A Plaid Point Of View
Last month Plaid announced additional funding from JP Morgan and American Express, as part of its previously announced $425M Series D round. The raise followed the company’s January decision to halt the $5.3 billion merger with Visa, due in part to the US Justice Department suing to block the merger, and brought the Plaid volcano to news headlines. Most industry insiders expected the company to continue to raise additional funding; however, it was a surprise to see large, traditional financial institutions (FIs) included in the raise. In this edition of the Great Data Debate, we will explore how Plaid views the financial data ecosystem, their role in it, and why they seem to be friendlier with banks these days.
Who is Plaid?
Plaid is one of those companies that nearly everyone working in Fintech has encountered either as a user of their service or as a customer of their services. Chime, Venmo, Robinhood, Coinbase, Betterment and many others use Plaid as the way to enable their customers to connect their bank accounts and facilitate a host of interactions with their money.
Plaid’s Global Head of Policy John Pitts words it this way, “Plaid is a financial data network that acts on behalf of consumers to empower them to retrieve their financial data from wherever it’s being held and share it with another entity who’s offering that consumer a better product, a different choice, or some other service that the data is necessary to power.”
As Plaid looks to the future, their products stretch well beyond simply connecting consumers to their data. The company has more recently branched into helping facilitate money movement through integrations with Stripe and Dwolla as well as introduced products that enable income verification, deposit switching, identity verification, and a host of fraud services.
Now I See You
Until the last few years, Plaid’s role was largely invisible and consumers rarely knew the name of the company powering the experience. However, in the last few years, the company has worked to build a consumer-facing brand and believes they can leverage that brand to communicate trust with the customer.
According to Plaid’s Global Open Finance Lead Dan Kahn, “The consumer is driving everything, and when we think about building products, we think about our principles – control, security, and transparency. Control for the end user, they know where their data is, where and how it’s being shared, and they have the ability to turn that on and off. Transparency means if there is a third party involved in powering the service we should make that transparent to the end user. We think that by taking a more active, visible role, we can actually improve transparency and provide additional controls for those end users, and then security is something we’ve always prioritized.”
For several years, relations between traditional financial institutions and Plaid were strained and Plaid was viewed unfavorably by some FIs. The company was critiqued for their screen scraping techniques and usage of consumer provided bank logins. Several FIs went as far as suing Plaid, while others played a game of cat and mouse by regularly turning off or blocking the services Plaid and other third parties were accessing. For Plaid, part of the shift to a better working relationship with FIs has been to convert as many of their bank connections to APIs as quickly as possible. According to Kahn, they are aiming to have 75% of their traffic committed to APIs by the end of 2021.
While this shift is encouraging, for many FIs, the battle was about more than screen scraping and the need to shift to APIs. Many banks have yet to build a strategy around open finance, and see consumer data as something very valuable. The idea of third parties being able to consume the consumer data and then build revenue generating products that leverage it can be unnerving. Some in the industry believe Akoya was created by the banks to serve as a counter-weight to this shift and allow for more direct control of the data flowing outside the FIs. However, much like MX, Plaid is less clear about the role Akoya will play.
“I think it’s interesting. The question is, what part of the market is Akoya going to serve and where are they going to offer value for the growth of the ecosystem?” says Pitts.
The participation of JP Morgan and re-up from American Express in the latest Plaid funding round may be an indication of Plaid collaborating more deeply with the big banks. However, when it comes to financial data, nothing is as straightforward as it may seem. Despite the investment and a data sharing agreement with JP Morgan, the bank’s CEO Jamie Dimon seemingly criticized Plaid as recently as January 2021, referring to “people who improperly use data that’s been given to them, like Plaid.” To further complicate the dynamic, many FIs have also now become customers of Plaid and utilize the company to incorporate data from other accounts, fund newly opened accounts, and help perform KYC on new customers.
According to Pitts, “We are seeing new types of companies, including FIs, start to say, ‘We want to start being Plaid data customers, not just Plaid data sources.’ We are also starting to see Fintechs say, ‘If we are going to be a hub for our customer’s financial life, we should be a data source for them.”
Let’s Get Regulated
One frequent criticism of data aggregators like Plaid is that, unlike FIs, they are not regulated. Critics believe the lack of regulation means consumer financial data has the potential to get exposed and that neither Plaid, or the Fintechs it powers, are held to the standards around liability as other regulated entities. However, Kahn says Plaid is ready for more oversight. “We’ve told regulators, ‘Come supervise us. We want to take on that responsibility.’ We see that as part of our role in the ecosystem.”
This stance is understandable when you realize Plaid is already doing many things around consumer data protection that would likely be required from a regulatory standpoint. Furthermore, the company sees regulation as a tool to ensure consumers are able to get access to their data and adds a layer of protection.
“The industry was able to close most of the gaps around what the consumer’s financial data access right looks like. Now we’re preparing for regulations to put in the final guardrails, like making that space and the scope of that consumer right clear. Once you know that the consumer has this really clear right, that’s not the end of open finance. Now you need to give the consumer all of the tools to navigate this new right effectively,” says Pitts.
So What About that Volcano?
When the DOJ filed their lawsuit to stop the Visa acquisition of Plaid, the main argument against the acquisition was the belief that Plaid represented a direct threat to the Visa debit network and a Visa/Plaid merger was therefore anticompetitive. The lawsuit included the presentation of what has become known as the Plaid ‘volcano’. This visual illustrated how Plaid was building a host of services that were less threatening at the moment, but could ‘erupt’ into a massive competitive threat over time.
Plaid didn’t address these services directly in our interview; however, the introduction of the bank transfers API this year shows this strategy playing out in real time. By connecting to thousands of banks and other data providers, Plaid has all the information it needs to facilitate a multitude of transactions that have previously been ‘owned’ by FIs. Money movement is one of the more obvious examples, but it would be easy to see Plaid offer future products such as lending services, factoring, cash management and payment processing either directly or through partners.
Yet even this vision is not big enough to capture the aspiration of Plaid. When asked what exciting things the company saw in the future, Dan Kahn offered, “When we think about the types of data that consumers could potentially share in order to get a better product and service, that it could be shared in real time in a secure way…that is really motivating to me, and I think it’s motivating to a lot of people at Plaid, to just think about how early we are in this open finance journey.”