I’m back to blogging after a successful exit last month. The Plaid acquisition is a great way for me to jump back in. Why read this? A key to understanding payments, banking and data is to balance historical knowledge with a network of people that know what is really happening behind the scenes. As the former head of two direct banks, former Senior Director of Oracle’s advanced technology solution’s practice and Yodlee’s first customer I have an informed perspective on the market for this one.
First congratulations to Plaid, going from a 2019 recap with around $40-60M in revenue to a $5B exit is just amazing.
Visa had to move here, as my numerous blogs outline, the KEY to creating a successful network is enabling 1000s of business to invest. Plaid enables “open innovation” where small companies can build on consistent APIs (see 2013 blog). For the non-techies think about how Apps were created before there was in iPhone App Store or Android marketplace (blog on how bank “apps” were created in 2008).
Core banking and payments are complex (see Oracle Flexcube Banking Architecture below). Internally, it took my online team 18-24 months to make significant changes. For example, in 2009 Visa issued a “mandatory” requirement for banks to implement to Visa Money Transfer APIs (AFT and OCT). 11 years later, and AFT/OCT has less than 40% adoption in the US. If it was hard within a bank (as head of channels) to implement change, you can be sure it is challenging for a 3rd party to drive it (without a business case).
For this reason, I’ve been told there are only 3 US banks that have active integrations with Plaid’s API. The majority of integrations are screen scraping (like Yodlee) or sit on top of existing APIs (like AFT/OCT). I’m not knocking PLAID, as working with banks is just about the hardest thing a start up can do.. And there are few choices for start ups that want to move a ball (beyond scraping). In screen scraping, I ask the consumer for credentials, log in on behalf of them and extract the contents of the HTML.
In this process, Plaid most likely obtains explicit consumer permissions to use the data. This is perhaps their biggest asset, as most consumer banks usually maintain permission within a defined set of banking services. Thus Plaid’s APIs are used (by Apps or permissioned data users) to querry against this warehouse (or request real time updates from screen scraping).
This dynamic creates a massive revenue problem. There is no bank direct revenue channel (ie can’t charge banks for screen scaping). The primary beneficiaries are 3rd party app developers and data products. If data products are the key path toward monetization, the banks have the power to cut off access. Additionally, key revenue services like account verification are moving away from screen scraping and into direct access (ex Early Warning).
Opportunities for Visa
- Create an open innovation platform for hundreds of start ups globally
- Gain direct consumer permission for use of data
- Gain access to debit data to enable new data products
- Resell Plaid’s platform to banks (Small to mid)
- Establish a new set of services to serve consumers and merchants directly (beyond payments)
Challenges ahead for Visa
- Banks are not keen on “open innovation” and want to own the consumer interaction
- Visa issuer relations could suffer given Plaid’s “back door” access to transaction data.
- Banks are very concerned about consumer data, and have the tools to “cut off” Plaid at any time
- Direct to consumer services diminish the “neutrality” of Visa’s payment network
- Managing the permissions and privacy/compliance of a massive new consumer data set
- Creating a consumer support group