What did Visa need to patch with Plaid?
Before Visa agreed to acquire data company Plaid for $5.3 billion, Mastercard had been pulling ahead in the race among the card brands to break beyond reliance on basic processing fees.
Visa’s Plaid deal is part of a series of rapid moves to manage challenges as diverse as gig economy payouts, real-time processing and building product stacks for technology clients. It also follows years of moves from Mastercard to serve the same goal.
One such deal was Mastercard’s $3 billion acquisition of a payment platform from Denmark-based technology company Nets in 2019. That deal came quickly on the heels of $1.1 billion in other Mastercard purchases, such as Ethoca, a fraud technology company; and Vyze, a point of sale provider.
At the time, Mastercard said these deals would slice into financial performance for the short-term, but also give Mastercard an inside track to provide issuers, merchants and acquirers the tools to handle border-less retail, supply chains and instant funds access.
“[Mastercard also has] its Vocalink property that supports real-time networks like The Clearing House in the U.S. and Faster Payments in the U.K.” said Dayna Ford, a senior research director at Gartner.
Visa’s Plaid deal "can also be seen as defensive to these Mastercard moves," Ford said.
Visa has been evolving over the past few years to become more of a technology provider in addition to a payment network. After opening its technology to external developers four years ago, Visa has made investments to accommodate financial services models that, at times, are positioned as rivals to traditional card processing.
For example, Visa has invested in Klarna, a Swedish installment payment company that has marketed itself as a way to avoid card debt. The investment gives Visa access to younger consumers and a company that has embraced new retail strategies that tie checkout to a broader experience.
And just before the end of the year, Visa formed a partnership with Global Processing Services, a U.K.-based payment technology firm that will allow Visa to accelerate its fintech outreach in Europe while both companies promote faster payments to support digital commerce. GPS has also worked with Revolut and other fintechs, giving Visa an extra connection to that part of the financial services market.
The Plaid deal "opens new markets and positions us to capitalize on the fintech-driven revolution in financial services,” said Al Kelly, Visa's CEO, in a conference call Monday. “The connectivity between banks and fintech developers has become critically important.”
Visa and Mastercard’s native real-time payment products, Visa Direct and Mastercard Send, are push-to-debit services that run on the networks traditional rails, and have gained significant adoption, according to Ford.
“They have gained especially in the form of payouts to gig economy workers and are often intertwined with the same fintechs that are utilizing Plaid,” Ford said. “It seems likely that Plaid will expand to include those rails as well.”
Plaid has gaps of its own — mostly geographic — as the company is live in only Canada, the U.K. and the U.S. But it’s in pilot in other markets, and has made strides in the U.S.
Plaid has connections to more than 2,600 fintech developers and 11,000 financial institutions. And about 25% of U.S. consumers with a bank account have connected that account to Plaid.
Visa’s global network will allow Plaid to quickly scale in international markets, while Visa makes up ground on Mastercard.
“Plaid represents an opportunity for Visa to enter new faster-growth fintech verticals, where Plaid remains significantly underpenetrated, such as banking, investing, and consumer payments,” Jeffries equity analysts Trevor Williams and John Hecht wrote in a research note on Tuesday.
Visa can improve its core business by enhancing the value proposition it can bring to existing and potential fintech clients, “where it has been playing catch up with Mastercard," they wrote.
Given Plaid’s scale with fintechs and Visa’s network, the deal is also a chance for Visa to extend its role in open banking, or data sharing between banks and third parties such as fintechs, though there may be more opportunity in the U.S., where there’s no PSD2 rule but still an impetus for the traditional banks in Visa’s issuer network to connect with technology companies.
“Plaid can be thought of as a grassroots PSD2 for the U.S., absent the SCA components,” Ford said, adding Plaid will have more competition in Europe as firms such as Token.io and Salt Edge already have a presence and payment vendors such as Adyen are building connections into bank APIs.