DEEP DIVE with Plaid: Fintech's Super-Connector
DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech company, discussing its history, products, culture, and how it has grown to be a leader in the industry.
In the 10 years since the Financial Crisis of 2008, financial technology (FinTech) companies have abundantly emerged — either as small start-ups disrupting traditional banks, or as firms collaborating with large institutions. The furious pace of innovation and the everyday consumer’s growing comfort with online and mobile usage, created a landscape in which customers are willing and able to have financial services delivered simply — anywhere and anytime.
However, a frictionless bridge was missing when a client signed up, specifically between the FinTech application and access to a customer’s banking data. There was no standard infrastructure that allowed a customer to securely authorize viewing of bank account information in real-time — until the launch of Plaid, a fintech that has become the industry’s “super-connector” by creating a secure portal and process to exchange financial information back and forth between customer, applications, and banks.
What Started It All
Back in 2013 at the TechCrunch Disrupt hackathon in Manhattan, two former consulting colleagues (William Hockey and Zach Perret) worked for 2 straight days on an app (Rambler) that mapped out consumer banking activity. Hockey and Perret’s previous idea of creating a consumer finance app had run into obstacles as they realized the difficulty in connecting financial services.
Rambler went on to win the competition and its technology would be the starting block behind Plaid’s popular APIs (application programming interface), an industry-favorite among fintech developers. The competition’s success helped gained exposure to venture capitalists, which prompted a move from New York to San Francisco in search of more engineers to ramp up growth.
Network Effects
An engineering colleague that had worked for Venmo was looking for a better solution to improve connections between the growing peer-to-peer payment application and external bank accounts. He had come to Hockey and Perret asking about testing Plaid’s API in Venmo; the trial was a great success and showed how quickly their product could scale and provide value to users and other apps. The news quickly spread out to other firms who found Plaid as a cost-effective, outsourced solution in avoiding the expense of an in-house engineering department for this specific need.
Young startups ended up creating an organic community network with their early and ongoing adoption, resulting in Plaid becoming THE industry infrastructure in fintech. Robinhood, Acorns, LendingClub, and Coinbase are some of the applications that used Plaid from their own beginning; the high-growth and success of these (now) well-known fintechs has led to further organic growth as more developing companies (over 1,800 apps) are leveraging its products to help provide financial data in real-time for large volumes of daily transactions.
Banks have also formed part of Plaid’s customer base as multiple national institutions, regional banks, and credit unions (over 9,600) now adopt the platform to grow their market share and service delivery in the online and digital marketplace.
Companies of all sizes are truly able to take advantage of the value that Plaid provides from a seamless user experience to secure and protected transfers of sensitive data.
How It All Works
A user downloads a 3rd party app and proceeds through the various onboarding screens, including entry of bank login information. Plaid’s widget (snippet of code) gets those credentials and packs it securely to be sent online to the bank for verification (of user identity or account balance). The bank then relays to Plaid the results of the verification, and Plaid informs the app in order to complete (or exit) the onboarding process.
If the other application needs to to updated on a recurring basis, Plaid will tokenize the user’s login information to keep the connection active. Banks are easily able to verify account information for direct deposit, and applications can quickly ensure proper fraud detection with real-time identity verification of new customers. Beyond powering this connection, Plaid is also able to provide analytics for budgeting and expenses by reviewing transaction activity.
The alternative method for connecting banks and applications involves a customer manually typing in their bank account information correctly (routing and account numbers), receiving a small trial deposit (i.e. $0.01 - $0.05) from the company, verifying the nominal deposit amount on the company’s app, and then having that amount debited. This process can take up to 5 business days from start to finish, which negatively impacts customer acquisition for applications relying on a convenient user experience. This lengthy delay would stifle growth of apps as prospective clients would look to other efficient options.
A Company Culture of Opportunity
Even though Plaid’s reputation is well-known in the developer community and the company may have an estimated valuation over $1 billion, it’s not a recognized brand with everyday consumers. The company still continues to perform well with this level of awareness, being able to grow incrementally in staffing each year (currently over 150 employees) yet doubling product usage and engagement from 2017 to 2018.
Despite this spectacular growth and success, Plaid and its founders remain focused on “democratizing financial services through technology” — creating a significant future impact in global issues such as financial wellness. They openly welcome new teammates with diverse backgrounds to join them on their mission of open access to financial data.
Traditional financial banking models relied on mostly physical branches and banks, and maintaining customer data in-house. This model then transformed to online and mobile banking in the last 10 - 20 years, and gave clients some visible access to their financial history. The emerging model today is that of transparency and partnership with 3rd party applications (on behalf of a customer request) that focus on helping clients achieve specific financial goals such as retirement, home ownership, or debt reduction.
Industry Trends and Outlook
As Plaid continues to influence and increases its industry presence in the world of fintech, there are critical themes that company will need to manage or work through:
Enhancing user experience while balancing security is an ongoing debate across the industry, especially as customers continue to ask for more convenience without sacrificing data protection;
Privacy continues to be a hot topic in light of the continuous trend of high-profile data breaches, and increasing pressure from government regulators in giving customers the right to view their personal data and decide how it gets shared;
Integration with outside applications can be “spotty” at times or be completely blocked due to systems from partner companies and institutions, not only impacting data quality but also Plaid’s reputation and relationships in the industry.
Overall, the team at Plaid continues to build towards their vision of financial innovation creating a path towards financial wellness. With an enduring belief that every company is inherently a FinTech at their core, Plaid aims to continue supporting consumers, developers, and institutional communities with its products and services.