Fintech and Open Finance: A conversation with Plaid’s Ben White
“As the COVID-19 pandemic presents new financial challenges, people are adopting fintech apps and services at a higher rate to help them navigate a broad range of financial needs. Not only did adoption increase as a result of the pandemic, but consumers view these new digital habits as their new normal, representing a major shift in consumer behavior.”[1]
- Plaid, “The Fintech Effect: Spotlight on Covid-19”
Plaid is a data network that powers the fintech tools millions of people rely on to live a healthier financial life. Plaid works with thousands of fintech companies like Venmo, SoFi, and Betterment, several of the Fortune 500, and many of the largest banks to make it easy for people to connect their financial accounts to the apps and services they want to use. Plaid’s network covers 11,000 financial institutions across the US, Canada, UK, and Europe. Headquartered in San Francisco, the company was founded in 2013 by Zach Perret and William Hockey.
At the end of 2020, Rob Davidson (Director, Data Analytics) and Emerick Mary (Jr. Research Analyst) of the Digital Think Tank by ICTC had a talk with Ben White (Policy R&D @ Plaid) about Plaid, Open Finance, Open Banking, and FinTech.
Rob: Hi Ben, can you tell us a bit about yourself and your work at Plaid?
Ben: Certainly. My name is Ben White, and I am on the policy team at Plaid, where I focus on the research and development. I think it’s unique and exciting to think about Open Finance from a policy perspective. It gives a different lens as to the space that we are operating in. Rapid digital acceleration in financial services means that things are developing quickly in real-time.
Plaid is essentially an infrastructure layer within the financial services ecosystem. We give consumers control over their financial data so that they can move around and hopefully find more customized products and services that can meet their needs. We’ve seen a huge push towards digital over the last year, but I think we are still in the early stages of adoption for a lot of these tools.
From a policy perspective, there’s still a lot of considerations about how fintech should be regulated; we need to take into account things like privacy and data security, as well as rights to consumer data. Canada, while slower to adopt fintech technologies, has progressed in the sense of really carefully thinking about the policy changes that they impact, by learning best practices from around the world and watching how other governments are giving consumers rights over their data.
I also lead some of our research work, which gives me insight on consumer needs and perceptions. We run surveys quite often around adoption of financial technology and consumers’ comfort with some of the new tools that they are using. We put out a couple of reports earlier this year on the impact of COVID-19 on fintech adoption[2] — it showed some remarkable results in terms of behavioral changes; people, at least for the time being, seem to be viewing some of these shifts as fairly permanent. For example, maybe we’ll see a permanent transition from banking inside a physical bank branch to doing everything on the phone or online.
Rob: What is the extent of Plaid’s activities in Canada?
Ben: Plaid has operated in the Canadian market for a little over two years, and we have partnerships with some of the larger fintech firms out there. Of course, over the past year, we’ve been heavily involved in consultations with the government and specifically the Ministry of Finance, as it has moved closer to establishing a formal open banking scheme. We are deeply interested in playing a role and making sure that the developments that take place move the industry forward and not backward — this has really been our tagline throughout these consultations. Rob, of course, we met via the work at the Standards Council[3], which is just another example of the coordination that is taking place in Canada to make sure that we move toward an innovative economy. Things are really in lock step and consumers are ultimately the beneficiaries.
Emerick: Plaid seems to have a suite of fintech products and services for users. But for those who may not be fully aware, can you expand on what these applications are?
Ben: Of course. Plaid builds digital integrations across financial institutions and third-party financial technology companies that want to use consumer permissioned data to build products and services. We build the tools that give consumers the ability to permission and share their data with financial technology tools and even other financial institutions so that they can benefit from customization and innovation.
From a consumer perspective, you might go to the app store thinking, “I want to have a budgeting tool. I want to be able to manage my money better than I do today.” So, you search “budget tool” in the App Store and download one. This tool can flag how much money you can spend today versus tomorrow and maybe even set some long-term goals for you. But for that tool to function, it needs to be able to read your banking activity. For example, let us say you bank with one of the big five and you want to download an application that is run by a third-party provider. While going through the onboarding flow, you will see what we call Plaid Link[4], and it will ask you to select your bank. We will ask you to provide some information which will then give Plaid authorization to essentially act as your agent, pulling out relevant information, and handing it to the third-party app. This is a whole new level of consumer engagement, not often offered by traditional financial institutions. It’s this kind of ability to access and share data that drives the fintech ecosystem.
