Protocol | Fintech

The failed Visa merger was a lucky break for Plaid

Plaid COO Eric Sager says the deal's collapse won't derail the fintech startup.

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In some ways, Plaid stands to benefit after its big deal with Visa fell through.

Image: Jonas Leupe/Unsplash

Plaid spent most of 2020 preparing to be gobbled up by Visa. Heading into 2021, it's going it alone again — and with a potentially higher valuation and newfound freedom from a giant corporation, it might be better off.

If it had gone through, the merger with Visa would have combined a rising star of the fintech revolution with one of the old guards of the financial services industry. But Visa said last week that it was ditching the $5.3 billion deal to avoid a "protracted and complex" legal battle with the Justice Department, which had sued to block what it considered an anticompetitive merger.

"At the end of the day, it was a mutual decision," Plaid Chief Operating Officer Eric Sager told Protocol. "The DOJ lawsuit lengthens the timeline to the point where the deal just didn't make sense for either party. We just ultimately felt it was in the best interest of our customers and ecosystem of consumers for us to go our own way."

Waiting for the merger to close had put Plaid in limbo during a turbulent year. But the aborted union is seen by many as a lucky break for a startup considered one of the most important players in the fintech revolution: one which some analysts say is now poised for bigger things with Visa out of the picture.

"When Plaid chose to sell, it made sense at the time, but I see this as a blessing in disguise" Melody Brue, senior analyst with Moor Insights & Strategy, told Protocol. "Although $5.3 billion seems like a painful missed exit, it can raise additional capital now at a much higher valuation, which likely has increased even since the breakup news broke last week."

Founded in 2013, Plaid emerged as a key fintech player by providing the infrastructure that made it easier for financing institutions — including banks and startups such as Venmo, Current and Prosper — to help consumers connect their data to financial apps.

Sager said Plaid had seen the Visa acquisition, which was announced in January 2020, as a way to expand its reach: "It would have helped us potentially to accelerate some of our international efforts. It would have allowed us to collaborate on certain kinds of product initiatives, things that we can make easier than on behalf of the ecosystem, creating even better solutions for developers and consumers."

But the merger subsequently hit road bumps. Just weeks after it was announced, the pandemic hit, triggering a global economic crisis. Then in November, the Justice Department sued to block the deal, which it argued was an attempt by Visa to take out a rising competitor.

That led to the merger plan being scuttled last week. "It has been a full year since we first announced our intent to acquire Plaid, and protracted and complex litigation will likely take substantial time to fully resolve," Visa CEO Al Kelly said in a statement.

Plaid Chief Operating Officer Eric SagerPhoto: Plaid

Plaid's view of how useful the merger might have been has also changed. "A year later, with the way the world has changed, some of those things suddenly look a little bit less urgent than they did at the time," Sager said.

The Visa-Plaid deal is just one of many aborted mergers in the U.S. in recent months, many of them scrapped due to the pandemic, many of them hanging in the balance for months. Mark Batsiyan, partner at venture capital firm Inspired Capital, said the lack of clarity over the Visa merger over the past year was likely tough for the Plaid team.

"I imagine they probably didn't progress as much on their product roadmap as they would have liked because of the uncertainty of the deal," he told Protocol.

But Sager downplayed the impact of the merger process. "I don't know how much it delayed us," he said. "It's certainly true that anytime you have a deal like this, there's a certain percentage of the company, when it comes to legal teams for example, that obviously spent time on a deal of this magnitude."

Besides, Visa's plan had been to maintain Plaid as an independent company, he said: "I don't think it really slowed us down at all. We kept building all the things that we were otherwise going to build, because we had every intention of continuing to run the business independently post-close."

And there might even be an upside to some of the waiting around: Sager said the deal has given Plaid far more brand recognition.

"It brought a lot of attention to what we're doing," he said. "It's hard to judge whether it's Visa, but the mere fact that the visibility and awareness of what Plaid is doing has been raised obviously introduces a lot of folks into the equation when it comes to things like partnerships. Now when I go to prospective customers, everybody seems to know who Plaid is versus a year and a half ago when you really had to explain what we do [and] what we could offer."

In fact, Plaid recently unveiled a partnership with the payment processing services company Jack Henry & Associates. In March 2020, the startup also signed a deal with Microsoft to help users sync their financial accounts with Excel. And Plaid told Protocol that it's rolling out a new partnership with a major tech company next month.

Plaid CEO and co-founder Zach Perret said in a statement that the startup will continue to work with Visa "as an investor and partner so we can fully focus on building the infrastructure to support fintech."

Brue said scuttling the deal actually sets the stage for bigger opportunities for Plaid.

"Had Plaid consummated the relationship with Visa, it would have access to Visa's vast network of potential customers," she said. "Save for a liquidity event for investors and a nice payday for employees, that seems like the only upside at this point. As an independent company, it has the advantage of faster product decisions, better talent acquisition and a much higher valuation down the road."

Batsiyan echoed this view, saying Plaid could see even faster growth given the way the pandemic accelerated the rise of fintech.

"Fintech adoption has just gone through the roof since COVID happened," he said. "They're a nimble startup and they'll figure it out. They're well-positioned to capture a lot more value as an independent company given some of the changes that have happened."

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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