#BeyondFintech: Building the financial infrastructure of the future
Recently, I was able to have a fascinating discussion with someone who is perfectly placed to see how Open Banking is playing out around the world and what it means for the future of financial infrastructure.
Keith Grose is the Head of UK at Plaid, an Open Banking data network that powers some of the biggest and most well-known fintech brands around the world. Keith joined Plaid from Google, where he worked on Pixel phones and Google Home speakers, as well as running business strategy for Google Pay and virtual reality. Prior to Google, Keith began his career as a management consultant at Bain & Company.
I was joined in this discussion by my co-host Monica Jasuja, Head of Product Management, Mobile Financial Solutions at Comviva, and we were able to cover a huge amount of ground with Keith. If you weren’t able to join the conversation, here are the main topics we covered and the key learnings I took from it.
Plaid is a fintech giant working behind the scenes
Plaid came about because the founders were trying to build a fintech app but discovered the custom bank account integrations they developed for it were the most valuable parts. As a result, they began licensing the technology and pivoted to be an API company for business customers.
Now, Plaid powers around 80% of fintechs in the US and is the technology behind well known brands such as Robinhood, Coinbase, Venmo, PayPal and Transferwise. The company has now built 1000s of APIs to connect with banks, standardising them and then developing their own endpoint APIs for use cases across embedded finance.
In a mobile-first world that is full of third party applications, this has resulted in financial services being unbundled and embedded into the experiences that technology giants can offer their large, global customer bases. Open Banking is a global phenomenon and Plaid wants to be the global leader within it.
Plaid operates around the world, moving into new markets whenever it sees customer demand. It also considers the quality of existing banking APIs when entering a new market, as this determines how much its financial access team will have to build with the banks. A final element of Plaid’s go-to-market decision making is whether there is long-term value in banking payments within a given region.
Open Banking is different in the US and Europe
As a major fintech player within the US and Europe, Plaid is well placed to identify one of the key differences between how Open Banking operates in both markets. Essentially, the main difference is Open Banking being market driven in the US, whereas regulation has driven it in Europe.
For Plaid, this has meant building API connections to around 10,000 banks and credit unions across the US in order to cover the long tail of financial institutions that exist there. This is very different to the EU, where a country’s entire population might use one of only four banks and where PSD2 regulation has mandated that banks make data available through APIs.
These different approaches have resulted in differences in consumer outcomes. In the US, users have greater tracking capability for everything from pensions to crypto in one place. In Europe, this account monitoring is less easy because data is based on checking accounts. However, where Europe really stands out in comparison to the US is the consumer’s ability to make real-time push payments.
Within Europe, there are other factors beyond regulation that have affected the way the market has developed. For example, different national regulators have enforced the PSD2 regulation in different ways. In the UK, the Open Banking Implementation Entity was established to enforce a single standard for APIs, resulting in better standardisation of banking APIs when compared to other countries.
Enforcing standards for APIs establishes a foundation for growth but culture and attitudes to banking also play their part. For example, while customers in the Netherlands were already familiar with account-to-account transactions, consumers in other countries need more time, repetition and education to get used to this method.
Either way, the competition and competitiveness that has resulted from Open Banking initiatives has led to better customer choice and, even though discrepancies exist today, it is likely we’ll see convergence in how Open Banking operates in developed markets over time.
Emerging markets are forging their own paths
In emerging markets, a completely different set of dynamics are at play to those in Europe and the US, resulting in some interesting and varied strategies within specific regions.
One of the things that connects emerging markets is the fact that they are able to leapfrog so much of the legacy infrastructure that is present in developed markets. For example, there is often no need to work around branch-based or card-based processes because they were never established. Instead, these markets have gone straight from cash to mobile payments.
This is the case in India, which is also taking a different approach to the US’s market-driven and Europe’s regulatory-driven adoptions of Open Banking. In India, Open Banking has been government-driven, with its Unified Payments Interface (UPI) establishing a single API connector for inter-bank transactions. It is too early to say whether this approach will be a success but it’s certainly an interesting strategy to watch.
Across Africa, Open Banking is also skipping over the branch and card stages of financial development, with most fintech startups operating as mobile finance providers already. Telcos and Mobile Network Operators (MNOs) play a big role in finance and, for an API-based company like Plaid, making these connections is just another element of being a global Open Banking platform.
Combining accounts and payment data to innovate
Platforms and propositions that combine Account Information Services (AIS) with Payment Initiation Services (PIS) are where the most exciting innovations are occurring right now.
These include rental platforms, where you can confirm identity and affordability, as well as setting up standing orders for payments. Fintech enables these applications and Open Banking means there are a range of tools available to design better experiences.
By combining Know Your Customer (KYC) and affordability checks with instant payments in a single user experience, service providers can transform financial services across a range of sectors. Gaming platforms are an obvious example of where this will matter in the near-term but longer-term it could also find its way into Point of Sale and ecommerce.
In terms of embedded finance, combining foreign exchange with Open Banking will be an interesting area to watch, as much of it can be automated in the background. The same is true for automated reconciliation of payments, which could result in big improvements to the merchant payout experience.
Security is a big challenge and a major priority
Security, privacy and fraud prevention are important parts of Plaid’s ongoing strategy and will be key elements of any dominant Open Banking platform.
On the B2B side, Plaid has established a robust, multi-week onboarding process that includes transaction monitoring and annual auditing for any business it partners with. For consumers, it has developed an experience that tells users who Plaid is, what it is doing and why it is doing it at every stage of the customer journey, so consumers feel in control.
The Plaid experience always relies on the user authorising any payments through their own banking ecosystem, so no data is passed or stored and authorisation is done in real time. Furthermore, as payments through service providers like Monzo or Revolut are increasingly made via Face ID, this is a fantastic experience that is also very secure.
Security and consumer privacy are major trends within fintech, with GDPR regulation in Europe and the California Consumer Privacy Act needing to be complied with. Plaid’s approach has always been to comply with these laws but also look for ways to standardise what they are doing. That’s because, looking ahead, it seems likely that a global consensus on consumer privacy and security will need to be reached.
If this occurs and governments are able to open up their identity databases through APIs, Open Banking platforms could help standardise security, privacy and fraud prevention processes across the world.
Building infrastructure for the future of finance
In the future, nimble and flexible implementations of Open Banking may well be more important to the global financial system than the SWIFT network is today. It would be almost impossible to modernise something as embedded in the financial system as SWIFT is, so it seems more likely that new systems will be adopted than old systems transformed.
The world of crypto is about building these new systems from the ground up using decentralised technology and this approach might have merit in areas such as clearing houses, exchanges and securitisation. However, the fact that many cryptocurrencies are very speculative and provide little in terms of consumer protection can’t be ignored.
Plaid is taking a different approach to building the infrastructure for the global financial system of the future. By standardising bank APIs and building endpoint APIs of its own, it is providing the layer between traditional finance and fintech that enables all sorts of innovative embedded finance use cases.
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