Visa’s new monopoly

Visa’s $5.3 billion acquisition of fintech startup Plaid is a very big deal. The outsize purchase price—double Plaid’s 2018 valuation—is a sweet win for the blue chip venture capital firms that invested early. And it boosts Visa’s efforts to diversify its business beyond credit and debit card services.

But the biggest reason the Plaid purchase is huge—the reason, in the words of Term Sheet’s Polina Marinova, it “will send shockwaves through the financial services industry”—is because of the juicy monopoly it could deliver to Visa.

You see, Plaid occupies a gatekeeper role between conventional banks and the app-based upstarts—including Venmo, Chime, Coinbase and Robinhood—trying to disrupt them. All of those apps currently rely on Plaid to provide a friction free sign-up process, letting customers enroll instantly with their online banking password. Without Plaid, the would-be customers would have to wait a day or more for the app to connect to their bank.

The pivotal link Plaid provides banks and fintech services will only grow in importance as more consumers discover finance apps. This will allow Visa to be the strategic go-between between the old world of banking and the new one—and to charge accordingly. Right now, as tech whisperer Ben Thompson notes in an excellent essay on the acquisition, Plaid charges apps a one-off fee to connect a new customer’s bank account. But in the future, Visa could leverage its gate-keeper position to levy a charge every time a customer logs on. (An update to Thompson’s post notes Plaid collects revenue every time someone engages in a transaction).

Thompson’s essay also highlights another key fact: Banks do not like the onslaught of new fintech apps trying to eat their lunch, and are also wary of Plaid’s role in giving them easy access to customers’ accounts. But in his words, Visa is well-positioned as “the devil banks know”—meaning the banks will prefer to work with Visa, with whom they have transacted for decades, rather than turn to any competitor aspiring to compete with Plaid. This is doubly true given the sensitive security issues involved, and as the financial industry looks for a better way than bank passwords (probably one involving biometrics) to let customers connect apps and bank accounts.

Finally, Visa’s control could help it determine winners and losers in the fast-growing fintech landscape, since access to Plaid’s API is now a make-or-break tool for many startups. Consider how PNC Bank last month cut off Venmo’s access to Plaid so as to push customers towards Zelle, an industry-owned Venmo competitor. It’s likely other banks will also adopt such sharp-elbowed tactics towards fintech competitors, and that they will work with longtime business partner Visa to carry them out.

The bottom line is that Visa is now poised to throw its weight around like never before, thanks to owning a critical new piece of banking technology, Plaid, and its longtime relationship with banks. There is no guarantee, of course, that it will be able to leverage its new power in the long-term—banks and competitors could come together to thwart it—but right now it has the clear upper-hand. It’s Visa’s monopoly to lose. 

Clarification: This story was updated on Jan. 20 to provide more details about Plaid’s revenue model.

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Thanks as always for reading The Ledger. Our weekly round-up of everything fin-tech is below – along with some exciting news about the new Coins2Day, which launched this morning. Read on for details.

DECENTRALIZED NEWS

This edition of The Ledger was curated by David Z. Morris. Contact him at [email protected].

Credits

The SEC warns that crypto IEO's (Initial Exchange Offerings) are, like, subject to securities law, man... Twitter is considering a tipping function... Brooklyn Nets player Spencer Dinwiddie issues a personal bond on his future earnings on the Ethereum blockchain... Plaid has also helped push for "open banking," the banking equivalent of social media data portability... Nesta, a U.K. Think-tank and foundation, offers a £ 3,000 prize for the best essay on blockchain...

Debits

Perennially troubled crypto exchange Cobinhood says it will shut down, but only temporarily, and everyone will get their money back. Well everything's fine, then... Amazon warns of security risks in browser extension Honey, which is, um, a competitor... A figure connected to the QuadrigaCX  crypto exchange collapse pleads guilty to securities fraud... Instacart workers go on strike to get their tips back... Ethereum wallet address associated with Hex, an alleged scam, are emptied of $7 million... Hypertech follows in the footsteps of OneCoin with what I'll call, for legal reasons, a multi-level, pyramid-shaped incentive structure.

