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On the Plaid acquisition

Yesterday, Plaid announced it was being acquired by Visa for $5.3 billion ($4.9 billion in cash, and $400 million in retention equity). It took me by surprise: I expected Plaid to continue to grow as an independent platform. Still, given that its Series C put it at roughly a $2.65 billion valuation, it represents a decent (if not spectacular) return for its investors.

Plaid is an integration platform for fintech: it makes it significantly easier for platforms to connect to banking institutions. As Ben Thompson wrote in Stratechery, this is a really big deal:

Many banks in the U.S. do not have APIs (Application Programming Interfaces) that offer a programmatic means of accessing a particular account; those that do are not consistent with each other in either implementation or in features. Plaid gets around this by effectively acting as a deputy for consumers: the latter give Plaid their username and password for their bank account, and Plaid utilizes that to basically log in to a bank’s website on the user’s behalf.

Nearly 25% of US banking customers have stored their banking credentials with Plaid, whether they realize it or not. It's what powers banking connections for Venmo, Coinbase, Acorns, and other major fintech apps.

The mechanism that Ben described is literally scraping: Plaid uses a programmable "headless" browser to pretend to be a user, log in, and perform actions on the Plaid user's behalf. These connections are inherently flaky and tricky to keep up to date: if a bank's user interface changes, the integration is likely to need to be rewritten. Multiply that by hundreds or thousands of institutions that don't have APIs, and it's a significant, full-time undertaking. Rather them than me.

"Rather them than me" for valuable tasks is a pretty good basis for a platform business.

These institutions often, for very good security reasons, do their best to block scrapers, usig services like Distil Networks. That means that anyone who wants to build a scraping integration will need to be whitelisted. And it's far less likely for Joe Schmo and his new, unknown fintech startup to get whitelisted than Plaid. When I spoke to Plaid on the phone recently, they told me that around 85% of its integrations had underlying relationships. Which implies that up to around 15% don't - an incredible statistic in itself, which is indicative of the technological state of the US financial industry.

As Ben points out, that inertia is possibly understandable from the point of view of the banks:

As long as it is hard to move money around, the more likely it is that that money will stay in the bank, collecting minuscule interest; or, if customers need value-added services, the path of lowest resistance will be simply getting them from their bank.

An API-based world where data sharing is possible changes that situation dramatically, and allows for a new wave of innovation in financial technology, where anyone can build services around anyone's bank account. And at the center will be Visa, taking a cut and doubtless learning from everyone's financial connections.

By lowering the friction to integrating with existing institutions, Plaid also entrenches the legacy banking system. The easier it is for fintech startups to work with traditional banking, the less likely they are to move to truly alternative systems. In a way, it allows them to protect against any threat posed by peer to peer currencies and the emerging decentralized ecosystem. In a world where Visa controls connectivity to fintech applications, any crypto network or alternative network who wants to reach those apps will need to make a deal with them and abide by their rules.

It's a good buy for them, although I wish we could see a world where Plaid continued to run as a completely independent company, free from the strings associated with legacy financial institutions.

If you're interested, the whole Visa / Plaid deck is worth a read.