As a startup founder, I found the period between signing the deal to sell our company and the final closing date to be a particularly nerve-racking time. It felt like anything could go wrong to scuttle the deal. I can only imagine what the Plaid founders felt like when they received notice last week that the Department of Justice was aiming to block their massive $5.3 billion acquisition by Visa, announced in January. I’m sure it wasn’t good. And upon reviewing the DOJ’s formal complaint (full copy here), I think they have real reason to worry.
The DOJ is making the case that Visa’s acquisition plans are driven by the desire to take out a potentially competitive player, rather than for synergistic reasons. How could a relatively small fintech startup put the fear of god into a behemoth like Visa, forcing them to pay a price of 50x revenues? By threatening their primary cash cow where they hold near monopoly power, the debit business.
Visa dominates debit
Visa controls over 70% market share of the US debit market (with MasterCard at 25%), earning $4 billion in revenues from this business, with $2 billion of that from online debit. The barriers to entry for this business are high, requiring a large network of card-holding consumers on one side and card-accepting merchants on the other, both of which Visa (and to a lesser extent, MasterCard) has. According to Visa’s CFO, this network enables Visa to enjoy a “relatively high margin” in the debit business.
Plaid’s impressive assets
When you look at the significant assets that Plaid has built, they are uniquely positioned to overcome the online debit market’s high entry barriers and potentially undermine Visa’s monopoly in online debit services. Plaid’s technology allows fintechs to plug into consumers’ various financial accounts, with consumer permission, to aggregate spending data, look up balances, and verify other personal financial information. Plaid has already built connections to 11,000 U.S. financial institutions and more than 200 million consumer bank accounts in the United States and growing.
The perceived threat from Plaid
It turns out that Plaid has been working on a potential debit killer, something they called “pay-by-bank” according to the DOJ complaint. (Notably, this service was not mentioned when the acquisition was first announced, as far as I can tell) Like Visa’s online debit services, Plaid’s planned service would enable consumers to pay for goods and services online with money debited directly from their bank accounts. This would be a direct competitor to Visa’s high margin debit business, and Visa knew it. According to the DOJ, VIsa’s CEO commented to his CFO that purchasing Plaid would be an “insurance policy to protect our debit biz in the US” and that the acquisition would be a “strategic, not financial” move.
Not looking good for the acquisition
From the DOJ’s perspective, Plaid’s pay-by-bank service had real potential to drive down prices for online debit transactions, chipping away at Visa’s monopoly and resulting in substantial savings to merchants and consumers. Interestingly, the National Retail Federation supports the DOJ lawsuit. For years, retailers have chafed against the high costs of accepting card payments. The NRF agrees with the DOJ that this acquisition would block badly needed competition that would bring lower processing fees.
I found the DOJ complaint to make a pretty compelling argument that Visa’s acquisition of Plaid would restrict price competition and bring less innovation to the payments market. The comments made by Visa execs, as quoted in the complaint, clearly suggest that Visa saw a real threat to their debit business in Plaid’s pay-by-bank service and planned to halt or at least slow roll the development of this service. Of course, Visa vigorously disagrees with the DOJ’s complaint as “flawed and contradicted by the facts”. But I think there is a high probability that this acquisition may not happen. Plaid’s founders (and stock option holding employees) shouldn’t count their chickens just yet.