One thing that has been really exciting to see is that banks have shifted their orientation towards these new products as well. I think at first, they were a little bit apprehensive. Traditionally, banks do not necessarily want their customers using products that they are not offering to them directly. But increasingly they are seeing it as a value add to their customers. Plaid Exchange[5] is another tool we have that helps the banks stand up the infrastructure on their financial data to make this data accessible. There is a real transition going on right now in terms of technology used to pass data. Legacy methods of doing this involve essentially going on to a bank’s front end and collecting the data via an online banking portal. However, this portal is not necessarily a structure that’s purposely built for making the data accessible; instead, it’s often purposely built for showing a customer their balance. Plaid Exchange is a structured API, designed specifically for the task of sharing the data. Moreover, many banks, especially smaller ones, might not have the internal resources to invest in building an API themselves. Plaid Exchange works with them and provides the dedicated infrastructure specifically for data sharing.
Emerick: How does Plaid define open banking?
Ben: Plaid likes to play in the space we call open finance. Open banking is a term that largely became adopted because of the second Payment Services Directive (PSD2[6]) in Europe, and the United Kingdom subsequently built a structure on top of that called open banking. Currently in the United Kingdom, you only have access to your payments data from your current accounts. Open banking describes a world in which consumers have access to their data, but it can be fairly limited in terms of what scope of data is available. Open finance refers to a world in which it is not just your bank account data that you have access to; it’s also your investment data, your liabilities data, and data on the assets that you have.
Open finance is about giving consumers that full picture of all of their finances. And it unlocks a significant number of use cases that have not yet existed. Where open banking is largely about building digital versions of existing products, open finance is about investigating what new financial products can be built.
In the United States, we think of ourselves as already playing in an open finance ecosystem: Plaid offers a range of products, including investments and liabilities and assets. In Canada we’re talking about a phased approach. So, maybe we can start with a narrower scope of data at the outset, alongside establishing strong and broad data rights for consumers. As more use cases come to market, they’ll have the confidence that they have control over their whole set of data.
Emerick: Thanks Ben. I have a question that I was going to ask later on, but I think it is relevant right now. Do you have any opinion on the current dynamic between open finance and innovations concerning blockchain technology and cryptocurrency?
Ben: Plaid counts as its customers some of the largest crypto providers in the world. From a policy standpoint, I certainly have some thoughts around safety, soundness and the regulatory perimeter, ensuring there are the proper consumer protections in place. I think it’s important that individuals have a good understanding of these spaces — which can be volatile — before getting involved.
Emerick: Do you think there is competition with decentralized protocols or applications built on top of on top of blockchain technology, for example?
Ben: In general, I think there’s tremendous room for innovation at that intersection, actually. One place that is particularly exciting at that intersection is what’s called embedded finance.[7] This is a term that’s starting to become more popular, which essentially involves consumer facing products and services that are not themselves financial products. Instead, it’s a product that has a financial component embedded to make it more appealing to consumers.
At the end of the day, we are interested in moving the financial services ecosystem to be more centered on the consumer; in allowing customization instead of relying on a one size fits all strategy. Every consumer’s life is different and our financial services should be different as well.
Emerick: Given the proliferation of use cases for consumers, what are the major hurdles for open finance?
Ben: That’s the million-dollar question today. And I think the answer is largely in the regulatory space — that’s where the biggest hurdles are. There’s clear demand in the marketplace among consumers. At the last count that we took in Canada, something around four million consumers are currently using open banking, but they are having wildly different experiences. That’s largely due to the particular orientation that their core financial institution takes towards data sharing.
Ultimately what we need to move towards in both Canada and in the U.S is to have strong and broad data rights legislation, enshrining that data belongs to the consumer; that consumers have the right to authorize third parties to access that data on their behalf, and then leave it to the industry to develop the technology to give them that level of control. We know that the legislation and regulation ecosystem can take a while to catch up. But currently in Canada and in the US, we are seeing the emergence of draft legislation that can establish these strong set of rights. The goal is a future where the status quo is that consumers have this control and feel the same level of security and of privacy as today.
