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By Penny Crosman January 16, 2020

Excerpt:

Bradley Leimer, co-founder of Unconventional Ventures and former head of innovation at Santander U.S. … said he hopes firms like MX will be able to fill the inevitable void.

“This is an opportunity for companies like MX to build out their own fintech business.”

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What the Visa-Plaid merger means for banks, fintechs

By Penny Crosman
January 16, 2020

Visa’s deal to acquire the data aggregator Plaid is likely to have ripple effects throughout the industry, including a possible fresh wave of fintech acquisitions, a reduction in tension with banks over screen scraping and increased momentum for open banking.

Many expect the $5.3 billion deal, one of the most successful fintech exits of all time, to kick off a fintech merger boom.

“Once you get one of these, they tend to come in waves,” said Sam Maule, managing partner for North America at 11:FS.

“We know there are financial institutions who would prefer Plaid operate differently in some cases, and we intend to address those concerns while not diminishing the value for developers, leveraging our global experience balancing a two-sided network,” said Visa CEO Al Kelly.

Last year, Fiserv acquired First Data, FIS bought Worldpay and Global Payments merged with TSYS in a small M&A frenzy.

“Once one went, they all went,” Maule said. “I will be curious to see if this creates a mini wave of interest.”

Mastercard or Visa might consider acquiring other data aggregators like Intuit, Envestnet Yodlee and Finicity. Industry observers have also suggested that MX, the popular data software company that helps banks analyze data and offer insights to customers, is a target.

“We are a fast-growing company and so in no way am I going to say it’s impossible that MX could get swept up in” a merger trend, said Brandon Dewitt, chief technology officer at MX. “We’ve watched some of our vision come into fruition in the market, and we continue to believe that more and more of that vision will continue to proliferate. Sometimes that will happen with acquisition. Sometimes that will happen with partnerships.”


Less friction with banks, less screen scraping

One of the most important impacts may be less fighting with banks over customer data. Plaid says it has connections with 11,000 financial institutions.

These relationships have periodically erupted in public dust-ups. The company sparred with Capital One over how much data Plaid could obtain on Capital One’s customers and legal liability. Its screen-scraping practices have drawn the ire of PNC and others, which complain that the practices provide fresh opportunities for fraudsters to commit identity impersonation and account takeover.

During his company’s announcement of the deal for Plaid, Visa CEO Al Kelly noted that the relationship between Plaid and financial institutions has not always been carefree.

“We know there are financial institutions who would prefer Plaid operate differently in some cases, and we intend to address those concerns while not diminishing the value for developers, leveraging our global experience balancing a two-sided network,” Kelly said.

Visa’s strong ties to banks and the fact that Gordon Smith, co-president, JPMorgan Chase and CEO of Consumer and Community Banking, openly endorsed the merger suggest the association will be striving to please its bank members.

“If Visa is absolutely phenomenal at something, it is security and compliance,” Dewitt said. “There is no doubt in my mind that their top security people and compliance people are going to look at, where are we doing things that may create friction in the market and how do we lessen that friction and ensure that we have the most security that we can wrap around this thing for it to be successful.”

Screen scraping has been the biggest point of contention between banks and Plaid.

At the beginning of 2020, JPMorgan said it plans to block fintechs from screen scraping — obtaining usernames and passwords of customers, logging in as them and copying and pasting their account information into a database.

The bank said it plans to tokenize account information and give consumers a consent mechanism and a dashboard with which they could monitor all the fintechs that draw their bank account information. The bank works with the major data aggregators Plaid, Envestnet Yodlee, Intuit and Finicity.

Visa could potentially provide centralized tokenization for all the banks that work with Plaid.

It could also help its bank members use Plaid’s technology for their own purposes.

“My guess is that the primary thing that Plaid does well — offer quick onboarding and transactional assessment for credit-driven fintechs — will be what Visa will use to help their bank clients do what they are still pretty bad at: digitally onboarding and assessing potential customers quickly online, on mobile apps, and potentially at point of sale,” said Brad Leimer, co-founder of Unconventional Ventures and former head of innovation at Santander U.S.


Competitive impact

Under Visa’s powerful umbrella, Plaid could help accelerate open banking initiatives and lead a democratization of finance.

“I like the idea of a larger infrastructure player laying the standards out,” Maule said. “It could make the kludgy Frankenstein infrastructure that we have all around banking and payments cleaner.”

But it could also end up shutting out small financial institutions and fintechs.

Plaid and the other large data aggregators (Yodlee, Intuit, Finicity) have forged data-sharing agreements with large banks and fintechs. Small banks and fintechs don’t always have the resources or the clout to write their own legal agreements and APIs.

While Visa could help the industry create a set of standards that would make this work easier, that may present a conflict of interest, according to Leimer.

“Visa is the largest payment network, and this type of acquisition extends their reach into fintech and into insights driven by letting them access checking accounts they didn’t have before, like Envestnet acquiring Yodlee, and then, I’m assuming, reselling these insights to hedge funds,” Leimer said. “Why would they create a standard for shared data APIs when there are so many competing parties trying to create open banking standards in the U.S.? This is why innovation in open banking in the U.S. has been slow. Standards aren’t open; they are created by competing entities with their own agendas, and very few of them consider the customer in their development.”

This merger could also make it harder for small fintechs and community banks to participate.

“Long term I think it’s bad as it will take speed to market away from Plaid as it gets sucked into Visa — it’s inevitable,” Leimer said. “Some fintechs already felt Yodlee’s and even Plaid’s pricing was getting out of reach. So this is an opportunity for companies like MX to build out their own fintech business, because I don’t see Visa being any better at continuing Plaid’s fintech partnership building long term unless they let them run nearly completely independent. I wish history didn’t tell us otherwise.”

Visa will inevitably cater to its largest clients, which could threaten the community banking model, Leimer said.

“My only hope is that Plaid can now have the resources to work with community banks and credit unions in as much earnest as they catered to fintechs, because it helped their growth, their bottom line and their valuation,” he said.

He said he hopes firms like MX will be able to fill the inevitable void.

“We need more companies to help fintech startups be born, innovate, get customers, scale and make the banking industry better,” Leimer said. “I’m really happy for the team at Plaid — they have done an amazing job of scaling up their business — but I’m not sure if the industry will be the better for it in the end.”