Fintech is all set to be a hot growth industry. Bank stocks were a massive hit in the decade since the Great Recession, but now the industry is primed for disruption through things like digital payments processing, blockchain, and banking services combined with e-commerce.
One of the biggest areas of growth in fintech has been financial aggregators and interaccount connectivity, and now Visa (V -1.19%) is betting on the movement with its $5.3 billion deal for Plaid. Plaid is the tech that enables apps like PayPal's Venmo, automated investing firm Betterment, zero-commission trading firm Robinhood, and thousands of other apps to connect with banking infrastructure and facilitate the transfer of funds. It may sound like a large sum of money, but this deal is a no-brainer for Visa.
Plaid is undoubtedly growing very quickly
Visa disclosed that it is paying $5.3 billion in cash and will eventually sell some new debt to replenish its reserves. Based on Plaid's last funding round in December 2018 -- in which it raised $250 million in cash -- the fintech outfit was valued at half the amount Visa will now pony up for it.
That implies Plaid is a fast-growing fintech start-up. Visa didn't provide any specifics on the small company's financials, but it did provide a little context. According to a report from EY.com cited by Visa, 75% of the consumers connected to the internet used a fintech application to move money between accounts in 2019, versus just 18% in 2015. Plaid is helping lead the way in that department, with Visa saying that one in four people with a U.S. bank account have used Plaid -- most of them unknowingly, as Plaid operates in the background to connect more than 11,000 financial institutions. Plaid connected 10 million accounts in 2015, but that number surged an average of 115% a year to reach over 200 million accounts in 2019.
Though the start-up won't be a core part of Visa's digital payments processing business, the fact that so many people are now using apps to move money around will help Visa stave off disruption from changes in consumer behavior in the years ahead.
Visa already had a vested interest in the company
Visa was among the businesses that participated in the last investment round in 2018, along with global rivals Mastercard and American Express. Acquisition activity has been heating up the last few years, and Plaid's huge growth has been on the radar of many digital finance firms. Perhaps keeping Plaid away from key competitors factored into the decision to make the purchase.
Buying out the rest of the equity in Plaid will also help Visa indirectly participate in the growth of other fintech companies. Plaid has penetrated key segments of the industry with its account linking software, including banking and investing (5% penetration of a $650 million addressable market), consumer payments (3% of a $950 million addressable market), and lending (2% of a $1 billion addressable market). Thus, there's plenty of room to keep expanding the multi-account connectivity software platform. Buying out the rest of Plaid also means Visa could plug the fintech firm into its global ecosystem. Plaid is well-established here in the United States but it has only just begun to expand internationally -- where Visa says there are 15-times more fintech users.
$5.3 billion is pocket change
All of the reasons for the purchase sound great, but was $5.3 billion worth it? Without knowing how big Plaid actually is, it's hard to say. However, Visa has time to let the small company develop, and the capital needed to support it.
During its recently completed 2019 fiscal year, the global digital payments leader generated $23.0 billion in revenue and $12.1 billion in net income (yup, you read that right, Visa operates at a 52.6% net margin). The company also had $7.8 billion in unrestricted cash on the books at the end of the year. Plaid and its massive potential in the years ahead thus cost Visa a quarter's worth of revenue and half a year's worth of net profit, not to mention liquid balances in reserve. Plaid may have doubled in value in just over a year, but my bet is it will go down as a pretty smart move on Visa's part down the road.