FIN­TECH’S HAPPY PLUMBERS

Plaid is ap­proach­ing a bil­lion­dol­lar val­u­a­tion by build­ing the pipes that con­nect your apps to your check­ing ac­count. Will the big banks try to snuff it?

Forbes - - CONTENTS - BY ALEX KONRAD

Plaid is ap­proach­ing a bil­lion-dol­lar val­u­a­tion by build­ing the pipes that con­nect apps to check­ing ac­counts. Will the big banks try to snuff it?

In San Fran­cisco, a city known for its startup office perks, Plaid’s sig­na­ture amenity re­quires a safety waiver. Zach Per­ret and Wil­liam Hockey, Plaid’s founders, love rock climb­ing, so on the sec­ond floor of their office, em­ploy­ees tackle a ver­ti­cal tread­mill that of­fers end­less hand­holds and footholds, much to the cha­grin of their gen­eral coun­sel.

Climb­ing isn’t just an office perk—it’s part of com­pany lore. On one of their first out­ings to­gether, Per­ret dropped his co­founder 15 feet. They laugh about it now: Six years after the com­pany’s found­ing in 2012, Plaid is ex­plod­ing in lock­step with the fin­tech sec­tor it helps power. Its soft­ware acts as a kind of plumb­ing, con­nect­ing apps to each new user’s bank

to quickly con­firm an ac­count holder, without any penny de­posits or pa­per­work. If on­line fi­nan­cial plan­ning, stock pick­ing and Bitcoin trad­ing are in gold rush mode, Per­ret and Hockey have the sure­fire busi­ness: the shov­els and pans.

Look under the hood at star­tups like Acorns, Bet­ter­ment, Coin­base and Clar­ity Money, and you’ll find Plaid hum­ming away. De­vel­op­ers love Plaid’s fast tech; founders and their in­vestors like sav­ing money by not hav­ing to build their own con­nec­tions. “We built this for our­selves,” Hockey says, “solv­ing prob­lems that were in­cred­i­bly hard to do.”

Plaid hooks into around 10,000 banks. It’s in­ter­nal for­tunes have im­proved, with $59 mil­lion in fund­ing from in­vestors such as Spark Cap­i­tal, NEA and the ven­ture arms of Citi and Amer­i­can Ex­press. In 2016, its $44 mil­lion Gold­man-led Se­ries B val­ued the com­pany at $250 mil­lion. To­day, with sales quadru­pled, the com­pany has re­cently re­ceived fund­ing in­ter­est valu­ing the com­pany at $1 bil­lion, ac­cord­ing to a source with knowl­edge of its fi­nances. Per­ret and Hockey em­ploy 130 peo­ple out of a spa­cious two-story office in the South of Mar­ket area of San Fran­cisco.

Hockey, 28, sees Plaid as a core build­ing block for star­tups: “We talk to peo­ple be­fore they raise money, some­times when it’s just two peo­ple in a room.” Adds Per­ret, 30: “Our mis­sion isn’t [sim­ply] fi­nan­cial ser­vices in­no­va­tion. It’s to en­able in­no­va­tion any­where by de­liv­er­ing ac­cess to the fi­nan­cial ser­vices sys­tem.”

The pair met as young con­sul­tants at Bain’s At­lanta office: Hockey, a Cal­i­for­nia na­tive, was straight out of Emory; Per­ret, a Duke grad, was a year ahead of him. Their bond ce­mented by that climb­ing mishap, Per­ret and Hockey shared a love for cod­ing and be­gan work­ing on projects in their spare time. Un­happy with the lack of trans­parency in the bills they were pay­ing, they tried to cook up a fi­nan­cial plan­ning tool. It floun­dered, but in the process they solved the tech­ni­cal chal­lenge of con­nect­ing their app to their bank ac­counts.

Though Yodlee gained trac­tion more than a decade ago as an ag­gre­ga­tor of fi­nan­i­cal data, many busi­nesses still de­pended on one-penny mi­cro-trans­ac­tions to ver­ify cus­tomer bank ac­counts. Oth­ers up­loaded PDFs of pa­per state­ments and typed in the data man­u­ally. Per­ret and Hockey sought to cre­ate an ap­pli­ca­tion pro­gram­ming in­ter­face, or API, to per­form the same func­tion with only a bank cus­tomer’s on­line user name and pass­word.

Set­ting up shop in New York in the spring of 2012, with Per­ret as CEO and Hockey as CTO, the pair scored a stroke of luck. Venmo’s en­gi­neer­ing chief was in the process of cut­ting the cost of a peer-to-peer money trans­fer for mak­ing pay­ments. The so­lu­tion was set­tling trans­ac­tions in big batches; while Venmo cus­tomers would trans­act in­stantly, the ac­tual pay­ment was de­layed a day. Plaid helped remove the risk: Venmo would know in real time that the sender had a suf­fi­cient bank bal­ance.

