June 5, 2023

You can’t win - lead: why Visa and MasterCard invest billions of dollars in fintech startups

One of the most high-profile events in the financial market in January 2020 was the purchase of a Visa payment system. fintech startup Plaid for $ 5.3 billion In addition to the impressive amount of the transaction, the fact that Plaid is one of the cryptocurrency-friendly companies, including including the Coinbase exchange and the Abra digital asset purchase and sale application, aroused interest.

This in turn triggered a series of rumors andspeculation about the true reasons why Visa took such a step, giving rise, for example, to conspiracy theories that the payment giant intends to crush the cryptocurrency industry for itself, in order to protect itself from competitors. ForkLog tried to understand whether this is the case in reality and what possible consequences this may have for the fintech industry as a whole.

Recall, the deal was announced on January 14, and hercompletion is expected within 3-6 months after obtaining the necessary regulatory permits. According to Visa, the acquisition of Plaid will allow it to provide users with advanced payment options and related services for fintech developers.

“This acquisition is a natural evolution.”Visa’s 60-year journey from creating a safe and reliable connection between buyers and sellers to providing consumers with access to digital financial services ... The combination of Visa and Plaid will lead us to the epicenter of the fintech world, expand our target market and accelerate our long-term revenue growth path ”, - said then the executive director and chairman of the company Al Kelly.

So, according to the presentation, which waspublished at the same time as the announcement of the transaction, the potential acquisition of Plaid will help Visa to add from 80 to 100 basis points to its revenue growth by 2021.

What is Plaid?

Plaid was founded in 2013 andbased in san francisco. Being essentially an aggregator of financial data, it aims to simplify the process of securely connecting bank accounts to financial management applications.

In particular, Plaid softwareallows you to reduce the previously too long verification process to a few seconds, receiving information about user bank accounts and reliably "packing" it for future use. Finance companies are also interested in making registration quicker and easier, and Plaid pays money for it.

80% connected to the Plaid network todaythe largest fintech applications in the United States, while the company's partners are more than 11 thousand banks and financial services companies. Among them are the already mentioned Coinbase and Abra. The Plaid user base has more than 200 million accounts, one in four of which belongs to users with active bank accounts, and the company employs about 450 people.

You can’t win - lead: why Visa and MasterCard invest billions of dollars in fintech startups

Plaid co-founders Zach Perret and William Hawkey. In 2015, they entered the Forbes ranking. 30 Under 30

By the time of the transaction with Visa, the company already had statusunicorn, securing venture capital investments of $ 310 million. A year ago, Plaid was valued at $ 2.65 billion. Another interesting fact is that Visa was one of Plaid’s early investors. Other notable organizations that have invested in Plaid include Andreessen Horowitz, American Express, Goldman Sachs, and Citi. Moreover, Visa's direct competitor, MasterCard, also invested in the company.

What are the goals of Visa and Mastercard

The purchase of Plaid was not the first transaction for the payment giant in the field of fintech. In total, Visa invested in almost 50 companies, including those working with cryptocurrencies.

So, in July 2019, together with BlockchainCapital led the $ 40 million Series B financing round for cryptocurrency custodian services provider Anchorage. For Visa, this was the second case of investments in cryptocurrency companies - the first was the investment in the developer of blockchain solutions for the financial industry Chain in 2015. In 2018, Lightyear acquired the Chain; at the same time, it was rebranded at Interstellar, which was designed to show the focus on product development on the Stellar blockchain.

MasterCard does not stand still. Back in March 2015, the company published a report in which the term “virtual currencies” was used repeatedly and each time in the context of competition, and in October of that year, MasterCard was among the investors of Digital Currency Group (DCG). For Barry Silbert, this was the first round of financing, which was also supported by other multibillion-dollar corporations: the Canadian bank CIBC, the insurance company New York Life, the TransAmerica Ventures venture capital fund and the British financial group Aegon.

Recall that DCG includes the investment company Grayscale Investments, the value of cryptocurrency assets under its management in 2019 reached almost $ 3 billion.

MasterCard is also active inobtaining patents in the field of cryptocurrencies and blockchain technology, among which patents for the technology of multicurrency blockchain systems and the method of accelerated processing of cryptocurrency transactions can be mentioned.

In addition, in February 2019, MasterCard togetherwith Ripple and Barclays, it became one of the investors of the SendFriend payment startup, which offers a solution in the field of international money transfers using XRP tokens.

It is also necessary to recall that in 2019 bothleading payment systems from the very beginning announced their participation in the sensational project of digital currency Libra from the social network Facebook, but subsequently left it, citing regulatory concerns as the reason. At the same time, Visa representatives did not miss the opportunity to note that "well-regulated blockchain-based networks can add value to digital payments for a huge number of people, especially from developing countries."

