Author’s Note: I am a huge fan of middleware companies. Datavant is a middleware company connecting health data; my last startup, LiveRamp (now NYSE:RAMP), is the largest marketing middleware company; and I am an investor in a number of middleware companies across industries. The Visa/Plaid combination is a great example of what makes the middleware space so compelling, which I’ll walk through below.
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Visa’s acquisition of payments company Plaid for $5.3 billion this week has cast a spotlight on an often-ignored part of tech: middleware. Though little understood, middleware companies make strong, defensible businesses, and can accelerate innovation across entire industries.
Plaid is a great middleware company. Wait, what is middleware again?
Middleware companies are connectivity companies. They build the interfaces, integrations and solutions that make it easy for different players in an industry to connect and collaborate around data. Middleware remains one of the least visible and least sexy classes of technology companies, but, as I noted after Salesforce’s acquisition of middleware company Mulesoft, middleware is entering a golden age.
For new financial technology companies, Plaid has built the underlying connectivity tools that make it easier for new entrants to “plug in” to the existing financial ecosystem, including exchanging transaction information with banks, credit card companies, and merchants. As Visa CEO Al Kelly noted in the conference call after the acquisition announcement, Visa aspires to be focused not only on payments, but “on the movement of funds for any purpose around the world.”
Life without Plaid would be slow (and full of friction)
Today, when a new fintech company like Venmo is founded, it can use the Plaid technology to avoid needing to build a direct technical integration with every bank in the country. To understand the value of middleware, it might be helpful to imagine a universe without Plaid where a new company is trying to launch its own financial application.
In the Plaid-less universe, that company would need to form individual relationships with and build technical connections to every bank, credit card company, and merchant where its customers would like to transact. The task is enough to keep many dozens of business development managers, lawyers, operations managers and engineers busy for years, which requires capital and time that is not available to most start-ups.
In that world, each new financial application would aspire to build its own proprietary version of Plaid. This is bad for everyone:
Despite these dynamics, this is how many industries have worked prior to the emergence of dominant middleware companies, from finance to education to healthcare.
Visa Has Always Been a Middleware Company. Plaid is just Visa 2.0.
Looked at from the right angle, Visa has always been a middleware company.
Unlike a bank, Visa does not actually extend credit to consumers. Instead, Visa acts as a middleman between the financial institutions that issue credit cards, the merchants who sell to consumers with credit cards, and the merchants’ banks. The key to Visa’s business model is that it has built a vast network of merchants and financial institutions, and it specializes in the payment mechanics (“plumbing”) necessary to enable those relationships. That includes things like authenticating borrowers, settling transactions, and facilitating the flow of funds.
It’s important to understand that not only would it be extremely expensive and redundant for each major bank to build its own payment network, but any given bank is also strategically ill-suited to do so. Whereas banks compete directly with the other banks that they would like to work with, credit card companies remain neutral, allowing them to work with everyone. No one bank would be able to obtain the ubiquity that Visa has obtained today.
Why Plaid is Dramatically Undervalued
$5.3 billion is almost certainly a hefty revenue multiple for Plaid. But the acquisition was well worth it for Visa, and if anything undervalues the power of Plaid’s network.
For many years, credit cards were the only real way to conduct a cashless transaction. Today, however, the market is shifting because of applications like Venmo, which allow customers to transfer funds directly from one account to another. New ways of transferring funds have also led to new payment networks springing up, which is where Plaid comes in.
According to the announcement, one-in-four people with a bank account have used Plaid (usually without knowing it) because Plaid is working with thousands of financial application developers and over 11,000 financial institutions. For a company founded in 2013, that is a massive network, and given Visa’s business, it makes complete sense for Visa to take it over.
The key thing to understand about middleware companies is that they are, in the truest sense, network effect businesses. Great technology is necessary, but not sufficient. Strong financials are necessary, but not sufficient. Middleware companies only work when they are ubiquitous among the relevant companies in an industry. Once a company obtains that position, it sets off a positive feedback loop where the company’s network makes its connectivity technology more and more valuable until it becomes table stakes for any new entrant that wants to work in the sector.
Visa built that flywheel for credit cards, and is up over 500% since its initial public offering in 2008. Plaid has now built its own flywheel for financial technology on a complementary network, and is well-positioned to follow a similar growth path.
