Increased Antitrust Scrutiny – a win or a loss for the startup world?

We have become accustomed to a world in which there are a few enormous players that end up acquiring a number of the rising stars in their segment, increasing their hold on the market and worsening the resulting prices and end products for consumers. Regulators have looked back on some of their previous decision-making and admitted some myopia. As a result the tide might be changing. In the US, Amy Klobuchar, (due to be chair of the Senate Judiciary Antitrust Subcommittee) has already proposed legislation to examine anticompetitive conduct within M&A while looking at ways of reforming enforcement. The best examples of where it has clearly gone wrong are Facebook’s unchallenged acquisitions of both Whatsapp and Instagram as well as Google and Amazon acquiring nascent competitors. Indeed, these companies and their massive influence was a critical point of discussion during the last Presidential election in the US and has clearly contributed to the increased scrutiny from the regulators.

In recent months, competition regulators (particularly in the US) have made decisions with some potentially far-reaching implications with regard to venture funding for startups. There are two instances I am referring to in particular: the first was the US Department of Justice’s (DoJ) decision to block Visa’s acquisition of Plaid on antitrust grounds; and the second was P&G’s failed acquisition of Billie. In both of these cases, the acquisition was blocked on the basis that an acquisition would essentially remove a competitive threat. While I believe in some ways for both Plaid and Billie, that this outcome may have indeed been in their best interest, and the best interest of market competition and the end customers, there is reason to believe this could deter investors in the longer term. 

Given the nature of venture capital investing, exit opportunities are a primary consideration in making a new investment. If these opportunities are reduced, or large companies are tempted to make acquisitions earlier, reducing overall returns, this may also reduce the attractiveness of the investment. Some startups also eventually rely on the more extensive distribution channels of existing players to continue to scale effectively, so this path to growth might be extinguished. On the other hand, with the rising popularity of the SPAC route to public listing and the increased flexibility of the direct listing, the result that I am hopeful for is that more companies will seek growth independently of being acquired and opt for public listings, and perhaps earlier than we have seen in recent years, giving public market investors more supply to match their voracious demand. 

In order to visualise possible outcomes, take Visa’s blocked acquisition of Plaid in the first instance. I feel strongly that the DoJ’s decision to block the acquisition was not only a huge affirmation for open banking but for fintech and competition more broadly. Some have observed that other open banking players may benefit from this outcome, as they might be sought out for an acquisition by Visa instead. However, the implications go a lot further than this and represent a fantastic example of the increasing scrutiny by regulators on these kinds of acquisitions. 

First, why did the DoJ come to this conclusion and what are the implications of this decision? The US attorneys for the DoJ claimed the deal would extend a Visa “monopoly” on debit transactions and neutralise a threat to their business. As Plaid currently stands, it is a San Francisco-based technology firm that uses APIs to connect consumer bank accounts to other apps (e.g. Venmo and Robinhood). Plaid has created an immensely valuable network having linked to more than 11,000 US banks which is all the more impressive given how the US lacks Europe’s developing Open Banking / API infrastructure. The rails being built by companies like Plaid in the US and others within the UK ecosystem may one day present a world in which we don’t need to use cards and can simply use bank-to-bank payments. This could not only compete with Visa and Mastercard, but actually present a better alternative to either of them. It could inspire other startups in the fintech ecosystem to increase their ambition and go for true scale – rather than aiming to be acquired after 5-10 years – and lead to a complete overhaul of the financial services industry as we know it.

Before looking at the outcomes in more detail, it is important to analyse a crucial part of the story – that is comparing the US vs. UK. Interestingly, but not surprisingly to those familiar with the open banking universe, the Visa – Plaid acquisition was given the go-ahead by the Competition and Markets Authority in the UK back in August 2020, in spite of them having launched an antitrust probe into the transaction process on a similar basis to the DoJ. The divergent conclusion here was down to the critical difference between the UK and US market, rather than differing levels of scrutiny by the UK and US regulators; and also explains why Plaid represents a much more significant threat to Visa currently in the US than in the UK. Without the Open Banking API infrastructure mandated in the UK by the regulators back in 2016, the US market is overwhelmingly fragmented; and to reiterate the point made previously, Plaid has created an entirely new ecosystem making themselves the middleman to more than 11,000 US banks – an extraordinary accomplishment. One of very few other entities in the US that has created a network as comprehensive as this is Visa and they clearly spotted that in the future, Plaid would be able to use this network in order to directly compete with them. Conversely, in Europe, a number of other Payment Initiation Service Providers have emerged to compete with Plaid’s European offering (e.g. Token, Yapily, True Layer, Tink and more). This was why the CMA determined that in the UK, even if Visa acquired Plaid, there would be enough competition coming from elsewhere to keep the landscape suitably competitive. 

A clear potential outcome therefore in the UK is that while Plaid is off limits for Visa in the US, the European open banking Payment Initiation Service Providers might not be, opening up those companies to a potential approach from Visa. After all, Sifted already reported Tink having held deal talks with Mastercard, Visa’s main rival; and Mastercard has in fact recently partnered with Token, an Octopus Ventures portfolio company, to power the connectivity layer of its open banking hub. Another potential outcome is these fintech startups (many of which have dreamt of the Visas of the world eventually presenting them with the “best-case-scenario” of swallowing them up and playing a part in continuing to expand their ~$440bn market cap) now realising that they should be seeking a better outcome for themselves. Plaid could be a Visa, not just part of Visa. And if they can do it, why not other fintechs too? I expect this outcome to drive fintechs towards the IPO market, following in the footsteps of Pensionbee and Marqeta, fulfilling public market investor desires to access more fintech, following years of private funding rounds extending later and larger than ever before. 

And how does this translate more broadly across the startup ecosystem? In my view we should see this as a positive move and not one that will change venture capital appetite for investment. Time will tell but I believe we will see a significant change in the market landscape as we know it, with a larger number of smaller players in a more competitive and fragmented market, across different industries, perhaps just as the regulators intended it!

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