One payment processing startup should expect an uptick in business following its acquisition by Visa Inc.
Having the backing of one of the country's biggest card networks gives Plaid Inc. a new level of credibility with banks since they already rely on Visa and Mastercard Inc. for many of their payment needs, several industry experts said. Visa agreed to acquire the San Francisco-based startup, which both Visa and Mastercard have backed as strategic investors, on Jan. 13 for $5.3 billion. With added clout and Visa's goal to expand the product internationally, Plaid might see its partnerships skyrocket.
Plaid's network links customers' bank accounts to their third-party finance apps, including PayPal Holdings Inc.'s Venmo LLC and Robinhood Markets Inc., among thousands of others.
Visa's acquisition "completely changes the game," according to Charles Potts, chief innovation officer at the Independent Community Bankers of America, an industry trade group. The deal illustrates how the technology has moved from traditional screen scraping — a method to share data by collecting the screen display from one application and translating it so another app can display it — to Plaid's more evolved system that allows it to plug directly into a bank's digital systems.
"It really is the culmination of this technology evolution," Potts said in an interview. "[In the early days], new technology vendors and fintechs had no other way to grab data from a bank's digital banking environment than to utilize screen scraping."
Although the data aggregator largely operates behind the scenes, Plaid hit the news recently when some big banks banned financial technology apps from using customer passwords to access data.
In December 2019, PNC Bank NA customers butted heads with Venmo. The PNC Financial Services Group Inc. unit had implemented security updates that prevented customer account information from being shared with the popular peer-to-peer payments app, among other fintech mobile apps. Plaid was at the root of the debate as the data aggregator that had previously connected Venmo to PNC. The bank's security upgrade halted Plaid's access to customer account and routing numbers, information needed to facilitate online transactions.
Plaid's suite of application programming interfaces allows 2,600 fintechs to connect to over 11,000 financial institutions, a model that could be threatened if big banks refuse to allow access.
Two weeks later, JPMorgan Chase & Co. said it would issue tokens to allow third parties to access customer data instead of permitting them to use customer passwords to access bank account information directly. Both Plaid and another aggregator, Yodlee Inc., have agreed to use tokens for their interactions with the bank.
Unlike the situation with PNC, JPMorgan's change to tokenization does not halt Plaid's access to necessary customer information — it is a different technical method to transfer data between parties, albeit with a greater nod to customer privacy.
As banks become more digital, they are less likely to allow screen scraping, which was primarily created for consumer-facing solutions where the vendor had no direct relationship with the bank, the ICBA's Potts said. Now, more and more banks are developing their own APIs and are working in direct partnership with companies like Plaid.
The Financial Data Exchange launched in fall 2018 is one driving force behind that in-house development. FDX aims to form a common, interoperable data standard that banks and fintechs can tap into. It started with about 20 companies but has more than tripled in size. JPMorgan's API is aligned with the FDX, according to a spokesperson, and a Bank of America Corp. spokesperson said BofA is "actively involved" with industry groups that promote API solutions for data sharing.
But all of that happens behind the scenes.
"The overwhelming majority of consumers have no idea that a [company like] Plaid even exists," Potts said, though he expects that will change with Visa's high-profile and public acquisition.
Visa's ownership will likely alleviate security and compliance concerns and give Plaid's service a "stamp of quality," Bernstein analyst Harshita Rawat said in a Jan. 14 note. Plaid's international expansion is in its early days, but Visa aims to accelerate those plans, Visa executives said on a call to discuss the deal with analysts. Rawat expects the company's initial international expansion to focus on Europe, given ongoing regulatory changes related to open banking.
In the U.S., community banks are likely to become Plaid's newest partners.
"If I'm a small to medium-sized independent community bank, I will be talking ... about how a Visa-Plaid solution could be used to help foster innovation," Potts said. "Now I recognize this is a credible solution, and I may not have been aware that these types of capabilities existed."