Who Does Own Your Banking Data

New technology is changing the banking world one transaction at a time. Fintech or financial technology is giving more opportunities to change the way consumers interact with their money. The new landscape has created a movement called open banking, which is fighting for banks and fintech companies to be a bit more transparent with their customers.

Traditional banking offered less freedom and control for consumers over their financial decisions. Open banking gives consumers more reign over their finances and ups transparency in their interactions. The goal of open banking is to put power into the consumer’s hands by enabling them to understand information about their bank accounts from third-party sources. With companies gathering your financial information for their own purposes, who actually owns your banking data?

The release of the iPhone in 2007 put an incredible amount of computing power and network connectivity in the pockets of the masses. This new technology created the ability to streamline many banking services but the banks themselves were slow to catch on. Startups like Venmo, on the other hand, were not.

Two young roommate programmers created the sleek money transfer app in 2009 after asking the simple question why couldn’t they pay each other back for a weekend trip on their phones? Those years after the financial crisis saw a proliferation of financial services and tech companies, which came to be called fintech. The space is a big one, loosely enveloping any tech company with a financial services flair. From crowdfunding sites like Kickstarter and Patreon to firms doing high-frequency stock trading and more. Seeing the success of these startups, big banks have begun jumping into this space as well. Today, the fintech industry is worth about $127 billion but is expected to more than double in size to 309 billion in 2022, according to PR Newswire and investors are taking notice.

The Fintech Technology Integration

There are now 58 fintech unicorns collectively worth more than $500 billion and one of the companies powering this growth is Plaid. If you use Venmo, Robinhood, or pretty much any other modern finance app, you’ve also used a company called Plaid. Zach Perret, a co-founder, and CEO of Plaid said:
“We’ve always had this kind of mantra of making money easier for consumers. We want to make money easier for everyone. We found that we need to go one layer deeper, and build the infrastructure that’s not behind these applications and so this infrastructure is the connectivity between your bank account and an application on the web. We are going to need new infrastructure players and we see people who are building these pipes today.”

So Plaid is an example of someone who is building pipes that are connecting the bank account information to potential new solutions that could be transformative. Through Plaid’s, application programming interface or API, the company can do a lot of the heavy lifting on the back end for someone who wants to make an app without a third party like Plaid, startups would have to hire their engineers and create their ways to sync with banks, which needs to be adjusted based on different laws and regulations of various countries.

Plaid also adds analysis on top of the bank account. So app users can do things like budgeting or expense management. It can authenticate bank accounts for direct payroll deposits and electronic bill payments, verify someone’s identity, verify someone’s balance in real-time, and understand income and employment.

Plaid has now become the leader in the space to enable this connection into the bank account. They’ve made it very, very easy for developers to adopt. They’ve integrated it with every bank in the US and now most of the banks in Canada and many in the UK and those integrations allows them to collect data or take action on your behalf.

Plaids said it integrates with a quarter of U.S. bank accounts. The company has attracted investments from the venture arms of Goldman Sachs, Citi, and American Express, and Mary Meeker, infamous venture capitalist and former Wall Street analyst, announced that she was joining Plaid’s Board in twenty eighteen.

Increasingly, we’re seeing this sense of the banks becoming fintech. J.P. Morgan a while ago said that they’re the largest fintech company, that they think of themselves as a technology company and despite the fact that they still have a lot of evolution to do, I’d say that many of the biggest banks are now starting to lean pretty heavily into becoming technology companies and fintech companies themselves.

Interaction with your bank account and savings

Fintech is changing the banking landscape by offering consumers more access and therefore more control over their financial data. So, for example, if I go to a bank and I want to apply for a mortgage, the bank can easily link the accounts that I have with them. But maybe you have a stock investment account, maybe you have another checking account.

Maybe I get funds from another place. How can I link all these accounts together, create a financial picture and then use that to apply for the mortgage without having to come in with my 40 pages of documentation?

The old model of connecting a bank or transaction account by using routing and ABN number and an account number, are not things that are just lying around. Whereas sort of your log into your bank is in your head most of the time. and fintech is growing.

