Here's why Visa made its bold play for buzzy fintech Plaid in a $5.3 billion mega-acquisition, despite knowing the risks

• Visa, the world's biggest payments provider, is set to acquire US payment infrastructure startup Plaid for $5.3 billion, in one of the largest acquisitions of a financial services startup to date and vindication for the buzzy fintech market.
• Business Insider spoke to industry experts on what the deal means for both Visa and Plaid to see if the deal made sense, what it would mean, and how it could work.
• Experts cited network effects as an advantage for Visa, since Plaid connects to developers, customers, and banks.
• "It does make sense when you look at other moves in this space," according to Sarah Kocianski, head of research at fintech advisory company 11FS, told Business Insider in an interview. "It's clear they want to be a broader infrastructure provider and become part of the fintech ecosystem."
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Visa, the world's biggest payments provider, is set to acquire buzzy, San Francisco fintech payment startup Plaid in a $5.3 billion mega-deal that, no doubt, has the champagne popping.

It's a steep figure - even for the highly valued, highly capitalized fintech startup market - but is Visa getting the bang for its buck?

Experts say: Maybe.

Plaid serves as the connective glue between financial apps like Robinhood and Credit Karma and customers' bank accounts. Through the use of application programming interfaces (APIs), the San Francisco-based fintech links the two sides, allowing financial data to flow between them.

More than 11,000 bank and financial services companies and more than 2,600 fintech developers use Plaid. The startup claims to touch one in four people with a US bank account.

"This is clearly a statement of ambition from Visa," one investor close to the company told Business Insider. "They are looking to capture a huge underlying market in which Plaid has a massive network effect which still has plenty of room to grow."

Though not strictly in the same part of the market, Visa is similar to Plaid in that it processes debit and credit card payments whereas Plaid focuses on authentication. The number of transactions and connections that Plaid processes will provide a new source of revenue but also access to staggering amounts of customer data, according to Sarah Kocianski, head of research at fintech advisory company 11FS.

"People love to say that data is the new oil but we haven't seen much of a move in that area in the industry yet," she told Business Insider in an interview. "That could be one part of this play from Visa."

Visa's decision to move into fintech follows similar steps taken by its major rival Mastercard which has already made strides with its Fintech Express programme which helps companies, such as Rapyd, onboard to its services. Similarly, the company has Mastercard Accelerate and perhaps more notably Mastercard StartPath which helps startups scale and find strategic investment.

Mastercard demonstrated ample fintech appetite previously when it acquired a 92% stake in UK payments company Vocalink in 2016.

The indications are that Visa is keen to be part of a major sector, particularly in Europe where Plaid is yet to establish itself. Fintech startups raked in a record $9 billion of funding last year, according to industry figures.

"It does make sense when you look at other moves in this space," Kocianski added. "It's clear they want to be a broader infrastructure provider and become part of the fintech ecosystem."

Prior to the acquisition, Visa participated in Plaid's $250 million Series C round in December 2018.

Plaid isn't perfect, so it isn't necessarily about acquiring great technology

Despite the possibilities brought about by Plaid's business model, some doubts remain about the efficacy of the deal.

Visa chairman and CEO Al Kelly acknowledged the potential for the need to make changes to Plaid as a result of issues raised by some market participants.

"We know there are financial institutions who would prefer Plaid operate differently in some cases, and we intend to address those concerns while not diminishing the value for developers, leveraging our global experience balancing a two-sided network," Kelly said.

Kelly didn't go into detail, but this is likely a reference to security.

Critics, such as analyst Ben Thompson, point out Plaid's "creaky" approach. Asking users to enter their banking credentials into a third-party app or site isn't a particularly hygienic approach from a security perspective.

"Bank login information is among the most sensitive credentials consumers have, and apparently one in four people in the U.S. with a bank account have shared those credentials with Plaid," Thompson writes. "Nearly all did so without knowing any better..."

And while the scale of Plaid is attractive to Visa, the sheer size of the company could be an issue if it looks to integrate the company into its network, Kocianski added, noting that acquisitions of this size are routinely messy.

But despite the possible kinks and growing pains, it appears that the tie-up could be a smart move from Visa which understandably wants a piece of the fintech pie.

Sources were unwilling to dwell on the valuation, a premium on Plaid's latest private valuation of $2.65 billion, but indicated that getting a deal done for Visa was better "sooner rather than later."