Executive Summary:
Plaid is a financial aggregator that offers an API, allowing other companies to connect to their customer’s bank account (as well as other financial institutions).
Plaid makes money by charging a variety of fees for connecting and using its service. The company operates on a freemium business model.
Founded in 2012, Plaid has risen to become one of the world’s most valuable FinTech companies. It is currently being valued at $13.4 billion.
How Plaid Works
Plaid is a FinTech company that works as an intermediary between your personal bank account and the financial applications you use.
To be able to use platforms like Acorns or Betterment, users need to connect their bank accounts to be able to deposit and retrieve money or let the apps analyze financial statements.
Traditionally, the problem has been that each bank uses its own complex legacy system, which would require app operators to build custom connections for each and every one of them.
Plaid solves this problem by offering an intermediate connection layer (through an API) for app developers. The API is standardized across all banks, which greatly simplifies the integration.
End-users opt in to share persona information with Plaid, including their name, account number, account type (debit or credit, for instance), balance, and many more.
Plaid then stores and secures that information by means of end-to-end encryption. Nevertheless, users have the ability to limit what information they want to be shared with third-party apps.
From a customer’s perspective, using Plaid is as simple as it gets. First, when signing up to a Plaid-powered app, users simply select the financial institution they want to connect with as well as their login data for that account.
Then, Plaid will encrypt the data that the user is willing to share (such as the account number) and share it with the third-party app in an encrypted manner. The app itself will never see or receive that information as it’s stored on Plaid’s servers.
Companies can use Plaid for a variety of use cases such as checking an account’s balance or transaction history, verifying one’s employment or income, conduct global identity verification, getting an overview of a person’s investments, and many more.
At the time of writing, Plaid works together with more than 12,000 financial institutions across North America and Europe.
Plaid Company History
Plaid, headquartered in San Francisco, California, was founded in 2012 by Zachary Perret (CEO) and William Hockey.
The founders actually met each other during an internship at consulting juggernaut Bain & Associates. After immediately hitting it off, they began dabbling in various business ideas they could potentially pursue.
What they initially settled on was to build a consumer financial management and recommendation tool. Unfortunately, that endeavor proved to be a lot tougher than initially expected.
Connecting to the banking accounts of the consumers they intended to serve required them to build custom integrations with each and every bank. To add to the complexity, some of those potential banking partners were still using technology developed in the 1950s (such as COBOL).
Their light bulb moment came when they realized that they weren’t the only ones facing that particular problem. The backend API that they built to integrate with these banks became the backbone of Plaid, which they began working on in 2012.
Back then, both Perret and Hockey were living in New York. Due to the city’s high cost of living, the pair ended up sleeping on their friend’s couch (Hockey) or by moving in with their girlfriend (Perret).
Their first breakthrough came a few months later. Back then, a little peer-to-peer payments app called Venmo was picking up steam and rapidly adding users.
Unfortunately, they faced a problem that prohibited them from scaling further. Settling a Venmo transaction would mean it had to put up the cash itself, making it riskier the more they grew. Their idea was to settle transactions in big batches, which would mean that the payments would be delayed by at least a day.
Plaid’s solution would allow Venmo to transact with its banking partners in real-time, thus removing the risk that the sender didn’t have a sufficient bank balance. Plaid ended up building Venmo’s backend infrastructure, which allowed them to rapidly scale up and become the dominant force it is today (Venmo, for reference, still uses Plaid).
The success Venmo experienced would soon attract other customers. Additionally, they won the TechCrunch NY Disrupt award (video of their presentation below), yielding them additional exposure.
With more and more customers onboarded, Plaid was eventually able to raise their first-ever round of funding. In September 2013, Spark Capital and a variety of other investors poured $2.8 million into the company.
The influx of cash allowed Plaid to move its headquarters from New York to San Francisco where it had access to substantially more software developers as well as FinTech startups that were willing to become its customer.
In the next three years, Plaid largely stayed away from the public eye and solely focused on improving its product as well as adding on new clients. That changed, when in June 2016, it announced a whopping $44 million round led by Goldman Sachs (with participation from other financial conglomerates including Citi Group and American Express).
Some problems, unfortunately, also soon started emerging. One of the firm’s fiercest competitors, Yodlee (which was acquired by Envestnet in 2015 for close to $600 million), filed a lawsuit, stating that Plaid infringed on one of its patents. The two parties eventually settled in February 2017, requiring Plaid to license all of Yodlee’s 78 issued patents.
Nevertheless, the lawsuit did not put a dent into the firm’s growth trajectory. By the end of 2017, Plaid counted close to 10,000 banks and FinTechs as customers. Clients included Wells Fargo, Citi, and Chase on the banking as well as Robinhood or Wealthfront on the FinTech side.
In 2018, Plaid finally began expanding into other areas of finance. In April, for instance, it launched a product called Assets which allowed lenders to embed Plaid directly into their applications.
In 2018, Plaid was able to almost double its customer base while expanding into Canada, its first foreign market.
The team capped the year off by raising another $250 million at a $2.65 billion valuation. The new round of funding put Plaid in the unicorn club just five years after launching. That money was put to good use immediately.
In January 2019, just a month after the funding was announced, Plaid acquired Quovo (a competitor focused on investment-related businesses) for as much as $200 million according to Bloomberg (in July, it embedded its product into the Plaid ecosystem, naming it Investments).
A few months later, in May, Plaid expanded into the United Kingdom by setting up an office in London. Ireland, France, Spain, and The Netherlands followed six months later. Europe, nevertheless, is a significantly harder market to penetrate.
While in the U.S. each bank develops and maintains its own infrastructure, the European parliament has already developed a common standard back in 2015 for all banks to adopt (known as PSD2/Open Banking).
