Visa's $5 billion Plaid deal takes a possible rival off the table

In the battle to control consumer data, Visa has made a major score by agreeing to acquire Plaid, a technology company that Visa — and banks — could have seen grow into a competitor.

Visa CEO Al Kelly acknowledged bank angst about Plaid, for which Visa agreed to pay $5.3 billion. Kelly said Plaid's data aggregation practices shouldn’t get in the way of the soon to be combined company’s plans to accelerate financial services and payments innovation.

“We know some banks prefer Plaid operate different,” Kelly said during a press conference Monday afternoon to discuss Visa's agreement to acquire Plaid. “We intend to address those concerns while not diminishing the value for developers.”

Traditional financial institutions have been at odds with Plaid and other aggregators over data access. An upgrade at Capital One cut off the data aggregator, for example.

Plaid was also at the center of a recent dispute between PNC and Venmo, in which PNC made it more difficult for consumers to use Venmo. Plaid verifies Venmo's user bank accounts, and PNC has changed its security protocols--which prevented Plaid from accessing some accounts data.

Patrick T. Fallon/Bloomberg

“Perhaps with ownership by Visa, both banks and consumers will feel more comfortable about handling over financial account details,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator. “Visa can also have some control over future development of new products, some that without Visa's ownership could have competed with its core card business.”

Plaid provides a range of user experience services and works with partners such as Venmo, Betterment, and Coinbase, among more than 15,000 financial institution partners.

In a typical scenario, users enter their online credentials and Plaid authenticates their account. It also works with ACH processors such as Stripe and Dwolla. For example, Plaid recently entered a data aggregation deal with Wells Fargo.

Plaid has established scale, with 25% of U.S. consumers with a bank account using Plaid, Kelly said.

“This opens new markets and positions us to capitalize on the fintech-driven revolution in financial services,” Kelly said, adding 75% of the world’s internet users used at least one fintech application over the past year. “The connectivity between banks and fintech developers has become critically important.”

Plaid has expanded in Canada and Europe in the past year, and is in beta in other markets, Kelly said. “These fintechs require a network.”

Plaid was recently valued at $2.65 billion, according to The Wall Street Journal. Visa and Mastercard both were part of a $350 million strategic investment in Plaid in September, a funding round that included Amex, Citi, Mary Meeker, Index Ventures, NEA and 16z.

"We can help where we're strong outside the U.S. and Plaid is just getting started," Kelly said.

The Plaid deal follows a series of moves Visa has made to open its technology development to external development, starting with opening its internal development about four years ago.

Mastercard in 2019 battled Visa to over the opportunity to acquire Earthport, which Visa won. This gave Visa the opportunity to expand its reach into cross-border transactions for e-commerce. Mastercard would up acquiring another company, Transfast, to accomplish the same expansion. The importance of open technology development to support fintech/bank partnerships suggests a new wave of acquisitions may follow Visa's Plaid deal.

Plaid uses application programming interfaces that connect financial institutions to developers to support consumer payments, lending, business finance, personal finance, banking and brokerage services. In addition to Venmo, Plaid also works with TransferWise, Paysafe, Current, Simple and Acorns, as well as challenger banks such as Chime.

Plaid's functionality is at the core of open banking, and other initiatives that tie banks to third party fintechs such as payment apps. By gaining access to Plaid's client network, Visa will be able to more easily add digital financial services and gain revenue from its own payment rails, and support its issuer banks who will be making deals with fintechs..

"Plaid's APIs give Visa a new pathway to data-driven revenue streams," said Richard Crone, a payments consultant. “The popularity of embedded banking is seen in Google Cash, Libra and other forms of ‘headless banking’ where banking companies are underneath someone else’s brand or letterhead.”