Perspective on the Visa/Plaid deal
to think about during your next haircut.
The fintech ecosystem scored a huge win last week, when Visa acquired Plaid for a whopping $5.3 billion — reportedly 40 times their current revenue! The price may seem high at first glance… but if you’re a believer in API-driven business models and the rise of embedded financial services, Visa shelling out ≈1% of their market cap to “own the pipes” not only makes a ton of sense, it was actually a bargain.
My prediction: the Visa/Plaid deal will create a domino effect of legacy financial services players moving urgently to partner with, and invest in fintech infrastructure companies.
Matt Harris of Bain Capital Ventures enlightened us back in November, proclaiming fintech as The Fourth Platform — following behind the internet, cloud, and mobile. The concept is that fintech is evolving from a stand-alone business model into “an ingredient used in other technology businesses.”
To examine this more closely, let’s consider the growth of FreshCuts, a hypothetical SaaS startup that drives digital transformation for barbershops. FreshCuts builds websites, automates appointment scheduling, and handles SEO/marketing for its customers. The company sprints to $15M in Annual Recurring Revenue (ARR), boasting a highly repeatable sales process, and clear line of sight to $45M ARR in its core business.
With a massive and increasing Total Addressable Market (the average male gets a haircut once per month!), an 8:1 Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio, and a Net Promoter Score of 85, FreshCuts commands interest from every investor in Silicon Valley, and signs a term sheet for a $75 million Series B round. But what does a company that services barbershops do with $75M? Enter, The Fourth Platform.
FreshCuts turns its attention towards financial services. To execute on the expansion strategy, FreshCuts needs to integrate tools to transform its business into a comprehensive solution for barbershops, with bespoke financial products that serve the customer better than horizontal, legacy offerings.
Let’s take a closer look at FreshCuts’ three-pronged plan, as well as how it impacts their own business and one of their end-users, 803 Stylez.
(1) Obtain merchant financials using low-cost accounting and bookkeeping automation as a hook.
FreshCuts integrates Ocrolus, an infrastructure platform that analyzes financial documents with over 99% accuracy. The new functionality allows FreshCuts to ingest bank statements, IDs, and business formation records, creating a streamlined onboarding and Know Your Customer (KYC) verification process. Further, actionable data can now be retrieved from uploaded invoices and purchase orders; this lets FreshCuts automate all of the back-office accounting work for a barbershop. Lastly, by plugging-in Ocrolus, FreshCuts has built a foundation for loan products and merchant services, without the need for manual underwriting.
SHAMELESS PLUG: I am Co-founder and CEO of Ocrolus. Last month we announced a partnership with Plaid, enabling customers to ingest documents and digital data through a single API.
BEFORE: 803 Stylez retains an accountant for $100/hr, and pays $500/year for Quickbooks. Including the business owner’s time, back-office financial work costs the barbershop $3k/year.
AFTER: FreshCuts automates the process completely for $200/month — resulting in $2.4k in new ARR for FreshCuts, along with 20% savings for 803 Sytlez, and peace of mind for its owner.
(2) Push financial management tools and small business loans.
Next, FreshCuts incorporates Plaid. This gives barbershops the ability to aggregate all of their financials into one dashboard, and connect bank accounts for ongoing monitoring, notifications, and dynamic loan offers. Deploying Plaid alongside Ocrolus completes FreshCuts’ vision of building a vertically-focused lending product, providing customers with convenient access to capital.
BEFORE: 803 Stylez banks at PNC, and works with an independent broker who charges a 10% finders fee to obtain small business loans from Biz2Credit. The average loan amount is $20k with 15% interest, on a revolving 8-month term.
AFTER: FreshCuts allows the barbershop to access banking and lending data in the same view. The broker fees disappear, and the loan product offered is designed specifically for barbershops — same amount and term, with 12% interest. FreshCuts adds $3.6k in revenue; 803 Stylez saves $3k/year.
The expansion plan is working to a tee, and the FreshCuts management team saunters into their year-end Board meeting nearing $60M ARR, including $15M from the new accounting and lending initiatives. Investors around the table are nodding in agreement; it’s time to take things to the next level.
(3) Provide a turnkey payments solution.
FreshCuts builds point-of-sale software and sets out to become a specialized Payment Facilitator (PayFac). For the backend component of work, FreshCuts leverages Finix, which provides infrastructure that allows high-volume businesses to manage and monetize their payments. FreshCuts sends an iPad to every barbershop on its platform, undercutting both legacy point-of-sale processors and industry-agnostic PayFacs like Square. The free iPad, more favorable rates, and simplicity of handling payments through a consolidated system create an undeniable value proposition for the barbershop owner.
BEFORE: 803 Stylez uses a Verifone terminal and Worldpay as its acquiring processor, with fees of 2.9% per transaction. This was also setup by the independent broker, who rakes $500/year to act as a middleman for support issues, organizing inquiries between the barbershop, Verifone, and Worldpay.
AFTER: FreshCuts now has a B2B2C revenue stream, earning 0.4% of every card purchase made in participating barbershops. FreshCuts accomplishes this while reducing 803 Stylez’ fees to 2.65%, saving the barbershop 0.25% per transaction. Further, FreshCuts takes over all customer support, thereby eliminating the broker.
With Ocrolus, Plaid, and Finix enriching FreshCuts core systems, barbershops can access ALL of their financial needs through the same interface they already interact with on a daily basis.
“Now that my finances are on autopilot, I can focus on my art!”
FreshCuts has completed its transformation from a useful tool for barbershops with an efficient marketing engine, to a barbershop-focused financial institution with net retention numbers through the roof. The evolution is a textbook example of an increasingly popular business strategy: the zero-CAC cross-sell into financial services. FreshCuts quickly acquired customers to use its core product, then figured out how to leverage fintech infrastructure APIs to make its offering more robust, and dramatically boost each customer’s LTV.
Customers always want to make their lives easier. If an app that a customer likes and frequently uses starts to push financial products, the convenience is difficult to resist. This is why Apple, Uber, Facebook, and other big tech companies are moving so aggressively into fintech. They already have the customer’s attention — now they’re focused on cross-selling and upselling to drive revenue and increase stickiness.
Circling back to my prediction and Visa/Plaid: the transaction was not made because of Plaid’s near-term revenue potential, it was made because of Plaid’s fundamental rooting in the future of financial services. API providers like Ocrolus, Plaid, and Finix are collectively building the fintech infrastructure stack: a set of tools designed to modernize existing financial services and fuel new entrants, ranging from Amazon to FreshCuts.
So, as financial institutions prepare to play defense against big tech and new players, investing in plumbing systems should be top of mind. Maintaining customers and deploying horizontal products will be harder than ever as The Fourth Platform quickly becomes pervasive. But if you own the pipes and the data that flows through, you can power the competition.