Furthermore, each country has specific laws that specify what type of data can be accessed and processed. As such, as opposed to one Pan-European player, there are a number of small, country-focused Plaids.
Its expansion was to be managed without the help of William Hockey, though. The second co-founders, who acted as the firm’s Chief Technology Officer, announced that he intended to step down from his role in June 2019.
Such changes are not uncommon in the world of venture-backed entrepreneurship. Some founders just enjoy the fast-paced building process more than slow and large-scale expansions. In a statement forwarded to TechCrunch, he stated:
“This conclusion was neither a rash nor a recent decision,” he wrote. “Over the past couple of years, I have known that there would come a point at which I would choose to move to a purely strategic and advisorial role.”
To help Plaid’s team cope with the loss of its dear founder, Visa announced in January 2020 that it intends to acquire the company for a whopping $5.3 billion.
Around the same time, a variety of other financial incumbents had acquired other FinTech companies. For instance, Intuit bought Credit Karma for $7.1 billion while PayPal paid $4 billion for coupon extension Honey.
However, if you think they lived happily ever after, then I got bad news for you. In June 2020, U.K. regulators issued concerns that a merger between Plaid and Visa would further solidify Visa’s dominant market position (its market share in the U.K is 82 percent according to Statista).
While the U.K. regulators approved the merger in August 2020, the United States was less kind. Two months later, in October, the US Justice Department said it had serious antitrust concerns with regards to the merger.
Then, in November, it filed a lawsuit against Visa, calling it “a monopolist in online debit transactions.” In January 2021, a year after the acquisition was announced, Visa officially called off the purchase.
Interestingly enough, Plaid wasn’t too mad about the acquisition falling through. The firm, as a result of heightened awareness due to the acquisition as well as increased interest in investment apps like Robinhood (due to the coronavirus and subsequent stimulus checks), was able to grow by more than 60 percent (equal to 4,000 new customers).
Plaid, just like in the years prior, continued to focus on adding new products while solidifying its relationship with existing banking and other clients. To support its expansion efforts, Plaid raised $425 million at a valuation of $13.4 billion (more than twice the price Visa agreed to pay!).
Unfortunately, portions of that money had to be used to pay fines. In August 2021, Plaid was fined $58 million after it obtained and used bank account credentials and financial information without the user’s consent.
As a result of that fine, it upped its Series D funding round with investments from JPMorgan and Amex.
Weeks later, Plaid announced a shift in strategy as it stated that it wants to become a payment network and rival the likes of Mastercard and Visa. To do that, it acquired verification company Cognito for $250 million in January 2022.
Plaid unwillingly entered the news cycle again in May 2022 when Stripe suddenly unveiled a competitor product.
This was particularly spicy because Stripe had been previously working together with Plaid and was thus granted access to sensible data that could’ve informed the launch. CEO Zach Perrett even went on to publicly denounce Stripe. However, Perrett and the Collison brothers, who founded Stripe, eventually reconciled.
Today, over 1,000 people are employed by the company which operates offices in the United States, United Kingdom, as well as the Netherlands.
How Does Plaid Make Money?
Plaid makes money from a variety of fees that its customers pay to be able to access and use the service.
Plaid is operating on a freemium business model, meaning its core product can be accessed free of charge.
Companies can build up to 100 connections to financial institutions as well as use its transaction (access detailed transaction history), authentication (grant access to user’s bank account), and balance (verifying account balance in real-time) products, respectively.
Once customers decide to opt into the paid service, they will have to pay a variety of fees depending on the type of product they use.
For instance, a one-time fee is applied whenever a new user account is connected to the Plaid API. A subscription fee is paid for every facilitated transaction (such as making a payment).
Additionally, companies pay a fee whenever they issue a request against the API to check a user’s account balance.
Many Plaid competitors, such as Tink or TrueLayer, have emerged ever since. They all monetize their services via a usage-based model as well.
Plaid, furthermore, continues to expand its product line. In May 2022, it announced the biggest feature expansion in its existence. For instance, the firm added KYC checks (made possible by its Cognito acquisition) as well as income verification.
All these features that Plaid develops are used to make its product more defensible in the light of potential competition.
As previously stated, Europe already has proper banking laws in place, which significantly hardens the possibility of expansion.
The United States, on the other hand, doesn’t have any frameworks. As such, banks are all developing their own standards and infrastructure. To some extent, this is wanted. Having complex systems in place diminishes the potential for upstarts (such as neobanks like Chime) to be successful.
On the other hand, the major banks could also form a sort of coalition to agree on a common standard. Similar developments have already taken place in the P2P payment space.
In an effort to combat Venmo’s growth and influence, a consortium of banks including Bank of America, Chase, PNC, U.S. Bank, Wells Fargo, Capital One, and BB&T created a payment network called Zelle.
Just two years after launching, Zelle had already surpassed Venmo and Square in terms of payment volumes – and is now the undisputed leader in the space.
Nevertheless, it has to be noted that no indicators point towards this happening in the domain that Plaid operates in. In fact, Plaid even has signed various partnership agreements with U.S. banks over the past few years, granting them exclusive access to their databases.
Plaid Funding, Revenue & Valuation
According to Crunchbase, Plaid has raised a total of $734.3 million across five rounds of venture capital funding.
Notable investors include Index Ventures, Goldman Sachs, Thrive Capital, Kleiner Perkins, Silver Lake, Ribbit Capital, New Enterprise Associates, and many more.
Plaid is currently being valued at $13.4 billion, a valuation that it received after its latest Series D funding round in April 2021.
The company has generated around $170 million in annual revenue during the fiscal year 2020 (based on reporting by Forbes). Its bottom line grew by more than 60 percent that year.
