey, explained that without a third party like Plaid, new start-ups “would have to hire their own engineers and create their own ways to sync with banks.” He likened it to the problem of traveling abroad with an American-made hair dryer that simply won’t work with a foreign outlet. Plaid acts as the adapter that enables the outlet (the bank) to connect with the device (the start-up) so it can function.

Other Functions

Mr. Hockey explained that Plaid also adds analysis on top of the bank account so app users can engage in budgeting plans and expense management.

“It can authenticate bank accounts for direct payroll deposits and electronic bill payments, verify someone’s identity as well his or her balance in real time and understand income and employment,” he said.

According to Chris Britt, CEO of Chime, an online bank start-up, the company’s direct deposit function “would be impossible without Plaid’s technology.”

According to Rajesh Kandaswamy, chief of research at Gartner, a research and advisory company, Plaid’s technology has eased some technical burdens for start-ups and has helped build the sector’s success. “Even if they don’t have capital, doing things quickly is important for a developer. For many FinTech companies who don’t have the dollars yet, Plaid became an option. It has enabled companies to grow and brings down capital costs, including time and effort,” he said.

Thwarting Competition

Visa is clearly not offering $5.3 billion based on Plaid’s current or even projected earnings. Visa also doesn’t need Plaid’s API network for itself since Visa is already connected to all the banks that currently connect to Plaid’s API platform, and Visa can cost effectively use Plaid’s API infrastructure without acquiring it.

But through this $5.3 billion acquisition, Visa will gain the ability to thwart competition and disempower innovators by monitoring, controlling, frustrating, and blocking their access to the financial system.

Visa’s willingness to spend a hefty $5.3 billion on the Plaid acquisition stems from Visa’s need to protect its lock on the consumer-payment oligopoly (a market dominated by a very few powerful enterprises) by preventing FinTech startups from rendering Visa’s antiquated number-based credit-card payment platform obsolete with smarter innovative payment solutions.

A Win-Lose

This acquisition presents a competitive win for Visa and a glorious exit for Plaid’s founders and investors, but a loss for consumers, for FinTech developers, for US retailers, and for US consumer banking institutions.

New European Union regulations require banks to release their data in a secure and standardized “Open Banking” form, so that it can be shared more seamlessly between organizations online. But for US-based FinTech startups, Plaid’s API platform has become a crucial infrastructure for integrating with US banks and providing consumers and retailers with innovative payment solutions that compete with Visa’s credit-card payment platform.

Sarah Grotta, director of debit and alternative products advisory service at Mercator, a group of companies with diversified business interests in energy, said Visa’s action enables the company to “have some control over future development of new products, some that, without Visa’s ownership, could have competed with Visa’s core credit-card business.”

According to some news reports, the importance of open technology development to support FinTech/bank partnerships suggests a new wave of acquisitions may follow Visa’s deal with Plaid.