Visa (V) - Get Visa Inc. Report announced earlier this week that it was paying $5.3 billion to acquire Plaid, a San Francisco financial technology startup. The deal reaffirms the existing fintech landscape, which for Visa was the intent all along.
Plaid makes application programming interfaces (APIs), the software routines that help computer systems communicate more effectively. Think of an API as a waiter at a restaurant. Customers place food orders with the waiter. He takes the requests to the kitchen. Twenty minutes later he returns with a piping hot plate of pasta. Plaid’s APIs help fintech companies route and serve up digital information.
According to a CNBC report, Plaid's APIs have become part of the software “plumbing” at Venmo, a popular peer-to-peer payment app. They’re also integral at Coinbase and Gemini, two of the leading cryptocurrency exchanges.
More mundane financial institutions have gotten into the act, as well. Plaid's APIs help online bank customers connect with encrypted databases to show account balances and stock price information. Plaid managers claim 11,000 bank clients covering 20 million consumer accounts. This means the systems are used by one out of every four people in the United States with a bank account.
Grabbing Plaid gives Visa control over key foundational infrastructure. It also provides the payment processing giant with insight into the inner workings of many smaller, disruptive companies. Some of these businesses pose a legitimate threat to Visa, so keeping them close makes sense.
The deal is reminiscent of Amazon.com’s 2012 buyout of Kiva Systems, a cutting edge robotics firm. At the time the ecommerce giant was strenuously building a global warehouse infrastructure to compete with Wal-Mart (WMT) - Get Walmart Inc. Report. The $775-million buyout of Kiva flipped the race on its head.
The robot maker was transforming warehouses with automation. Its bright orange robots, about the size of a large ottoman, were capable of moving entire shelves packed with materials. This “goods to picker” approach was much quicker, safer and cost effective than having employees roam 800,000 square foot warehouses. The idea caught on. Kiva robots, and their codebase, became critical at big warehouses operated by companies such as Walgreen’s (WBA) - Get Walgreens Boots Alliance Inc. Report and Staples.
However, with the take-over, new sales of Kiva products to competitors stopped. Trade show appearances were curtailed. The coveted Kiva codebase was integrated into the Amazon Web Services software stack. Two years later, all contracts with competitors were allowed to expire.
As late as 2016, the rest of the fulfillment sector was still trying to catch up, according to a story in Bloomberg.
Amazon.com managers saw an opportunity to grab a competitive advantage by strategically removing a leading infrastructure provider, and they took it. The ensuing better margins helped the company bludgeon competitors for years to come.
In fairness, Visa managers say they have no current plans to shut down Plaid. Vasant Prabhu, the chief financial officer, claims the deal will be accretive to revenues from the onset. That might mean as much as 100 basis points of revenue growth by 2021. And the firms will work together to accelerate Plaid’s global expansion, while integrating its core APIs with Visa Direct, the inhouse direct payment product.
It’s noteworthy that the Plaid deal didn’t come cheaply. The $5.3 billion acquisition price is about twice the Dec. 2018 private valuation. For what it’s worth, Visa and Mastercard (MA) - Get Mastercard Incorporated Report, its payment processing frenemy, participated in that financing round.
The two companies often work together to set fintech standards. Occasionally, they pursue relationships with the same fintech companies, only to carve up regional monopolies in the end.
It happened in 2019 when Visa and Mastercard separately took after Revolut, a London-based debit card operator. Ultimately the company agreed to region-specific deals. Mastercard won a limited-time exclusive contract in the United States and half of Europe. Visa got the other half share, plus exclusive rights in 24 other regions.
These relationships with fintech companies are more important than ever as Visa and Mastercard become the become the backbone of all digital transactions. It’s probably a large part of the underlying drive to acquire Plaid. The prize is a big one.
Analysts at McKinsey & Co., a management consulting firm, found the global payment processing market grew to $1.9 trillion in 2018. The sector is expected to reach $2.7 trillion by 2023 as fintech companies make contactless payments commonplace.
Visa shares have been a perennial winner because managers have always been one step ahead of the biggest trends. The acquisition of Plaid fits that mode. Managers are making its processing platform indispensable to companies that would otherwise be disruptive.
Although Visa trades at 27x forward earnings and 18x sales, it’s still attractively priced given the prospects. Growth investors should buy it into weakness.