By Marcus Falck, Edvard Bruu (Stockholm School of Economics), Christopher Shim, Angela Xia, Karthik Neelamegam, Adit Rajeev (University of Cambridge)
Overview of the deal
Acquirer: Visa
Target: Plaid
Estimated value: $5.3 billion
Announcement date: 13th January 2020
Acquirer Advisors: Lazard
Target Advisors: Goldman Sachs
Visa is buying fintech company Plaid for $5.3 billion. Plaid’s latest funding round valued the company at $2.65 billion, exactly half the number that Visa is paying for the company. The high price tag comes in the midst of an uptick in capital flowing into M&A in the payments and fintech space – in turn stimulated by rapid industry consolidation as providers aim to fight off competition from start-ups, more adequately prepare for major swings in the fintech arena, and combat low margins. Current industry momentum around firms like Plaid, together with the target’s standing and global reach, could help explain the price premium.
Connectivity between financial institutions and developers has become increasingly important to facilitate consumers’ ability to use fintech applications. 75 percent of the world's internet-enabled consumers used a fintech application to initiate money movement in 2019 versus 18 percent in 2015. Plaid has been a leader in enabling this connectivity at scale. Today, one in four people with a U.S. bank account have used Plaid to connect to more than 2,600 fintech developers across more than 11,000 financial institutions.
This deal represents both an entry into new ventures and complementary improvements to Visa’s existing enterprise. Plaid’s fintech-centric business opens new market opportunities for Visa globally and the deal allows the NewCo to deliver augmented payment capabilities and associated value-added services to fintech developers. The acquisition should also provide Visa the opportunity to work intimately with fintechs through all stages of their growth while also accelerating the development of Visa’s core business. Once closed, the NewCo will likely deliver substantial advantages to developers, financial institutions and consumers.
“The combination of Visa and Plaid will put us at the epicentre of the fintech world, expanding our total addressable market and accelerating our long-term revenue growth trajectory.” - Alfred Kelly, CEO & Chairman of Visa
Company Details (Acquirer - Visa)
Visa Inc. is a global payments technology company that facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a processing network that enables authorization, clearing, and settlement of payment transactions. Visa Inc. also offers card products, as well as value-added services. It provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands. The company has a strategic partnership with NovoPayment to enable financial institutions and merchants to deploy Visa’s digital solutions in Latin America and the Caribbean.
- Founded in 1958
- CEO: Alfred Kelly
- Number of employees: 19,500
- Market Cap: $437.1 billion - EV: $ 444.7 billion
- LTM Revenue: $23.0 billion - LTM EBITDA: $15.7 billion
- LTM EV/Revenue: 19.4x - LTM EV/EBITDA: 28.3x
Company Details (Target - Plaid)
Plaid Inc enables users to connect their bank accounts to an app. The company aims to democratize financial services via technology and construct consumer experiences, developer-friendly infrastructure, and intelligent tools that allow users to solve problems by creating products. Plaid offers a set of technical infrastructure APIs that enable developers to build financial products for connecting consumers and traditional financial institutions. Its product suite provides transaction histories, authentication for ACH and ETH payments, identity verification, real-time balance verification, and more. The company’s products are used for personal finances, consumer payments, lending, banking and brokerage, and business finances. It serves Fortune 500 companies.
- Founded in May 2013
- CEO: Zach Perret
- Number of employees: 420
- Market Cap: $N/A - EV: $ Non-disclosed
- LTM Revenue: $110.9 million - LTM EBITDA: $Non-disclosed
Projections and Assumptions
Short-term consequences
The acquisition of Plaid implicates several profitable synergies for both companies. In the last year, more and more banks and financial institutions have been raising concerns about the safety risks of some of Plaid’s services, especially in regards to services that utilize so called “screen-scraping”. In some cases, even cutting off access to customer data, limiting the company’s offering. The acquisition of Plaid could therefore be utilised to leverage Visa’s partnerships within the financial industry to ensure that the service can offer availability to its current wide range of financial institutions - giving Plaid a competitive edge.
The synergies of the acquisition is not limited to Plaid, since the transaction implicates several benefits for Visa as well. One aspect being the instant access to customer transaction data that extends beyond the scope of their own services. This data can of course be utilized to optimize and expand Visa’s current services, while also giving the opportunity to sell the data to their partnering banks and institutions - providing additional value to such a partnership.
Despite the staggering $5.3 bn transaction, Plaid’s revenue is limited to only $109 million, adding approximately 1% to Visa’s annual revenue. This also means that Visa values Plaid at 50x the company’s current revenue. Making it clear that the acquisition is driven by the long-term synergies rather than the fundamentals.
Long Term Upsides
For a long time Visa’s acquisitions have been driven by their “Network of Networks”-strategy, and the purchase of Plaid is no exception. By operating as an aggregator between banks and fintech-companies, Plaid works as the connection between the established financial sector and the newcomers within the industry. The former, banks and financial institutions, are already heavily integrated within the Visa services; while the ladder, fintech-companies, operate independently of the payment facilitator. The acquisition of Plaid has the potential to integrate these companies within the Visa-network, expanding its customer base.
As previously stated, Plaid has a similar position within their market as Visa does, by acting as a center point between different financial actors. Though Visa’s business model is reliant on transaction fees from retailers, Plaid’s revenue stream comes from the services they provide when it comes to interconnecting financial data between two different actors. In times where consumers are increasingly moving to digital banking solutions, this transaction enhances Visa’s business model from a payment provider to to that of a gatekeeper for financial data. This strategic shift has the potential to be greatly beneficial for Visa through the growing demand for customer data from financial institutions, while also diversifying the company’s earnings.
Risks and Uncertainties
One of the key concerns regarding the deal is related to the reuse of data. Open banking regulations have not been formally implemented in the US, which means that banks do not have a consistent set of application programming interfaces (APIs). The major implication of this is that Plaid has to act as an intermediary for customers in order for them to link their bank with a third-party application. In these cases, Plaid essentially copies over a user's login credentials, acting as a secure intermediary – this is known as 'screen scraping'. However, not all banks seem to be willing to share their credentials with third parties; JPMorgan Chase (who announced it will restrict ‘screen-scraping’ for access to its customers’ accounts) and PNC Financial Services Group recently tightened their third-party data sharing practices, due to security concerns. If this trend continues in 2020, the scope of the deal’s synergies related to open banking, which is said to create a more customer-centric, transparent and fluid experience for customers, may be limited.
An alternative view is that the transaction may in fact validate open banking in the US. For instance, it has been suggested that perhaps Visa could position itself as a solution to rising security concerns; by bringing together Plaid's network with its own relationships in the banking realm, it could create a new, secure industry standard for verification. This appears to be a best-case scenario for Visa, and whether or not we observe this remains to be seen.