Plaid Inc. is a fintech startup revolutionizing the open banking industry with cutting-edge unified banking APIs (Application Programming Interfaces) to unify the tech ecosystem for the financial sector and fintech products. The company was founded by Zach Perret and William Hockey in 2012 due to their difficulty in accessing data while building products for the financial sector and fintech. It differentiates itself from most payment facilitating fintech by allowing developers to share banking, personal data and other financial information through its APIs in real-time. In short, the APIs enable third-party apps to connect users’ bank accounts with fintech apps easily with minimal disruptions.
It enables mobile payment companies such as Venmo and Chime to offer banking services without significant investment in the infrastructure themselves. It has also onboarded multiple big-name clients such as SoFi (SOFI: NASDAQ), Wise (LSE: WISE) and Acorns. In addition, it has recently completed its Series D funding round led by J.P. Morgan and American Express in April 2021. The funding round valued Plaid at a valuation of $13.4 billion, and it has plans to go public in 2022.
Plaid made money by charging fintech or financial institutions various fees when using its products. Plaid operates on a freemium business model with multiple tiers of different pricing depending on the volume of customer transactions.
Stripe has recently launched Financial Connections to challenge Plaid dominance in open banking. Financial Connections is powered by Plaid competitors MX and Finicity. Despite the new entrants in the open banking market, Plaid still retains the highest valuation and is ranked top 10 in the financial data APIs sector, according to G2, a peer-to-peer review site for business software.
Plaid has embarked on an acquisition strategy to increase its product offerings and expand its total addressable market (TAM). It acquired Quovo to improve its product building capabilities in the finance and investment data niche. Quovo is a popular investment and brokerage aggregation platform used by leading industry players such as Vanguard, SoFi and Betterment. Plaid also recently acquired an identity verification and compliance platform, Cognito, back in January 2022. Cognito is an identity and verification compliance platform that facilitates KYC (Know Your Customer) and AML (Anti-Money Laundering) functions for leading financial services companies such as Affirm and Wyre. Cognito makes it easier and faster for users to verify their identity when signing up for financial services online.
Plaid has also recently unveiled its expansion (in its “Plaid Forum” event) into the identity and income verification sector, as well as offering new products for account funding and disbursement.
Plaid is currently a private company, and its finances are not public. Plaid declined to comment about its revenue, but analysts have estimated its 2021 revenue to be $225 million. That translates to a price to sales multiple of 60 to 1 at a $13.4 billion valuation. Although the multiple seems high, investors are paying top dollar for fintech startups due to their high CAGR (compounded annual growth rate). For example, Stripe is valued at a 50 to 1 price to sales (PS) multiple in 2021 based on analysts’ projected revenue of $ 2billion. It is important to note that Plaid’s PS multiple has doubled since Visa’s acquisition offer of $5.3 billion (at a 26.5 PS multiple) in early 2020. The Visa offer eventually fell through amid a Justice Department lawsuit that challenged the acquisition on antitrust grounds.
Plaid IPO has not been officially announced yet, and hence there is no prospectus provided in regard to Plaid share price. Plaid’s share price will depend on the IPO valuation and the number of shares on issue.
Should you invest in Plaid?
Plaid is a promising company with high revenue growth and a competitive advantage in a growing open banking sector. Analysts are projecting Plaid’s revenue to grow triple-digits
Plaid. Research by Accenture concludes that 76 per cent of banks expects Open Banking API to increase by 50 per cent or more in the next three to five years. In addition, Juniper Research forecasts that global payment transactions facilitated by Open Banking will exceed $116 billion in 2026 from just under $4 billion in 2021. That translates to a forecasted CAGR of 96 per cent from 2021 to 2026. Fintechs is experiencing a mass adoption phase right now, and the proportion of US consumers using fintech has reached 88 per cent, a figure higher than video streaming subscriptions (78 per cent) and social media (72 per cent), according to Plaid 2021 Annual Report titled The Fintech Effect.
Plaid’s fintech products currently have multiple use cases in personal finance, lending, wealth, consumer payments, banking, and business finances. However, Plaid’s 2021 Annual Report indicates that there is no single-use case surpassing 70 per cent penetration, suggesting a considerable room for growth in the coming years.
Based on the open banking outlook, it is not unusual for Plaid to double its valuation in the following years or go public at a higher valuation anticipating future revenue growth. However, 2022 might be a good time to invest in tech IPOs as some companies, such as Instacart, have slashed their valuation by 40 per cent to reflect the recent plunge in tech stocks. Investors might be able to take advantage of the lower valuation this year.
Watch out for an IPO in 2022
There is no official date for Plaid’s IPO yet, but many industry insiders anticipated it to go public this year along with some of the hottest IPOs names, such as Klarna and Instacart. Industry insiders cite that Plaid could go public through a special purpose acquisition company (SPAC). However, Plaid might delay its IPO considering the carnage suffered by fintech stocks such as Affirm and PayPal, where their share price has fallen by more than 50 per cent. In addition, market weakness, such as accelerating inflation and rising interest rates, might discourage companies from going public this year. Furthermore, Plaid has recently raised $425 million in its Series D funding and might have enough cash runway to survive 2022.
Plaid is an innovative and evolving fintech company that is constantly evolving, even as we speak. Plaid is at the forefront of the open banking revolution, and it is set to benefit from the sector’s exponential growth. Although there is no official date for its IPO, it is one of the hottest IPO anticipated by the market in 2022, alongside Stripe and Klarna.
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