Plaid is an integral part of the infrastructure that the exploding FinTech industry depends on to connect consumers to financial institutions. Popular financial companies such as Chime, Coinbase, Robinhood, Venmo, and Betterment use Plaid to instantly connect their customers’ bank accounts. Instead of waiting days for manual confirmation of micro-deposits, FinTech companies can work with Plaid to offer their customers immediate access to financial interactions between the company and the customer’s bank account.
Plaid’s offerings are poised to expand beyond connecting consumers to their financial data. The company is on the verge of providing a number of fraud prevention services, identity verification, income verification, and deposit switching. They’ve recently integrated with Dwolla and Stripe to help facilitate money movement, as well.
Until recently, Plaid’s presence in the marketplace was mostly invisible to consumers. As the company pivots to provide a meaningful customer experience, they build trust among consumers who depend on FinTech companies to manage their financial lives.
Originally launched by William Hockey and Zach Perret in 2012 with headquarters in San Francisco, California, Plaid allows consumers to connect popular apps to their bank account to make payments or transfer money. Apps that allow customers to use their bank account sign-in credentials to quickly make payments or transfer money are likely using Plaid to power those transactions.
Apps pay Plaid fees for access to the technology, so consumers get the benefit of the advanced technology without paying for it directly. Plaid receives a small fee for each transaction facilitated by its software.
Here’s an example of how Plaid works when a customer interacts with a financial app:
This process makes it simpler and faster for consumers to make large purchases and trade, as Plaid authenticates users so they can make ACH deposits.
Some apps use only the tokenized version of the customer’s log-in information to provide a bridge that activates only when the app is in use.
The app Empower uses Plaid to ping a user’s bank account regularly so they can monitor spending activity on all bank accounts and connected credit cards with the goal of setting spending limits. Apps like Digit ping a bank account each time a user transfers money to verify that there’s enough cash in the account. Some apps use Plaid to verify the identities of users to minimize fraud, as well.
Plaid has created bridges between more than 11,000 banking institutions and consumer financial apps to make access to crucial information like account balances easier and safer. The company is primed for continued growth. With big-name partners like Square, Carvana, Astra, Checkbook, DriveWealth, Stripe, and Dwolla, Plaid has earned the attention of investors.
Plaid’s latest funding round valued the company three times higher than the valuation just one year earlier.
Customer interest in apps that allow them to conduct the day-to-day business of managing their finances without having to interact in person is just one factor driving Plaid’s upward trajectory. Many consumers interact with their financial service providers digitally, and Plaid’s convenient and fast setup combined with increased security is democratizing access to financial services.
A $5.3 billion offer from Visa during January 2020 was eventually blocked by the Justice Department. Even after that setback, the company continued to grow.
Plaid raised $425 million in April 2021 during a Series D funding round. Some experts say the company is now worth more than $15 billion. A more recent round of funding backed by American Express and JPMorgan Chase raised $600 million. Plaid has received a total of $900 million through five rounds of funding.
Plaid helps power the fintech sector, so it makes sense that as fintech companies grow, Plaid grows along with them. The app eliminated the need for consumers to wait days to confirm penny deposits so they could connect their bank accounts to financial apps while reducing the paperwork associated with identity verification to near zero.
The founders consider Plaid more than just a partner for successful fintech companies. Hockey and Perret regularly meet with fintech startups long before they raise money to fund their ideas. The company aims to support innovation in fintech by making the financial services system accessible.
Plaid’s owners and innovators are confident that their future is bright. In May 2021, they rolled out Plaid Exchange. The product works to help smaller financial institutions compete with larger and more powerful players. Plaid Exchange helps provide increased transparency and privacy for consumers while moving away from traditional credential-sharing models.
The open banking model is gaining ground as traditional financial institutions realize that they must accept a shift toward this model due to consumer demand. Plaid’s growth in valuation over the past two years could mean that when it goes public, it may be a large initial public offering (IPO) compared to other growing companies in the fintech sector.
Plaid is supported by heavy-hitting investors such as Google Ventures, Citi Ventures, Goldman Sachs Investment Partners, MasterCard, Visa, and Omega Venture Partners. Their application programming interface (API) eliminates micro-transactions to verify bank accounts for consumers who want to connect a financial app to their banking institution. For consumers, Plaid is nearly invisible, working in the background to streamline a previously complicated and time-consuming process.
Without Plaid’s innovative technology, companies like Robinhood and Fannie Mae would have to create a proprietary method to allow users to sync to bank accounts. Each individual bank would provide integration procedures, which could make the process impossibly complicated for smaller fintech startups.
Plaid currently acts as a middleman to more than 11,000 banks across the United States, Europe, and Canada, allowing fintech apps to access important information without having to retain a dedicated team of engineers.
Plaid has earned its reputation as an innovative technology company in the fintech space. Aggressive expansion of the business combined with cutting-edge tech has captured the attention of the most traditional financial institutions, including Visa, MasterCard, Citigroup, and American Express.
When Visa tried to acquire Plaid for $5.3 billion early in 2020, Visa’s CEO noted that the move was partially an insurance policy against threats to the company’s debit business. After the Department of Justice intervened, citing anti-trust laws, Visa abandoned the project. The DOJ’s view of Plaid’s position in the industry provides evidence of the fintech company’s unique position. Visa’s attempted acquisition demonstrates that Plaid is indeed a threat to traditional financial institutions if they don’t move toward a future that allows consumers fast, safe and seamless access to their financial information.
Plaid’s proprietary technology deals with an important pain point head-on. Before Plaid, software companies and financial apps had to figure out software suites unique to each bank.
Now that Plaid has created a new industry-wide standard, the privately held company is poised to go public. Of course, many private companies decide to stay private, and that’s one of the risks associated with pre-IPO investing. However, favorable market conditions for IPOs combined with a new open banking model that meets the evolving needs of consumers could mean that a Plaid IPO is on the horizon.
Plaid is a leader in the open banking trend. Fellow fintech companies including Robinhood, Affirm, and Coinbase went public during the past year. Each of these fintech companies reached market capitalizations of $30 billion to $60 billion.
Private equity investing has traditionally been accessible for only institutional investors and super high net worth individuals. The U.S Securities and Exchange Commission (SEC) is working to open up the private equity world to a larger number of investors. Investing in promising companies pre-IPO is one way to diversify investments to guard against the volatility of the stock market. This new asset class has outperformed the S&P 500 during the last 20 years.
In fact, 84% of investors would prefer greater exposure to alternative assets within the next five years. Many financial experts believe that private equity will surpass hedge fund investments as the most sought-after investment class by 2023, with private equity investing increasing by 59% between 2017 and 2023.
Contact The Spaventa Group today to learn more about investing in Plaid and other opportunities in the pre-IPO private market.