Jamie on Software

Last month, Visa announced their intention to buy Plaid for $5.3 billion dollars.

Plaid provide an abstraction around bank accounts. They offer a developer-friendly API to query one or more of a user’s accounts. This allows startups and consumer products to offer financial analysis and services in a bank-agnostic way.

On the back of this purchase, and alongside my general growing interest in fintech, I’ve been becoming more and more bullish about Visa.

But why did Visa pay so much for Plaid?

$5.3b is a lot of money. It’s somewhere between a 25x and 50x multiple of Plaid’s revenue.

The Plaid team are impressive, but at $5.3b, it’s got to be something strategic. As my friend Rich put it, when you’re counting in billions, it’s not an acquihire.

So if it’s not revenue, and it’s not (just) the team, what’s the strategic value in Visa’s owning Plaid?

I can think of three big reasons:

1. It solidifies Visa’s core business.

Visa is a three-sided network. It provides the infrastructure to move money between consumers, merchants, and banks.

When Visa works well, everyone benefits:

Consumers get instant access to credit, and can buy products from anywhere the card is supported.

Merchants can accept payments from anyone, and no longer need to run back-office operations responsible for credit and payments, nor handle cash.

Banks can offer credit to consumers more easily, at higher interest rates, and collect fees from merchants to provide the aforementioned credit management services – and, in doing so, reduce merchants’ exposure to credit risk.

For arranging this service, Visa charge merchants and banks a percentage of each transaction. The underlying economics of the business are excellent: they have over a 50% profit margin, steady revenues, a long pedigree, and revenue still grows 10% year-on-year.

Plaid can contribute to this core business, since an increase in fintech innovation is likely to increase transactions simpliciter:

Banks can offer more, and better tailored, financial products to consumers. Visa can better integrate identity and security services with payments, reducing rates of fraud. More broadly, and more importantly, fintech can, and will, bring finance to the under- and unbanked.

Thus, Visa can leverage Plaid to shore up the existing network, make being a Visa customer more attractive, and create whole new demographics of customers in developing markets.

All of this means more transactions, and more transactions means more transaction fees.

2. Plaid is a good business in its own right.

A 25x to 30x multiple on revenue is large, but Plaid are still a relatively young company.

Plaid offers Visa the opportunity to take fees from the “other side” of the consumer’s relationship with the bank: in GraphQL terms, the queries against the bank account rather than the mutations on it. This is somewhere Visa currently aren’t able to capture value.

Plaid’s target customers are software engineers, but the institutions at the bottleneck to Plaid’s growth are banks. Now Plaid has the weight – and half-century of personal relationships – of Visa behind it, the product itself can grow substantially more.

Plaid are also, so far, focussed heavily on the U.S. Fintech opportunities are global, so now Plaid can lean on Visa’s global reach to expand internationally.

All this said, Plaid could represent a significant income stream for Visa in its own right.

3. Plaid is part of a broader Cambrian explosion in fintech.

Finally, this purchase reflects a wider trend.

As Stripe, Twilio, Algolia, and now Plaid have shown, making developers happy is big business.

But making developers happy and productive also has serious downstream effects. It reduces the amount of time and money it takes to create new products. It encourages the development of new tools which themselves make developers happy and productive, effecting a Cambrian explosion of new products and tools.

Just like the set of norms and tools developed around open source, and composability in smart-contract technologies, making it easy, cheap, and secure for developers to access financial data will only accelerate the potential of technology –– and, crucially, along dimensions we can’t easily predict.

In short: it increases the amount of innovation possible in the world.

If I am at all correct about this, then Visa have shorn up their excellent business model, giving themselves access to an attractive new revenue stream, and now control a resource which has already, and will continue to be, central to sustaining and growing the fintech space, and, eventually, the global economy.

Thanks to Jessica Cooper, Richard Burton, Peter King, JS Denain, and Jonny Corrie for their notes and comments.

A while ago, J and I noticed we’d lie in bed, fiddling with our phones for 30, 40, 45 minutes, an hour, many, most mornings, every morning. Sometimes our fiddling was productive, clearing emails, writing lists, researching some topic or other – but most of the time, it wasn’t.

And it’s easy to justify it to yourself if it’s AngelList, or LinkedIn: you’re keeping up with career options. Hacker News is obviously of great professional concern to a software engineer. Twitter keeps you wired into the zeitgeist. And, as for Facebook, what could be more important than friends and family?

The point, of course, is that I’m fickle and distractible and the only thing that can salvage my mornings, whittle and form them out of the chaos, is to leave the matter out of my hands entirely. Leave motivation and bandwidth in the hands of a /system/, and make delivery an inevitability – or at least a reliable expectation – rather than something subject to whimsy and caprice.

So we built a system, and we call it “book hour”. Every morning, we read, at least, a few pages of a dead-trees paper book. Before touching our phone.

A glimpse of analog before our days become digital.

You can turn off your alarm. If somebody calls you, you’re allowed to answer. And it’s flexible: if you both agree on an exemption – early start, late start, got to catch a flight, etc. – then it’s allowed.

But it turns out that we rarely need an exemption, because beginning your day with a few pages of a book is actually a really nice thing to do.

So, incentives:

Carrot: you end up reading more, and, in a relaxed and controlled manner, gradually phase into your day.

Stick: If you touch your phone before reading a few pages, £10 goes in a savings pot in our joint bank account. When the pot reaches some amount, we take ourselves out for dinner.

This is good because it serves the psychological function of an incentive without any great real-terms material loss (we’d probably spend the money on eating out anyway.) It hurts without hurting.

It’s effective, and I urge you to try it out if you too are looking for an easy and fun way to cut down on screen-time.

It’s also, I think, illustrative of a more general approach to productivity, good work, and human happiness:

Build systems that minimise friction, and, where appropriate, align your incentives with your interests.

Research is chaotic, but it’s okay, because we can build routines which encourage regular, structured work and limit the possibility of procrastination.

Memory is chaotic, but it’s okay, because we can use spaced-repetition to minimise friction and make long-term memory a choice. (As for incentives: how about an Anki hour?)

The shape and structure of data is chaotic, but it’s okay, because we can work with statically typed languages and write unit tests, both of which have all kinds of good upstream effects.

The world is chaotic, but it’s okay, because systems help tame it.