In my mind, a truly differentiated and sustainable platform is characterized by three traits: (1) It adds value by enabling the various platform participants to engage in actions they would be precluded from if it wasn’t for the platform; (2) it has a sustainable competitive moat / differentiation that is difficult to replicate for any newcomer; and (3) it has significant scalability potential due to various product and / or service offering expansion opportunities. While it is unclear how Visa will proceed with Plaid, before its acquisition, Plaid met all three of the above criteria, making it a truly differentiated platform.
The U.S. banking system is a highly regulated and disjointed system that tends to protect the large incumbent banks. Historically, banks have been unwilling to share customer data with any other external finance applications, as doing so would risk their monopolistic grasp on the market. More recently, however, the world has been moving towards a more consumer friendly open banking system, with the lenient European Union banking regulation leading the way. Additionally, while legacy banks do enjoy a significant market share advantage today, they often lack the radical innovation required to cater to the quickly evolving needs of an ever more demanding consumer, and thus have an incentive to collaborate with innovative fintech start-ups. The start-ups, on the other hand, rely on critical bank data to operate their service in the first place. Enter Plaid, a fintech infrastructure technology company that aggregates sensitive customer data at large banks and, through its developer API, gives third party fintech applications access to it. Plaid hence unlocks the previously inaccessible bank data for startups, enabling them to run their services. It also reinjects relevance into the legacy banks by sharing their data with the latest cohort of innovative fintech startups.
The key moat for Plaid is the trust that it was able to build over time with the startups and in particular with the banks. More open banking practices generally come with greater convenience and efficiency, but also greater risk for the consumer. The more widely circulated sensitive bank data is, the more likely it can be extracted or misused for fraud, which is why banks are careful and slow to share their customer data. Plaid needed to earn their trust through continuous, breach free operations in order to gradually become the de facto gate keeper of bank customer data. It has done so through highly competent security measures, enforcing controls, routine tests and encryption standards. Nevertheless, certain banks such as JP Morgan Chase have recently restricted Plaid’s data access out of security concerns, illustrating the banks’ ability to cut off services like Plaid from its data at any point in time. Bank trust is hence not only a competitive moat, but a pre-condition for any service like Plaid to continue existing. As trust cannot be accelerated but rather builds over time, it would be very difficult for any newcomer to enter the space and seriously challenge Plaid’s position.
Lastly, there is a diverse set of product and service expansion opportunities for Plaid to pursue, and it has already demonstrated its ability to successfully expand its business model. While Plaid started out as a payment data provider, it quickly evolved beyond that domain to include data for other financial services. It also acquired Quovo, a similar platform focused on consumer lending and investment data, such as loans or brokerages, further widening its reach. Going forward, the real value lies in not just the collection of data, but the analysis and productization of it. Given its trajectory, Plaid has a real chance of becoming the company with the most holistic perspective of an individual’s financial situation, ranging from its cash assets to its investments to its loans. This scale and completeness of data has tremendous value as data driven decisions and hence analytics become increasingly important for any company or individual. Monetizing this data could take a number of different product formats. One could envision a financial profile service where individual consumers can access their own financial profile and third party startups can access anonymized customer cohort profiles. Alternatively, given the increasing focus on data privacy, Plaid could launch a service that monitors what kind of financial data is shared with which third party applications. While the exact format of the products is not clear, it’s is evident that Plaid has a lot of additional expansion potential.