The timing of Plaid’s entrance into the banking industry was almost too perfect. Just as digital banks and fintechs started to flood the market and customers began looking for a way to connect their banking accounts with fintech apps they wanted to use, Plaid rolled in.
In many ways, Plaid enabled the rapid growth of many fintechs, initially through the process known as “screen scraping” of bank account data, but more recently through secure application programming interface (API) connections with a growing number of financial institutions. “Without a third party like Plaid, start-ups would have to hire their own engineers and create their own ways to sync with banks,” says CNBC’s listing for Plaid in its Top 50 Fintech blog.
Since its launch as a data network in 2013, Plaid says to one in four U.S. consumers with a bank account have used the fintech to connect to their primary bank account and that Plaid works with over 12,000 financial institutions. The company is popular with investors such as Google, Goldman Sachs, Visa, Citi and venture capitalists and was looking to do an IPO in 2022. That’s off the table for now, the company’s CEO Zach Perret has stated.
Plaid’s rapid growth raises the question: What’s next on the horizon?
Snapping Up Other Fintech Companies
Partnerships are critical for fintechs like Plaid, who want to build a one-stop product for the banking industry. Another method — one which Plaid is already ramping up — is acquiring smaller fintechs. Plaid’s latest addition is identity verification and KYC specialist Cognito, which it acquired in early 2022.
Perret said in an interview with Axios regarding the acquisition that Plaid was looking to fix a common problem many of their customers were having.
“Our customers need many things to serve their end users,” Perret explained. “Our customers offer every type of financial services product. And the consistent message we hear back from them is that they want to onboard more good users.”
Axios reporters probed Perret on Plaid’s plans for future acquisitions. The CEO noted there is plenty of runway open for both acquisitions and partnerships.
“We actually have a very broad partnership team. If it’s within our core wheelhouse — connectivity and financial data networks — that’s an area we want to build,” Perret said, adding that Plaid is open to partnering outside of its current capabilities as well.
Keep an Eye On Plaid:
Plaid might be in the data space for now, but its open-ended game plan could set it up for growth into other areas of banking.
This one-stop-solution sounds optimal for Plaid and other large fintechs like Block and Stripe, but in a post-interview comment Axios questioned the efficiency of it: “Is there room for a whole bunch of best-of-breed solutions or is everything going to be swallowed up into a Plaid or into a Stripe?”
The Head-to-Head Between Stripe and Plaid
Critical to where fintech Plaid is going next is its relationship to the rest of the banking industry — particularly with its other fintech competitors.
It’s important to recall that Plaid’s journey nearly reached what every startup founder dreams of: a buyout deal from one of the world’s largest companies. Plaid had that opportunity with Visa in 2020 when the payments giant agreed to purchase Plaid for $5.3 billion. However, Visa walked away following a Department of Justice lawsuit based on the premise the acquisition would compromise competition in payments.
The canceled deal didn’t hold Plaid back. It’s valuation quickly outgrew Visa’s deal offer. Now, however, Plaid faces a major contender once outside the company’s playing field. Stripe, a payments processing software company, is vying for Plaid’s audiences, TechCrunch reports.
“Recent product news from Stripe and Plaid indicate the two private companies are gunning for one another as the market for B2B financial technology matures, expands and individual players increasingly overlap,” the publication states.
Stripe in May 2022 announced its ‘Financial Connections’ program, a service mimicking Plaid’s core offering. It allows customers to connect their accounts with Stripe to other financial accounts to “access financial data to speed up or run certain kinds of transactions,” as TechCrunch explains.
The announcement put Stripe “on a collision course with Plaid’s core business,” says TechCrunch.
After Stripe’s CEO Jay Shah tweeted about its new product, Perret responded with an initial tweet suggesting Stripe may have violated non-disclosure agreements in RFPs. Later, after deleting that initial tweet, Perret tweeted that he welcomed Stripe to the ‘fintech party’,” reports CNBC.
Despite the tiff, Perret said he doesn’t foresee Stripe becoming the competitive issue for Plaid that has been raised by some in the industry.
“It’s a really quickly growing market and competition and it’s important to remember it’s not a zero sum here,” he told Axios. “Stripe is a payments company. And I expect that Stripe entering the market will continue to expand the market in many senses.”
Vying for a Tight Space:
Plaid and Stripe have crossed into each other’s territories — highlighting issues in the oversaturated fintech market.
But just as Stripe has taken steps into fintech Plaid’s terrain, Plaid had already taken steps toward Stripe’s customer base. In June 2021, Plaid acquired Flannel — a software company designing payment API systems.
What Comes Next for Plaid?
A hint of where Plaid might move next is contained in its Cognito acquisition.
In explaining the deal, Perret said KYC (know your customer) protection is an important area for the industry. Many financial institutions have reiterated the need for strong and thorough fraud monitoring systems that are built into their backend systems.
“The reality is our financial system was built for a world that didn’t envision the internet,” Perret told Axios. “And as such, all of the technology has been retrofitted into a set of human-oriented processes which are now going predominantly digital.”
Given its renewed focus on KYC in banking, Axios speculated as to whether Plaid will offer to help financial companies with other elements of the onboarding process — specifically with underwriting, “because they have such a wealth of data.” With Cognito, Plaid now has the capability of understanding who a client’s customers are and what kind of customers they are as well.