- Consumer expectations for fully digital financial lives, digitalization of financial institutions and embedded financial services in digital experiences will drive future trends.
- Partnerships and investments from financial service incumbents build trust and credibility but require care to eliminate conflicts and controls on the business.
- The path forward in a space that has important challenges to be solved is always hard; for entrepreneurs, that means finding a way to persevere through tough times.
Even in the frothy market for fintech, Plaid stands out as a runaway success. The company, which provides the “plumbing” that lets people connect their bank accounts to fintech companies, has amassed over 4,000 customers from Coinbase and Venmo to Microsoft and Google and in January 2020 announced that it would be acquired by Visa for $5.3 billion. After the Department of Justice entered into litigation to block the acquisition, Plaid and Visa mutually decided to terminate the merger agreement almost a year after the announcement. While both parties believed they would be successful in court, they were concerned about the time it would take to resolve. During the last year Plaid has continued to grow and seen a tremendous uptick in demand. We have seen firsthand how Plaid has enabled so many fintech’s to launch and grow, becoming a core component in the growth of the sector.
But it almost never happened. CEO Zach Perret and his co-founders didn’t set out to build a fintech infrastructure startup; they wanted to build consumer apps. They only built the infrastructure because it didn’t exist, and they needed it for their other ideas.
Perret shared that story during a fireside chat at the 2020 Commerce Summit, hosted by Commerce Ventures and Silicon Valley Bank. The conversation, moderated by Dan Rosen of Commerce Ventures, was full of insights that are relevant to entrepreneurs and executives in fintech and beyond.
Plaid’s founders decided to move forward with their infrastructure play even though it had been tried before with only moderate success. Behind the team’s decision was the conviction that their predecessors had gone about it wrong, and that they could bring a new value to the market. It made getting funded harder — likely, much harder. But ultimately, they were proven right.
Another key element of Plaid’s success was its decision to take investments from many of the incumbents in the financial services industry, the very sector Plaid was aiming to disrupt. While the decision gave Plaid credibility and helped to accelerate its growth, Perret understood he was navigating perilous waters.
Perret describes how he did it below, shares his thoughts about the future of fintech, and offers advice for all founders about the entrepreneurial journey. Here are some edited excerpts:
Dan Rosen: Can you tell us about the inception story of Plaid? How did you come up with the idea?
Zach Perret: It was actually somewhat of a lucky accident. When I first got exposed to financial services, I spent about a year working for a consulting firm where I was considered the tech guy. In that experience, I got to see first hand that financial services was relatively behind on the technology front.
Fast forward a set of months, I decided to leave the consulting firm ideally to go join a startup. My co-founder and I — at the time, he was just a really good friend — were working on a series of side projects to try to figure out, “Did we like building these things? What kinds of jobs did we want at startups?”
It was pretty clear to us that consumers were really frustrated with financial services, so we started working on a series of apps to try to help them better understand their money, better interact with it. None were very good, but they led us down this path of understanding that getting data from financial institutions, structuring it, making it useful, available, and so on was really hard. We ended up building our own bank integrations, so we were spending 85% to 90% of our time on the back end figuring out how to build the infrastructure. Fortunately, one of our friends and contacts came to us and said, "Your apps are terrible, but can I license the back end of what you're building?"
For us, that was the aha moment. Maybe these side projects actually could generate a company.
There were companies trying to do aggregation before Plaid. Were you at all nervous about the fact that the market opportunity had been tried and didn't seem to lead anywhere big?
Yes and no. The biggest issue raising money was exactly that point. There were two companies in the space, Yodlee and CashEdge, and none had achieved breakout growth. That in one sense made the market look small. However, in another sense, it gave us this fantastic opportunity because we had a belief that the previous attempts were not focused on the right style of digitization.
We had a deep belief in “personal financial management plus” tools that could also do things. Robo-investing is a really great example of a category that is PFM plus. They analyze your spending and then figure out how to execute on it. The second belief was in embedded finance (where certain financial services become integral to the working of other apps) which is largely a trend that we're seeing play out.
Another advantage we had was a belief that developers themselves are a great distribution channel. Everyone in the market at the time was selling top down. We wanted to build a bottoms up sales process to the point that we didn't do enterprise sales until this year really at any sort of scale.
Finally, we had a team that was maniacally focused and worked ridiculously hard in order to go out and chase the challenge. Everyone had this very deep belief in the mission and the outcome we were trying to create. We had this mantra of “make money easier for everyone.”