Even the players that we see who are looking at creating these new dashboards, we’ve got a list of, you know, probably more than 20 now, which probably means there are about 200 of them out there.

As we change our definition of fintech to not just include those small startups, you know, coming out of accelerators or being v.c funded, we’re now starting to include lots of things that are a step beyond just kind of these tech companies.

So the banks themselves, or many companies that have never thought of themselves as a technology company or fintech company, but need to do fintech things.

Over 80 percent of all of the biggest fintech companies now are customers of Plaid. So at this point, you’re almost making a mistake not to pick Plaid as your infrastructure. No other company seems to be tackling the same problem as Plaid with much success. In fact, Plaid bought its biggest competitor Quovo in 2018. Startups don’t often do M&A, but we’re incredibly fortunate to have found this company that with such a great fit with Plaid. Quovo had built a very similar but different type of product.

So Plaid has focused on enabling you to interact with your banking data or move money in your checking and savings accounts really easily and simply and Quovo had built a similar type of product focused on brokerage accounts.

So how could you get a full picture of your brokerage data, understand how your stocks were doing, and so forth? So it was two different pieces of infrastructure but related and now we’re really fortunate to have them together. Now one is able to view the entire consumer’s financial life, such that if you’re trying to do something, you can go to one service.

Regulation of data ownership and permission

Banks and private companies will always try to innovate to provide better opportunities for their customers. Plaid creates an environment on the back end for consumer-facing companies to innovate their services without having to invest a whole lot into the infrastructure.

Few organizations can compete on their level and the company has expanded to the UK with global ambitions. The UK, in particular, is way ahead of the US in adopting the rules and regulations necessary to have the data infrastructure that is going to be needed for the next decade of fintech.

In Europe and the UK, we have the established rule that the customer owns their data and can permission it through protocols that are designated to other regulated entities, and under open banking is that the liability for that data safety transfers as it goes from one regulated entity to the next. So in the U.S, there is an operation without this structure, which is really difficult and not appropriate.

The regulatory environment is completely different in Europe. It is a little bit more forward-leaning around consumer ownership and access to data.

In Europe, the laws are quite clear, saying that consumers have access to ownership of all their financial data and actually they stipulate how that data can be shared, which is great.

We still have a long way to go in terms of challenges and communicating across a nation is no easy feat. When you have a company like Plaid and it takes your data with your permission and uploads it to some other entity. It is now governed by a whole series of murky rules which are overlapping and sometimes conflicting, involving third parties and also involving data ownership. There is no clarity in the U.S about who owns the data and when the liability for the security of that data transfers from one entity to the next.

The UK’s Payment Services Directive, which is termed informally as open banking, is where consumers have access to all their data brokerage banking but they get to control it. It’s a way to have better data security and more consumer security. It’s been required now of the major banks in the UK.

The UK has one of the most robust fintech ecosystems in the world. Many say that’s thanks to open banking laws that make it easier for fintech companies to compete. Those require banks to standardize customer data and make it easier to export in the same format. UK’s single biggest trading partner is the United States and the two countries have some of the most prominent economies in the world.

Open banking revolution

Open banking in Europe has a set of regulations that enforce that banks have API and ways to share consumer data when the consumer requested that it is shared and in the U.S there are a similar set of principles. However, we don’t have stipulations around those APIs existing. The reality is though, that in the UK there are far fewer banks and so it’s much easier to ask all of those banks to go and build APIs.

In the U.S, there are more than 10,000 banks and credit unions, and community banks, and asking all of them to go until the APIs is immensely difficult. Not to mention the fact that many of the banks don’t actually have their own in-house technology teams, so they have to go out and pay consultants to build all that stuff on top of it. So the practicality of it is quite low. However, the principle, the idea that consumers have access there and data is foundational that’s actually reflected on both sides of the ocean.

The open banking revolution is just starting in the U.S. It remains to be seen if American politicians will work to foster through government regulation or promote private companies like Plaid and their mission to help consumers better understand and own their financial data.