How Does Plaid Make Money? Business Model of Plaid


How Does Plaid Make Money

Plaid is a popular financial data aggregator and API provider that connects apps with banks. Companies use its API to allow their users to connect their bank accounts with other apps.

Plaid primarily makes money via subscription fees. The company also makes money from one-time fees and per-request fees.

Founded in 2013 by Zach Perret and William Hockey, Plaid was originally focused on financial management software. The developers were trying to create a solution for bookkeeping and budgeting. However, they found out that the finance industry had no suitable tools for connecting bank accounts with applications.

In January 2020, Visa announced its plans to buy Plaid at a value of $5.3 billion. But this plan fell to the wayside when the Department of Justice blocked the deal based on anti-monopoly principles.[1]

What is Plaid & How Does It Work?

Plaid is a fintech company that connects apps and services with a user’s bank account. It acts as an intermediary between apps like Coinbase and the user’s bank account. Plaid’s API provides third-party apps with the data they need to process transactions or validate a user’s identity.

By using Plaid, companies bypass the technological barrier faced while trying to integrate a banking system’s API into their software. Plaid acts as a custodian of all relevant information that apps need and provides data on a need-to-know basis for each app. Many popular online wallets and money transfer services like Venmo, Chime, Truebill, and YNAB use Plaid to connect with a user’s bank.

In addition to wallets and money transfer apps, Plaid also provides data to mobile banking apps such as Chime. It also supports fintech applications such as Albert and Copilot that provide users with financial health tools. Plaid is also used by several services for fraud prevention. They work by scanning a user’s bank login activity.

Loan apps rely on Plaid’s infrastructure to calculate a user’s credit score based on their transaction history. When a user inputs their bank login information within an app, it is transferred to Plaid. Plaid acts as the custodian of that data, sharing it with the application only when needed.

This way, applications don’t have to deal with the legal liability of storing the bank information themselves. Users don’t directly interact with Plaid as it works behind the scenes. And Plaid doesn’t cost anything extra to the customer.

Users pay the same amount as they normally would if the bank data was shared directly with an app. Instead, Plaid charges applications for using its API. In that sense, it is similar to a payment processor such as Visa or Mastercard.

Plaid is the most convenient way for apps to connect with a user’s bank and view their financial data. But it has also transformed into a necessity over time. Many startups and young fintech companies cannot operate without relying on the technological backbone of Plaid.

Each financial institution in the US has a unique API and data management system. The technological challenge of designing a platform that connects directly with thousands of banks would require too much time and money. Because something like this is not financially viable for most companies, they use Plaid’s existing infrastructure as a solution.

Plaid provides data to over 6,000 services and apps, by connecting them to over 12,000 financial institutions across the US. Plaid lets users control the type of data that is shared with an app. And it doesn’t share data without the user’s permission.

Apps cannot make financial transactions like withdrawals using the data provided by Plaid. Each app has an authorized set of permissions that it must abide by. Plaid also invests a lot of resources into making its cloud infrastructure as secure as possible.

The company hires independent security researchers and fintech experts to audit the API and its security systems. Plaid also uses multi-factor authentication and AES-256 data encryption to keep financial information safe from misuse. Plaid’s network has yet to be breached.

In the unlikely event that a hacker manages to breach the Plaid security layer, they will also have to bypass the bank’s security system. Banks have their own anti-fraud systems that act independently of Plaid. Because of the convenience and security offered by Plaid, it is used by a wide range of apps.

Plaid claims that one out of four US adults uses its services to connect apps with their financial accounts. For developers, Plaid provides a testing program through which they can get API access and test credentials for free. This helps businesses familiarize themselves with the technology used by Plaid.

Plaid also has a ‘Pay as you go’ plan that provides unlimited live items with no contractual minimums. Finally, there is a ‘Custom plan’ with discounts based on access volume. This plan is for larger companies and costs $500 a month.

It also includes additional features like account management and priority access to Beta technologies. Custom plan users also get premium support from the Plaid team and direct assistance with API integration. When a company feels like it needs access to better data, a plan upgrade can be requested.