Emerick: Has COVID-19 impacted fintech adoption, in your opinion?
Ben: Yes. I mentioned the survey that we ran earlier this year, it was based in the US, but it was a representative sample of two thousand adults, and something like seventy five percent of them said that they would not have been able to continue to manage their finances without financial technology.
In the very early days of the pandemic, when the markets were quite volatile, there was a bit of a surge in downloads of investing apps that Plaid supports. However, despite this surge, I think we are still in an early wave of overall fintech adoption, although it’s trending upwards. EY does a report on global fintech adoption and in 2015 Canada was 15 percent and now it is at around 70 percent.
Emerick: What about Plaid specifically? Has COVID-19 had an impact?
Ben: For Plaid specifically, COVID-19 has opened our eyes to a couple of opportunities where data connectivity is currently lacking, or where there’s an opportunity to really make an impact. When the government developed stimulus programs to provide small businesses with funding, we rolled out a program[8] that would give those small businesses access to their payroll data, which is where they had all the information they needed to understand how much funding we are eligible for. It revealed a lot of the gaps in terms of access to these sorts of tools that financial technology is starting to fill and will continue to fill.
Going forward, I think we are certainly expecting that some of the trends that appeared because of COVID-19 will continue. I think for many people, it was their first exposure to a lot of fintech tools and their first opportunity to build that trust and understanding. Once they have a foot in the door, so to speak, and become aware of the tools available to them, we expect that adoption will continue to grow.
Rob: What are the use cases and associated benefits that differentiate Plaid from its competition?
Ben: In terms of the differentiating elements, there are a couple of things that come to mind, particularly for the financial technology companies and financial institutions that are Plaid customers. Our customers engage with Plaid through their developers who are building to Plaid’s API. Plaid, of course, takes enormous pride in having really great technical support engineers that work with company’s developers. We provide a couple of tools that I think are distinct from competitors in the market. The first is what we call a transactions enhancement tool.[9] Say you are a financial technology company, and you want to show your users how much money they are spending across a range or subset of different merchants: To assist consumers, Plaid has an algorithm that essentially parses the sometimes indecipherable string of numbers and letters on your banking statement transactions list; as an example, your transaction list might simply say “Starbucks” and then 14 digits of randomness. The transactions tool organizes your spending into understandable categories to ease personal financial management and planning.
Another thing that we offer is real time updates. If you are living paycheck to paycheck and you need immediate real time information on where your finances stand, you do not want to be seeing yesterday’s information. You don’t want to put people in a position where they’re spending money that they don’t actually have and then they incur an overdraft fee. That is a terrible user experience. Plaid uses these things called webhooks,[10] which are essentially a flag that gets sent up through our API. When a user logs into their application, it will send a flag to Plaid to go and pull the real time data for that consumer.
The last thing I will mention, and I do not think this is currently live in the Canadian market, but it is the US, is what we call a consumer portal.[11] It is a website that presents all the consumer’s linkages and connections across both their financial institutions and our third-party applications in one single place, and gives them tools to control those connections. If you applied for a mortgage loan one time, you do not need to continue to share any more data with your mortgage lender. You can go into this website and turn off data sharing, and rest assured knowing that neither Plaid or the third party will be pulling down your data and moving it at all. I think there is some exciting developments in the realm of giving consumers control. I think data is still something that is amorphous, pretty scary for a lot of consumers.
Rob: Who are your most successful Canadian customers or partners?
Ben: Our largest customers currently in the Canadian market are Wealthsimple[12], Wave[13], and Drop[14]. Wealthsimple is a neo-bank that has some innovative investing features. Wave is tremendously successful in the space of serving small businesses; we have had some great conversations with them on open banking as we consider whether small businesses fall under this umbrella or not. Drop is a consumer-facing platform that does a rewards program for online shopping and is, I think, a cool example of how you can start to build in some of these financial technology capabilities into the regular day to day stuff that consumers are already doing.