Share Your 2020 Predictions!

Whether you're a high-flying fintech founder or a lowly crypto day-trader, We want your 2020 predictions for financial technology and blockchain.

Email these and other comments, tips, and projections, along with anything you want to share about yourself, to [email protected]. We'll include the most insightful and/or hilarious comments in a Ledger edition coming soon.

THE FUTURE OF FORTUNE IS HERE

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BUBBLE-O-METER

249.1%

That's the 30 day return on an investment in Bitcoin SV (BSV), a bitcoin spinoff, according to data from Coingecko. Both it and a similar but more established "fork" known as Bitcoin Cash (BCH) saw an outsized pump alongside the rising price of Bitcoin (BTC). 

Both BSV and BCH had particularly sharp spikes within a short period midday Tuesday U.S. Time, along with other crypto assets, which tend to move in tandem with the price of BTC. BCH and BSV are meant to be direct competitors to BTC, but are used far less frequently. According to Coinmetrics, BTC daily transactions are in the neighborhood of $1.3-1.7 billion USD, while BCH lives in the $100 million volume neighborhood, and BSV's is a flatlined $10-15 million.

Perhaps most striking of all, BSV's pump was bigger than BCH's, leading to a temporary "flippening," in which BSV grew to have a greater total value than BCH. While Bitcoin Cash is controversial, Bitcoin SV is absolutely radioactive, thanks to its association with two figures–Craig Wright and Calvin Ayre–notorious for controversy and legal bumbling. The project's ascendancy would seem to be a serious black eye for the legitimacy of cryptocurrency as a whole.

It's not easy to explain anything when it comes to cryptocurrency, but two factors suggest themselves. First, people who want to buy "Bitcoin" are known to sometimes be confused by the existence of three coins with such similar names (They're not the same thing). And second, it's hard to discount the idea of manipulation when it comes to a coin that's as thinly traded as BSV in particular.

FOMO NO MO'

The state has a long history of forcing prisoners—especially black men—to work. After slavery was abolished, Mississippi leased a soaring number of prisoners to private industry. Public outcry over deaths and mistreatment forced the state to end that program in 1890. Mississippi then founded the state penitentiary known as Parchman Farm, which was modeled after a slave plantation. It still houses over 3,000 of the state’s 21,000 prisoners.

One of the promises of fintech is that automation can make financial products accessible to more people, potentially helping even high-risk borrowers get access to capital when they need it most. A deep dive investigation by The Marshall Project finds what could be described as an anti-fintech: debtor's prisons, still in operation, in 21st century Mississippi. The system keeps people with debts as low as $656.50 in state facilities while they work in fast food and other mostly low-wage roles. Most shockingly, only a quarter of the wages earned under the program go towards the required restitution, with the rest going to the corrections department and courts. As with most parts of the U.S. Criminal justice system, African-Americans are over-represented in the program.

“Debtors prisons are an effective way of collecting money," said one legal scholar, "as is kidnapping."

THE LEDGER'S LATEST

With Plaid Acquisition, Visa Makes a Big Play for the 'Plumbing' of the Fintech World - Rey Mashayeki

Lessons on Modern Financial Scams From the Man Who Tried to Sell the Eiffel Tower - Twice - Ben Carlson

How Shadowy Brokers Allegedly Launder Billions for Crypto Criminals - Jeff John Roberts

Laws Meant to Shut Down Tax Havens And Close Loopholes Could Have the Opposite Effect - Erik Sherman

Would You Share Your Salary With a Friend? Should You? - Kristen Bellstrom and Emma Henchcliffe

MEMES AND MUMBLES

The gentle opening words of a thread that will become a gut-wrenching roller coaster ride of suspense, intrigue, and sandwiches. We won't spoil anything, but it involves a receipt, a credit card, and an eagle-eyed conductor. Don't miss it.