Plaid segments its financial data into various categories. Authorization data contains account and routing numbers. It is used by banking apps such as Chime to complete instant online payments.

Then, there is Know Your Customer (KYC) data, which is used by any app that requires strict ID verification. This could be a loan app, crypto wallet, or investment app. KYC data is available globally to a multitude of applications. Plaid also provides businesses with data on a user’s income, assets, transactions, balance, liabilities, and identity.

Despite Plaid’s security, it has been accused of not being transparent enough about what data it shares with some of its clients. In 2021, Plaid settled a $58 million class action lawsuit over claims of privacy breaches. The plaintiffs stated that Plaid was giving away more data than needed without the consent of users. In addition to the monetary settlement, Plaid also agreed to change certain business practices in favor of more transparency.[2]

 

Business Model of Plaid

Plaid is a financial data aggregator and API provider that operates on a business-to-business model. It also has a freemium model through which it charges businesses a higher monthly fee in exchange for better services. Plaid acts as an intermediary between financial institutions and apps.

Through Plaid’s API, apps can gain access to a wide range of financial information about a user. This includes KYC data, bank login data, asset data, transaction data, and more. Plaid provides information on a need-to-know basis and requires users to provide their permission before data access is granted.

Plaid charges applications for access to its API. This is done through a freemium model where access to a test mode is free. The test mode gives developers an idea of how to best integrate the Plaid API and its data within their app.

Within the test program, Plaid allows developers to add up to 100 bank accounts and their relevant financial data. Each one of these accounts is referred to as an ‘item.’ By coordinating with businesses during this stage, Plaid reduces the work that has to be done once the business decides to become a paying customer.

Plaid provides an essential service to businesses that want to interact with an end user’s financial data. By giving these businesses access to its API, Plaid frees them from the responsibility of having to design their own standardized API. In exchange for a fee, companies get access to a huge database of financial information for millions of users across thousands of banks.

This data helps businesses tailor their strategies and advertisements to target specific demographics. Certain apps can even tweak their offers and discounts in real-time based on data provided by the Plaid API. For example, a used car marketplace like Shift can provide users with the best offers based on their financial history and bank balance.

Businesses that take advantage of Plaid’s API data enjoy higher turnover rates and increase customer satisfaction through targeted offers. Loan companies are able to lower risks and approval times with Plaid’s API. With Plaid, fintech companies such as Venmo give end users the ability to instantly transfer funds between accounts.

Plaid provides unique market insights and real-time financial information to businesses. Who then use this data to increase the quality and value of services that they provide to end users. This drives more users to the business, and the business scales up in size.

When a business scales up, they have the option of using Plaid’s ‘Scale’ plan. This is the company’s top plan and has a minimum fee of $500 per month. Businesses get integration assistance, which helps them create a smoother experience for their end user.

Plaid’s biggest rival is Stripe Connect, as they offer similar services. Stripe also integrates directly with banks and offers flexible pricing options to companies who want access to its API. Compared to Plaid, Stripe charges more for each instant bank account verification.

Stripe also has a custom plan for high-volume businesses that need to make a lot of API calls. But they aren’t transparent with their minimum pricing, which makes them less attractive to some smaller businesses.

Stripe is also reported to have better basic customer service compared to Plaid. However, this doesn’t take Plaid’s Premium Support into account.

There is no data on the financials of Plaid, as it is a private company. It is hard to speculate on Plaid’s operating costs.

Plaid is estimated to have an annual revenue of around $232.7 million per year, but it also has considerable expenses.[3] These include things like staffing costs, hosting costs, technology costs, and development costs.

Due to the lack of data on Plaid’s financials, it is unclear how profitable the company’s business model is.

How Does Plaid Make Money?

Plaid makes money from three different revenue streams. These include one-time fees, subscription fees, and per-request fees.

As Plaid is a private company, details about how much revenue they generate from these different revenue streams aren’t public.

