Banking applications don't usually create a buzz at "hackathon" events. But two consultants in their early 20s were running out of options.
It was five years ago, and the pair had just quit their steady jobs at the consulting firm Bain & Co. They had an idea to build technology that linked banks and consumers through apps, but the 70 investors they had already pitched weren't buying it. So, they decided to prove their concept would work.
William Hockey and Zach Perret spent two adrenaline and caffeine-fueled days at the 2013 TechCrunch Disrupt hackathon in Manhattan, sleeping in sporadic hour-long shifts, building an app that showed users their debit and credit card transactions on a map. The duo, plus a friend who helped out for free, ended up winning the competition and the attention of investors.
"At these hackathons, it's usually, 'Here's my new social app, or here's my new dating app for my college sorority.' Nobody had ever built a financial application," said Hockey, co-founder of the winning app, called Rambler, as well as the fintech start-up Plaid. "No one believed in our product — we figured, let's just go build something on our own technology."
Rambler is long gone but its underlying technology has since become a household name among fintech developers. That technology, Plaid's APIs, has attracted investments from the venture arms of Goldman Sachs, Citi and American Express, and some say, has helped accelerate the growth of the payment sector over the past five years.
Despite popularity with coders, the average person interacting with Plaid most likely wouldn't recognize the company. It quietly powers everything from the popular peer-to-peer payment app Venmo to the mobile investing apps Robinhood and Acorns to cryptocurrency exchanges Coinbase and Gemini.
Plaid says it integrates with more than 10,000 banks, and connects to roughly 20 million consumer accounts. While it does not give specific numbers or a full list of companies, Plaid said its customer base doubled from 2017 to 2018.
"Plaid has quietly created a very big infrastructure without the consumer knowing that they're powering it," said Christopher Dawe, co-head of private investment at Goldman Sachs Investment Partners.
Dawe, who led Goldman's 2016 Series B investment in Plaid, said the company's low-key, behind-the-scenes operating culture mirrors that of its founders.
"I actually think that approach is thematic of their leadership style," Dawe said.
Hockey and Perret met in Atlanta as associates at Bain and immediately bonded over a of love rock climbing and coding. They worked as consultants for less than a year before deciding, as 29-year-old Hockey put it, they preferred "pushing code to pushing power points." Their original ambition was to create a consumer finance app, but certain roadblocks they hit became a new inspiration altogether.
"We started to realize we were struggling so much of the time because we couldn't connect anything to financial services," Hockey, now Plaid's chief technology officer, said in an interview at the company's San Francisco office. "The fundamental building blocks that make it really easy to build an application, we just couldn't find."
The founders left Atlanta and headed to New York. They crashed on friends' couches and spent the better part of 18 months working on the new idea. The recent college graduates had been coding for years. Hockey started when he was 12, fixing neighbors' computers in California as a hobby, and Perret, now 31, picked it up in his late teens. The two built an original prototype for Plaid and raised enough money to move forward and "build, heads down," for 20 hours at a time.
The TechCrunch hackathon was the first time a team had built a full-scale financial services application live, in less than 24 hours, they said. After they won, "a lot of people started paying attention," including venture capitalists. They moved the company to San Francisco in order to expand and find engineering talent. Plaid now employs nearly 200 people, many of whom get together on Thursdays to go rock climbing. And in the case someone gets stuck in the office, there's a climbing wall there, too.
As they were building out the tech, a friend who happened to be the head of engineering at PayPal-owned Venmo showed interest. He was looking for a better way to link Venmo's peer-to-peer payment app to bank accounts, and asked Hockey and Perret to test what they had been working on. They didn't jump at the opportunity.
"He kind of lobbied us for a couple months and finally we were like 'alright sure'," said Perret, who is now Plaid's CEO. "It was a great proof-point to see tons of people using Plaid at scale inside of Venmo, which then helped launch us into a lot of other applications."
Venmo and other applications rely on Plaid's protocol known as application programming interface, or API. The acronym is not unique to the banking sector but Plaid's version does a lot of the heavy lifting on the back end that could otherwise take days. Without a third party like Plaid, start-ups would have to hire their own engineers and create their own ways to sync with banks.
A company spokeswoman likened the problem to traveling abroad with a hair dryer. When you try to plug a U.S. appliance into a foreign outlet, the volts and the physical shape of the plug won't line up. If you jam the plug in, the dryer will spark, overheat, or just not work. Plaid, in this case acts as the adapter, enabling the outlet (the bank in this metaphor) to connect with the hair dryer (Venmo, to use an example) and work.
