Anyone who thinks that the astronomical valuations of technology companies will return to Earth in 2020 will have that assumption disabled by an important agreement overnight.
The Visa payment giant has just agreed to pay $ 5.3 billion (£ 4.1 billion) for Plaid, a business just founded in 2013.
The agreement comes only seven months after Visa paid a total of $ 250 million (£ 192 million) for Earthport, a payment services business, in which the rival Visa Mastercard had also been interested.
Mastercard has also been active in the fintech space in recent years, disbursing £ 700 million in 2017 for Vocalink, a payment technology company that was previously owned by a consortium of banks, including Lloyds Banking Group, Barclays, HSBC and Royal Bank of Scotland
So what is Visa getting for your money?
Plaid is a developer of the so-called APIs – application programming interfaces.
These are limits through which different parts of a computer system exchange information.
In the case of Plaid, its software allows financial technology providers to connect to their clients’ bank accounts.
The company, which was valued at $ 2.65 billion (£ 2.04 billion) in its last round of fundraising in 2018, states that between one in four and one in five Americans with a bank account has used the service.
Other important customers include Venmo, a PayPal-owned mobile service, the payment provider.
Plaid technology allows Venmo to link the accounts of its customers to the bank accounts of those customers instantly.
There have been questions about arrangements like these.
Banks have been cautious because they are concerned about the security of their clients’ accounts and also because they fear that it will dilute the strength of their relationship with their clients.
Capital One, for example, recently updated its systems in such a way that it eliminated such agreements with third parties.
In response, API developers have argued that they are a secure way to allow financial data to be shared.
They argue that APIs such as Plaid allow banks to transmit data from their clients’ accounts without having to reveal the passwords of those clients.
Therefore, it is considered significant that, in the press release issued by Visa to announce the agreement, an approval appointment from a senior executive of JP Morgan Chase, the largest bank in the United States, was included in which he highlighted the importance of giving consumers “more security and control over how their financial data is used”.
Al Kelly, executive president and president of Visa, added: “We are extremely excited about our acquisition of Plaid and how it improves the growth trajectory of our business.
“Plaid is a world leader in fast-growing financial technology with the best capabilities and talent in its class.
“The acquisition, combined with our many fintech efforts already underway, will position Visa to offer even more value to developers, financial institutions and consumers.”
And that is the key reason why Visa has made this deal.
While the world is more and more move to a society without cashVisa and Mastercard are obsessed with the idea that consumers can also, over time, stop using credit and debit cards to make payments directly from their bank accounts, for example, using their mobile phones.
Consequently, they are trying to prepare their businesses for the future by obtaining access to technology that allows them to participate in that sector of the payment market, moving away from card payments to the broader activity of moving funds.
To that end, Visa has been investing in other services, such as Visa Direct, which allows companies operating in the so-called ‘concert economy’ to pay their employees more quickly and that allows customers of peer services to transfer money to and of your bank accounts more quickly.
APIs such as Plaid also potentially offer another expansion route for card companies because they open the door to greater participation in the intercompany payment market.
However, the main attraction for Visa may be that Plaid has relationships with almost all the fastest growing financial technology companies in the United States, including Venmo and Robinhood, the stock trading service without commissions.
Potentially, that gives Visa access to millions of other potential customers, as well as a better insight into fintech trends and access to other new fintech companies.
Plaid also potentially gives Visa the ability to influence those companies and, in theory, prevent them from developing products and services that can compete with those of Visa.
For Plaid, meanwhile, being bought by Visa should mean that financial services companies and banks in particular have greater confidence in him because they have been working with Visa for a longer time.
While banks can resist sharing their clients’ financial data with third parties, they are likely to have few problems with Visa, as they already work closely with them.
Meanwhile, Plaid’s owners, which include Goldman Sachs investment bank, renowned technology investor Mary Meeker and venture capital firms Index Ventures, Kleiner Perkins and Andreessen Horowitz, can enjoy a spectacular return on their investment.
Ironically, it is believed that another investor in Plaid is Mastercard, which should help offset any unhappiness by missing out on the business itself.