One-Time Fees

Whenever an end user’s financial account is initialized with a company’s app, the company pays a one-time fee to Plaid for that account. These fees aren’t disclosed on Plaid’s website, and they are charged based on the number of people who use a service.

One-time fees are generally charged on things like bank account verifications, payroll income requests, and document verifications.

 

Subscription Fees

Plaid charges a flexible monthly fee to businesses who wish to access its API. There are two subscription plans- ‘Pay as you go,’ and their ‘Custom plan.’ The first one has no minimum spending limit and allows businesses to add an unlimited number of financial accounts.

The custom plan is targeted at high volume businesses that need to make lots of API calls on a regular basis. Plaid charges a minimum fee of $500 per month and offers volume discounts. With volume discounts, the per-use cost is lowered.

 

Per-Request Fees

Plaid has three kinds of per-request fees:

  • Flat Fees: Every time the application makes a request for certain functions, a flat fee is charged. This includes requests for recent transactions, audits, asset reports, and account balances.
  • Flexible Fees: Charged every time the application makes a request, but fees can vary depending on the amount of information requested. Asset reports with large datasets or extended transaction histories going back 61 days can incur additional fees on top of the basic flat fee.
  • Payment Fees: Whenever a user makes payments via the application, Plaid charges a one-time fee to the business. A payment fee request is initiated once the user reaches the end screen with a successful transaction message. This fee is charged even on transactions that are later reverted.

 

Plaid Funding, Valuation & Revenue

Plaid is currently a private company, and its financials aren’t available to the public. Right now, it is unclear what the company is valued at.

However, Plaid raised $734.3 million in funding over seven rounds between 2013 and 2021. Notable investors include Bedrock Capital, American Express Ventures, JP Morgan Chase, New Enterprise Associates, and Silver Lake.[4] The company’s latest funding round was a series D round in August 2021, which raised an undisclosed amount.

Plaid’s last disclosed valuation was $13.4 billion when it raised money through a series D funding round in 2021.[5] Since then, the company hasn’t had any more funding rounds. That indicates that it has sufficient capital to continue operations and growth.

Annual revenue for Plaid is estimated to be around $232.7 million.[6] But there is no official report to verify this. Given the recent upwards trend in global fintech app usage, it is possible that Plaid could be making more than this figure.

 

Is Plaid Profitable?

Plaid is likely profitable. However, the company raised $425 million in 2021 during a series D round that valued it at $13.4 billion.[7] They likely still have some of the funding from their last investment round available or they have become profitable on their own and won’t need to raise capital again. Time will tell.

Downloads of fintech apps increased 35% from 2020 to 2021.[8] That means that Plaid’s market has been growing, which could suggest that the company might also be growing.

Indeed, a report from 2021 claims that Plaid’s business grew by 60% year-over-year (YoY) between 2020 and 2021. According to estimates, the company had an annual revenue of $170 million in 2020.[9] Currently, Plaid’s annual revenue is estimated to be $232.7 million, which is a 36.8% increase compared to 2020.[10] However, as Plaid doesn’t release details about their expenses it’s unclear if those figures make the company profitable.

The only thing known is that the company hasn’t raised money since 2021. That could also indicate that Plaid has become profitable but cannot be confirmed.

 

Conclusion

So there you have it! We’ve covered all the ways that Plaid makes money, and we hope that you feel more informed about their business model. Whether you’re a potential investor or just curious, we think this is a great resource to learn more about how Plaid works and what they do.

It’s clear that this company has found a way to solve a real problem that people have been struggling with for years: how do we safely share our personal financial data with companies?

It’s a win-win situation. Companies can get access to more data, which they can use to provide better services and products to customers. Customers get better experiences because they have access to more information about their finances.

Thanks for reading! We hope you found this article helpful. If you did, please share it with friends and coworkers who might also find it interesting.

If you have any questions or comments about this article or would like us to write an article on something else, feel free to reach out to us.

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Sources

  1. Techcrunch
  2. Protocol
  3. Growjo
  4. Crunchbase
  5. Forbes
  6. Growjo
  7. Forbes
  8. Medium
  9. Forbes
  10. Growjo