Visa's (V +0.73%) attempt to acquire Plaid may not have worked out as planned, but that doesn't mean that the massive payment network operator is giving up on its attempts to add to its empire. In fact, the fintech giant just announced a new $2 billion acquisition. In this Fool Live video clip, recorded on June 28, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss what company Visa is acquiring and what it could mean for investors.
Jason Moser: Matt, in January, it was announced that Visa was not going to be going through with its plan to acquire a financial services company, Plaid. That was primarily due to antitrust concerns. Not a shock. Certainly, it was a risk that we all acknowledged existed. It became a reality. But that didn't stop Visa's management's wheels from turning. Visa just announced they are going to now acquire a Swedish fintech start-up company called Tink for $2.1 billion. I wonder how do you feel about this deal? Given the size of the business, it doesn't seem like there would be necessarily the same antitrust concerns, particularly because I think that the debit connection that existed with Plaid, I don't think that same connection exists with Tink. But nevertheless, $2.1 billion, that's a lot of money. Does this deal make sense?
Matt Frankel: Tink is entirely focused on the European market, which I think will help with regulatory issues as well. It's definitely a replacement for Plaid in Visa's strategy. It's pretty obvious. It's a clear replacement. But having said that, it's a somewhat smaller company, they're paying $2.1 billion. Plaid is valued at something like $13 billion on the private market. But I think Visa was going to acquire it for $4 or $5 billion.
Moser: That deal with something like $5.5 billion.
Frankel: I'd say this is about half the size of the Plaid deal when you look at the price Visa is paying. It's an all cash transaction. Tink is a player in open banking, just like Plaid was, or is I should say.
Moser: Sure.
Frankel: They essentially open up consumers' banking information with their permission, usually if the checkbox or something for your information actually be out there securely. But it shares your information with all these lenders, fintechs, things like that, to optimize the consumer banking experience, is that goal. Lenders have access to financial information of potential customers that can help them offer them better terms or loans than they would otherwise get. We've talked about similar things in the U.S. market with Upstart. This is one that we've talked about it a lot recently. Where they look at a bigger picture of a customer's financial data before making a lending decision. They won't just pull the FICO score and be done with it. Open banking can be applied to situations like that as well.
Moser: Yeah.
Frankel: Big potential applications here. As I mentioned, Tink is and will continue to be for the time being focused on the European market. But really a big part of Visa's strategy to go beyond just its core business of being a payment network.
Moser: Yeah, that's an interesting point you make in Visa trying to get past that core business. I think that's the business that everyone is so familiar with is in simplest terms, Visa is the company that owns that card that's in your wallet. Mastercard (MA +1.17%) is the company that gave you that card that's in your wallet. Now, anybody that follows the payment space, you know that it's far more nuanced than that. There are a number of hands in that cookie jar, so to speak. But given companies like Mastercard and Visa today, they are positioned in the market. The conversation has been one lately of disruption. Smaller players, Fintech, these types of companies disrupting companies like Mastercard and Visa in rendering them "obsolete". Now, I tend to think that's extremely shortsighted. I think that's a very shortsighted view. Part of the reason why I think that is because of just what we're seeing right here. We're seeing with Mastercard, we are seeing with Visa, they're making these little bolt-on acquisitions as they go along in order to build out that strategy and become more things to more people. I think that what some may not think about fully is that when they make an acquisition like this, it just immediately plugs into this massive network. You look at businesses with massive networks and you look at Facebook, for example, or look at Netflix. Companies where even if you saw a mass exodus of users, it's still at the end of the day isn't going to meaningfully dent the total number of people that are using those networks. When you have that network, it gives you the ability to really do a lot of different things. I look at companies like Visa and Mastercard, to me they see just as relevant today, and these are the types of acquisitions that should keep them relevant for the foreseeable future. But I don't know, do you think they're going to be regulated out of the market or disrupted out of the market?
Frankel: Yes. Visa's biggest obstacle to growing through acquisition is regulation. We saw that with the Plaid acquisition.
Moser: Of course.
Frankel: Visa could afford to buy Square if it really wanted to.
Moser: Sure.
Frankel: It couldn't get approval to do that.
Moser: I would imagine antitrust concerns would be down there.
Frankel: Visa has cited a $185 trillion global payments market, and that includes things that they are not involved in yet, like person-to-person payments, like business-to-business transfers, things like that. They want to branch out from the core business. Regulation is an obstacle. But these businesses are acquiring become infinitely more valuable under Visa's umbrella, like you mentioned. How much more valuable do you think Instagram became when Facebook took it over?
Moser: It's almost impossible to even quantify it, and that was a $1 billion acquisition and now Facebook really is, it's Instagram for all intents and purposes rate.
Frankel: Right. Or YouTube when Google [Alphabet] (GOOGL 2.62%)(GOOG 2.69%) acquired it?
Moser: Yeah. Another hit.
Frankel: There's a bunch of examples like that where a business might've seemed like a pretty hefty price tag to pay for a "start-up." But how much more valuable does it become under that? Instagram paired with Facebook's 2 billion users or whatever, it becomes Facebook.
Moser: Yeah.
Frankel: It's a pretty crazy concept that Visa can acquire a small company and it's instantly creating billions of dollars in value.
Moser: Because of the value of the network.
Frankel: Right. Visa's network is enormous.
Moser: Yes, it is.
Frankel: How universal is Visa accepted for businesses in the U.S. now?
Moser: Yeah. I think that's a very difficult thing that disrupted a powerful and widespread network.
Frankel: I've gone three months at a time without using cash, and one of the big reasons is companies like Visa and Mastercard.
Moser: That's right.
Frankel: Take that as you will, but I think it's a step toward diversification. Especially for U.S. consumers I don't know how significant this is going to be, just because it's a European focused business. But it's definitely a step toward them diversifying.
