Hello hello everyone! Ian here again. You'll be hearing from me more often in the coming months. I'm sorry, and you're welcome ;) Today I wanna dive into a buzz phrase that recently underwent some big changes in DC, and what that means for our space.
Big Changes In Open Banking
In January 2018, the UK became one of the first countries to implement a new policy called “Open Banking.” It essentially gave consumer financial data control back to the users. Open Banking rules in the UK stemmed from an EU regulation called PSD2, which called for banks to create easily accessible API’s so developers can access a consumer’s financial data with consent.
Why was Open Banking necessary in the first place? Banks are sitting on a goldmine of consumer data and don’t know what to do with it. So they keep it behind locked gardens: closed systems that are used internally. But in a world where data is the new currency, consumers have historically been restricted from accessing or porting over their consumer data. Banks have been extremely protective of their untapped gold mine—mainly because they know that big businesses can be built on top of it.
Plaid is a massive company that doesn’t even leverage consumer data (yet), it just provides access to it for developers. Plaid found a loophole of sorts—have the user log into their bank and screen scrape the transaction data. It’s janky but it works—Plaid almost sold to Visa for $5B, raised a $425M Series D led by crossover fund Altimeter Capital at a $13.4B valuation, and is valued even higher than that in the secondary markets.
Open Banking has had an interesting effect in the UK—it’s led to more data aggregation startups like Teller, Modulr, TrueLayer, and a data aggregator that Visa purchased recently for $2.1B called Tink. It’s also led to more innovation, since developers have easier access to financial data. The Open Banking Implementation Entity reported 5.8B API calls in 2020, 3 years after the program started.
The concept of Open Banking is prevalent in other countries too. India’s Unified Payment Interface is a great example. It’s essentially a real-time payment network to allow seamless payments and bank account access for the largely unbanked Indian population. As of May, it had over 100M monthly active users on the platform, and partnerships through banks with digital wallet products from Amazon, Google, Paytm, Jio, Samsung, and WhatsApp.
What I’m getting at is: Open Banking rules can spur innovation and open up a new financial ecosystem for countries. So when President Biden dropped his extremely broad executive order, the fintech community was happily surprised to see it included Open Banking. The order said that the CFPB would set rules around allowing consumers to access their financial data. It doesn’t include “payment initiation,” which was a part of PSD2 and you can read about here.
But as with any rule change, there are winners and losers.
Winner: Large Consumer Fintech Companies
For companies like Chime, Acorns, Current, and other companies that have a ton of users, this is fantastic news. For those who are unaware, Plaid and other fintech infrastructure costs are some of the largest fixed costs for consumer fintech companies. If Open Banking leads to more competition, that should at least give these companies more leverage to get a better rate from Plaid. Or perhaps, banks actually do make it easier for developers to integrate directly, and consumer fintech companies can bypass Plaid all together.
TBD: Large Consumer Fintech Companies
There are two ways data work: data in (information being received) and data out (information being sent).
And while this is great for companies like Chime, Varo, Dave, MoneyLion, SoFi, Acorns, and other large consumer fintech companies on the ‘data in’ side of things, the data out part is still a question.
Why do these large neobanks make it easier for a user to move their data from one neobank to, potentially, another? Do some neobanks restrict data access for potential competitors, even if the data belongs to the consumers—the same anti-competitive way banks restricted fintech companies, but to a newer crop of startups? Are smart entrepreneurs thinking about ways to leverage neobank data to develop a new kind of product around financial data management?
Way too early to figure this out, but it's one of the large potential questions around US Open Banking regulation that will take some time.
Honestly this is probably a net-win for Plaid because it has been working on these relationships with big banks around permitted data sharing for years. It’s made some progress too, like Capital One and Plaid announcing a data sharing partnership on June 8th (warning: the Capital One PR is of course is hella jargony), and a partnership with US Bank in late May too. I’m confident that Plaid can be one of the first integration partners to take advantage of the US Open Banking rules
But on the downside, this will lead to more competition, and you can see that the company’s diversifying its product to combat that competition risk. According to Plaid’s publicly available developer docs, the company’s running a beta program for deposit switching (which allows users to easily switch their primary bank), bank transfers (which allows users to send bank account payments via ACH), and income verification through payroll data. There are also about 15 startups working on all three of these areas—a new sector of early stage fintech around Plaid for X popped up over the past year. But expanding your product to add a suite of financial data related API’s for developers makes sense when you have such a head start.
Yes there will be more competition—maybe some of these UK companies will come to the US. But most of the fintech ecosystem has expected Open Banking to come to the US eventually anyways (not so abruptly, through an executive order, but still.) I’m sure Plaid’s had a plan around Open Banking in the US that they can now execute on. It seems like that includes expanding Plaid’s product suite aggressively. I wouldn’t be surprised to see Plaid make some early stage acquisitions either.
It’s about time this happened. Banks have been hoarding consumer data for years. It’s like someone struck oil in their backyard, but they’re waiting for the oil prices to rise before drilling.
Banks have always been scared about creating high quality digital products, because it’ll cannibalize their bank branch strategy (which would be very expensive and mean the last few years of investments into it were useless). But they also won’t open up access to that data for developers—even though it belongs to the customers*.*** It’s funny because banks are essentially guardians of consumer financial data, but act like the owners.
This regulation starts to level the playing field for fintech companies and banks. Financial institutions can’t hoard this data anymore, and future fintech entrepreneurs can leverage this information more easily than ever. I’ve always wondered what kind of products and services can be created if we had seamless financial data access—hopefully we’re about to find out.
Winners: Embedded Fintech & Crypto Companies
It’s a great time to be a fintech founder. Venture capital dollars are flowing, new funds are popping up left and right, and talent (while extremely expensive) is gravitating towards newer and riskier ideas.
Now, US financial regulation is moving in your favor too?
I expect 2 things: that this will take at least 2-5 years to implement, and that once it's implemented, a lot of founders are going to take advantage of this to add or augment existing fintech products.
So far, Plaid’s only really used by the fintech community. I don’t know many e-commerce retailers that use Plaid, because why? But in a few years after things like co branded credit cards become more popular, leveraging transaction data to offer things like merchant branded rewards seamlessly. We already see this with Buy Now Pay Later.
Of course, fintech companies can leverage and create these experiences, but embedded fintech is extending its tentacles into a lot of niche areas with complicated financial services. As these financial problems get solved, leveraging bank data to augment these product experiences and make them more personalized makes a lot of sense. It's obvious in consumer finance, but there’s a big opportunity around financial data insights in business banking too.
As for crypto, I think there are still so many untapped areas around leveraging financial data to help people make smarter financial decisions in crypto. I mean an Acorns for crypto sounds like a no brainer (if you’re building this, my email is email@example.com.)
Consumer financial data always belonged to the consumer. For years, banks came up with excuses around security to limit the amount of data and the type of data that was accessible, as a way to cripple fintech startups.
The problem is the people it hurt the most were consumers. Banks have never built the right digital experiences for their consumers, but also were trying hard to prevent others from doing so too. That never seemed quite fair to me.
These API’s to provide secure data access are super doable to build, especially for banks now touting themselves as “tech companies” (lol). But banks have almost little to no incentive to do so— why would banks want fintech companies to have a direct secure pipeline to consumer data?
Other countries like the UK used regulation to force banks to make this change, putting financial data access into the hands of consumers. Now, the US is trying to do the same. If it works, this change should have profound effects on the US banking ecosystem.