Much has been written about the Plaid acquisition by Visa recently. Among other great articles is Visa, Plaid, Networks and Jobs by the legend Ben Thompson. Ben makes the argument that the Visa credit card network is a 3-sided network between banks, merchants and consumers. Visa sits at the center, and their financials reflect the dominant position they have created. Similarly, Plaid is a 3-sided network between banks, developers/apps, and consumers. The question is: why pay ~50x revenue to get into the data game? Why does Visa care about developers?
Jobs of Credit Cards
Credit cards solve for a couple of jobs
For consumers, carrying around a credit card is easier than a substantial amount of cash.
For consumers, the credit in the name credit card implies an ability to purchase items not currently affordable.
Banks are able to lend and collect transaction fees
Merchants can sell on credit without managing the business of customer credit.
Bank transfers, in theory, could attack the first consumer use case readily. If they worked well that is.
Why aren’t cash transactions more common?
There are 2 predominant methods for moving cash: Wiring money and the ACH network. The fees on wiring money preclude it from being used for anything trivial. ACH standards for the Automated Clearing House, which is operated both by the Fed as well as a private entity ‘The Clearing House’. The ACH network is low-cost but painfully slow by today’s standards.
The ACH network is gargantuan in volume, but it primarily settles transfers that are predictable and not immediate. Your payroll, utility bills, and other similar transactions typically use the ACH payment rail. ACH underpins many other customer-facing applications, but much of the network is actually covered from sight.
The limiting factor for P2P and B2C payments
As it currently stands, the ACH network is functionally unusable for modern eCommerce. Multi-day settlements and chargebacks simply do not measure up to credit cards for merchants. Imagine waiting 3 days for Amazon to confirm your purchase. Much of consumer payment app functionality currently is an illusion of speed. Think of Venmo: Venmo will pay out via the ACH network when you withdraw fully. This takes between 1-3 days. Venmo only feels instant: If you exchange money peer-to-peer, the internal Venmo ledger simply updates. Crucially: You cannot immediately access your money with Venmo, except for a significant fee. Venmo can pay out near-instantly using the VISA fast funds rail, which uses a Visa debit card not ACH. Customers being willing to pay a capped 1% fee to access their money is but one sign that a faster ACH network could have enormous utility.
What if there was a better way?
Imagine a world where the ACH network settled instantly. Instead of ~3% credit card fees, merchants would be paying something closer to the .25 fee of an ACH transaction. Lower cost and instantaneous would be a game-changing evolution both for merchants as well as Fintech companies. Credit card companies could still facilitate the purchase of buying on credit, but they would no longer be competing against carrying around a wad of $100s for the other use case of payments.
This better way is coming - Real-Time Payments
I mentioned earlier a company called The Clearing House, which runs the only private ACH network in the US. The Clearing House is currently building a platform called Real-time Payments (RTP), which will act in many ways like an instantaneous ACH. This platform will solve many of the pain points of the ACH network and potentially open up an explosion of Fintech payments. With real-time payments, the potential for P2P payments will grow. RTP could even allow merchants to accept bank transfers for eCommerce and at point-of-sale. Need credit? Affirm can make you that loan on the spot.
Suddenly, the invulnerability of the credit card network doesn’t seem quite so permanent.
A new 3-sided market and why Plaid?
Under this view, Visa is not simply buying Plaid to get their fingers in another pie but to get ahead of an alternative network that could undermine some of the utility of the credit card business. In this vision of the future, banks, consumers and merchants all interact via the 3-sided marketplace run by the Clearing House. The question becomes: who will own the pipes in and out of the Clearing House?
The banks will struggle because they are fragmented, are distrusted, and they don’t have an incentive to change up the status quo here.
Fintech companies themselves need bank APIs to interact bank-to-bank and will still need banks to access the Clearing House.
Merchants have never led the charge and will not lead here again.
A logical answer is Plaid. Plaid will enable the network and become a tax on all transactions moving in and out of the Clearing House. The Clearing House will run the network, and Plaid will supply the APIs (technical pipes) that enable banks, merchants and apps to interact with each other via the Clearing House. Fintech companies will pay a fee to have access to bank accounts and send transactions to run their business. Merchants and consumers will find new ways to utilize the instant RTP network. Banks may be dragged forcibly along for the ride, but the genie in many ways may be out of the bottle.
Conclusion
Ben is right: if Fintech fails to expand bank transfers, Visa is phenomenally well positioned. Credit cards are a lucrative business. They may have the most impressive financial statements around. If Fintech starts to succeed at new payment rails, Visa is now well-positioned to capture value from these transactions as well.