The Financial Technology (FinTech) space has seen tremendous growth over the last decade. 10 years ago if you mentioned the word “FinTech” in a conversation you would have been met with blank stares. These days though, it’s one of the fastest growing sectors within early stage investing, and people cannot get enough of it.
In 2010 only $2 billion was funded towards FinTech companies, by 2018 that number had ballooned to $50 billion. To say that the space has exploded would be an understatement. It’s crazy to think that we live in a world today where technology as boring as a payment processor has become a household name. (Stripe / Square)
Even Apps such as Venmo have become so prevalent in today’s world that the company name itself has become a verb. The younger generations these days say, “Don’t worry I’ll Venmo you for it”, as a way of saying that they will pay someone for something.
The children that grow up today will never have to write a paper check in their life. If any type of financial service cannot be provided on their phone, they will not even think about accessing it, that is how prevalent FinTech has become over the last decade.
Startups aren’t the only ones that have been looking to take advantage of the growth of this industry. The incumbents (Banks, Payment Networks, Credit Providers) have definitely taken notice, and have been sometimes quietly, and other times not so quietly making moves to jump onto this movement. One of the most recent announcements of Visa acquiring the startup “Plaid” for $5.3 Billion caught everyone by surprise, and is a huge sign that the major players are looking to innovate, and innovate quickly.
A quick primer on Plaid
In their own words, “Plaid is a data network that powers the FinTech tools millions of consumers rely on to live healthier financial lives”.
In practice, Plaid is a business that created technology which allows users to connect their bank accounts to online FinTech services (Banks, Brokerages, Credit Cards, anything you can think of). For example, take the situation of you signing up for a new brokerage account. At some point during the process they are going to ask how you are going to fund the account, and most likely you will be doing this via an ACH transaction from your Checking/Savings account at your bank. What Plaid does is allow you to “sign in” to your bank with your normal username and password, and verify your bank account right on the spot. This all happens within seconds, and doesn’t require users to go through the hassle of the old way we used to link our banks up.
Does anyone else remember the old way we used to link our bank accounts to services? We used to have to wait for those two small < $1 deposits to hit our bank statements, and then log back into our accounts to confirm those deposits. It was incredibly annoying for all users, and it made the experience of signing up for new products terrible. Plaid is the reason that this process is basically non-existent these days.
Additional Plaid also offers software that allows developers of any application to use this technology that they have created for a small fee. This allows other FinTech startups to get off the ground running much faster than if they had to create this type of technology themselves.
For Visa, buying Plaid is something akin to insurance against disruption by other technologies that might enter the market. Visa is one of the largest payment networks on the planet, and has been used globally for decades. They have a strong presence and are not likely to go anywhere anytime soon, but they also know that if they do not innovate, that eventually they will be left behind. This purchase of Plaid is a huge step in the right direction for Visa in terms of innovation. Not only does this grant them the technology that Plaid offers for use within their own products, but also, and maybe even more importantly, it offers them direct insights into the FinTech startups that are using Plaid, and the all of the data collection that that brings.
This can help Visa more easily identify other trends within the payments industry as they arise, and catch onto those more quickly than their competition. I believe that with this move Visa has signaled to their competition that innovation is something they are truly pushing, and I believe that other players (Mastercard) will also feel the need to follow suit.
While this recent Plaid acquisition is one of the largest FinTech exits in a while, I have no doubt that it will be anywhere near the largest of the next decade. This is a space that is only going to grow exponentially in size. Technologies such as Blockchain, Artificial Intelligence (AI), and Internet of Things (IoT) are going to also have tremendous effects on this industry. I’m thoroughly excited, and will be keeping a close eye on where this all leads these next 10 years.