So Plaid now calls itself a payments company. It was only a matter of time, really.
Earlier today, the data and connectivity startup announced a new payments partner ecosystem that will extend its existing payments infrastructure and make ACH bank transfers a more attractive alternative to credit card transactions.
But the big winners here are merchants, who now have a low-cost alternative to avoid credit card processing fees that cut into their margins.
Before today, most of Plaid’s payments activity centered around improving customer onboarding and account funding through its payment initiation service. But the launch of the payments ecosystem heralds a much deeper integration with the payment flow of its partners and what could be a fundamental reshaping of how certain transactions are made.
Here’s why they’re building the ecosystem and who stands to benefit from it.
Building a new payments network
This payments ecosystem is really the culmination of a number of moves the company has made over the years.
First, Plaid enabled data to be connected between fintech apps and financial institutions. It subsequently created an identity product so customers could verify users are who they say they are. Then, it built a tool to check the balance of an account to ensure it has sufficient funds to make a money transfer.
It also added a payments initiation service that leverages the other tools to help customers onboard new users and add funds to their accounts quicker. And finally, it built a tool to assess the risk of bank transfers and minimize ACH returns.
Now it’s extending all those capabilities through an ecosystem of partners to enable account-to-account money movement, which it says will increase conversions and lower payment costs while decreasing the risk of customers being hit with insufficient funds or chargebacks.
Plaid today announced nearly 50 partners for the payments scheme, including Checkout.com, Marqeta, Dwolla, Galileo, Silicon Valley Bank and Square, that will integrate Plaid’s technology into their offerings.
When we talked with Plaid execs ahead of last week’s Plaid Forum, they spoke broadly about how the company was building a multisided network between consumers, merchants and their banks. Here’s CEO Zach Perret on the company’s view of what that looks like:
We think about the components of a network and how that network applies to our business. We think about financial institution relationships and how we can learn from the way Visa has worked with financial institutions for decades and apply some of that into the way that we run our business day to day.
The payments ecosystem is a full-fledged manifestation of that idea as Plaid seeks to connect a variety of different financial apps and services as they move money between them.
Potential winners and losers
It’s early yet, and there’s no telling how much or how quickly fintechs and their customers will begin offering bank transfers as a real alternative to credit card transactions. But assuming some amount of adoption, there are very clear indications of who might benefit and who won’t from such an offering.
Obviously, Plaid benefits from this launch, both in expanding the use of its payment capabilities and hooking even deeper into its customers’ apps and services. Ecosystem partners are winners as well, now that they have one more money movement option to process transactions. It helps that bank payments could potentially lower fees, particularly on recurring bills or transactions.
But the big winners here are merchants, who now have a low-cost alternative to avoid credit card processing fees that cut into their margins. Companies like Square or Checkout.com could see substantial benefit to their bottom lines by giving customers the option to easily initiate account-to-account payments into their checkout flows.
As for losers, while Plaid’s head of revenue Paul Williamson told the Wall Street Journal that the company sees the program as “complementary” to credit card networks, there’s no doubt that if it takes off, we could see more merchants opt for account transfers as the preferred method of payment. It’s hard to imagine even a substantial increase in payments moving to ACH affecting the likes of Visa or Mastercard, but low-risk bank transfers could potentially eat into Stripe’s business.
And as Jason Mikula pointed out on Twitter, the bank transfer option could be bad news for a variety of fintechs and neobanks like Chime, Varo or Aspiration (many of whom are Plaid customers), as debit interchange is their primary revenue driver. The same could be true for corporate card and spend management startups that offer their platforms for free while making money off card transactions.