Why Middleware Is Eating the World
While companies like Mulesoft and Plaid (and older companies like Visa) have proven the middleware model in various markets, more and more examples of large middleware companies are popping up – and I believe the next $100 billion enterprise technology company will likely be a middleware company.
For the last 40 years, one of the fundamental problems in enterprise technology has been the connectivity of data within an enterprise. Companies like Oracle and Salesforce emerged to satisfy that need. The next generation of problem is about the connectivity of data across enterprises: the core function of middleware, and an exponentially stickier, more defensible, and more valuable use case. The explosion of data across sectors and the explosion of point-solution SAAS applications has made cross-organizational data connectivity a huge challenge in every major part of the economy.
Thanks to Bob Borek for helping to draft this post.
AnalyticsIQ, a marketing data and analytics company, recently adopted Datavant’s state de-identification process to enhance the privacy of its SDOH datasets. By undergoing this privacy analysis prior to linking its data with other datasets, AnalyticsIQ has taken an extra step that could contribute to a more efficient Expert Determination (which is required when its data is linked with others in Datavant’s ecosystem).
AnalyticsIQ’s decision to adopt state de-identification standards underscores the importance of privacy in the data ecosystem. By addressing privacy challenges head-on, AnalyticsIQ and similar partners are poised to lead clinical research forward, providing datasets that are not only compliant with privacy requirements, but also ready for seamless integration into larger datasets.
"Stakeholders across the industry are seeking swift, secure access to high-quality, privacy-compliant SDOH data to drive efficiencies and improve patient outcomes,” says Christine Lee, head of health strategy and partnerships at AnalyticsIQ.
“By collaborating with Datavant to proactively perform state de-identification and Expert Determination on our consumer dataset, we help minimize potentially time-consuming steps upfront and enable partners to leverage actionable insights when they need them most. This approach underscores our commitment to supporting healthcare innovation while upholding the highest standards of privacy and compliance."
As the regulatory landscape continues to evolve, Datavant’s state de-identification product offers an innovative tool for privacy officers and data custodians alike. By addressing both state-specific and HIPAA requirements, companies can stay ahead of regulatory demands and build trust across data partners and end-users. For life sciences organizations, this can lead to faster, more reliable access to the datasets they need to drive research and innovation while supporting high privacy standards.
As life sciences companies increasingly rely on SDOH data to drive insights, the need for privacy-preserving solutions grows. Data ecosystems like Datavant’s, which link real-world datasets while safeguarding privacy, are critical to driving innovation in healthcare. By integrating state de-identified SDOH data, life sciences can gain a more comprehensive view of patient populations, uncover social factors that impact health outcomes, and ultimately guide clinical research that improves health.
Both payers and providers are increasingly utilizing SDOH data to enhance care delivery and improve health equity. By incorporating SDOH data into their strategies, both groups aim to deliver more personalized care, address disparities, and better understand the social factors affecting patient outcomes.
Payers increasingly leverage SDOH data to meet health equity requirements and enhance care delivery:
Payers’ consideration of SDOH underscores their commitment to improving health equity, delivering targeted care, and addressing disparities for vulnerable populations.
Capital District Physicians’ Health Plan (CDPHP) incorporated SDOH, partnering with Papa, to combat loneliness and isolation in older adults, families, and other vulnerable populations. CDPHP aimed to address:
By integrating SDOH data, CDPHP enhanced their services to deliver comprehensive care for its Medicare Advantage members.
Value-based care organizations face challenges in fully understanding their patient panels. SDOH data significantly assists providers to address these challenges and improve patient care. Here are some examples of how:
By leveraging SDOH data, providers gain a more comprehensive understanding of their patient population, leading to more targeted and personalized care interventions.
While accessing SDOH data offers significant advantages, challenges can arise from:
To overcome these challenges, providers must have robust data integration strategies, standardization efforts, and access to health data ecosystems to ensure comprehensive and timely access to SDOH data.
With Datavant, healthcare organizations are securely accessing SDOH data, and further enhancing the efficiency of their datasets through state de-identification capabilities - empowering stakeholders across the industry to make data-driven decisions that drive care forward.
Explore how Datavant can be your health data logistics partner.
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