Plaid Kickstarts Open Banking in the US

2020 has been a peculiar year so far for FinTech. What started as a fast-paced time of deals (acquisitions, IPO, partnerships, etc.) has been derailed by the pandemic. Startups are struggling to raise funds, and growth stage companies are downsizing operations to conserve cash on hand. The industry has shifted from an expansion mindset to a conservative one. At times like these, true industry leaders step out into the spotlight and continue to make bold moves.

Plaid, the San Francisco-based FinTech unicorn that connects 1 in 4 consumer financial apps with banks, has made its latest move of industry-wide implications. Coming off the acquisition announcement from Visa in January, Plaid is now launching a new program called Plaid Exchange (PX). The company in now turning its focus to help financial institutions get connected in a way that gives banks more oversight and controls for security.

The financial services industry as a whole eagerly awaits if this move will be the catalyst for the Open Banking movement in the US.

Connecting FinTech with Banks

Since its was founded in 2012, Plaid has helped the world connect their banks with top apps like Venmo, Coinbase, Betterment, Chime, and Robinhood — through a proprietary API that connects over 10K financial institutions. Customers are able to establish a link with their bank account in order to transfer funds easily through the non-bank app. As the industry continued to expand, more FinTech apps were created for users to connect with their banks, which increased the demand for account links and data aggregation from Plaid.

For some institutions, Plaid has had to rely on screen scraping, in which a banking webpage is scanned through a web browser. If there’s an update to the page, then the aggregation of data fails. Since established banks are often built on legacy infrastructure and systems, consistent connections may not be possible. There are also some banks that refuse to allow 3rd-party aggregators to create links on a users behalf due to unknown security protocols and controls.

Banks that now choose to work with Plaid to build their own API would have a modern token-based system for clients. Similar to today’s social networks, customers can see if they connected their bank account with a 3rd-party service and disable the link.

Financial institutions can also utilize Plaid Exchange to build their own new services that connect directly with primary bank accounts through the API. Companies can easily review the status of connections to identify issues within the infrastructure.

Despite widespread usage and popularity over the last 9 years, the current model of data sharing in the US is still broken. With Plaid Exchange, banks are in control and can direct traffic from the start with an “all-in-one API solution.”

Plaid works both sides with Plaid Exchange

Plaid’s vision continues to focus on accelerating API-based access across the financial services industry. The Plaid Exchange integration allows for this through the ability to update transaction data as it becomes available (instead of waiting for refresh requests from users), add-on security and network notifications, and roadmaps to deeper products. Most importantly, this will be facilitated through a Gateway API for banks to use Plaid as its own integration layer — institutions would ultimately choose which data aggregators or FinTech apps can access their user’s data.

Previously, Plaid fully represented the FinTech companies delivering new and innovative financial services and the end-users of these apps, who demanded their bank allow connections. With PX, the industry leader is now providing support for institutions concerned about protecting consumer data AND fulfilling client requests for 3rd party connectivity.

One of the the institutions most widely discussed in data aggregation is PNC Bank, who is continuously flooded with with complaints from clients unable to link accounts to Venmo (after a security update from the bank). PX will directly reduce these and other frustrations between big banks and their clients.

This new offering comes at a time when Plaid’s primary customer base of FinTech startups, who has been hit hard by COVID-19, has started to slow down. Lending apps have been impacted by rising defaults, neobanks have seen reduced customer spending activity, and savings platforms have poor rates to offer. Integrating with banks directly provides a new revenue stream of sustainability and implications for becoming the industry’s ecosystem of choice.

Plaid Exchange will be available for all banks and credit unions interested in a fully-built API for data access (including integration, infrastructure, and ongoing support services). There are anticipated implementation costs in getting started based on internal teams and systems architecture, but these expenses will be custom priced for each banking platform. For many small and regional banks, this can be their initial move towards digital transformation in financial services. For the financial services industry in the US, this can lead to the start of open banking.

What is Open Banking?

Open Banking calls for banking data to be openly shared among 3rd parties (outside of the customer and bank) to deliver higher quality financial services and innovation. This current movement in the industry was spurred by the EU’s pro-fintech, open banking framework that requires data sharing (through a revised Payment Services Directive, PSD2). In the UK, open banking has become mandatory for banks to share data in order to increase the quality and competition of banking services. From a risk perspective, institutions are concerned over privacy, security, and regulatory action.

Overall global progress is minimal and has varied by market, regulatory ecosystem, and consumer demand for privacy and security. The early signs of impact point to FinTech companies that are rebundling or unbundling financial services on behalf of customers. For popular fintech brands such as Robinhood and Wealthfront, offering more services through rebundling helps diversify revenue streams and make customers more “sticky” (increase retention).

For Plaid, this bold to gain banks as clients and start the open banking movement in the US will need support from government regulations or an industry consortium. In the US, there are no signs of regulatory approval on the horizon due to the complex mix of regulation and government agencies. There are industry groups working together to discuss trends and changes, but these are mostly lead by larger institutions instead of smaller regional banks or credit unions. Without government support or a champion from within, open banking remains as a “nice-to-have.”

WILL banks opt in [for open banking]?

Banks, like their clients, act on trust. In order for Plaid Exchange to deliver deep impact to the industry, the FinTech company needs to rally institutions of all sizes and grow appeal as the Open Banking movement. The potential to gain growth through network effects is how Plaid became so successful in the early days of fintech.

Small and mid-tier markets may be the best initial direction for PX to get into market quickly and be validated. However, the underserved market of credit unions has existing support from other technology providers with APIs. Plaid would be entering a highly competitive market segment here, which is open to change in the near-term but already has support from other banking tech and API partners. Coming off the acquisition by Visa in January, the perception is that Plaid would favor working with the largest banks in the industry first.

As dynamic of an offering as PX is, the lack of product depth on launch day may not be enough to get banks over the line to sign up for lengthy contracts. With upcoming applications to be launched on top of PX, institutions may take a wait-and-see approach before making a decision to sign-up. An optimal strategy would be to tap into its existing relationships with 10K+ institutions and create a list of banks and credit unions that have a high-level of trust in Plaid and its value proposition. Gaining early adopters and turning them into champions for Plaid Exchange (and Open Banking) will be the most critical driver of change.

OPEN BANKING in the us for 2020

The road ahead is still full of uncertainty for Open Banking, but what is clear is that the first move has been made by a top FinTech to bridge the industry gap with institutions. Over a decade ago, fintechs and banks were at odds with one another — competing for the same market share. A few years passed and both sides started to partner with one another and share strengths of technology (from FinTech) and industry experience and licensing (from established institutions). In 2020, FinTech is now openly serving banks as an additional customer segment.

With Plaid Exchange, the seed has been planted and conversation started on Open Banking becoming a reality in the US. Even though PX can still be a success on its own without every bank becoming a client, the potential for a deeper industry change is now real. Institutions of all sizes can now quickly kick start the path for digital transformation in financial services.

Open Banking that freely allows a customer’s banking data to be accessed in the US is still out in the distant future. A combination of regulatory changes, customer demand, and industry groups can push for this change to take place sooner. Based on the history of banking regulation avoiding change, this movement may not happen for the next few years. Regardless, Plaid Exchange has now created an opening for others in the industry to follow through and explore what Open Banking in the US can look like and how everyone can participate in the movement. //

Thanks for reading — feel free to comment or share this article below!

. . . . . . . . . . . . . . . . . . .

Be a part of our FinTech community at FinTechtris —> For more industry content and discussions (including trends, deep dives on unicorns, and sector analysis) — signup for our newsletter and Slack channel access today!