Fintech On Fire…No Surprise To Us Here

What a great time to be a long fintech….

Yesterday Visa bought Plaid for $5.3 billion (read about it here). I did not see Visa coming for this one and likely Mastercard was a bidder themselves leading to the big number (both Visa and Mastercard were investors). Here is Visa’s deck on why they did it and its worth a read for any fintech investor.

A quick perspective on what $5.3 billion means to Visa – one quarter and half of EBITDA….Visa has a 450 billion market cap.

I have a few friends that were seed investors that made whopping returns which is a reminder of why seed investing is so thrilling and fulfilling.

I am glad I waited an extra day to write about the acquisition because Ben Thompson made my job easier with his breakdown of the deal.

So far 2020 is shaping up like I predicted here

The big question all predictions must answer in 2020 is ‘Can Fintechs Really Beat Banks‘?

I personally think we will see a lot more acquisitions (mega and small) as the banks come to terms with the 60 million accounts outside their direct reach.

This big fintech acquisition comes on heels of Schwab’s acquisition of TD Amritrade and Paypal’s $4 billion Honey acquisition(this is a good read).

What does Plaid do you ask?

My friend Julien has a simple and smart explanation from last year.

I’ve been focused on fintech for a long time and I doubt I would have invested in Plaid’s 2012 seed round if offered because I was too busy armchair quarterbacking Yodilee (who were the leader at the time). In 2012 I was telling Yodilee that they were missing the boat by not working closer with startups like Stocktwits to make the service more affordable and ubiquitous. I was early but could sense the consumer fintech explosion. Yodilee was too slow to move and Plaid moved in quickly helping companies like Robinhood and Venmo grow really fast.

Note – Yodilee did sue Plaid for patent violations.

By 2015, I was well aware of Plaid and asked my friend Matt Murphy to make an intro to the founders – to see if we could invest – which he did:

In 2015 Yodilee did get bought by Envestnet ($ENV) for $590 million. Not horrible, but not $5 billion. By the way, Envestnet closed today at all-time highs and is a stock I have followed but not owned.

Plaid executed near perfectly from the start. The timing of their launch and their plan could not have been better as consumer fintech began to explode.

I became cynical towards Plaid when Goldman Sachs made a $44 million series B investment back in 2016. Obviously, this was a great/shrewd investment by Goldman, but I hated the idea of old school banking getting involved with Plaid so early. Here we are in 2020 and we are in the inevitable phase of all this fintech activity.

Ben Thompson’s summary which I linked to above sums it all up for Visa:

This hints at the best case scenario for Visa from this acquisition: a new financial network, with Visa at its center, transforming the consumer financial services industry just as the credit card transformed the consumer retail industry. If that happens, it’s not out of the question that such a network will be so superior to today’s means of moving financial information and data that the company will be able to charge an ongoing toll, instead of simply a set-up fee (and, perhaps, share it with the banks).

The worst case scenario, meanwhile, will see Plaid’s creaky approach deliver barely good enough service to fintech applications in the U.S., with nothing near the reliability or profitability of Visa’s credit card network. Which, from Visa’s perspective, is not a problem either!

Visa will also be able to help Plaid expand internationally, including to more favorable markets like the U.K. and E.U. At first glance, open banking might seem to be a problem for Plaid, but the truth is that screen-scraping is not a long-term solution, and developers will still prefer to use one well-built API that abstracts away thousands of financial institutions instead of re-inventing the integration wheel.

And, most importantly from Visa’s perspective, the credit card business is not going anywhere — if anything, it’s getting stronger. Companies like Stripe are making credit cards more useful in more places, while Apple is making it even easier to use credit cards both online and offline. It is tempting to look at how payments work in countries like China, but that ignores the path dependency of one market using cash until recently, and the other receiving unsolicited Bank Americards 51 years ago. Once a job is done — and credit cards do their jobs very well — it takes a 10x improvement to get users to switch, and, in a three-sided network, that 10x is 10^3.

I used to own both Visa and Mastercard but now just own Mastercard. I can’t be the only now thinking that if I were to just own one of these great stocks, Visa now has a more interesting network and platform opportunity.