US banks have given the nod to Visa’s $5.3bn bet on open banking through Plaid, the San Francisco fintech that connects bank accounts to apps.
At first glance this looks foolhardy. Plaid is a data aggregator that shares customer information with online companies such as PayPal’s Venmo so that users can make payments and keep an eye on their spending without ever going to the bank. Retail banks should see this as a threat. The easier it is for customers to access financial services through third-party apps the less they interact with the bank that holds their current account. Banks lose their chance to up-sell services. One day customers might decide they do not need a bank account at all.
Visa, however, built its business on symbiosis rather than disruption. If the era of data sharing cannot be avoided then it makes sense for banks to prefer working with a known entity.
The deal could therefore help some of the problems Plaid has experienced as it has expanded to work with more than 11,000 financial institutions. In theory, banking data in the US belongs to the individual. But banks sometimes prevent access to outside companies, citing the need to ward off potential damaging breaches. A recent security update at PNC Bank prevented Plaid from accessing information. With Visa’s backing such concerns may ease.
For Visa this is an expensive deal. At $5.3bn Visa is paying twice Plaid’s last private valuation. Most of the acquisition will be purchased with a mixture of cash and debt. Another $400m will be in stock. It may not leave much of a dent in the $420bn company’s $14bn cash pile but the immediate benefits look fairly modest. Plaid makes most of its money from licence fees. Visa expects the deal to add up to 100 basis points to revenue growth in 2021, suggesting about $250m. This means Visa is paying 21 times Plaid’s expected sales.
Look to the horizon, however, and the deal is worth the price. Plaid’s data will give Visa insights into most of the major financial technology companies. That could direct the company’s future acquisitions and product sales. Visa has just bought a key piece of the infrastructure required for a digitised financial system.
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