Venmo’s val­i­da­tion helped the startup take off among other fin­tech cus­tomers that were look­ing to em­u­late Venmo’s suc­cess. Some now-well­known apps would sign up months be­fore they be­came house­hold names. “We’d think, That idea’s kind of weird. And then they’d get crazy scale,” Hockey says.

After mov­ing to San Fran­cisco that fall in search of more en­gi­neers, Plaid sought out Sil­i­con Valley’s ven­ture cap­i­tal­ists with high hopes. The startup had cus­tomers, a work­ing prod­uct and rev­enue. It also had two first-time founders who still strug­gle to ex­plain what they do in non-nerd English. “We got re­jected 50 times,” Hockey says. “You think it was only 50?” Per­ret in­ter­rupts.

Plaid sur­vived on a shoe­string bud­get. Hockey lived on a friend’s couch. Per­ret moved in with a new girl­friend. Friends would take them to din­ner. Fi­nally, Spark Cap­i­tal led a $2.9 mil­lion seed round in July 2013, and money has flowed ever since. (Hockey and Per­ret also hit Forbes’ 30 Under 30 list in 2015.) “They were re­ally young, but they ran a tight ship,” says Spark co­founder Santo Politi.

To­day Plaid’s reach ex­tends across tens of mil­lions of end users and thou­sands of apps, which ac­count for hun­dreds of bil­lions in spend­ing and fi­nan­cial plan­ning. The com­pany’s rev­enue was $40 mil­lion last year, ac­cord­ing to Forbes’ es­ti­mate, and its cash-flow is close to breakeven. But in a soft­ware in­dus­try that li­on­izes “the three nines,” or ser­vices that run prop­erly 99.9% of the time, Plaid is an un­usual suc­cess: It doesn’t al­ways work. Plaid’s own pub­lic sta­tus page re­veals con­nec­tions to banks with up­time of 98% or even 95%—mean­ing that 5 out of every 100 au­then­ti­ca­tions with that bank will fail in that mo­ment, a rate that would be un­ac­cept­able were it not for the dif­fi­cul­ties im­posed by the banks. App mak­ers who in­te­grate with ser­vices like Ama­zon and Google ex­pect their apps to work with a con­sis­tency im­pos­si­ble for a ser­vice like Plaid to even ap­proach, says War­ren Hog­a­rth, who uses Plaid at his money man­ager startup, Em­power. The prob­lem, he says, is that Plaid re­mains at the mercy of the banks, which don’t feel any ur­gency to share their cus­tomers’ data with apps that aren’t help­ing their bot­tom line. “It’s a tricky place to be,” he says.

Should the banks ever band to­gether to of­fer their own joint APIs, they could un­der­cut much of Plaid’s busi­ness. Com­pe­ti­tion is also heat­ing up, from new star­tups and from holdovers such as Yodlee and Finic­ity, which also of­fer so­lu­tions for con­nect­ing to banks by API. One ven­ture cap­i­tal­ist who has stud­ied fin­tech warns that with many bank ac­counts con­cen­trated with a few lead­ing banks, it could be hard for Plaid to main­tain pric­ing if cus­tomers fo­cus more on cost. “None of these com­pa­nies us­ing Plaid are cost op­ti­miz­ing yet,” he says. “What hap­pens when they’re not fo­cused on adding tons of new cus­tomers?”

Plaid’s founders know that they need to ex­pand the uses of Plaid if they want to be a com­pany much larger than their pre­de­ces­sors, some of which ended up ag­gre­gat­ing data and bundling it to third parties. (Plaid says it will never sell its users’ data.) Per­ret says the big op­por­tu­nity is to ex­pand how bank ac­counts are used to­day. Plaid could help apps in hos­pi­tal­ity, travel and shop­ping un­der­stand their users’ spend­ing to make them bet­ter of­fers. The com­pany is al­ready ex­per­i­ment­ing with this ap­proach with mort­gages. And com­pa­nies like Airbnb and Uber could move away from credit card trans­ac­tions to pass along lower fees to their cus­tomers. “Every com­pany is be­com­ing a tech com­pany,” Hockey says. “And we have this the­sis that every com­pany needs to be a fi­nan­cial ser­vices com­pany, too.”

FI­NAL THOUGHT “When money re­al­izes it is in good hands, it wants to stay and mul­ti­ply in those hands.” —IDOWU KOYENIKAN

per­ret and hockey: plaid helps apps save money on bank trans­ac­tion costs, but faces some tough com­pe­ti­tion.

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