Plaid and Honey: How consolidation helps and hinders competition
Two major payments players have made record acquisitions in the start-up technology sector over the past three months. In November, PayPal splashed $4 billion on Honey, a bargain-finding browser extension which scrapes the internet for the cheapest deals, and this month Visa bought Plaid, the “plumbing” which connects fintechs to users’ bank accounts, for $5.3 billion.
The purchases seem big, but the payments industry has seen bigger. “Plenty of digital ink has been spilled about the amount of money involved here, but compared to something like FIS’ $43 billion WorldPay acquisition, this isn’t actually that big,” says 11:FS’ head of research Sarah Kocianski, who notes the latest acquisition of Plaid is because “Visa understands that the industry’s underlying infrastructure needs to change”.
The acquisitions point to an emerging landscape of consolidation where some of the most successful fintechs and consumer champions are seemingly being swallowed up by bigger players in the space, hoping to use them as a stepping stone to positions in the market they can’t yet tap.
But the start-ups don’t walk away empty handed. Yes, they are giving up their independence and likely entering a far more bureaucratic system which could hinder their agility, but they are also gaining the global footprint and subsequent mass adoption they have so badly fought for and struggled to achieve since they founded.
PayPal’s acquisition of Honey means the web browser extension can essentially grow its user base from 17 million to 317 million, just as Visa’s acquisition of Plaid means the fintech can piggy-back off the card issuer giant’s 337 million card holders and persuade the otherwise hesitant US banks under Visa’s trusted name that Plaid’s unfamiliar technology is now worth the perceived risk.
The reasons why PayPal and Visa made their acquisitions can be unpicked largely by looking at where the deals position them in the payments ecosystem. Honey pits PayPal in the deal discovery process ahead of its all too familiar battle ground at the checkout page, whilst Plaid pits Visa in the middle of fintechs’ relationships with banks and consumers giving the card issuer ‘ally’ status in space which is seen as a tangible threat to traditional credit and debit cards.
“In some ways, the card networks were the ‘fintechs’ of a previous era – the technological ‘rails’ that Visa, American Express and Mastercard brought into being in the late 1950s and 1960s enabled the birth and growth of the credit card business,” says West Monroe Partners’ payments practice leader Eric Marks. “The Visa-Plaid transaction is an example of those early pioneers continuing to adapt to the new era of consumer payments.”
In this new era, it seems consolidation is key. But it isn’t necessarily killing competition, as is the assumption with any market which experiences the breeze of billion dollar acquisitions by big players. If we swap the word ‘consolidation’ out for ‘standardisation’, it’s far more clear what’s going on. Instead of kicking players out, the payments space is trying to build itself in a way which invites more to the table.
“There is a huge market demand for standardisation in the fintech space and Plaid is one of the leaders,” says API builder Tribe Payments’ CEO and co-founder, Suresh Vaghjiani.
Plaid’s offering opens up the payments market. “The banking API era will mark a shift from siloed transaction data between one customer and one financial institution, to one in which technology companies can harness universally available data to build products,” says corporate credit card provider Brex’s CEO Henrique Dubugras.
“What you might not know, though, is that Plaid was on stage at one of our Finovate events way back in 2014,” says Greg Palmer, vice president at Finovate, a sister-brand to FinTech Futures.
“At that point they were already well on their way – they were close to signing their 1,000th customer, and they had already signed companies from spaces like lending, payments, expenses & accounting, asset management, and PFM. In the years following their time on stage, we’ve seen countless demoing companies come across our stage who relied on Plaid to underpin their offerings from a wide variety of areas.”
Similarly, harnessing Honey’s data on the cheapest prices and how consumers decide on purchases before checkout means other retailers have a better chance to win out over Amazon. Under PayPal’s management, its 24 million merchants can benefit from this price comparison feature and compete against an (until now) uninterrupted customer journey with Amazon, identifying where customers drop off their shopping carts and why.
But it’s not guaranteed that other big players will play nice. These infrastructure-changing acquisitions can see swipes between the competition. Most notably, Amazon’s notification to its customers that Honey had a security flaw just weeks after PayPal bought the browser extension. It stopped swathes of Honey customers from using the coupon-finding service with one of the world’s biggest retailers.
PayPal competes with Amazon as an online payment processors, and Honey charges retailers, like Amazon, a percentage of sales made with the online coupons it finds. So it’s entirely plausible Amazon did this in retaliation – it still doesn’t even accept PayPal as a direct payment option.
Whilst these potential attempts at ‘one upping’ the competition could be damaging, it’s worth the risk for both the payments giants trying to stay relevant and the fintechs striving to achieve global adoption. These two acquisitions are on the way to establishing a fairer payments playing field for everyone. Traditionally seen as carrying a monopoly risk, consolidation is now becoming synonymous with standardisation – something which is breeding rather than hindering competition.
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