The breakthrough technology that Plaid created over a decade ago was the ability to connect in real-time to almost every bank and credit union in the United States. This had never been done before and was a groundbreaking advancement for financial services.
Now that technology is mature, we are seeing all the possibilities that can flow from it. I caught up recently with Eric Sager, the COO of Plaid, a position he has held for five years now. We had a wide-ranging conversation covering a number of initiatives that Plaid is working on right now and how they are building on that foundation.
The Transformational Role of APIs in Financial Services
The discussion kicked off with a look at Plaid’s evolution from a bank connectivity platform to a broader fintech solution provider. The emphasis on avoiding screen scraping in favor of API connections has been transformational. This shift underscores the increasing significance of APIs in enhancing the security, efficiency, and scalability of financial services.
One of the use cases that is getting more adoption recently is account-to-account (A2A) payments. When Visa looked to acquire Plaid in early 2020 this was the use case that I thought was driving that transaction (it ultimately was blocked by the US government). It has taken a while for A2A payments to get traction and we are still in the early days here, but Plaid is in a great position to make it happen.
While Plaid began life in the fintech space, with primarily fintechs as customers, banks soon became interested in what Plaid was offering. But these days it is just as likely to be a non-financial services firm that is talking with Plaid.
Etsy is a customer now, as are Tesla, Rivian and John Deere,” Eric said. “John Deere is a great American company that I grew up hearing about in Germany and seeing them become a Plaid customer is amazing.” Plaid enables these non-finance firms to accept A2A payments in a smooth, seamless experience.
Fraud and Risk Management in Real-Time Payments
With the advent of real-time payments, managing fraud and risk has become more critical. Our conversation highlighted the importance of fraud solutions in an ecosystem where transactions are instant. Plaid’s position at the center of financial transactions enables it to offer powerful fraud prevention tools, benefiting institutions, consumers, and developers alike.
“If there’s an instance of fraud, with real-time payments that money has gone instantly,” Eric explained. “That’s another area where, given just the nexus that we sit at, where we have the insights into what’s happening across the ecosystem, we’ve been able to build some incredibly powerful fraud solutions for our customers.”
FedNow mentioned Plaid in its last update on the service that came out just last month. And Plaid has an entire section of the website dedicated to FedNow. They have something similar for RTP from The Clearing House. Clearly, Plaid is all in on real-time payments.
The Emerging Trend of Cash Flow Underwriting
Cash flow underwriting is an area that I am very interested in and Plaid is also doing great work here. The shift towards cash flow underwriting in lending represents a significant enhancement to traditional credit assessment methods. This approach leverages bank account information to offer better rates and products tailored to individual needs, especially benefiting consumers who are underserved by traditional credit scoring models.
Plaid has an interesting new partnership with Prism Data, the cash flow underwriting specialist that was recently spun out of Petal as a separate company. I was curious why Plaid would decide to partner with Prism Data rather than build that capability themselves.
Eric had this to say: “These partnerships ended up being this classic example of one plus one actually ends up being three. There are some opportunities where we are competitive with each other, but maybe a company could have used us, but they’re using Prism. But on the whole, we’re growing the pie so quickly, for everyone involved, that it’s good. It’s good for both Plaid, Prism, our developers and the consumer as well.”
The Role of Open Banking in Data Ownership
The discussion touched upon the regulatory environment, particularly the anticipated impact of new open banking regulations known as Section 1033. The principle that “it’s the consumer’s data” is central to the ethos of fintech companies like Plaid. This viewpoint supports a future where consumers have greater control over their financial data, fostering competition and innovation in financial services.
You can see that Plaid feels very strongly about this. Their 84-page comment letter on the new Section 1033 rules is a testament to that fact.
Eric demonstrated this passion: “I have the right to my data, and I have the right to share it to benefit myself. It is not okay for an institution to capture that data behind their own four walls and not allow me to use it for other use cases, because it ultimately stifles competition. Fundamentally, it’s the consumers’ data.”
There is going to be so much innovation built on top of open banking by both banks and fintechs and Plaid wants to be in the center of it all with others building on their technology.
The Partnership With Fiserv
Another partnership I was interested in discussing with Eric was the recent announcement between Plaid and Fiserv. Many of the banks that Plaid connects with are running Fiserv core banking software and so this partnership allows Plaid to write one set of code to connect with potentially thousands of banks.
Eric said that this partnership was such a great strategic fit given Fiserv’s broad banking customer base. “Our objective is always to serve consumers and developers in the best way that we possibly can. Sometimes that means we build it ourselves, but where it means we can partner will absolutely partner as well. You don’t want to have to write two sets of code to do these kinds of things if one set will suffice. By the time you add it all up, and you have hundreds or thousand of customers and developers that are going through this, it actually saves a lot of time and effort for people.”
The International Perspective and Expansion
Lastly, the conversation shed light on the global perspective of fintech, particularly in Europe. The European market, with its advanced regulatory framework for open banking, offers different challenges and opportunities compared to the U.S. Plaid has been in Europe for many years and just recently poached a senior Adyen executive to run its operations there.
Eric pointed out that there is not true open finance in Europe yet because regulatory frameworks are currently focused on only bank account data. It needs to expand to investment data and other areas beyond the core checking account which is where is focused now.
Plaid has come a long way in the last four years since the Visa announcement was made. Their position in the industry is now far stronger than it was before the pandemic. While they don’t have the market to themselves, they have built a suite of offerings that reflect many of the major recent developments in fintech.
