Future of Finance: Plaid’s punchy valuation, history of banking crises

Hello Quartz readers!

This week, Plaid’s valuation broke into the upper echelon of fintech startups when Visa bought it for $5.3 billion. When you look at some of those high fliers, some of their businesses are not necessarily all that new. Where does Plaid fit in?

For all the hype, private firms like Stripe (payments), Nubank (bank), Robinhood (retail brokerage), and Ant Financial (everything), as suggested in our field guide in November, act a lot like regular financial companies. They take deposits, process payments, make loans, and provide brokerage for stock and options trading. They may rely on software hosted in the cloud, but they have analogs that go back to the last century (card payments) or even millennia (banking).

In some ways, Plaid doesn’t look much like a finance company: it doesn’t take risk or hold capital. Instead, it constructs the electronic pipes that connect financial companies to each other. It makes money by selling licenses to its platform.

One of its big clients is Venmo, the payment app, which Plaid connects to users’ underlying bank accounts. Plaid also links up other types of enterprises. Used car companies like Carvana use Plaid for bank-to-bank payments, and to verify income and determine proof of funds, for example.

Seen that way, Plaid looks a lot more like payment companies such as Visa, Stripe, and Alipay, part of Ant Financial. That’s nice for Plaid: Visa and Mastercard are worth a combined $750 billion in market cap. Investors love Big Tech-style networks and platforms, and these companies lean toward that type of business model.

Complexity is the friend of a company like Plaid. As Bernstein analyst Harshita Rawat wrote in a report, if not for Plaid, startups would have to “overcome a rather monumental task of doing custom integrations with thousands of financial institutions.” Six-year-old Plaid has more than 11,000 companies on its network, giving them access to more than 200 million consumer bank accounts.

Still, there are risks for Plaid’s—and now Visa’s—business. It’s a long shot, but if the industry standardized those connections, perhaps with some government prodding, developers might not need a third party to do so much of the heavy lifting. In the meantime, Visa says it’s building a network of networks.

Financial Technology partners has a 216-page report titled, “The Rise of Challenger Banks.” A section about developing countries notes that markets in Africa, Southeast Asia, and Latin America are a big opportunity for challenger banks because of their large unbanked populations, high mobile penetration, and growing middle class.

This has been a convincing argument for a lot of people and probably explains the $10 billion valuation for upstarts like Brazil’s Nubank. My sense is that investors are looking for the next Ant Financial, which quickly rolled out financial services to a massive population in China that didn’t have them before.

What these reports often don’t mention is that banking in emerging markets is quite risky. The US has had two systemic banking crises since the 1980s, but during that span it had a relatively sound currency, the government didn’t (despite its best efforts) default on its debts, and the economy returned to growth reasonably quickly even after a deep recession. No economy or region is immune to banking crises, but in emerging markets, you may also face hyperinflation, government defaults, and particularly severe recessions.

With that in mind, it’s interesting that investments in companies that are leveraged to risky economies are so fashionable. Are Silicon Valley investors, who may typically buy stakes in tech companies in big developed countries, used to dealing with these risks? A look at some portfolios suggests maybe not.

Since banking blowups usually go unmentioned in pitch decks, I’ll leave you with a list of systemic financial crises in Latin America (and the US) up to 2008:

1️⃣ Ant Financial is reviving its IPO, according to the Financial Times (paywall). Alibaba owns a 33% equity stake in the company, which is reportedly considering a dual listing in Hong Kong and mainland China.

2️⃣ Amazon told its shoppers that Honey, the price-tracking company PayPal bought for $4 billion, is a security risk. The online retail giant, mind you, operates a rival to Honey called Amazon Assistant.

3️⃣ Goldman Sachs finally has an app for Marcus—the consumer bank it launched in 2016. In its new consumer and wealth management division, revenue increased 8% to $1.4 billion in the most recent quarter.

4️⃣ A small group of investors in Wirecard want to appoint their own auditor to look at the company’s books, according to the Financial Times (paywall). The German fintech’s chairman recently resigned, citing personal reasons.

5️⃣ China is finalizing rules for online-only banking, Reuters reported. Regulators are looking to contain risks, while potentially giving foreign players greater access to the market.

Digital brokerages in Nigeria are springing up that let locals invest in US stocks. Nigerian investors may not always have faith in the companies listed on domestic stock exchanges, but some are seeking out well-known American brands like Tesla and Facebook.

US regulators are warning about a new type of crypto scheme. The SEC urged investors to “use caution” before buying digital tokens offered through online exchanges, which may be selling unregistered securities to US-based traders.