That's a simple description for what they do — Plaid also adds analysis on top of the bank account so app users are able to do things like budgeting or expense management. It can authenticate bank accounts for direct payroll deposits and electronic bill payments, verify someone's identity, verify someone's balance in real time and understand income and employment.
It is otherwise difficult to link to a bank account. Without a quick way to verify account ownership, for example, the other solution is the much slower trial deposit method. It's easy to forget the slow pain of depositing 4 cents at a time in an account and waiting for a customer to confirm the deposit details.
Plaid gained legitimacy by getting early adoption by companies like Robinhood, which notched a $5.6 billion valuation in its latest funding this spring. It has also benefited from a domino effect and word of mouth, the founders said. When companies do sign up, it's often during their early years — at the same point when managers are deciding whether to build off of Amazon Web Services or Microsoft's Azure for cloud computing.
"Not every platform is going to take off the way that Venmo and some of these other household names have in the fintech space," said Goldman's Dawe. "But for those that do, you get this portfolio effect of companies finding Plaid without having to market to them."
U.S. cryptocurrency start-up Coinbase, now valued at a reported $8 billion, is one customer that found Plaid through word of mouth after using a competing API. Its product is innately more complicated than most others in fintech. Instead of moving dollars to dollars, Coinbase takes money from a bank account and moves it in and out of irreversible and volatile payment methods like bitcoin.
Coinbase uses Plaid to link those accounts and to flag fraud on its trading platform.
"If you have a scammer trying to buy a $100,000 in crypto, and the bank account itself isn't funded to that level, the ability to check that in real time is really, really valuable," said Dan Romero, vice president and general manager of Coinbase Consumer. "We have moved billions of dollars through the U.S. banking system through Plaid."
Romero said Hockey and Perret have a way of under-promising and over delivering, a rare trait in competitive start-up culture. While Plaid is not a household name among consumers, Romero said it's extremely well known among developers, and that name recognition has helped Coinbase add to its own "legitimacy."
"They're built for engineers in particular," said Derrick Fung, CEO of another Plaid customer called Drop. "All the transaction data that's fed to us — they clean it up so it's displayed in a way that's recognizable."
Chris Britt, CEO of Chime, also uses Plaid. The banking app start-up's direct deposit function would be impossible without Plaid's technology. Because applications pay based on the number of users and how actively those users are engaging with their product, Plaid has been able to grow along with the portfolio of companies it works with.
"They really ride the wave of all of this explosive growth of fintech," said Britt.
That growth has been fueled by a steady wave of venture funding. The total deal value of venture capital money going to fintech companies in 2018 has reached $7.5 billion, according to data from Pitchbook, up from $6.9 billion last year.
Banks certainly don't want to miss out on that wave. Dawe met first met Plaid executives in Los Angeles ahead of the Series B funding. Plaid raised $44 million in its last round from Citi Ventures, American Express Ventures, New Enterprise Associates and Goldman Sachs Investment Partners in June 2016, putting its valuation at $225 million, according to Pitchbook. Other investors include Google Ventures and Spark Capital.
The Goldman team said they saw value in the founders, the sector itself and some of the evolutionary forces behind its growth. Plaid is generating revenue according to Pitchbook, although it declined to say how much. And it has developed a competitive advantage — or moat — despite other venture-backed companies in the sector. Yodlee, which has raised $660 million, is its main competitor, according to Pitchbook.
"It was about the data network effects, and what we thought was a sustainable moat or advantage compared to other companies in the space," Dawe said. "Our belief is that Plaid becomes part of the connective tissue where developers rely on their tech in order to understand the user behavior of the customer."
The technology eases certain technical burdens for start-ups, and has helped the sector take off in recent years, according to Gartner's Chief of Research Rajesh Kandaswamy.
"Even if they don't have capital, doing things quickly is important for a developer. For many fintech companies who don't the dollars yet, Plaid became an option," Kandaswamy said. "It has enabled companies to grow, and brings down the capital costs — including time and effort."
Kandaswamy said technologies like API are much more important for banking than for other industries. But while banks have become more comfortable layering with fintech companies, there is a chance they could eventually get rid of the need for a middleman.
The U.K. is on the forefront of "open banking," and EU law now requires companies to release their data in a secure and standardized form, so that it can be shared more seamlessly between organizations online.
"Regulatory changes in some regions are accelerating open banking and resetting the rules of competition," Gartner said in a recent note to clients.
Still, Plaid is much more bullish on cooperating with banks than disrupting them. While they acknowledge risks, they said they're looking to expand current offerings and see long-term opportunity as a middle man.
"The banks themselves are winning," Perret said. "We think of it as this virtuous cycle where we're enabling more speed and efficiency, creating more net innovation, and ultimately giving people greater value in the financial system."