Rob: For 2021, what do you think are the two to three open banking and open finance progressions you would like to see in Canada?
Ben: I think timing is a really key element to any regulations that are coming out in Canada. We are starting to see developments around data portability, and also payments modernization and Digital IDs. These need to sync, with open finance as the first mover. And for this to work, open finance needs to have a broad scope of data. We did some research internally and what we found was that if the open banking scheme were to be set up to only allow transaction data to be incorporated, a significant number of use cases that are currently active would disappear. What we do not want to see is a two-tiered system where there is a limited amount of data that is included in the legislated data rights that everyone has access to; and then there’s other data types that consumers are already relying on to power their use cases, but suddenly they are either swept away or become increasingly costly because financial institutions decide that they want to monetize that data. The analogy that we’ve been harping on in the consultations with the Canadian Ministry of Finance, is that it is akin to the health care system: you have a set of rights that gives everyone access to health care, but additional services on top of that basic health care, can be available via specialists, at a fee. The same should apply in open banking. You should have a broad set of rights to your data.
What has been really encouraging throughout these consultations is that fintech companies want to be accredited. They do not want to be seen as playing out regulatory arbitrage or playing outside the bounds; they want to be established and supervised and recognized as being significant and well-known players. And we do not want there to be any cutoff for the smallest new entrants so they cannot make it to the playing field. It is very encouraging to see all actors on board with this notion that, yes, we need more structure, we need more supervision. Canada has a tremendous opportunity to make the leap from fast follower to global leader in data portability. We are very excited to do our part in building out this ecosystem.
Emerick is a decentralization advocate, which led him to go down the rabbit hole in the crypto-economy space. Today, he is closely monitoring the development of Bitcoin, decentralized finance (DeFi) on Ethereum, decentralized autonomous organization (DAO), non-fungible token (NFT), stablecoin and central bank digital currency (CBDC).
[1] Plaid, “The-Fintech-Effect-Spotlight-on-Covid.Pdf,” accessed June 7, 2021, https://plaid.com/documents/the-fintech-effect-spotlight-on-covid.pdf.
[2] “The-Fintech-Effect-Spotlight-on-Covid.Pdf.”
[3] “Canadian Data Governance Standardization Collaborative,” Standards Council of Canada — Conseil canadien des normes, November 26, 2019, https://www.scc.ca/en/flagships/data-governance.
[4] “Instantly Link Users’ Financial Accounts,” Plaid, accessed June 7, 2021, https://plaid.com/plaid-link/.
[5] “Build the Future of Open Finance | Plaid Exchange,” Plaid, accessed June 7, 2021, https://plaid.com/plaid-exchange/.
[6] “Payment Services (PSD 2) — Directive (EU) 2015/2366,” Text, European Commission — European Commission, accessed June 7, 2021, https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en.
[7] internationalbanker, “Does Embedded Finance Pose the Biggest Threat to Traditional Banking?,” International Banker, December 22, 2020, https://internationalbanker.com/banking/does-embedded-finance-pose-the-biggest-threat-to-traditional-banking/.
[8] Kate Rooney, “Plaid Gives Lenders Access to Small Business Payroll Data to Speed Emergency Loan Approval,” CNBC, April 6, 2020, https://www.cnbc.com/2020/04/06/plaid-gives-lenders-access-to-start-up-payroll-data-for-sba-loans.html.
[9] “Transactions API — Access Transaction Data,” Plaid, accessed June 7, 2021, https://plaid.com/products/transactions/.
[10] “API,” accessed June 7, 2021, https://plaid.com/docs/api/webhooks/.
[11] “The Convenient Way to Manage Your Financial Data | Plaid,” accessed June 7, 2021, https://my.plaid.com/.
[12] “Wealthsimple: Get Rich Slow | Invest, Save, Spend & File Taxes,” accessed June 7, 2021, https://www.wealthsimple.com.
[13] Wave, “Wave Financial: Financial Software for Small Businesses,” Wave, accessed June 7, 2021, https://www.waveapps.com/.
[14] “Get Rewarded. Supercharge Your Debit and Credit Cards.,” accessed June 7, 2021, https://www.joindrop.com/.
