In game-theory optimization, when a “big stack” makes a bet based on “position,” they have a competitive advantage. Visa made such a move today with the acquisition of Plaid. Please see the article on TechCrunch: https://techcrunch.com/2020/01/13/visa-is-acquiring-plaid-for-5-3-billion-2x-its-final-private-valuation/
Today, I will discuss why some risks have increased for Visa. Visa is undoubtedly one of the largest companies with a market capitalization of $422 Billion, so when competing for acquisitions, it has a “big stack” of equity. In 2018, there was a private equity funding round that valued Plaid at $2.65 Billion, roughly half of the purchase price that Visa paid today. Visa, however, had “position” relative to other potential acquirers of Plaid because they, like Mastercard, were a part of Plaid’s 2018 private equity funding.
Why did Visa want to acquire Plaid?
By acquiring Plaid, Visa gains data access to checking and savings accounts held by some consumers at banks. Visa also gains access to some consumers’ investment account data because of Plaid’s 2018 acquisition of Quovo.
What competitive advantage does this acquisition provide?
Visa is able to expand its BigData platform to include personal and commercial financial data on customers using Plaid even if those customers are not using the Visa network. Visa will be stronger in serving its customers using that data, so it was a good strategic bet.
What are some of the risks to consider?
- Risk 1 – What is the criteria for “too big” in 2020?
Do Anti-Trust considerations include expanding one’s data network to new populations and increased depth of data? Surely Visa will benefit from the business insights and services to its network that this new data provides in fraud detection, cybersecurity, money laundering, and competitive AI. Some of the larger users of Plaid data were PAYPAL, Coinbase, Betterment, and many start-up fintech payment companies. Therefore, Visa has gained a competitive advantage by gaining access to non-card payments, wealth data, and insights into the success of fintech companies.
- Risk 2 – Information Security.
With access inside Visa of the consumers’ bank and investment account passwords and data, there is a need for a broader data security framework for consumer data protection at VISA. Visa would also need process and policy coordination with the customers’ banks if a breach occurred.
- Risk 3 – Data Governance under Governance, Risk, and Compliance (GRC) Policies.
Visa will need to define limitations on the use of customer bank account or investment data. Additionally, improved disclosures and customer privacy choices should be considered.
- Risk 4 – Financial Performance Risk.
MarketWatch described the acquisition on Jan.14, 2020 in “Visa’s Bet on Plaid Is Costly but Necessary.” This article describes the acquisition as dilutive to earnings for up to three years. The acquisition was also described as defensive, given the success of Mastercard in expanding beyond card as a multi-rail payments company.
Any action has the potential to increase risks. Inaction and internal focus expose a firm to obsolescence. Not addressing risks diminishes competitive advantage. Getting an independent risk assessment creates a dialogue on the prudent levels of risk-taking given the environment.