According to the two most popular versions amongfinancial analysts, all these Visa and MasterCard initiatives suggest that both companies are not only trying to find their place in the rapidly developing world of innovative financial services, but also to maintain their status as the dominant forces in the market.

Is there a direct threat to cryptocurrencies?

If we consider a single transaction betweenVisa and Plaid, it is worth noting that the payment giant is estimated at $ 420 billion, while the total capitalization of the entire cryptocurrency market as of early February 2020 was about $ 260 billion.

Nevertheless, some representatives of the community almost immediately stated that such steps by Visa are aimed at eliminating potential competitors and are based on the principle “you can’t win - lead.”

“Visa will continue to buy any platform,which will take away part of its centralized and vicious market share of payment protocols. They cannot buy only one truly decentralized and freedom-providing protocol - Bitcoin. ”, - wrote user @CrptoDemps.

The fact that Visa's actions are dictated by growing competition, said the co-founder of Morgan Creek Digital Anthony Pompliano:

“Over the next 3-5 years, leading companies in the field of financial services will buy up various fintech startups. If they don’t do this, startups will push them out of business. ”

This idea was continued by Trezor Wallet co-founder and, until recently, Casa strategic development director Alena Vranova. In a comment to ForkLog, she said:

“I think Visa doesn't want to be left behindblockchain trains, whatever they may be, but at the same time, she also does not want to bear the risks associated with development. It seems that having refused to participate in the Libra project under the pressure of the US Senate, Visa with the help of Plaid decided to choose an easier way. Although I do not exclude that we can really talk about an attempt to neutralize competitors. "

Similar point of view expressed by CEO Ripple Brad Garlinghouse:

“Such consolidation does not surprise me, and we can expect that this will give an impetus to other similar events in 2020 - in fintech, cryptocurrencies and other fields”, - wrote the head of Ripple.

A more conservative opinion is held by a fintech investor and partner at Black House Private Equity, a company specializing in mergers and acquisitions Chris Thomas. In a comment for ForkLog, he said:

“For Visa, this is a common extension of its ecosystem.and access to that part of the client base, to which it usually does not have access. I don’t think that they will be able to somehow suppress cryptocurrencies, but they can learn and try to make their products more innovative, although for such companies this is a very difficult task. ”

The changing landscape of the payment services market

Representatives of the above Ripple and Stellarrefrain from commenting on how the deal between Visa and Plaid, as well as other important initiatives of the two giants in the payment market, can affect their own position. Nevertheless, increasing competition means that in the foreseeable future it will be possible to observe a certain change in the balance of power.

Recall that December 2019, Ripple attracteda record $ 200 million, after which the capitalization of a California-based company grew to $ 10 billion. Last year, the global payment network RippleNet grew to more than 300 customers in more than 45 countries on six continents and includes a new strategic partnership with MoneyGram. In addition, Ripple's “liquidity on demand” (ODL) payment solution is actively developing, where the XRP token acts as an intermediate currency. MoneyGram also uses it, and at the end of last year, the British company for money transfer services TransferGo announced plans to switch to ODL.

An important share in the fast payment sector is alsothe Stellar platform, in favor of which IBM chose in 2018. Last year, the release of 26 stablecoins on the Stellar blockchain for use in money transfers, issue and redemption of tokens, as well as for payments for services, was reported by the Wirex cryptocurrency platform.

And already in early 2020, the intention to replacethe outdated SWIFT protocol using a payment solution based on Stellar was announced by fintech company Lightnet from Thailand. Its goal is to reach millions of users in the Asian region, offering the level of financial mobility that providers of traditional financial solutions are not able to provide.

However, Visa also makes clear that herown ambitions in this sector are very high. In the presentation for the deal with Plaid, the company identified key areas for growth (banking and investment, landing, consumer payments, financial management and business services), and also indicated a high expansion potential in international markets, where the number of users of fintech applications is 15 times exceeds the US.

You can’t win - lead: why Visa and MasterCard invest billions of dollars in fintech startups

Source: Visa

Possible way to enter international marketsmay lie through the Revolut digital banking application, the expansion of the partnership with which was announced in September 2019. Prior to this, the two companies successfully collaborated in the EU, but in future plans joint access to the markets of Australia, Brazil, Canada, Japan, New Zealand, Russia , Singapore and the USA at the initial stage and subsequent expansion to a number of other countries around the world, including Ukraine.

Further developments promise to be veryinteresting. The fact that the payment services market needs radical changes, today almost no one doubts, and the fact that such giants as Visa and MasterCard do not remain aloof from the latest trends, this only confirms.

Andrew Asmakov