Open Banking And Its Friends

Big moves by Visa and Mastercard have thrust data aggregators into the spotlight just as the focus of payments is expanding and the aggregation model is modernizing.

Like most businesses, the payments world has been upended by the coronavirus pandemic and its impact on buyers and sellers alike. But just before the virus struck in the United States, Visa Inc. announced it had clinched a deal to shell out $5.3 billion for Plaid Inc., an 8-year-old financial-data aggregator with links to 11,000 financial institutions.

Those connections are the vital links that let apps like Venmo (peer-to-peer payments), Chime (online banking), and Betterment (digital investing) reach financial institutions and serve users.

It’s called open banking, and it’s an increasingly essential business, not just for Plaid and not just because businesses are—tentatively—reopening and consumers are shopping again.

The number of fintech startups that need these links to make their apps work smoothly is growing at a much faster rate. There were 8,775 of them in North America in February, up 52% from the same time in 2019, according to data-collection service Statista. By contrast, that number grew only 2% from 2018 to 2019.

“The number of financial apps consumers are using is growing pretty significantly. The number of payment apps is growing pretty quickly. And that’s going to continue,” says Ben Isaacson, a former Mastercard Inc. executive who is now senior vice president for product strategy at The Clearing House Payments Co. in New York City.

The same faster expansion is happening overseas. The Statista numbers show a one-year doubling of fintech startups in the Europe, Middle East and Africa region and a 91% jump in the Asia-Pacific area.

Not only are there more apps, but the apps themselves are adding users hand over fist. PayPal Holdings Inc.’s Venmo service recently reported 52 million users, up fully 30% in one year. Square Inc.’s Cash App, meanwhile, has hit 30 million users, which means it added 6 million just since the start of the year.

In concert with this app growth, aggregators like Plaid are booking more and more business. The company serviced more than 200 million linked accounts last year, up more than 55% from 2018 and 20 times greater than the number in 2015.

No wonder, then, that the card networks are paying attention—and opening their wallets. Mastercard agreed in June to lay out $825 million in a deal for Finicity Corp., a 21-year-old company whose clients include Brex Inc., a fast-growing startup offering services such as business credit cards and cash management.

“They have very strong connectivity into the banking infrastructure, so we felt they were the right partner for us,” says Craig Vosburg, president for North America at Mastercard.

‘A Big Deal’

Payments providers and other financial services have long relied on data aggregators, but the business—and its technology—are undergoing fundamental changes.

Using prearranged links, aggregators access app users’ financial accounts on their behalf to perform services ranging from identity and balance verification to funds movement. The process makes for a faster, smoother transaction for consumer and fintech alike.

“Fintechs are an important sector in our economy,” says Stuart Rubinstein, chief executive of Akoya LLC, an aggregator spun off in February by Fidelity Investments and now owned equally by Fidelity, The Clearing House, and 11 TCH banks. Between the fintechs and banks that hold their mutual customers’ accounts, he adds, “We are the underlying connective tissue.”

These links to financial institutions can support a variety of purposes. “Account verification, for example, is one of a variety of opportunities, and something PayPal and Venmo have been applying for quite some time,” says Katja Lehr, director of global payment products at PayPal Holdings Inc. “Another example where PayPal and Venmo are leveraging open-banking data is in our risk decisioning, making sure our customers can use the payment method of their choice.”

But the nature of that “connective tissue” is changing. Aggregators historically relied on a technique called screen scraping, in which the aggregator deploys the app user’s valid credentials to access his accounts at financial institutions. These days, the business is moving toward application programming interfaces to achieve the same ends with safer connections.

APIs are “the new normal,” says Brian Costello, vice president of data strategy at one of the early players in aggregation, Envestnet Yodlee, Redwood City, Calif. “It’s a big deal.”

‘A Blunt Instrument’

The change includes an API standard for data sharing under development by the Financial Data Exchange, a Reston, Va.-based trade group embracing fintechs, aggregators, and financial institutions. The standard aims at what the group calls “data minimization.”

“Screen scraping is going to grab all the data and then sort through it. It’s a blunt instrument,” says Tom Carpenter, director of public affairs and marketing for the group, which operates under the auspices of the 21-year old Financial Services Information Sharing and Analysis Center (FS-ISAC).

By contrast, Carpenter says, the standard restricts data gathering to only the information required to satisfy a specific request.

But more changes are in the offing, some experts say, now that Visa and Mastercard are laying out big sums to jump into open banking. The move toward developing a standard for data exchange played a role in stoking Mastercard’s interest. “We don’t see [screen scraping] as a great way for this business to be built,” says Vosburg. Visa did not respond to a request for comment for this story.

That standardization undergirds what Mastercard sees as a way forward in payments not necessarily based on plastic. “Not every open-banking use case will involve a payment or movement of money, but there’s a reasonable subset that do,” says Vosburg. “Our strategy is very much founded on payments beyond credit and debit cards.”

He cites services like Mastercard Send, the network’s real-time transfer product, and the company’s efforts to develop a blockchain for payments, as examples of that strategy. “All these things can come to bear in an open-banking environment where there are needs to move funds,” he adds.

‘Very Powerful’

Some observers also see the card networks’ open-banking acquisitions as a way to build pipelines for additional transaction volume in businesses such as bill payment and peer-to-peer transfers.

“This is why Visa paid $5.3 billion for Plaid,” says Patricia Hewitt, principal at PG Research & Advisory Services in Savannah, Ga. “It gives Visa ownership of all those connections.”

Others see value just in the data the aggregators can spin off, even if it’s anonymized. With these acquisitions, the card networks have “access to some of the best data on what people do. That’s very powerful,” says Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based consultancy.

Perhaps the biggest factor, though, lies in efforts to move the United States to a nationwide real-time payments network connecting nearly all the country’s financial institutions. The Federal Reserve plans to have its real-time gross settlement system, FedNow, up and running by 2024 at the latest, for example.

That could put pressure on traditional card-payment networks, some observers say, if FedNow ultimately bumps up against such fast-payment services as Mastercard Send and Visa Direct. But a trend toward real-time payments could also put a premium on managing access by fintech apps to account data as those apps ramp up to compete for transactions that are irrevocable.

As unemployment lingers in the wake of Covid-19, a key to that action will lie in controlling risk, and that’s where the networks’ stake in open banking could hand them an advantage. “The real-time risk is that the money must be there and the user must be who he says he is,” says Hewitt.