Consumer facing fintech has seen a pretty crazy explosion of popularity both in terms of usage, but also in terms of investment over the last five, six years. Why has this industry grown so fast? Why now?
If you talk to the early fintech companies, anyone that wanted to move money had to go out and figure out how to become their own money transmitter. Then, along comes a Stripe, for example, or a Plaid, or many of the new infrastructure companies that are out there, and even the digitization of the credit bureaus.
Basically all of the foundational elements of building a consumer fintech company went from being very hard in 2012 to being much easier certainly circa 2017, 2018. So, you start to see the maturation of companies that could take advantage of all that stuff. The complexity of issuing a card even five years ago was incredibly high. The amount of overhead, the size of your compliance team, the size of your risk and fraud team, all that stuff meant that only large companies could do it. Since then, the complexity has gone down, the simplicity has gone up.
We like to believe that Plaid had a little bit to do with it, but frankly it was just a timing thing where lots of companies built great infrastructure all at the same time. That enabled this consumer fintech wave to really expand.
Plaid took some investment along the way from corporate investors (including American Express, Citi, Visa, MasterCard, and Goldman Sachs). What are the tradeoffs or considerations for taking money from corporate investors and when to do so?
Financial institutions are an important part of the ecosystem that we serve. We really wanted to build brand recognition and trust within traditional financial services and taking money from these corporate investors was one way to do that. [We were] an infrastructure provider that had 25 to 30 people and were connecting millions of consumer accounts through our system. From the earliest days, we'd invested in fantastic privacy and security controls, and really made that a huge focus. However, we also needed that to be publicly recognized.
Bringing together this consortium of financial institutions to lend input and credence to the company was really crucial. We got a lot of advantages as well by having contacts on the bank side making sure that we were talking to the right people. Many of these financial institutions turned into long term Plaid customers, and I think that's really fantastic. But the initial impetus for us was about credibility .
Was it difficult to create the dynamic that brought in corporate investors with the right mindset, but not wanting to be beholden to any one strategic relationship?
It was a huge concern of ours. We wanted to be thoughtful about how to make sure that when we work together, everyone wins. This meant first making sure corporate partners were treated fairly and consistently and reducing controls on the business that could create conflicts of interest like funding control and blocking rights. We also focused on creating strong points of contact with our team to develop partnerships with these investors.
What would you imagine is going to occur in the next three to five years in financial services or fintech?
This morning I tweeted that Square's market cap is approaching that of Goldman Sachs, which is a completely crazy thing to me. PayPal is approximately equal to Bank of America. It's been amazing to see tech-enabled digital finance now truly chasing and perhaps at some point surpassing a lot of the more traditional incumbents.
As we look ahead, the first trend that I expect to come out of this is increasing digitization of the incumbents. I think it's hard for the incumbents to do the level of technology investment that’s required to fully compete with the more tech-forward or tech-centric firms.
The biggest banks can make this technological investment. The medium sized banks barely can get there. The smallest banks don't have any technologists on staff, so they're really relying on outsourcing there. I suspect that we'll see a rise of enablement tools particularly in the U.S. for banks (ranked) 25 through 11,000. That'll be an interesting trend.
(On the consumer side) 80% are saying that they believe they can live their financial life fully digitally or they don't need to go back into a bank branch. That is a huge step forward. I suspect that we'll see a lot of the big banks chase that and play catch up.
Then, the last trend is embedded finance. We're seeing big technology companies, like Uber, for example, have so many different bits and pieces of financial services that are embedded — ways to pay their drivers, give loans or leases to their drivers, give consumers rewards, stored value, the card, so many of these different things. This concept of every company having embedded financial services in different digital experiences, I suspect that will continue in a big way. I think there are great businesses to be built to enable that.
Any parting advice for founders about starting a company or the journey of being an entrepreneur?
Find a way to not die. If you choose a space that has important challenges to be solved and you're committed to that space for long enough, important challenges will be solved. But the path is always hard.
There were many times when Plaid was on the brink of total failure. There have been multiple times when myself or my co-founders cut our salaries to zero. Multiple times. It's a journey that in retrospect seems easy and people talk about these overnight successes. But it's incredibly hard along the way.
My advice is to find a way to continue. Don't let the story be over, because if you work long enough on the right set of problems, a great outcome will eventually get there.
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